<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 2000
REGISTRATION NO. 333-85163
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PREDICT IT INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 7375 84-1433978
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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268 W. 44TH STREET, 5TH FLOOR
NEW YORK, NEW YORK 10036
(212) 217-1200
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
ANDREW P. MERKATZ
PRESIDENT
PREDICT IT INC.
268 W. 44TH STREET, 5TH FLOOR
NEW YORK, NEW YORK 10036
(212) 217-1200
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
Copies to:
MICHAEL L. PFLAUM, ESQ.
MARLENE M. MARKARD, ESQ.
CAMHY KARLINSKY & STEIN LLP
1740 BROADWAY, 16TH FLOOR
NEW YORK, NEW YORK 10019-4315
(212) 977-6600
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
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, other than securities offered only in connection with dividend or interest
reinvestment plans, 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, 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
check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
The information contained in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Commission is effective.
This prospectus is not an offer to sell these securities and we are not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
SUBJECT TO COMPLETION DATED APRIL __, 2000
[LOGO]
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PREDICT IT INC.
13,189,152 SHARES OF COMMON STOCK
------------------
This prospectus covers an aggregate of 13,189,152 shares of our common
stock, which will be sold from time to time by the stockholders named on page
35. We will not receive any money from the stockholders when they sell their
shares of common stock, but we will receive monies upon the exercise of our
stock options.
Our common stock is quoted on the OTC Electronic Bulletin Board under the
symbol "PRITE." On April 13, 2000, the price of our common stock as quoted on
the OTC Electronic Bulletin Board was $1.3125.
------------------
The securities offered hereby are speculative and involve a high degree of
risk. SEE "RISK FACTORS" COMMENCING ON PAGE 5.
------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
APRIL 18, 2000
<PAGE>
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 the prospectus nor the sale of common
stock means that 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 these shares of common stock in any circumstances under which
the offer or solicitation is unlawful.
TABLE OF CONTENTS
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PAGE
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Prospectus Summary......................................................................................... 3
Summary Financial Information.............................................................................. 4
Risk Factors............................................................................................... 5
Special Note on Forward-Looking Statements................................................................. 9
Available Information...................................................................................... 10
Predict It................................................................................................. 11
Use of Proceeds............................................................................................ 11
Price Range of Common Stock................................................................................ 11
Dividend Policy............................................................................................ 12
Capitalization............................................................................................. 12
Selected Financial Data.................................................................................... 13
Management Discussion and Analysis of Financial Condition And Results of Operations........................ 15
Business................................................................................................... 18
Management................................................................................................. 26
Executive Compensation and Other Information............................................................... 28
Stock Option Plan.......................................................................................... 29
Related Party Transactions................................................................................. 30
Principal Stockholders..................................................................................... 31
Selling Security Holders................................................................................... 33
Plan of Distribution....................................................................................... 36
Description of The Capital Stock........................................................................... 37
Shares Eligible for Future Sale............................................................................ 41
Legal Matters.............................................................................................. 41
Experts.................................................................................................... 42
Disclosure of Company Position on Indemnification for Securities Act Liabilities........................... 42
Index to Financial Statements.............................................................................. F-1
</TABLE>
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PROSPECTUS SUMMARY
PREDICT IT INC.
Our business is the development of interactive products, which are
distributed over the Internet. The Predict It business allows users to
participate actively by predicting the outcome of events and evaluating the
results of their participation and those of other users. Our innovative system,
which is patent pending as of the date of this registration statement, permits
users to pick and exchange predictions with other users. Predict It accumulates
all user picks into a database that, over time, allows Predict It to calculate
the accuracy of predictions for any set of events whose outcome can be measured
objectively. Our initial product offering, "Predict It Sports," allows users to
pick and exchange predictions on sporting events with other Predict It users. We
utilize our database to calculate the accuracy of those predictions and allow
other users to view the entries. Our system, unlike chat rooms, bulletin boards
and stock tracking systems, enables users to quickly find and view the
predictions of the best analysts, who in turn may earn money each time their
future predictions are viewed. Users may post predictions and view the
predictions of others free of charge.
We employ a strategy in which we enter into partner relationships with
other Internet companies to market our product by creating a web site with
Predict It's content, while simultaneously maintaining the overall look and feel
of our partners' web sites. Presently, revenues are principally earned by the
sale of advertisements either by us directly or on a revenue sharing basis with
our partners. Unlike other businesses on the Internet that attempt to attract
visitors by providing many services on one web site, our strategy is to attract
visitors by providing unique, compelling and user-generated content that drives
repeat visits by Predict It users to the web sites of companies with which we
have created partnerships.
On June 30, 1999, we purchased Virtual Stock Exchange, Inc. Virtual Stock
Exchange is an Internet-based stock market simulation and forecasting company
that operates www.VirtualStockExchange.com, which services over 100,000
registered members and generates in excess of 4.5 million page views per month.
Consumers may access Virtual Stock Exchange directly via its web site or at
other web sites, including Crosswalk.com, PlanetDirect.com and
Collegestudent.com. Virtual Stock Exchange is a separate Predict It product that
can also be accessed at the Predict It Network web site, www.predictit.net.
Please see the "Selected Financial Data" and "Business" sections for a detailed
account of this transaction.
On March 13, 2000, we commenced a private offering of units consisting of
shares of Series B Preferred Stock and warrants to purchase shares of our common
stock. On April 14, 2000, we issued an aggregate of 43 units to new and existing
shareholders.
We maintain our principal business operations at 268 W. 44th Street,
5th Floor, New York, New York 10036. Our telephone number is (212) 217-1200, and
our web sites include http://www.predictit.com, http://www.sports.predictit.com,
http://www.predictit.net, and http://www.VirtualStockExchange.com.
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SUMMARY FINANCIAL INFORMATION
The summary financial information below is derived from and should be read
in conjunction with the financial statements, including the notes to the
financial statements, appearing elsewhere in this prospectus.
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<CAPTION>
HISTORICAL
--------------------------------------------
SEPTEMBER 2, PRO FORMA AS ADJUSTED FOR
1997 EXCHANGE, INC.
(INCEPTION) ----------------------------
THROUGH YEAR ENDED DECEMBER 31, YEAR ENDED YEAR ENDED
DECEMBER 31, ---------------------------- DECEMBER 31, DECEMBER 31,
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenue:
User fees................................... $ 7,712 $ 4,519 $ 24,173 $ 11,616
Advertising................................. 6,000 174,517 56,736 233,610
-------- ---------- ------------ ------------ ------------
13,712 179,036 80,909 245,226
-------- ---------- ------------ ------------ ------------
Costs and expenses:
Site development/maintenance................ 177,783 406,778 227,243 573,805
Selling, general and administrative(2)...... $ 21,402 340,698 2,786,164 503,679 2,882,615
Amortization of intangibles(1).............. 244,676 489,352 489,352
Interest expense (income)................... 3,000 856 9,768 8,144
-------- ---------- ------------ ------------ ------------
21,402 521,481 3,438,474 1,230,042 3,953,916
-------- ---------- ------------ ------------ ------------
Net loss before income tax.................... $(21,402) $ (507,769) $ (3,259,438) $ (1,149,133) $ (3,708,690)
======== ========== ============ ============ ============
Net loss per share--basic and diluted......... $ (.04) $ (.21) $ (.37) $ (.25) $ (.37)
======== ========== ============ ============ ============
Weighted average number of shares
outstanding................................. 488,412 2,381,327 8,872,400 4,581,327 9,972,400
======== ========== ============ ============ ============
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<CAPTION>
AS OF
DECEMBER 31,
1999
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BALANCE SHEET DATA:
Working capital...................................................................................... $ (680,986)
Total assets......................................................................................... 4,027,249
Long term debt....................................................................................... 51,773
Total liabilities.................................................................................... 1,864,517
============
Accumulated deficit.................................................................................. (3,788,609)
============
Total stockholders' equity........................................................................... 2,162,732
============
</TABLE>
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(1) Represents amortization expense related to goodwill resulting from the
acquisition of Virtual Stock Exchange, which is being amortized over a
period of three years.
(2) Includes the impact of employment agreements entered into upon the
consummation of the acquisition of Virtual Stock Exchange, representing
additional costs of $114,000 and $57,000 for the years ended December 31,
1998 and 1999, respectively.
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RISK FACTORS
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS.
We were organized in September 1997 and first introduced SportsCappers at
SportsCappers.com in March 1998. We reintroduced SportsCappers in September 1998
and introduced Predict It Sports in March 1999. In addition, on June 30, 1999 we
acquired Virtual Stock Exchange, Inc., which was formed in 1997. Because of our
limited operating history, it is extremely difficult to evaluate our business
and prospects. Our revenue and income potential are unproven and our business
strategy is constantly evolving. Since the way in which the Internet is used is
constantly changing, we may need to further change our business strategy to
adapt to those changes.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO INCUR ADDITIONAL LOSSES IN THE
FUTURE.
We have incurred losses since inception, including a net loss of
approximately $3,259,438 for the year ended December 31, 1999. As of December
31, 1999, we had an accumulated deficit of approximately $3,788,609. Although we
expect our revenues to grow in upcoming quarters, we expect to have increasing
net losses and negative cash flows for the foreseeable future. The size of these
net losses will depend, in part, on the rate of growth in our revenues from our
advertisers and from our partners, and on our expenses. We expect that our
operating expenses will increase significantly for the foreseeable future. With
increased expenses, we will need to generate significant additional revenues to
achieve profitability. Consequently, it is possible that we may never achieve
profitability, and even if we do, we may not be able to sustain or increase
profitability on a quarterly or annual basis in the future. For a more detailed
account of our historical losses, please see the "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections.
OUR OPERATING EXPENSES ARE FIXED OVER THE SHORT TERM SO WE MAY NOT BE ABLE TO
RESPOND QUICKLY IF OUR REVENUES DO NOT MEET OUR EXPECTATIONS.
Our fixed monthly operating expenses in the short term consist of
obligations to our employees, landlord, and certain vendors in the aggregate
amount of approximately $250,000. In the event we do not generate the amount of
revenue we expect, we may not be able to adjust these obligations quickly enough
to offset any revenue shortfall.
OUR SUCCESS DEPENDS ON FUTURE USAGE OF OUR PRODUCTS AND SERVICES AND ACCEPTANCE
OF THE INTERNET AS AN ADVERTISING MEDIUM.
We expect to generate substantially all of our future revenues through
Internet advertising and subscriptions. These methods of revenue generation are
relatively new and largely untested. Since the Internet advertising market is
new and rapidly evolving, we cannot yet gauge its effectiveness as compared to
traditional advertising media. Advertisers that traditionally relied on other
advertising media may be reluctant to advertise on the Predict It web sites,
believing that Internet advertising is less effective than traditional
advertising media for promoting their products and services. Consequently, they
may allocate only limited portions of their advertising budgets to advertising
on Predict It web sites. We may be required to find alternate means of revenue
generating if Internet advertising does not continue to grow or if we are
unsuccessful in increasing our advertising revenues.
GROWTH OF OUR BUSINESS MAY STRAIN OUR MANAGERIAL, FINANCIAL AND OPERATIONAL
RESOURCES.
We have experienced, and may continue to experience, rapid growth. Between
April 14, 1999 and April 14, 2000, we hired 32 employees. We expect to hire an
additional 10 employees by the end of 2000 in an effort to develop our products
and technology and expand our sales force. Our failure to attract and retain
highly qualified employees may disable our growth and may distract the efforts
of our existing personnel. If we do experience growth, it could place a
significant strain on our managerial, financial and operational resources. Any
growth we may experience will result in increased responsibility for existing
and new management personnel. Our effective growth management will depend on the
following:
o Our ability to integrate new personnel into our corporate structure;
5
<PAGE>
o Ensuring that our operational, management and financial systems and
controls continue to operate efficiently; and
o Our ability to recruit, train, motivate, manage and retain highly skilled
employees in light of the intense level of competition in our industry.
We cannot be certain that our systems, procedures or controls will be
adequate to support our operations or that we will be able to manage any growth
effectively. If we do not manage our growth effectively, our expenses may exceed
our revenues and we may never achieve profitability.
OUR LOSS OF ANDREW MERKATZ AND OTHER KEY PERSONNEL COULD IMPAIR OUR ABILITY TO
ACHIEVE PROFITABILITY.
Our future success depends, in part, on the continued service of our key
management personnel, particularly Andrew Merkatz, our President, Robert Jacobs,
our Vice President of Business Development, Geordie Pace, our Senior Vice
President of Product Development, Desmond Glass, our Corporate Controller and
Alana Oldham, our Chief Technology Officer. The loss of Andrew Merkatz may
result in the loss of confidence in our business by our employees, partners,
advertisers and the financial market. Consequently, we could lose employees and
advertising revenue and our stock price could decrease. Furthermore, we may be
unable to raise additional capital. The loss of Robert Jacobs may hinder our
ability to enter into new distribution agreements and may affect our
relationships with existing partners. Consequently, we could lose advertising
revenue generated from our partner relationships. The loss of Geordie Pace may
result in our inability to modify existing products and introduce new products
in a timely manner. Consequently, we may not be able to retain existing users or
attract new users. The loss of Desmond Glass could result in a lack of
consistency in our financial systems and controls during our growth period.
Consequently, we may not be able to record and report accurately our financial
condition and future financings may be delayed. The loss of Alana Oldham may
result in the interruption of our web site services. Consequently, we may fail
to attract new users and maintain existing users. Currently, we have employment
agreements with Mr. Merkatz and Mr. Pace. For detailed accounts of these
employment agreements, please see the "Executive Compensation and Other
Information" section.
THE DEVELOPMENT OF THE PREDICT IT AND VIRTUAL STOCK EXCHANGE BRANDS WILL REQUIRE
US TO EXPEND SIGNIFICANT RESOURCES.
We believe broader brand recognition and a favorable consumer perception of
the Predict It and Virtual Stock Exchange brands are essential to our future
success. Accordingly, we intend to continue entering into partnerships under
which our partners will develop and promote our brands. We expect that we will
be obligated to pay fees to our partners under these agreements. These
expenditures may not result in a sufficient increase in revenues to cover such
advertising and promotion expenses. Furthermore, our partners may not
effectively promote our brands. Even if brand recognition does increase, the
number of new users may not increase. Further, even if the number of new users
increases, the number of visits to our web sites and the web sites of our
partners may not increase sufficiently to justify the expenditures. If our
strategy to increase brand awareness is unsuccessful, these expenses may never
be recovered and we may be unable to increase future revenues.
OUR COMPANY WILL NOT BE ABLE TO GROW IF WE CANNOT RAISE ADDITIONAL FUNDS BY JULY
2000.
We anticipate the need to raise between $2,000,000 and $4,000,000 by July
2000 in order to fund more aggressive brand promotion, develop new or enhanced
services, respond to competitive pressures, and/or make acquisitions. We may be
unable to obtain any required additional financing on terms favorable to us. If
adequate funds are not available on acceptable terms, we may be unable to fund
our expansion, successfully promote our brand, develop or enhance services,
respond to competitive pressures or take advantage of acquisition opportunities.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY BECAUSE OUR COMPETITORS ARE MORE
ESTABLISHED AND HAVE GREATER RESOURCES THAN WE DO.
The interactive sports and stock categories are rapidly evolving and are
very competitive. There are no substantial barriers to entry in this market. We
anticipate that the number of direct and indirect competitors
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will increase in the future. This could result in price reductions for
advertising, reduced margins, greater operating losses or a loss of market
share, any of which would decrease our ability to achieve profitability.
Many of our existing competitors, such as Sandbox.com and
HollywoodStockExchange.com, have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we do. This may allow them to devote
greater resources than we can to the development and promotion of their products
and services. Many of our competitors offer a wider range of services than we
do. Our competitors' services may attract users to their sites and may
consequently result in decreased visits to our sites. Our competitors may also
engage in more extensive research and development, adopt more aggressive pricing
policies and make more attractive offers to existing and potential employees,
partners, advertisers and electronic commerce partners. Our competitors may
develop products and services that are equal or superior to ours or that achieve
greater market acceptance. In addition, current and potential competitors may
establish relationships among themselves or with third parties to better address
the needs of advertisers and businesses engaged in electronic commerce.
ENHANCEMENT OF OUR PRODUCTS AND SERVICES WILL REQUIRE US TO EXPEND, AND MAY
STRAIN, OUR RESOURCES.
To be successful, we must adapt to rapidly changing Internet technologies
and user demand by continually enhancing our products and services and
introducing new products and services. Specifically, our future success will
largely depend on obtaining revenue, which may be achieved by:
o increasing the number of advertisers that advertise on our web site;
o charging our users for specific services we plan to provide;
o entering into agreements with third parties under which we share revenue
generated by services and products sold on our web site; and
o expanding our existing products and services and creating new products
and services, such as in the areas of politics and entertainment.
We cannot be certain that these attempts to generate revenue will generate
enough revenue to offset their cost or achieve profitability.
SYSTEM FAILURE COULD SIGNIFICANTLY REDUCE OUR REVENUES.
The servers that host our web sites are backed-up by remote servers, but we
cannot be certain that the back-up servers will not fail or cause an
interruption in our service. Our web sites could also be affected by computer
viruses, electronic break-ins or other similar disruptions. Our users depend on
Internet service providers, online service providers and other web site
operators for access to our web sites. Each of these providers has experienced
significant outages in the past and could experience outages, delays and other
difficulties due to system failures unrelated to our systems. Further, our
systems are vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events. Any system
failure, including network, software or hardware failure, that causes an
interruption in our service could result in reduced visits to our web sites and,
therefore, reduced revenues.
PROTECTION OR DEFENSE OF OUR INTELLECTUAL PROPERTY RIGHTS MAY DAMAGE OUR
REPUTATION AND REQUIRE US TO EXPEND SIGNIFICANT RESOURCES.
We have filed for patents on our services, but no action has yet been taken
on our applications. We may be subject to or may initiate proceedings in the
United States Patent and Trademark Office, which may demand significant
financial and management resources. While we enter into confidentiality
agreements with our employees and consultants, the steps we have taken to
protect our proprietary rights may not prevent misappropriation. Further, third
parties may infringe or misappropriate our patents, trademarks or other
proprietary rights, which could injure our reputation and our business. In
addition, we do not know whether we will be able to defend our proprietary
rights since the validity, enforceability and scope of protection of proprietary
rights in Internet-related industries is uncertain and still evolving. Although
we believe our products and information system do not infringe upon the
proprietary rights of others, we cannot be certain that third parties will not
assert infringement claims against us.
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COLLECTION OF PERSONAL INFORMATION ABOUT OUR USERS IN THE FUTURE MAY SUBJECT US
TO POTENTIAL LIABILITY FOR INVASION OF PRIVACY.
Although we have a policy, which is available on our web site, against
using personal information, current computing and Internet technology allows us
to collect personal information about our users. We may decide in the future to
compile and provide such information to our corporate customers and electronic
commerce partners. If we begin collecting such information, we may face
potential liability for invasion of privacy for compiling and providing to our
corporate customers and electronic commerce partners information based on
questions asked by users and visitors on our web sites. Because we may not
obtain permission from users to distribute this information, we may potentially
face liability for invasion of privacy.
OUR OFFICERS AND DIRECTORS MAY BE ABLE SIGNIFICANTLY TO INFLUENCE MATTERS
REQUIRING STOCKHOLDER APPROVAL BECAUSE THEY OWN A LARGE PERCENTAGE OF OUR
OUTSTANDING SHARES.
Our executive officers and directors beneficially own in the aggregate
approximately 51.3% of our outstanding common stock. These stockholders may be
able to exercise control over all matters requiring approval by our
stockholders, including the election of directors and the approval of
significant corporate transactions. This concentration of ownership may also
have the effect of delaying or preventing an acquisition or change in control of
Predict It, which could significantly reduce our stock price.
REGISTRATION OF ALL OF OUR OUTSTANDING COMMON STOCK IN THIS REGISTRATION
STATEMENT MAY REDUCE THE PRICE OF OUR COMMON STOCK.
The shares registered by this prospectus have not previously been
registered. As of the date of this prospectus, we have 11,982,402 shares of
common stock (including 500,000 shares currently being held in escrow pending
Predict It achieving certain milestones) outstanding, not including:
o 1,000,000 shares of Series A preferred stock, which are convertible into
an aggregate of 1,000,000 shares of common stock;
o 430,001 shares of Series B Preferred Stock, which are convertible into an
aggregate of 4,300,010 shares of common stock;
o granted options to purchase an aggregate of 2,058,025 shares of our
common stock;
o issued warrants to purchase an aggregate of 4,925,000 shares of common
stock; and
o issued unit purchase option to purchase 8.6 units, consisting of 86,000
shares of Series B Preferred Stock, which are convertible into an
aggregate of 860,000 shares of common stock, and warrants to purchase
860,000 shares of common stock.
The 13,189,152 shares being registered represent 100% of the outstanding
shares of our common stock, 100% of the shares of our common stock underlying
our Series A Preferred Stock and 11.9% of the shares issued upon exercise of
certain of our options. Sales of substantial numbers of shares of our common
stock in the public market after this offering, or the perception that our
stockholders may sell their stock, could cause the market price of our common
stock to decline. In addition, the sale of these shares and any resulting market
price reductions could impair our ability to raise capital through the sale of
additional equity securities.
SINCE OUR SHARES ARE "PENNY STOCKS," YOU MAY BE UNABLE TO RESELL THEM IN THE
SECONDARY MARKET.
A "penny stock" is an equity security with a market price of less than
$5.00 per share which is not listed on the Nasdaq or a national securities
exchange. Due to the extra risks involved in an investment in penny stocks,
federal securities laws and regulations require broker/dealers who recommend
penny stocks to persons other than their established customers and accredited
investors to make a special written suitability determination for the purchaser,
provide them with a disclosure schedule explaining the penny stock market and
its risks, and receive the purchaser's written agreement to the transaction
prior to the sale. These requirements limit the ability of broker/dealers to
sell penny stocks. Also, because of the extra requirements, many broker/dealers
are unwilling to sell penny stocks at all. As a result, you may be unable to
resell the stock you buy in this offering and could lose your entire investment.
8
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SINCE THE MARKET FOR STOCKS OF INTERNET COMPANIES HISTORICALLY HAS EXPERIENCED
EXTREME PRICE AND VOLUME FLUCTUATIONS, OUR SHARES MAY EXPERIENCE EXTREME PRICE
AND VOLUME FLUCTUATIONS.
The market for the stocks of Internet-related companies has experienced
extreme price and volume fluctuations. Therefore, the market price of our common
stock may be volatile and may decline. In the past, securities class action
litigation has often been instituted against companies following periods of
volatility in the market price of their securities. If instituted against us,
regardless of the outcome, litigation could result in substantial costs and a
diversion of our management's attention and resources.
WE MAY BE DELISTED FROM THE OTC ELECTRONIC BULLETIN BOARD ON MAY 17, 2000.
Our common stock is quoted on the OTC Electronic Bulletin Board, a NASD
sponsored and operated quotation system for equity securities. We are not
currently filing reports under the Securities and Exchange Act and will not do
so until this registration statement and our registration statement on Form 8-A
are declared effective by the Commission. If such registration statements are
not declared effective prior to May 17, 2000, we may not be able to maintain our
listing on the OTC Electronic Bulletin Board. Consequently, our shareholders may
have difficulty determining the fair market value of our common stock and we may
be unable to obtain required future financing.
EXERCISE OF EXISTING OPTIONS AND WARRANTS WILL DILUTE OUR COMMON STOCK AND MAY
MAKE IT MORE DIFFICULT TO RAISE CAPITAL.
The exercise of 2,058,025 existing options and 4,925,000 warrants will
dilute our common stock and may depress the market price of our common stock in
any market that may develop for such securities. In such event, raising capital
may become more difficult.
PROVISIONS IN OUR CHARTER OR AGREEMENTS MAY PREVENT OR DELAY A CHANGE OF
CONTROL.
Provisions of our certificate of incorporation and bylaws and provisions of
applicable Delaware law may discourage, delay or prevent a merger or other
change of control that a stockholder may consider favorable. For instance,
certain provisions of our certificate of incorporation and by-laws, and the
significant amount of common stock held by our executive officers, directors and
affiliates, could together have the effect of discouraging potential takeover
attempts or making it more difficult for stockholders to change management. In
addition, our board of directors may issue up to 10,000,000 shares of preferred
stock and may determine the price and the terms, including preferences and
voting rights, of those shares without stockholder approval. Issuance of
additional shares of our preferred stock could, among other things:
o discourage bids for our common stock at a premium over the market price;
or
o adversely affect the market price of, and the voting and other rights of
the holders of, our common stock; or
o have the effect of delaying, deferring or preventing an acquisition or a
change in control of Predict It.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Some of the statements contained in or incorporated by reference in this
prospectus discuss our plans and strategies for our business or state other
forward-looking statements. The words "anticipates," "believes," "estimates,"
"expects," "plans," "intends" and similar expressions are intended to identify
these forward-looking statements, but are not the exclusive means of identifying
them. These forward-looking statements reflect the current views of our
management; however, various risks, uncertainties and contingencies could cause
our actual results, performance or achievements to differ materially from those
expressed in, or implied by, these statements, including the following:
o the success or failure of our efforts to implement our business strategy;
and
o the other factors discussed under the heading "Risk Factors" and
elsewhere in this prospectus.
We assume no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. For a
discussion of important risks of an investment in our securities, including
factors that could cause actual results to differ materially from results
referred to in the forward-
9
<PAGE>
looking statements, see the "Risk Factors" section. You should carefully
consider the information set forth under the caption the "Risk Factors" Section.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in or incorporated by reference in this prospectus might not
occur.
AVAILABLE INFORMATION
We will file reports, proxy statements and other information with the
Securities and Exchange Commission. Such reports, proxy statements and other
information can be inspected and copied, at the Public Reference Room of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, at the Northeast Regional Office of the Commission located at Seven
World Trade Center, Suite 1300, New York, New York 10048 and at the Midwest
Regional Office of the Commission located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms. Our
Commission filings will also be available to the public from the Commission's
web site at http://www.sec.gov.
We have filed a registration statement with the Commission on Form SB-2,
under the Securities Act of 1933, with respect to the securities described in
this prospectus. This prospectus, filed as part of the registration statement,
does not contain all of the information set forth in the registration statement
and the exhibits and schedules filed with the registration statement. For
further information about us, and our common stock described by this prospectus,
reference is made to the registration statement and to the exhibits and
schedules filed with it. Statements contained in this prospectus regarding the
contents of any contract or any other document to which reference is made are
not necessarily complete, and, in each instance where a copy of such contract or
other document has been filed as an exhibit to the registration statement,
reference is made to the copy so filed, each such statement being qualified in
all respects by such reference. Any document we file may be read and copied at
the Public Reference Room.
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<PAGE>
PREDICT IT
Predict It Corp., the immediate predecessor to Predict It Inc., was
incorporated under the laws of the State of Delaware on August 11, 1998 as
SPORTSCAPPERS, INC. Predict It Corp. was the successor to the business of
SPORTSCAPPERS, INC., a Colorado corporation incorporated in September 1997,
which merged in August 1998 into SPORTSCAPPERS, INC., a Delaware corporation. We
changed our name to "Predict It Corp." on January 4, 1999. On April 28, 1999,
Predict It Corp. merged with and into WDC Development, Inc. WDC Development was
the surviving corporation and it changed its name to "Predict It Inc." The post-
merger business of Predict It Inc. is the pre-merger business of Predict It
Corp. and its predecessors. On June 30, 1999, through a wholly-owned Delaware
subsidiary of Predict It Inc., we purchased Virtual Stock Exchange, Inc., a
Delaware corporation. We maintain our principal business operations at 268 W.
44th Street, 5th Floor, New York, New York 10036. Our telephone number is
212-217-1200, and our web sites include http://www.predictit.com,
http://www.sports.predictit.com, http://www.predictit.net and
http://www.VirtualStockExchange.com.
USE OF PROCEEDS
We will not receive any part of the proceeds from the sale by our
stockholders of our common stock. However, we will receive $57,528.75 from our
stockholders upon the exercise of stock options registered in this Registration
Statement. The proceeds will be used for general corporate purposes to grow
Predict It's business.
PRICE RANGE OF COMMON STOCK
Our common stock is currently quoted on the OTC Electronic Bulletin Board
under the symbol "PRITE." There was no active market for Predict It's securities
until April 28, 1999(1). The following table sets forth the high and low bid
price information for the common stock as quoted on the OTC Electronic Bulletin
Board for the periods indicated. The quotations reflect inter-dealer prices,
without retail mark-ups, mark-downs or commissions, and may not represent actual
transactions.
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
HIGH BID LOW BID
-------- -------
<S> <C> <C>
October 1, 1998 through December 31, 1998............................... $ 0 $ 0
January 1, 1999-March 31, 1999.......................................... $ 1.50 $ 0
April 1, 1999-June 30, 1999............................................. $ 4.25 $ 1.87
July 1, 1999-September 30, 1999......................................... $ 2.93 $ 1.03
October 1, 1999-December 31, 1999....................................... $ 2.09 $ 1.25
January 1, 2000-March 31, 2000.......................................... $ 2.21 $ 1.06
</TABLE>
On April 13, 2000, the closing bid price as quoted by the OTC Electronic
Bulletin Board for our common stock was $1.3125. As of April 13, 2000, there
were approximately 25 holders of record of our common stock.
There is no public trading market for any of our preferred stock, options
or warrants.
- ------------------
(1) Prior to the reverse merger, Predict It Inc. (then named WDC Development,
Inc.) was listed on the OTC Electronic Bulletin Board from November 1998
through April 27, 1999.
11
<PAGE>
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We
presently intend to retain any earnings for use in the business and do not
anticipate paying cash dividends in the foreseeable future. Any future cash
dividends will be at the discretion of the board of directors and will depend on
our earnings, financial condition, cash flows, capital requirements and other
considerations that the board of directors may consider relevant. Our Series A
Preferred Stock does not pay any dividends.
CAPITALIZATION
The following table sets forth, as of December 31, 1999 the capitalization
of Predict It Inc. The following table should be read in conjunction with the
financial statements and notes thereto of Predict It Inc., Virtual Stock
Exchange, Inc. and the unaudited pro forma financial statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
ACTUAL
-----------------
<S> <C>
Current liabilities:
Accounts payable and accrued expenses.............................................. $ 1,086,824
Loans payable to stockholders, net of debt discount of $438,222.................... 561,778
Capital lease obligations-current portion.......................................... 64,142
Notes payable, stockholders........................................................ 100,000
Long-term liabilities:
Capital lease obligations.......................................................... 51,773
-----------
Total liabilities.................................................................... 1,864,517
-----------
Preferred stock, $.01 par value, 5,000,000 shares authorized, 1,000,000 shares
Series A issued and outstanding at December 31, 1999 (stated at liquidation
preference)........................................................................ 3,000,000
Common stock, $.01 par value, 25,000,000 shares authorized, 11,303,448 shares issued
and outstanding at December 31, 1999 (exclusive of 500,000 shares held in
escrow)............................................................................ 113,034
Additional paid-in capital......................................................... 3,595,529
Deficit............................................................................ (3,788,609)
Unearned compensation.............................................................. (757,222)
-----------
Total stockholders' equity........................................................... 2,162,732
-----------
Total liabilities and stockholders' equity........................................... $ 4,027,249
===========
</TABLE>
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SELECTED FINANCIAL DATA
On April 28, 1999, Predict It Corp. merged with and into WDC Development,
Inc. WDC Development was the surviving corporation and changed its name to
"Predict It Inc." In the merger, all of the outstanding capital stock of
Predict It Corp. was converted into shares of common stock of the surviving
corporation. For accounting purposes, the merger has been treated as a
recapitalization of Predict It Corp. Financial statements prior to the merger
are those of Predict It Corp. The financial statements give retroactive effect
to the conversion of Predict It Corp. capital stock into Predict It Inc. common
stock to reflect the recapitalization.
On June 30, 1999, through a wholly-owned Delaware subsidiary of Predict It
Inc., we purchased 100% of the outstanding stock of Virtual Stock Exchange,
Inc., a Delaware corporation. In exchange, we issued to the 3 stockholders of
Virtual Stock Exchange an aggregate of 2,700,000 shares of our common stock,
representing approximately 23% of our outstanding common stock. Of the shares
issued, 500,000 shares will be held in escrow, with 50% of such shares to be
released in January 2000, and the remaining 50% of such shares to be released in
January 2001, as long as the number of registered users and page views of the
combined activities exceeds certain specified amounts. No shares were released
in January 2000 because the specified milestones were not met.
Set forth below is selected financial data of Predict It Inc. as of
December 31, 1999, and for the years ended December 31, 1999 and 1998. The
statements of operations and the balance sheet data as of December 31, 1999 and
for the years ended December 31, 1999 and 1998 have been derived from the
audited financial statements of Predict It Inc. included elsewhere in this
prospectus. Also set forth below are summary unaudited pro forma financial data
of Predict It Inc. The unaudited pro forma as adjusted statements of operations
data for the years ended December 31, 1999 and December 31, 1998 are presented
as if the acquisition of Virtual Stock Exchange, Inc. had occurred as of the
beginning of the periods presented. The unaudited pro forma as adjusted
financial data has been prepared based on the audited and unaudited financial
statements of Virtual Stock Exchange, Inc., which are included elsewhere in this
prospectus. The unaudited pro forma as adjusted financial data is not intended
to be an indication of the results that would have occurred for the periods
indicated or which may be realized in the future. The selected financial data
and summary unaudited pro forma as adjusted financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical financial
statements of Predict It Inc. and Virtual Stock Exchange, Inc. and the notes
thereto included elsewhere in the prospectus.
13
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------
SEPTEMBER 2, PRO FORMA AS ADJUSTED FOR
1997 EXCHANGE, INC.
(INCEPTION) ----------------------------
THROUGH YEAR ENDED DECEMBER 31, YEAR ENDED YEAR ENDED
DECEMBER 31, ---------------------------- DECEMBER 31, DECEMBER 31,
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
User fees................................... $ 7,712 $ 4,519 $ 24,173 $ 11,616
Advertising................................. 6,000 174,517 56,736 233,610
-------- ---------- ------------ ------------ ------------
13,712 179,036 80,909 245,226
-------- ---------- ------------ ------------ ------------
Costs and expenses:
Site development/maintenance................ 177,783 406,778 227,243 573,805
Selling, general and administrative(2)...... $ 21,402 340,698 2,786,164 503,679 2,882,615
Amortization of intangibles(1).............. 244,676 489,352 489,352
Interest expense (income)................... 3,000 856 9,768 8,144
-------- ---------- ------------ ------------ ------------
21,402 521,481 3,438,474 1,230,042 3,953,916
-------- ---------- ------------ ------------ ------------
Net loss before income tax.................... $(21,402) $ (507,769) $ (3,259,438) $ (1,149,133) $ (3,708,690)
======== ========== ============ ============ ============
Net loss per share--basic and diluted......... $ (.04) $ (.21) $ (.37) $ (.25) $ (.37)
======== ========== ============ ============ ============
Weighted average number of shares
outstanding................................. 488,412 2,381,327 8,872,400 4,581,327 9,972,400
======== ========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1999
------------
<S> <C>
BALANCE SHEET DATA:
Working capital...................................................................................... $ (680,986)
Total assets......................................................................................... 4,027,249
Long term debt....................................................................................... 51,773
Total liabilities.................................................................................... 1,864,517
============
Accumulated deficit.................................................................................. (3,788,609)
============
Total stockholders' equity........................................................................... 2,162,732
============
</TABLE>
- ------------------
(1) Represents amortization expense related to goodwill resulting from the
acquisition of Virtual Stock Exchange, which is being amortized over a
period of three years.
(2) Includes the impact of employment agreements entered into upon the
consummation of the acquisition of Virtual Stock Exchange, representing
additional costs of $114,000 and $57,000 for the years ended December 31,
1998 and 1999, respectively.
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<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Predict It Inc. provides user-generated prediction services on the
Internet. The innovative patent-pending system objectively measures, identifies
and ranks users, who are known as analysts, based on their prediction
performance in event categories such as sports, finance, politics, and
entertainment. The Predict It system then compensates these analysts when other
Predict It analysts seek out their opinions. The Predict It web site lends
itself to any set of events whose outcomes can be measured objectively and which
occur with some regularity. Currently, Predict It offers predictive services for
sports and finance, but we plan to expand our product offerings into additional
product categories, including politics and entertainment. Predict It Inc. is
publicly traded on the OTC Electronic Bulletin Board under the symbol "PRITE."
On April 28, 1999, Predict It completed a reverse merger with WDC
Development, Inc. in which we merged with and into WDC Development. WDC
Development was the surviving corporation and changed its name to "Predict It
Inc." The post-merger business of Predict It Inc. is identical to the pre-merger
business of Predict It Corp. and its predecessors. For accounting purposes, the
merger has been treated as a recapitalization of Predict It Corp. For tax
purposes, the merger was a tax-free exchange of equity securities. The
historical activities of WDC Development were limited to capital raising
activities, all of which were completed at or prior to the merger.
On June 30, 1999, through a wholly-owned Delaware subsidiary of Predict It
Inc., we acquired Virtual Stock Exchange, Inc., a company engaged in predictive
stock market simulations through its web site, www.VirtualStockExchange.com. The
acquisition was made in connection with our expansion into the area of financial
predictive services. As a result of the acquisition, we have recognized
approximately $1,468,000 of goodwill on our Balance Sheet. The goodwill is being
amortized over a three-year period.
On December 8, 1999, certain existing stockholders and a former director
made a bridge loan to us in the aggregate amount of $1,000,000. The loan was
evidenced by 1-year promissory notes in the aggregate amount of $1,000,000 plus
interest, which shall accrue at a rate of 10% per year, compounded annually. In
conjunction with the bridge loan, we issued warrants to purchase an aggregate of
625,000 shares of our common stock at an exercise price of $1.60 per share.
On February 14, 2000, Dawntreader Fund I LP, an existing shareholder, made
a bridge loan to us in the amount of $300,000. The loan was evidenced by a
one-year promissory note in the amount of $300,000, plus interest, accruing at
the rate of 10% per year, compounded annually. In conjunction with the bridge
loan, we issued warrants to purchase an aggregate of 187,500 shares of our
common stock at an exercise price of $1.60 per share.
On March 15, 2000, we received a bridge loan in the aggregate amount of
$1,000,000. The loan was evidenced by one-year promissory notes in the aggregate
amount of $1,000,000, plus interest, accruing at a rate of 10% per year,
compounded annually. In conjunction with the bridge loan, we issued warrants to
purchase an aggregate of 625,000 shares of our common stock at an exercise price
of $1.60 per share.
On March 13, 2000, we commenced a private offering of units consisting of
shares of Series B Preferred Stock and warrants to purchase shares of our common
stock. As a result of this offering, on April 14, 2000 we raised $4,300,000 and
issued to new and existing shareholders 43 units, consisting of an aggregate of
430,001 shares of Series B Preferred Stock and warrants to purchase an aggregate
of 4,300,010 shares of common stock. A total of 23 of these units were issued to
our former noteholders as a result of their conversion of promissory notes
totalling $2,300,000. In conjunction with this offering, warrants to purchase an
aggregate of 812,500 shares of common stock held by Dawntreader Fund I LP,
Robert H. Lessin and Patriot Capital Limited were cancelled.
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1999 VS. YEAR ENDED DECEMBER 31,
1998
REVENUES
Revenues increased to $179,036 for the year ended December 31, 1999, from
$13,712 for the year ended December 31, 1998. The increase in revenues was
primarily due to the fact that we did not commence significant revenue
generating activities in 1998. In addition, the acquisition of Virtual Stock
Exchange has significantly increased Predict It's membership, enabling us to
receive favorable advertising rates. Revenue
15
<PAGE>
for the year ended December 31, 1999 was from advertising revenues ($174,517)
and analyst subscriptions ($4,519).
SITE DEVELOPMENT AND MAINTENANCE EXPENSE
Site development and maintenance expense consist primarily of web site
hosting, maintenance expenses and amortization related to capitalized software
costs. Site development and maintenance expense was approximately $407,000 for
the year ended December 31, 1999 which includes approximately $82,000 of
amortization expense related to capitalized software costs and $249,000 in web
site hosting and maintenance costs. Site development costs incurred during the
year ended December 31, 1998 were approximately $178,000, including $90,000 of
amortization expense related to capitalized software costs and $25,000 in web
hosting and maintenance costs.
SELLING, GENERAL AND ADMINISTRATIVE
Selling general and administrative costs increased $2,445,466 from $340,698
for the year ended December 31, 1998 to $2,786,164 for the year ended
December 31, 1999. Staffing costs increased from $109,000 to $1,308,000. The
increase is attributable to our increase in personnel from 3 to 28 full-time
individuals. Operating costs increased from $26,333 in the year ended
December 31, 1998 to $197,871 in the year ended December 31, 1999 primarily due
to rent, utilities and insurance expenses. Professional fees for the year ended
December 31, 1999 and 1998 were $611,173 and $88,382, respectively. The increase
is primarily due to professional fees resulting from increased regulatory filing
expenses and consulting fees for public relations.
AMORTIZATION OF INTANGIBLES
Amortization expense for the year ended December 31, 1999 was $244,676
representing the amortization of the registered user base acquired from Virtual
Stock Exchange.
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1998 VS. SEPTEMBER 2, 1997
(INCEPTION) THROUGH DECEMBER 31, 1997
REVENUES
Revenues increased to $13,700 for the year ended December 31, 1998, from $0
for the period September 2, 1997 (Inception) to December 31, 1997. The increase
in revenues occurred due to the fact that we commenced revenue generating
activities in 1998. Advertising revenue increased to $6,000 and analyst
subscription revenue increased to $7,700 for the year ended December 31, 1998,
from $0 for the period from inception to December 31, 1997.
SITE DEVELOPMENT AND MAINTENANCE EXPENSE
Site development and maintenance expense consist primarily of web site
hosting, maintenance expenses and amortization related to capitalized software
costs. Site development and maintenance expense was $178,000 for the year ended
December 31, 1998 which includes $90,000 of amortization expense related to
capitalized software costs, $65,000 paid to a former source provider for the
transition to a new web site and $23,000 in web site hosting and maintenance
costs. Included in the $90,000 of amortization expense is approximately $49,000
of unamortized software costs which were deemed to be impaired, and written off,
as a result of rebuilding the site through a new provider. Site development
costs in 1997 were capitalized until the launch of our web site in April 1998.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs increased $320,000 from $21,000
in 1997 to $341,000 in 1998. Staffing costs increased from $9,000 to $141,000.
The increase is attributable to having three employees in 1998 as compared to
one in 1997. Operating costs increased from $3,000 in 1997 to $44,000 in 1998
primarily due to increased rent and moving costs as a result of our moving into
new office space in the third quarter of 1998. Professional fees for consulting,
legal and accounting services increased from $9,000 to $95,000. Marketing
expenses increased from $0 in 1997 to $45,000 in 1998 due to Internet
advertising of $23,000 and $20,000 in travel and entertainment.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through the private
placement of our preferred stock and the sale of our common stock. As of
December 31, 1999, we had approximately $734,574 in cash. On March 13, 2000, we
commenced a private offering of units consisting of Series B Preferred Stock and
warrants to purchase shares of our common stock. As a result of this offering,
on April 14, 2000, we raised $4,300,000 and issued to new and existing
stockholders 43 units, consisting of an aggregate of 430,001 shares of Series B
Preferred Stock and warrants to purchase an aggregate of 4,300,010 shares of
common stock. A total of 23 of these units were issued to our former noteholders
as a result of their conversion of promissory notes totalling $2,300,000. In
conjunction with this offering, warrants to purchase an aggregate of 812,500
shares of common stock held by Dawntreader Fund I LP, Robert H. Lessin and
Patriot Capital Limited were cancelled. We believe our existing cash balances
will be sufficient to meet anticipated cash requirements for the next twelve
months.
Our capital requirements depend on numerous factors, including (i) market
acceptance of Predict It's services; (ii) the amount of resources we devote to
investments in our product development; and (iii) the resources we devote to
sales and marketing.
We anticipate that we will continue to evaluate possible investments in
business, products and technologies, and plan to expand our sales and marketing
programs while conducting more aggressive brand promotions.
YEAR 2000 COMPLIANCE
To date, we have not experienced any disruption in our services as a result
of, nor has any third-party vendor on which we depend been affected by, the
commencement of the year 2000. Although we do not anticipate that our web sites
will be affected by the year 2000, if we, or third-party providers of hardware,
software and communications services, fail to remedy any year 2000 issues, the
result could be lost revenues, increased operating expenses, the loss of
customers and other business interruptions, any of which could harm our
business. The failure to adequately address year 2000 compliance issues in the
delivery of products and services to our customers could result in claims
against us of misrepresentation or breach of contract and related litigation,
any of which could be costly and time consuming to defend.
Our worst case scenario for year 2000 problems would be the failure of our
Version 3 products and Oracle database, resulting in loss of data. To protect
against the failure of our Version 3 and Oracle database in the year 2000, we
have implemented Raid 0+1 Oracle mirroring and striping for fail over and an
Oracle Replication Server, nightly back-ups, and an archive log so that we can
recover all data up to the time of a potential system failure caused by Year
2000 failure. In the event of a Year 2000 failure we will be required to devote
resources to correct it. Due to our skilled in-house developers and the strength
of our existing vendor relationships, we believe we will be able to respond
promptly to any failures that may still occur.
17
<PAGE>
BUSINESS
PREDICT IT
OVERVIEW
Our business is the development of interactive products, which are
distributed through the Internet. The Predict It product allows users to
participate actively by predicting the outcome of events and evaluating the
results of their participation with those of other Predict It users. The Predict
It product also lends itself to calculating predictions for any set of events
whose outcome can be measured objectively. Our initial product offering,
"Predict It Sports," allows users to pick and exchange predictions on sporting
events with fellow users. Our database then calculates the accuracy of these
predictions and allows users to view those results. Our system, unlike chat
rooms, bulletin boards and stock tracking systems, enables users to quickly find
and view the predictions of the best analysts, who in turn earn money each time
their predictions are viewed. Users may post predictions and view the
predictions of others free of charge.
On March 1, 2000, we entered into an agreement with China Interactive Media
Group to establish an online prediction company to be known as Predict It China.
Under this agreement, China Interactive is bringing our Internet technology and
business models to the Asian Internet market. Predict It China is based in
Beijing and began operations in March 2000. Under the terms of the agreement,
China Interactive is providing initial financing, the core management team, and
operating support for Predict It China, while we are contributing to Predict It
China's proprietary technology and intellectual capital.
On March 2, 2000, we entered into a license agreement with Predict It
China, LLC. Under this agreement, Predict It China is bringing our Internet
technology and business models to the Asian Internet market. Under the terms of
the agreement, Predict It China is obligated to pay us a fee for the license.
On June 30, 1999, through a wholly-owned Delaware subsidiary of Predict It
Inc., we acquired 100% of the stock of Virtual Stock Exchange, Inc., a Delaware
corporation. In exchange, we issued 2,700,000 shares of our common stock,
representing approximately 22.5% of our outstanding common stock. Of the shares
issued, 500,000 shares will be held in escrow with 50% of such shares to be
released in January 2000 and the remaining 50% to be released in January 2001,
as long as the number of registered users and page views for the combined
entities exceeds certain specified amounts. Virtual Stock Exchange's business is
an interactive web site where individuals create and manage hypothetical stock
portfolios, conduct mock trading, and compete with other members for prize
money, generally not to exceed $1,000 per month, based on their portfolio
performance. The web site also provides quotes and research on United States
financial markets through links to other sites, and a forum for individuals to
exchange ideas with other members on a variety of investment topics. Virtual
Stock Exchange operates www.VirtualStockExchange.com, which services over
100,000 registered members and generates in excess of 4.5 million page views per
month. Consumers may access Virtual Stock Exchange directly via its web site or
through other web sites, including Crosswalk.com, Planetdirect.com and
Collegestudent.com.
We market our product by entering into partnerships with relevant industry
and news content providers. We earn revenue principally by the sale of
advertisements either by us directly or on a revenue sharing basis with our
partners. Unlike other businesses on the Internet, our strategy is to provide
unique, compelling and user-generated content that encourages repeat visits to
our web sites and those of our partners.
INDUSTRY BACKGROUND
The Internet has emerged as a mass-market global medium for communications,
information and online commerce, enabling millions of users to obtain and share
information, and interact and conduct business electronically. Industry analyst
International Data Corporation estimates that the number of Internet users was
approximately 97 million at the end of 1998 and will reach approximately 320
million by the end of 2002, representing a compound annual growth rate of
approximately 35%. The growth in Internet usage is being driven by several
factors, including an increasing base of computers in the home and in the
workplace, advancements in the performance and speed of personal computers,
improvements in network infrastructure, more convenient, faster and cheaper
access to the Internet and increased public awareness of benefits of using the
Internet.
18
<PAGE>
In addition to its benefits for individuals, the Internet provides
businesses with a new method for delivering product information, as well as
marketing and selling products and services. As the Internet has grown, many
businesses have recognized the Internet as an important vehicle for
communicating with customers and changing traditional business processes and
practices. As businesses have turned to the Internet as a new way to reach
consumers, they have developed web sites designed to hold users' attention for
extended time periods. More recently, new technology has enabled commercial
transactions to be conducted over the Internet, creating the opportunity for
business-to-consumer and business-to-business electronic commerce. According to
International Data Corporation, worldwide electronic commerce revenue was
approximately $32 billion in 1998 and is expected to grow to more than $425
billion in 2002, representing a compound annual growth rate of approximately
90%.
We believe that the creation of web sites designed to hold users' attention
for extended time periods is an emerging market opportunity. Properly developed,
these consumer-friendly web sites may alter the way businesses interact with
their customers. Nevertheless, significant shortcomings in the way users
interact with the Internet must be overcome for this market opportunity to be
fully realized. In short, web sites need new ways to encourage visits and
increase repeat visits to their sites.
THE PREDICT IT SOLUTION
We believe one of the major problems with the Internet is that every web
site is competing to become the most visited web site on the Internet. Building
brand loyalty and attracting visits to a web site has become increasingly
costly, with intense competition and constant upgrades and enhancements required
by web developers who are trying to keep up with competitors by adding new
content to keep users at the site for extended periods and to create demand for
users to return to the site.
The answer for many of these web sites has been to incorporate the content
of other, third party, web-sites, in order to increase speed to market for new
features and enhancements to the site. By incorporating the content of other,
third party, web sites, these web sites are able to maintain their business
focus of growing their membership bases and attracting new users to their sites.
Predict It provides a solution for these content sites by providing its
customers with a comprehensive, ready to use product, that can be incorporated
within the customers web site without altering the overall look and feel of
their own web site. This allows web sites to attract new users and retain
existing users without having to hire new staff, install new software or buy new
hardware. We believe the Predict It solution is well positioned to benefit from
this trend.
In short, Predict It will offer its users:
o A comprehensive, ready to use product, designed to hold users' attention
and encourage repeat visits by providing content that retains the look
and feel of the customer's existing site;
o New revenue opportunities;
o Detailed reports on usage patterns and registered users; and
o Reliability, performance and scalability.
PRODUCTS AND SERVICES
Our initial product is Predict It Sports, which was originally introduced
as SportsCappers in March 1998 and re-introduced in September 1998. Predict It
Sports is a sports information service that contains content and quantitative
opinions on sporting events that are user-generated. It permits tracking of the
accuracy of members' sports predictions and displays them in a manner that
encourages competition and motivates repeat visits to the site. The service
caters to sports fans that want to exercise their competitive nature by
competing against other users. The site documents the performance of registered
users and allows viewing of prior and future predictions of top performers based
on their historical success. Entering predictions is free to anyone who visits
the site and wishes to participate. In addition, as an added incentive to
encourage repeat site utilization, registered users share in a unique revenue
structure that pays registered users each time their predictions are viewed.
Incentive payments are presently paid at the rate of $10 per 1,000 pages viewed,
so that more money is earned each time a user's prediction is viewed. This
encourages usage by some of the very best amateur analysts and makes the site a
compelling destination for sports enthusiasts. We believe our
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service is more appealing to users of other sports information services since
our service caters to sports fans who want to exercise their sports expertise by
competing against other sports enthusiasts. Our site now focuses on football,
basketball, hockey and baseball, and has the potential to expand into other
global sports markets by extending coverage to international sports, including
rugby, cricket and track and field.
The Predict It Sports product is the first of several sites to be developed
using the Predict It concept. Other usages may include financial information,
current events, and entertainment. According to Intelligent Worldwide, an
industry analyst, 71% of online users look for general news, 59% access
entertainment information, 50% look for sports information, and 40% use the web
to monitor stocks or other investments. The potential of these markets presents
opportunities for us to expand our Predict It database of information.
On November 10, 1999, we entered into a three-year agreement with an
on-line content provider, pursuant to which we have agreed to design, produce,
host, operate, maintain and support different versions of the content provider's
online sports prediction service.
On November 18, 1999, we introduced a redesigned web site,
www.sports.predictit.com, enabling users to gain access to global events using
up-to-the-minute information, increased research capabilities, and additional
features.
On July 16, 1999, we introduced the Predict It Network web site, which we
plan to use to integrate all of our current and future products, including
Predict It Sports and Virtual Stock Exchange, with products that we may acquire.
This will allow us to integrate additional products and services that we may
develop or acquire. In addition, we built the Predict It Network web site so
that, as the number of users increases, all of our users will be able to access
our web sites at one time. Our Predict It Network web site is located at
www.predictit.net.
On June 30, 1999, through a wholly-owned Delaware subsidiary of Predict It
Inc., we purchased Virtual Stock Exchange, Inc., a Delaware corporation. Virtual
Stock Exchange's business is an interactive Internet application where
individuals create and manage hypothetical stock portfolios, conduct mock
trading, and compete with other members for prize money, generally not to exceed
$1,000 per month, based on their portfolio performance. The web site also
provides quotes and research on United States financial markets through links to
other sites, and a forum for individuals to exchange ideas with other members on
a variety of investment topics. Virtual Stock Exchange operates
www.VirtualStockExchange.com, which services over 100,000 registered members and
generates in excess of 4.5 million page views per month. Consumers may access
Virtual Stock Exchange directly via its web site or through other web sites,
including Crosswalk.com, Planetdirect.com and Collegestudent.com. For a period
of nine months following the Virtual Stock Exchange acquisition, Messrs. Cheng
and Yen, the principle founders of Virtual Stock Exchange served on our
management team as Vice President of Business Development and Director of
Technology, respectively. Effective as of March 1, 2000, Messrs. Cheng and Yen
resigned from their respective offices in order to pursue other opportunities.
However, Mr. Cheng will continue to serve as a member of our board of directors.
PREDICT IT DATA SYSTEM
Predict It has developed a patent-pending database system (which includes
data-model, system architecture, SQL calls, mathematical formulae and
user/administration interface) which lends itself to any set of events whose
outcome can be measured objectively. The initial product on our patent-pending
database system, Predict It Sports, enables users to enter predictions on
sporting events. Our system then stores the user's predictions, allowing other
users access to the entered prediction. Upon conclusion of the sporting event
being predicted, our system calculates/tabulates the accuracy of the predictions
and allows other users to view the entries and the results. Our system ranks the
top analysts based on the accuracy of their predictions, and this information is
made available to other users. The logical structures underlying our system can
be modified for expansion into other areas of interest (politics, for example),
based upon modifications to our database to include the underlying information
for the subject matter of the new area in which our system would be used.
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PREDICT IT SYSTEM FEATURES
FOR USERS
o Live Demo. Anonymous users navigating the system see live data. Seeing
current games and current user records encourages participation.
o Easy Registration. A two-tier registration system makes it easy for
users to get started. The first tier registration, which gives users
total access, requires only the user's nickname, email address and
password. To receive their earnings payments, users must complete the
more personal name, address and telephone fields.
o Intuitive Pick Entry. The layout of the pick entry page makes it easy
for novice sports fans to participate.
o Advanced Research Capability. The cornerstone of the Predict It concept
is the up-to-the-minute reporting system, which allows users to find the
top performers in any category over any period of time. Users can gather
further information by viewing the details associated with anyone's
record to see how these top performers accomplished their impressive
track records.
o Up-to-the-minute Earnings Reports. Earnings are calculated and posted to
users' accounts immediately following each event for which predictions
were posted.
o User Registration Management. These controls allow users easily to
change their email address, password and contact information.
FOR PUBLISHERS
o Branding. Publishers incorporate their site's logo, design and
functionality together with the Predict It product to create a custom
menu so the users feel as though they are still in the publisher's site.
In addition, our products can be customized to the publisher's
specifications, providing enhanced branding opportunities.
o Advertising Management. Using the DoubleClick Dart system, publishers
have access to a powerful and flexible advertising management system,
which can be used independently of or in conjunction with the publishers'
existing advertising management system.
FOR INTERNAL ADMINISTRATORS
o Easy Expansion into New Sports. All of the world's major sports leagues
are already loaded into the database and can be activated within seconds.
If a real time feed is not incorporated or is not available for that
sport, all of the tools exist to manually input the events and results.
o Up-to-the-minute information. We have signed contracts with
SportsTicker, owned in part by ESPN, and PC Quote, to provide the latest
information to the users of our sports and financial products.
SYSTEM INTEGRITY CONTROLS
o Pick Entry. The system traps for and eliminates all of the possible ways
that users may attempt to enter picks on events already underway.
o Earnings. The system controls for users who may repeatedly access their
own picks or the picks of their friends in an attempt artificially to
increase earnings balances.
CUSTOMERS AND DISTRIBUTORS
We generate revenues from advertising sold on our site and on our partners'
sites. We optimize our revenues by entering into partnerships with other web
sites to attract advertisers to specific market niches. In this way, we can
expand our opportunities to reach more users who will view the services that we
offer.
Consequently, our strength lies in our ability to generate revenue through
our partner relationships with limited marketing and advertising expenditures.
Our partner relationships allow us to attract visits to our web sites and those
of our partners based on the strength of our partners' marketing and advertising
efforts. In
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return for providing our partners with content and their ability to increase
their advertising revenue, we generally share 50% of our partners' advertising
revenue that our Predict It service generates from our partners' web sites. We
believe that this creates an attractive opportunity for establishing partner
relationships since we provide our partner with free content and increased
advertising revenue opportunities and because our product encourages users to
make repeat visits to our partners' sites.
Our current partners are:
o CBS Sportsline
o Didax (Crosswalk)
o MyWay.com
o DBC Sports
o Sports.com (Sportsline)
o Vegas Insider (Sportsline)
o CMP
o Venture Catalyst
o Nando Media
o LA Times
o Carolina Hurricanes
o Meadowlands Racetrack
o Sportal UK, Ltd
o Snowball/IGN.com
o TodaysSports.com
o Fuxito Worldwide, Inc
o College Student.com
o Rouze Media
o Soccerage.com
o The Sports Daily
o Voice Media
o Soccer Alliance
o Wall Street Gals
o Bettors World
o Investor Links
o Web On-Site
o Acceleration Software
o Silly Sports
o The Daily Spread
o SHGoddess
o MLB Fans
o SportsRumble
o Sport Hits
o Women's Basketball
o Football USA
o Aces Sportsbook
o American Digital Media
o NFL Fans
o SSG Online
o GLE Sports
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o Bet Maker
o The Prescription.com
o The Jaguar Syndicate
o Sport Chip
o Troutsports
o Hockeysfuture (Beano)
o Square Circle Media
o The Black World Today
o S & H Gaming
o Singled In
o EnterSports
o Street Insider
o Gay Financial Network
o Market Voyager
o SportsJuice.com
o US Fans
o Sportstation
o Smart Ray Network
o Scrum.com
Each web page of our web site is designed to optimize potential advertising
opportunities without diminishing the overall user experience. The layout
generally is configured to allow for 1 larger and 3 smaller advertisements. This
design allows the site to generate a high potential cost per thousand without
alienating the viewer. We anticipate that the bulk of advertising to be priced
on a cost per thousand basis. At present, our rates are $25, with discounts for
volume purchases. In certain circumstances, we may elect to accept advertising
purchases on a cost-per-click or cost-per-lead basis or barter basis. We may use
this rate structure when the potential revenue is projected to be greater than a
cost per thousand basis or if excess inventory is available. Through
December 31, 1999, we had entered into one barter arrangement in which we
provided 875,000 impressions per month for three months and the customer
provided the same.
As the Internet advertising market matures, online advertising decisions
will increasingly be made on the ability of a web site to reach certain
demographics desired rather than on the ability to deliver bulk viewers. We
believe that we are in a position to take advantage of this opportunity because
of the nature of our products and services. Our initial target market of United
States and international sports information and financial markets represents an
attractive demographic for potential advertisers since the sports and finance
areas have historically generated substantial users with favorable demographics.
COMPETITION
The interactive sports and stocks categories are rapidly evolving and very
competitive. Although there are no substantial barriers to entry in this market,
we believe we can discourage potential competitors from entering the market by
demonstrating leadership in the following areas: audience reach, compelling
content, operational excellence, strategic alliances, functionality of the web
site, scalability of technology, brand recognition and member affinity and
loyalty.
We compete directly or indirectly for advertisers, viewers, members and
content providers with competitors that fall within the following two
categories:
o Interactive game-based communities, such as Sandbox.com, Smallworld.com
and HollywoodStockExchange.com; and
o Community-generated ratings and advice web sites, such as Deja.com,
Clearstation.com, Inforocket.com, I-Exchange.com, Raging Bull.com and
Epinions.com
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We believe that other competitive sites that provide for online sports
pools, sweepstakes, and competition in financial market predictions present an
opportunity for us rather than a competitive threat, since our products and
services can be used as tools for individuals who are avid participants at these
other sites. By providing a source of knowledge to viewers, we believe our
products and services will encourage users of these sites to visit our sites to
view the predictions of our members.
We anticipate that the number of direct and indirect competitors will
increase in the future. This could result in price reductions for advertising,
reduced margins, greater operating losses or loss of market share, any of which
would materially adversely affect our business, results of operations and
financial condition.
We also compete for visitors with many Internet content providers and
Internet service providers, including web directories, search engines, shareware
archives, content sites, commercial online services and sites maintained by
Internet service providers, as well as thousands of Internet sites operated by
individuals and government and educational institutions. These competitors
include free information, search and content sites or services, such as America
Online, CNET, CNN/Time Warner, Excite, Infoseek, Lycos, Microsoft, Netscape and
Yahoo!. We also compete with the foregoing companies, as well as traditional
forms of media such as newspapers, magazines, radio and television, for
advertisers and advertising revenues. We believe that the principal competitive
factors in attracting advertisers includes the amount of visits to our web site,
brand recognition, customer service, the demographics of our members and
viewers, our ability to offer targeted audiences and the overall
cost-effectiveness of the advertising medium we offer. We believe that the
number of Internet companies relying on web-based advertising revenue will
increase substantially in the future. Accordingly, we will likely face increased
competition, resulting in increased pricing pressures on our advertising rates
which could in turn have a material adverse effect on our business, results of
operations and financial condition.
Many of our existing and potential competitors, including web directories
and search engines and large traditional media companies, have longer operating
histories in the web market, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we have
currently. Our competitors may be able to undertake more extensive marketing
campaigns for their brands and services, adopt more aggressive advertising
pricing policies and make more attractive offers to potential employees,
distribution partners, commerce companies, advertisers and third-party content
providers. Advertisers may perceive Internet content providers and Internet
service providers, including web directories, search engines, shareware
archives, sites that offer professional editorial content, commercial online
services and sites maintained by Internet service providers as more desirable
web sites for placement of advertisements.
In addition, substantially all of our current advertising customers and
partners also have established collaborative relationships with certain of our
competitors or potential competitors, and other frequently-visited web sites.
Accordingly, we cannot be certain that we will be able to grow our membership
base, usage levels and advertiser customer base at historical levels or retain
our current members, usage levels or advertiser customers. Advertisers may find
other web sites more attractive if web usage grows at a faster rate on the web
sites of competitors and thus, our partners may decline to renew their
agreements with us. We may not be able to compete successfully against our
current or future competitors and competition could have a material adverse
effect on our business, results of operations and financial condition.
TECHNOLOGY
As of April 14, 2000, our public web site, www.predictit.com, which
features the Predict It Sports service, is currently hosted and maintained by
Frontier Global Center. Frontier Global Center provides a guaranteed 99.7%
uptime and monitors all aspects of the servers on a 24-hour basis using a pager
gateway with a 15-minute response time in off-hours. Frontier Global Center
provides an on-call telephone line answered 24 hours a day by on-duty engineers
and maintains UPS systems capable of maintaining power on battery for several
hours.
Predict It services are written in Java using an Oracle database and run on
a Unix platform. The system was designed using state-of-the-art technology and
is fully scalable with respect to anticipated increases in traffic.
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INTELLECTUAL PROPERTY
Predict It seeks to protect its proprietary rights, but its actions may be
inadequate to protect its patents, trademarks or other proprietary rights to
prevent others from claiming violations of their proprietary rights. Predict It
has one patent application on file with the United States Patent and Trademark
Office. Predict It enters into confidentiality agreements with its employees,
consultants and distributors, and generally controls access to and distribution
of its proprietary information. Despite Predict It's efforts to protect its
proprietary rights from unauthorized use or disclosure, parties may attempt to
disclose, obtain or use its proprietary information. The steps Predict It has
taken may not prevent misappropriation of its proprietary information. Third
parties may infringe or misappropriate Predict It's proprietary rights, which
could have a material adverse effect on Predict It's business, results of
operations and financial condition. The validity, enforceability and scope of
protection of proprietary rights in Internet-related industries is uncertain and
still evolving.
Furthermore, third parties may assert infringement claims against Predict
It. Claims relating to infringement of the trademarks and other intellectual
property rights of third parties and any resultant litigation, should it occur,
could subject Predict It to significant liability for damages and could result
in the invalidation of Predict It's proprietary rights. In addition, even if
Predict It prevails, any litigation could be time-consuming and expensive to
defend, and could result in the diversion of management's time and attention,
any of which could materially adversely affect Predict It's business, results of
operations and financial condition. Any claims from third parties may also
result in limitations on Predict It's ability to use the trademarks and other
intellectual property subject to those claims unless Predict It enters into
agreements with the third parties responsible for those claims. However, such
third-party agreements may be unavailable on commercially reasonable terms.
We seek to protect our copyrights, service marks, trademarks, trade dress
and trade secrets through a combination of laws and contractual restrictions,
such as confidentiality agreements. For example, we attempt to register our
trademarks and service marks in the United States and internationally. However,
effective trademark, service mark, copyright and trade secret protection may not
be available in every country in which our services are made available online.
We currently own a number of Internet domain names, including
PredictIt.com, SportsCappers.com Predictit.net, and VirtualStockExchange.com.
Domain names generally are regulated by Internet regulatory bodies. The
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. We, therefore, may be
unable to prevent third parties from acquiring domain names that infringe or
otherwise decrease the value of our trademarks and other proprietary rights.
NEW AND EXISTING REGULATION ON THE INTERNET
We are subject to the same federal, state and local laws as other companies
conducting business on the Internet. Today, there are relatively few laws
specifically directed towards online services. However, due to the increasing
popularity and use of the Internet and online services, it is possible that laws
and regulations will be adopted with respect to the Internet or online services.
These laws and regulations could cover issues such as online contracts, user
privacy, freedom of expression, pricing, fraud, content and quality of products
and services, taxation, advertising, intellectual property rights and
information security. Currently, applicability to the Internet of existing laws
governing issues such as property ownership, copyrights and other intellectual
property issues, taxation, libel, obscenity and personal privacy is uncertain.
Several states have proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission also has recently
started a proceeding with one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues could directly affect the way we do business or could create uncertainty
in the marketplace. This could reduce demand for our services or increase the
cost of doing business as a result of litigation costs or increased service
delivery costs, or could otherwise harm our business. In addition, because we
offer our services to users worldwide, foreign jurisdictions may claim that we
are required to comply with their laws. In some jurisdictions, we may be
required to collect value-added taxes on our fees.
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Our inadvertent failure to comply with foreign laws could subject us to
penalties ranging from fines to bans on our ability to offer our services.
EMPLOYEES
As of April 14, 2000, we had 32 full-time employees, including 6 in sales
and business development, 20 in product development/technology and 6 in
corporate and administrative functions. From time to time, we also employ
independent contractors to support our engineering, marketing, sales and support
and administrative organizations. We depend on our key personnel to manage our
business effectively in a rapidly changing market. For a more detailed account
of our key personnel, please see the "Risk Factors" and "Management" sections.
FACILITIES
We are headquartered in New York City, where we lease approximately 4,900
square feet at 268 W. 44th Street, 5th Floor, New York, New York 10036. The term
of this lease is 6 years, 2 months and the average monthly payment over the term
of the lease is $12,935. We believe that our existing facilities are adequate to
meet our current and foreseeable requirements or that suitable additional or
substitute space will be available as needed.
LEGAL PROCEEDINGS
Predict It is not a party to any material legal proceedings.
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MANAGEMENT
The following table sets forth certain information with respect to our
executive officers, directors and key employees as of April 14, 2000:
<TABLE>
<CAPTION>
NAME AGE COMPANY POSITION AND OFFICES HELD
- ---------------------------------------------- --- ---------------------------------------------
<S> <C> <C>
Andrew P. Merkatz............................. 31 President and Director
Desmond Glass................................. 30 Corporate Controller
Robert Jacobs................................. 38 Senior Vice President of Business Development
Geordie Pace.................................. 35 Senior Vice President of Product Development
Alana Oldham.................................. 30 Chief Technology Officer
Jeffrey Berman................................ 31 Vice President of International Business
Development
Gary Cheng.................................... 25 Director
Andrew Weissman............................... 32 Secretary and Director
Ajmal Khan.................................... 38 Director
Carol Lee..................................... 41 Director
</TABLE>
Andrew P. Merkatz, age 31, became the President of Predict It as of
May 17, 1999. Immediately prior to joining Predict It, from 1998 to 1999,
Mr. Merkatz was the Vice President of Corporate Development and Finance for
FLOORgraphics, Inc., an out-of-home media company based in Princeton, New
Jersey. Between 1995 and 1998, he was the Chief Financial Officer and Chief
Operating Officer of SiteSpecific, Inc., a New York-based Interactive Marketing
Agency that he assisted in founding in 1995. Mr. Merkatz began his career in
1990 as a Private Equity Analyst for Interlaken Capital, Inc., in Greenwich,
Connecticut. He received his B.A. in Economics from the University of
Pennsylvania and his M.B.A. from Harvard University Graduate School of Business
Administration.
Desmond Glass, age 30, joined Predict It in September 1999 as its Corporate
Controller. Prior to that, between May 1996 and 1999, Mr. Glass worked at
Primedia, where he served as Controller of Automobile Magazine and the Modern
Bride Group. Prior to serving as a Controller at Primedia, Mr. Glass worked in
the acquisition department at Primedia, where Mr. Glass performed financial due
diligence for acquisition candidates. Between 1994 and 1996, Mr. Glass held a
senior position within the internal audit department of Capital Cities/ABC.
Prior to his affiliation with ABC, between 1990 and 1994, Mr. Glass worked at
Deloitte & Touche LLP, where he was responsible for clients in the financial and
manufacturing industries. Mr. Glass is a member of the Institute of Chartered
Accountants and attained his Bachelor of Commerce degree from University College
Dublin, Ireland.
Robert Jacobs, age 38, has served as Vice President of Business Development
for Predict It since July 1998 and as Senior Vice President of Business
Development since June 1999. Between 1990 and 1998, Mr. Jacobs was employed by
Bergen Brunswig Corporation, holding several sales and management positions of
increasing responsibility. Prior to joining Bergen Brunswig, Mr. Jacobs was a
Director of LaRae Enterprises, a private investment banking firm focusing
primarily on mergers and acquisitions. Mr. Jacobs received a B.A. in Psychology
from UCLA.
Geordie Pace, age 35, joined Predict It in June 1999 as its Senior Vice
President of Product Development. Prior to that, Mr. Pace worked at PaceKim
Partners, the Internet consulting agency that he co-founded in 1998. Between
1997 and 1998, Mr. Pace was Director of Production and Technology for CKS New
York (now USWEB/CKS), where he was responsible for creating interactive
strategies for such clients as Audi, Duracell and W.W. Grainger. Between 1996
and 1997, Mr. Pace served as Associate Creative Director and Director of
Production at SiteSpecific Inc., a New York-based Interactive Marketing Agency
that was acquired by CKS in 1997. From 1994 to 1996, Mr. Pace served as Special
Projects Manager at the University of Missouri, College of Engineering.
Alana Oldham, age 30, has served as our Chief Technology Officer since July
1999. Between June 1998 and July 1999, Ms. Oldham served as the Director of
Technology of Pixelpark, an international e-commerce Internet agency which is a
subsidiary of Bertelsmann AG. At Pixelpark, Ms. Oldham built strategic and
technical teams and created e-business solutions for clients such as Proctor &
Gamble, The Museum of Modern Art and Radio Shack. Prior to joining Pixelpark,
Ms. Oldham served as a technology innovator for
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companies, including THINK New Ideas, where she was a technical producer from
August 1995 to March 1996, and Sun Microsystems where she was a programmer from
October 1993 to September 1994.
Jeffrey Berman, age 31, has served as Vice President of International
Business Development since March 27, 2000. From 1997 to 2000, Mr. Berman served
in marketing and business development capacities and, most recently, Senior
Manager, Business Development at SportsLine.com. From 1994 to 1997, Mr. Berman
served as Regional Marketing Manager for Falk Associates Management Enterprises,
subsidiary of SFX Entertainment. Mr. Berman holds a B.A. in Public Policy from
Duke University and an M.B.A. from Georgetown University.
Gary Cheng, age 25, has served as a Director of Predict It since 1999. From
July 1999 to March 1, 2000, Mr. Cheng served as our Vice President of Business
Development. From 1997 to July 1999, Mr. Cheng served as the President of
Virtual Stock Exchange, a New York-based stock market simulation, message board
and prediction company, which he co-founded in 1997. From August 1996 to 1997,
Mr. Cheng served as a consultant at Systems & Computer Technology Corporation,
where he helped develop and launch their Web for Faculty and Advisors product.
Mr. Cheng holds a B.S. in Electrical Engineering from Cornell University.
Andrew Weissman, age 32, has been the Secretary and a Director of Predict
It since 1998. Since June 1998, Mr. Weissman has been a Senior Vice President
with the Dawntreader Fund I LP, which is a venture capital fund focused on early
stage Internet companies. Between November 1997 and June 1998, Mr. Weissman was
the President of Virtuosity Press, a start-up company formed to acquire the
copyrights to out-of-print and out-of-stock books. Between October 1997 and
1998, Mr. Weissman was Senior Counsel at America Online, and was responsible for
structuring and negotiating content distribution, marketing and e-
commerce-related transactions with AOL's largest distributors. He has also
practiced media and corporate law in Washington, D.C. and New York City, and
holds a B.A. in Economics from Wesleyan University and a J.D., magna cum laude,
from Georgetown University.
Ajmal Khan, age 38, has served as a Director of Predict It since 1999. In
1989, Mr. Khan founded Verus Capital Corp., a diversified investment group, and
has served as its President since its inception. He has been involved in
successfully structuring and syndicating North American real estate and
corporate acquisitions. Verus' principal activities involve the ownership of
hotels, venture capital financing, corporate acquisitions, and several
franchising and licensing joint ventures. Since February 1999, Mr. Khan has
served as a Director of Wattage Monitor, Inc., which provides electric rate
information over the Internet. Since October of 1998, Mr. Khan has served as a
Director of Advanced Bodymetrics, Inc., a publicly-traded high-tech company
dedicated to developing sports wristwatches that are able to monitor and display
various functions of the human body. Since July of 1998, Mr. Khan has also
served as a Director of iParty Corp., a publicly-traded company dedicated to
providing information and services with respect to coordinating parties and
events. Since June 1999, Mr. Khan has also served as a Director of On2.com Inc.,
a publicly-traded company that develops broadband video compression.
Carol Lee, age 41, has served as a Director of Predict It since 1999. Since
1990, Ms. Lee has been employed at The Prospero Group, a real estate investment
company, where she has served as President since 1999. Between 1990 and 1998,
Ms. Lee served as Vice President of Prospero. Ms. Lee holds a Bachelor of
Commerce from the University of British Columbia and an M.B.A. from Harvard
University.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
During the last five years, none of the directors, executive officers or
control persons of Predict It have been:
o A party to a bankruptcy proceeding;
o Convicted in a criminal proceeding;
o Subject to any order, judgment or decree permanently or temporarily
enjoining, barring, suspending or otherwise limiting his involvement in
any type of business, securities or banking activities; or
o Found to have violated a federal or state securities or commodities law.
DIRECTOR COMPENSATION
Compensation of Directors consists solely of reimbursement of their
expenses for attending meetings.
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EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to our Chief
Executive Officer and all of our executive officers who received compensation in
excess of $100,000 for the fiscal year ended December 31, 1999:
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------------------
AWARDS
-----------------------
ANNUAL COMPENSATION SECURITIES PAY-OUTS
--------------------------------------- RESTRICTED UNDERLYING -----------------------
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION AWARDS SARS PAY-OUTS COMPENSATION
- ---------------------------- ---- ---------------- ----- ------------ ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Andrew P. Merkatz(1) ....... 1999 $ 87,499.95 0 0 0 945,475 0 0
Chief Executive Officer 1998 $ 0 0 0 0 0 0 0
and Director
Robert Jacobs............... 1999 $ 102,500.04 0 0 0 27,250 0 0
1998 $ 39,023.48 0 0 0 81,750 0 0
</TABLE>
- ------------------
(1) Mr. Merkatz became our President and Chief Executive Officer on May 19, 1999
OPTION GRANTS IN 1999
Set forth below is information on grants of stock options for our executive
officers for the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------
% OF TOTAL OPTIONS
NUMBER OF GRANTED TO EMPLOYEES EXERCISE PRICE
NAME OPTIONS GRANTED IN FISCAL YEAR PER SHARE EXPIRATION DATE
- ------------------------------------------ --------------- -------------------- -------------- ---------------
<S> <C> <C> <C> <C>
Andrew P. Merkatz......................... 537,198 30% $ 2.00 5/18/02
Andrew P. Merkatz......................... 168,006 9.3% $ 2.62 5/18/02
Andrew P. Merkatz......................... 9,421 .5% $ 1.75 5/18/02
Andrew P. Merkatz......................... 15,971 .8% $ 2.00 5/18/02
Andrew P. Merkatz......................... 214,879 12% $ 3.75 5/18/04
Desmond Glass............................. 70,000 3.9% $ 1.50 9/27/02
Alana Oldham.............................. 120,000 6.7% $ 2.00 7/27/02
Geordie Pace.............................. 15,000 .8% $ 1.50 9/27/02
Geordie Pace.............................. 100,000 5.5% $ 2.30 6/03/02
</TABLE>
COMPENSATION ARRANGEMENTS
On May 19, 1999, we entered into an Employment Agreement with Mr. Merkatz.
Mr. Merkatz'sinitial employment term expires on May 19, 2002. Mr. Merkatz
currently receives a base salary of $140,000 per year, which is subject to
review by management, and any merit increases will be subject to our company
policy. Under the terms of the agreement, Mr. Merkatz is eligible to receive a
bonus for services rendered, subject to the discretion of our Compensation
Committee. Upon executing his employment agreement, Mr. Merkatz received options
to purchase 537,198 shares of common stock at an exercise price of $2.00 per
share. Such options vest in equal portions over three years and have
anti-dilution protection. As a result of this anti-dilution protection, upon the
consummation of the Virtual Stock Exchange acquisition, Mr. Merkatz received an
option to purchase 168,006 shares of our common stock at an exercise price of
$2.62 per share, vesting in accordance with the above option. Also as a result
of the anti-dilution protection, and as a result of our issuance of additional
stock options to our employees, on August 18, 1999, November 18, 1999 and
February 18, 2000, Mr. Merkatz received options to purchase 9,421 shares of our
common stock at an exercise price of $1.75 per share, 15,971 shares of our
common stock at an exercise price of $2.00 per share and 62,050 shares of our
common stock at an exercise price of $1.38 per share,respectively, vesting in
accordance with the above options. In addition, Mr. Merkatz received a
performance-based option to purchase 214,879 shares of our common stock at an
exercise price of $3.75 per share which is scheduled to vest as follows:
(i) 50% of the performance-based option shall vest on May 1, 2000 if the number
of registered users of Predict It exceeds 312,500 by such date and the page
views of Predict It for April 2000 exceed 25,000,000; and (ii) the remaining 50%
of the performance-based option shall vest on May 1, 2001 if the
29
<PAGE>
number of registered users of Predict It exceeds 937,500 by such date and the
page views of Predict It for April 2001 exceed 85,714,275. However, in the event
the performance-based goals for the May 1, 2000 vesting schedule are not met by
such date, then if by May 1, 2001 the number of registered users of Predict It
exceeds 1,125,000 and the page views of Predict It for April 2001 exceed
102,857,130, then the whole performance-based option shall vest on May 1, 2001.
Such option does not have anti-dilution protection. In the event we terminate
Mr. Merkatz's employment for any reason other than "for cause," Mr. Merkatz will
be entitled to 180 days advance written notice of the termination and 30 days'
salary.
On May 1, 1999, we entered into a Consulting Agreement with Verus Capital
Corp., one of our stockholders, for a two-year term ending April 30, 2001. Under
the agreement, Verus receives $10,000 per month plus authorized out-of-pocket
expenses for providing Predict It with consulting and advisory services relating
to its business. We have the right to terminate the agreement "for cause" and
Verus is restricted during the term of the agreement, and for two years
thereafter, from competing directly or indirectly with us by engaging in any
competitive business or by rendering any services to any competitor of ours,
except in a limited capacity as a passive investor in a publicly-traded company.
On June 9, 1999, we entered into an Employment Agreement with Geordie Pace.
Currently, Mr. Pace's base salary is $115,000 per year, which is subject to
review by management, and any merit increases will be subject to our company
policy. In addition to his base salary, Mr. Pace shall be eligible to receive an
annual bonus of up to $30,000 upon meeting certain conditions. Mr. Pace has been
granted an option to purchase 100,000 shares of common stock at an exercise
price of $2.30 per share. Such option will vest over three years with one-third
of the shares exercisable on June 9, 2000 and one-sixth of the shares
exercisable every six months thereafter. Mr. Pace is an at-will employee. In the
event we terminate Mr. Pace'semployment for any reason other than "for cause"
Mr. Pace will be entitled to 30 days' salary and accrued vacation and bonus.
STOCK OPTION PLAN
On April 28, 1999, upon completion of the reverse acquisition, our 1999
Stock Option Plan became effective. On March 10, 2000, our 1999 Stock Option
Plan was amended to reserve a total of 3,000,000 shares of common stock, subject
to the approval of our stockholders.
OUR 1999 STOCK OPTION PLAN
Under our 1999 Stock Option Plan, key employees, officers, consultants and
directors are given an opportunity to acquire our shares. Our 1999 Stock Option
Plan provides for discretionary option grants, under which key employees,
officers, and consultants may be granted options to purchase our shares of
common stock at an exercise price not less than 85% of the fair market value of
our shares on the grant date. The options granted under our 1999 Stock Option
Plan may be either incentive stock options designed to meet the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended, or non-statutory
options not intended to satisfy such requirements. Options may be granted to
eligible individuals in our employ or service or in the service of any
subsequent corporation.
On March 10, 2000, our 1999 Stock Option Plan was amended to reserve a
total of 3,000,000 shares of common stock for issuance over the ten-year term of
our 1999 Stock Option Plan. Currently, there are 3,000,000 reserved shares of
our common stock which remain available for issuance.
Options have maximum terms of ten years from the grant date. Options are
not assignable or transferable other than by will or by the laws of inheritance.
The option may be exercised only by the optionee. The optionee will not have any
rights with respect to our shares of common stock underlying the options until
the options are exercised and the option price is paid for the purchased shares.
Our Board of Directors has the authority to cancel outstanding options in return
for the grant of new options for the same or a different number of shares with
an exercise price based on the lower fair market value of our common stock on
the new grant date. However, our Board of Directors may terminate our 1999 Stock
Option Plan at any time. Our 1999 Stock Option Plan terminates on April 28,
2009.
If we are acquired by merger, consolidation or asset sale, or there is a
hostile change in control, each option granted under the 1999 Stock Option Plan
may be accelerated, and all unvested shares issued under the 1999 Stock Option
Plan may be immediately vested.
30
<PAGE>
RELATED PARTY TRANSACTIONS
On May 1, 1999, we entered into a Consulting Agreement with Verus for a
two-year term, ending April 30, 2001. Under the agreement, Verus receives
$10,000 per month plus authorized out-of-pocket expenses for providing us with
consulting and advisory services relating to our business. Verus is one of our
stockholders and Ajmal Khan, one of our directors, is the President and founder
of Verus.
On December 8, 1999, existing shareholders, including Keith Rosenbloom, who
was serving as a director at such time and who is an existing shareholder, made
a bridge loan to Predict It in the aggregate amount of $1,000,000. The loans
were evidenced by promissory notes for an aggregate amount of $1,000,000, plus
interest accruing at the rate of 10% per year. In conjunction with the bridge
loans, we issued warrants to purchase an aggregate of 625,000 shares of our
common stock.
On February 14, 2000, Dawntreader Fund I LP, an existing shareholder, made
a bridge loan to us in the amount of $300,000. The loan was evidenced by a
one-year promissory note in the amount of $300,000, plus interest, accruing at
the rate of 10% per year, compounded annually. In conjunction with the bridge
loan, we issued a warrant to purchase 187,500 shares of our common stock at an
exercise price of $1.60 per share.
On April 14, 2000, we issued 23 units consisting of an aggregate of 230,000
shares of our Series B Preferred Stock and warrants to purchase an aggregate of
2,300,000 shares of our common stock to Dawntreader Fund I LP, Commonwealth
Associates, L.P., Falk Family Foundation, Michael Falk, Asia World Holdings
Ltd., Ed Shea, Robert Priddy, Robert O'Sullivan Family Trust, and Keith
Rosenbloom, existing security holders, in exchange for the conversion of their
outstanding notes totalling $2,300,000. Commonwealth Associates, L.P. acted as a
placement agent in this transaction. As part of their compensation for their
services as placement agent, we issued to Commonwealth Associates, L.P. a unit
purchase option to purchase 8.6 units consisting of an aggregate of 86,000
shares of Series B Preferred Stock and warrants to purchase 860,000 shares of
common stock at an exercise price of $100,000 per unit. In conjunction with this
private offering, warrants to purchase an aggregate of 312,500 shares of common
stock held by Dawntreader Fund I LP were cancelled. We have engaged Commonwealth
to explore additional private placement equity financings for us.
For information concerning employment and consulting agreements with, and
compensation of Predict It's executive officers and directors, see the
"Management--Employment and Consulting Contracts" section.
We believe that the terms of the foregoing transaction are no less
favorable to us than could have been obtained from non-affiliated third parties,
although no independent appraisals were obtained.
31
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of April 14, 2000, as follows:
o By each person who is known by Predict It to beneficially own more than
5% of Predict It's common stock, fully diluted;
o By each of Predict It's directors;
o By each officer named under the "Management--Executive
Compensation--Summary Compensation Table"; and
o By all executive officers and directors as a group.
Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. The
percentages set forth in the table assume 11,982,402 (including 500,000 shares
being held in escrow pending Predict It achieving certain milestones) shares of
common stock outstanding as of April 14, 2000.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK PERCENT OF
NAME OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED OWNERSHIP
- ---------------------------------------------------------------------------------- ------------------ -----------
<S> <C> <C>
Dawntreader Fund I LP ............................................................ 4,271,402 (2) 33.8%
188 West 22nd Street, 11th Floor
New York, NY 10011
Gary Cheng ....................................................................... 1,261,683 (3) 10.5%
c/o Predict It Inc.
268 West 44th St., 5th Floor
New York, NY 10036
Howard Yen ....................................................................... 1,261,683 (3) 10.5%
c/o Predict It Inc.
268 West 44th St., 5th Floor
New York, NY 10036
GEM France ....................................................................... 918,381 7.6%
712 Fifth Avenue, 7th Floor
New York, NY 10019
Thomas Courts .................................................................... 750,982 (4) 6.1%
c/o Predict It Inc.
268 West 44th St., 5th Floor
New York, NY 10036
Andrew P. Merkatz ................................................................ 335,842 (5) 2.8%
c/o Predict It Inc. -- -
268 West 44th St., 5th Floor
New York, NY 10036
Andrew Weissman .................................................................. 4,271,402 (6) 33.8%
c/o Dawntreader Fund I LP -
188 West 22nd Street, 11th Floor
New York, NY 10011
Carol Lee ........................................................................ 0 *
c/o The Prospero Group 517-1177
West Hastings Street
Vancouver, B.C., Canada V6E 2K3
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK PERCENT OF
NAME OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED OWNERSHIP
- ---------------------------------------------------------------------------------- -------------- ----------
Robert Jacobs .................................................................... 27,250 (7) *
c/o Predict It Inc.
268 West 44th St., 5th Floor
New York, NY 10036
<S> <C> <C>
Ajmal Khan ....................................................................... 259,243 (8) 2.1%
c/o Verus Capital Corp.
1177 W. Hastings Street, Suite 2000
Vancouver, B.C., Canada V6E 2K3
Alana Oldham ..................................................................... 0 (9) *
c/o Predict It Inc.
268 West 44th St., 5th Floor
New York, NY 10036
Geordie Pace ..................................................................... 0 (10) *
c/o Predict It Inc.
268 West 44th St., 5th Floor
New York, NY 10036
Desmond Glass .................................................................... 0 (11) *
c/o Predict It Inc.
268 West 44th St., 5th Floor
New York, NY 10036
All Executive Officers and Directors 6,155,420 51.3%
as a group (9 persons).......................................................... -------------- -----------
</TABLE>
- ------------------
* Represents less than one (1%) percent
(1) Rule 13d-3 under the Securities exchange Act of 1934 provides the
determination of beneficial owners of securities. That rule includes as
beneficial owners of securities, any person who directly or indirectly has,
or shares, voting power and/or investment power with respect to such
securities. Rule 13d-3 also includes as a beneficial owner of a security
any person who has the right to acquire beneficial ownership of such
security within sixty days through means, including, the exercise of any
options, warrant or conversion of a security. Any securities not
outstanding which are subject to such options, warrants or conversion
privileges are deemed to be outstanding for the purpose of computing the
percentage of outstanding securities of the class owned by such person.
Those securities are not deemed to be outstanding for the purpose of
computing the percentage of the class by any other person.
(2) Represents (i) an immediately exercisable warrant to purchase 156,250
shares of common stock at an exercise price of $1.60 per share; (ii) 85,000
shares of Series B Preferred Stock, convertible into 850,000 shares of
our common stock; and (iii) an immediately exercisable warrant to
purchase 850,000 shares of common stock at an exercise price of $1.50
per share.
(3) Includes 233,645 shares of common stock which are being held in escrow
pending Predict It's achievement of certain milestones.
(4) Includes the following: (i) an immediately exercisable option to purchase,
for a period of 5 years, 125,000 shares of common stock at an exercise
price of $.30 per share; and (ii) an option to purchase, for a period of
one year, 100,000 shares of common stock, vesting in equal quarterly
amounts, at an exercise price of $.60 per share, all of which shall have
vested by May 15, 2000.
(5) Mr. Merkatz holds an option to purchase 537,198 shares of our common stock
at an exercise price of $2.00 per share, of which one-third shall have
vested on May 19, 2000 and the remaining two-thirds
(Footnotes continued on next page)
33
<PAGE>
(Footnotes continued from previous page)
shall vest every 6 months thereafter in one-sixth increments. This option
is subject to anti-dilution protection. Mr. Merkatz also holds an option to
purchase 168,006 shares of our common stock at an exercise price of $2.62
per share, of which one-third shall have vested on May 19, 2000 and the
remaining two-thirds shall vest every six months thereafter in one-sixth
increments. In addition, Mr. Merkatz holds an option to purchase 9,421
shares of our common stock at an exercise price of $1.75 per share, of
which one-third shall have vested on May 19, 2000 and the remaining
two-thirds shall vest every six months thereafter in one-sixth increments.
Mr. Merkatz also holds an option to purchase 15,971 shares of our common
stock at an exercise price of $2.00 per share, of which one-third shall
have vested on May 19, 2000 and the remaining two-thirds shall vest every
six months thereafter in one-sixth increments. Mr. Merkatz also holds an
option to purchase 62,050 shares of our common stock at an exercise price
of $1.38 per share, of which one-third shall have vested on May 19, 2000
and the remaining two-thirds shall vest every six months thereafter in
one-sixth increments. Mr. Merkatz also holds an option to purchase 214,879
shares of common stock at an exercise price of $3.75 per share, of which
one-third shall have vested on May 19, 2000 and the remaining two-thirds
shall vest every six months thereafter in one-sixth increments upon
attaining certain targets. This option is not subject to anti-dilution
protection.
(6) Represents (i) an immediately exercisable warrant to purchase
156,250 shares of common stock at an exercise price of $1.60 per share;
(ii) 2,415,152 shares of our common stock; (iii) 85,000 shares of Series B
Preferred Stock, convertible into 850,000 shares of our common stock; and
(iv) an immediately exercisable warrant to purchase 850,000 shares of
common stock at an exercise price of $1.50 per share held by Dawntreader
Fund I LP of, which Mr. Weissman is Senior Vice President. Mr. Weissman
disclaims beneficial ownership of such shares and warrants.
(7) Represents an option to purchase 81,750 shares of common stock at an
exercise price of $.245 per share, of which 27,250 options vested on July
19, 1999. Does not include an option to purchase 27,250 shares of common
stock at an exercise price of $2.30 per share, of which one-third shall
vest on June 24, 2000 and the remaining two-thirds shall vest every 6
months thereafter in one-sixth increments.
(8) Represents (i) 210,000 shares of common stock and (ii) 49,243 shares of
Series A Preferred Stock convertible into 49,243 shares of our common stock
held by Verus Capital Corp., of which Mr. Khan is founder and President.
Mr. Khan disclaims beneficial ownership of such shares.
(9) Ms. Oldham holds an option to purchase 120,000 shares of common stock at an
exercise price of $2.00 per share, of which one-third shall vest on July
26, 2000 and the remaining two-thirds shall vest every 6 months thereafter
in one-sixth increments.
(10) Mr. Pace holds an option to purchase 100,000 shares of our common stock at
an exercise price of $2.30 per share, of which one-third shall vest on June
4, 2000 and the remaining two-thirds of which shall vest every six months
thereafter in one-sixth increments. Mr. Pace also holds an option to
purchase 15,000 shares of common stock at an exercise price of $1.50 per
share, of which one-third shall vest on September 27, 2000 and the
remaining two-thirds shall vest every six months thereafter in one-sixth
increments.
(11) Mr. Glass holds an option to purchase 70,000 shares of common stock at an
exercise price of $1.50 per share, of which one-third shall vest on
September 27, 2000 and the remaining two-thirds shall vest every 6 months
thereafter in one-sixth increments.
SELLING SECURITY HOLDERS
The following table shows for our stockholders the following information:
o The number of shares of our common stock beneficially owned by them as of
April 14, 2000 and covered by this prospectus; and
34
<PAGE>
o The number of shares of common stock to be retained after this offering,
if any.
<TABLE>
<CAPTION>
COMMON STOCK(1)
------------------------------------------------
NUMBER OF SHARES NUMBER OF SHARES
OWNED PRIOR TO AND BENEFICIALLY OWNED
NAME OF SELLING SECURITY HOLDER REGISTERED IN THE OFFERING AFTER THE OFFERING
- --------------------------------------------------------------------- -------------------------- ------------------
<S> <C> <C>
Tom Courts........................................................... 650,982(2) 100,000
---------- ----------
Dawntreader Fund I LP................................................ 2,415,152 1,856,250(3)
Keith M. Rosenbloom.................................................. 466,682(4) 80,000(5)
Robert Jacobs........................................................ 27,250(6) 81,750
---------- ----------
Paul Yahnke.......................................................... 225,421 0
GEM France........................................................... 918,381 0
Snowmass Technologies LLC............................................ 81,697 0
Falk Family Foundation............................................... 70,841 21,255(7)
Michael S. Falk...................................................... 70,841 21,255(7)
Robert A. O'Sullivan Family Trust.................................... 16,664 5,000(8)
Robert L. Priddy..................................................... 141,676 600,000(9)
Gary N. Mansfield.................................................... 16,664 0
Ron Moschetta........................................................ 49,999 0
Commonwealth Associates, L.P......................................... 416,683 1,892,500(10)
Navigator Holdings Corp.............................................. 546,600(11) 0
Sprott Capital S.A................................................... 546,600(11) 0
Century Capital Corp................................................. 382,716 0
Perth Management Corp................................................ 525,992(12) 0
Rock Capital Corp.................................................... 365,575 0
Salter Street Management Corp........................................ 516,815(13) 0
National Day Corporation............................................. 512,936(14) 0
Asia World Holdings, Ltd............................................. 380,830 1,000,000(15)
Bright Outlook Consultants, Ltd...................................... 370,575 0
Pyrennes Investments Limited......................................... 522,118(16) 0
Verus Capital Corp................................................... 259,243(17) 0
Harold W. Gorden..................................................... 10,000 0
Mid-Continental Securities Corp...................................... 7,500 0
Howard Yen........................................................... 1,261,683(18) 0
Gary Cheng........................................................... 1,261,683(18) 0
Scott Appleby........................................................ 176,634 0
John B Lowy.......................................................... 7,500 0
Vision Consulting International Inc.................................. 282,402 0
Alan M. Bass......................................................... 2,500 0
Sharon Brasure....................................................... 10,000 0
Leanne Donovan....................................................... 1,211 0
Robert Felch......................................................... 428 0
Jerry Gruenbaum...................................................... 1,850 0
Craig Hickok......................................................... 1,250 0
David G. Irwin....................................................... 2,500 0
Denise Johnson....................................................... 1,950 0
Jason E. Johnson..................................................... 1,950 0
K.D. Johnson......................................................... 1,950 0
Maile Johnson........................................................ 1,950 0
Aimee Masure......................................................... 1,250 0
James M. McCully..................................................... 1,000 0
Judith McCully....................................................... 1,000 0
Marla McCully........................................................ 500 0
Thomas Shakespear.................................................... 1,211 0
Stephen M. Siedow.................................................... 22,500 0
---------- ----------
Total.............................................................. 13,551,335 5,658,010
---------- ----------
</TABLE>
(Footnotes on next page)
35
<PAGE>
(Footnotes from previous page)
- ------------------
(1) We assume no purchase in this offering by any stockholder listed above of
any shares of our common stock and that each stockholder will sell all of
its shares being registered hereby.
(2) Includes an immediately exercisable option to purchase, for a period of
5 years, 125,000 shares of common stock of an exercise price of $.30 per
share. Does not include an option to purchase, for a period of one year,
100,000 shares of common stock at an exercise price of $.60 per share, all
of which shall have vested by May 15, 2000.
(3) Represents (i) an immediately exercisable warrant to purchase 156,250
shares of common stock at an exercise price of $1.60 per share; (ii) 85,000
shares of Series B Preferred Stock, convertible into 850,000 shares of our
common stock; and (iii) an immediately exercisable warrant to purchase
850,000 shares of common stock at an exercise price of $1.50 per share.
These securities are not being registered under this registration
statement.
(4) Includes 49,999 shares of common stock that are directly owned and 416,683
shares of common stock that are held by Commonwealth Associates, of which
Mr. Rosenbloom is Director of Merchant Banking. Mr. Rosenbloom disclaims
beneficial ownership of the stock held by Commonwealth Associates.
(5) Represents (i) 4,000 shares of Series B Preferred Stock, convertible into
40,000 shares of our common stock; and (ii) an immediately exercisable
warrant to purchase 40,000 shares of common stock at an exercise price of
$1.50 per share. These securities are not being registered under this
registration statement.
(6) Includes an option to purchase 81,750 shares of common stock at an exercise
price of $.245 per share, of which 27,250 shares became exercisable on
July 19, 1999. Does not include an option to purchase 27,250 shares of
common stock at an exercise price of $2.30 per share.
(7) Represents (i) 1,063 shares of Series B Preferred Stock, convertible into
10,630 shares of our common stock; and (ii) an immediately exercisable
warrant to purchase 10,630 shares of common stock at an exercise price of
$1.50 per share. These securities are not being registered under this
registration statement.
(8) Represents (i) 250 shares of Series B Preferred Stock, convertible into
2,500 shares of our common stock; and (ii) an immediately exercisable
warrant to purchase 2,500 shares of common stock at an exercise price of
$1.50 per share. These securities are not being registered under this
registration statement.
(9) Represents (i) 30,000 shares of Series B Preferred Stock, convertible into
300,000 shares of our common stock; and (ii) an immediately exercisable
warrant to purchase 300,000 shares of our common stock at an exercise price
of $1.50 per share. These securities are not being registered under this
registration statement.
(10) Represents (i) 8,625 shares of Series B Preferred Stock, convertible into
86,250 shares of our common stock; (ii) an immediately exercisable warrant
to purchase 86,250 shares of common stock at an exercise price of $1.50 per
share; and (iii) a unit purchase option to purchase 8.6 units, consisting
of 86,000 shares of Series B Preferred Stock, convertible into 860,000
shares of common stock and a warrant to purchase 860,000 shares of common
stock, at an exercise price of $100,000 per unit. These securities are not
being registered under this registration statement.
(11) Includes 163,884 shares of our common stock underlying 163,884 shares of
Series A Preferred Stock, convertible at any time at the option of the
holder.
(12) Includes 157,704 shares of our common stock underlying 157,704 shares of
Series A Preferred Stock, convertible at any time at the option of the
holder.
(13) Includes 154,953 shares of our common stock underlying 157,704 shares of
Series A Preferred Stock convertible at any time at the option of the
holder.
36
<PAGE>
(Footnotes continued from previous page)
(14) Includes 153,789 shares of our common stock underlying 153,789 shares of
Series A Preferred Stock, convertible at any time at the option of the
holder.
(15) Represents (i) 50,0000 shares of Series B Preferred Stock, convertible into
500,000 shares of common stock; and (iii) warrants to purchase
500,000 shares of our common stock at an exercise price of $1.50 per share.
These securities are not being registered under this registration
statement.
(16) Includes 156,543 shares of our common stock underlying 156,543 shares of
Series A Preferred Stock, convertible at any time at the option of the
holder.
(17) Represents (i) 49,243 shares of our common stock underlying 49,243 shares
of Series A Preferred Stock, convertible at any time at the option of the
holder; and (ii) 210,000 shares of our common stock.
(18) Includes 500,000 shares of our common stock held in escrow pending the
achievement of certain milestones.
37
<PAGE>
PLAN OF DISTRIBUTION
We are registering the shares of our common stock covered by this
prospectus.
We will pay the costs, expenses, and fees of registering the common stock,
but our stockholders will pay any underwriting or brokerage commissions and
similar selling expenses relating to the sale of shares of their common stock.
Our stockholders may sell our common stock at market prices prevailing at
the time of the sale, at prices related to the prevailing market prices, at
negotiated prices or at fixed prices, which may change. Our stockholders may
sell some or all of their common stock through:
o Ordinary brokers' transactions, which may include long or short sales;
o Transactions involving cross or block trades or otherwise on the NASDAQ
SmallCap Market;
o Purchases by brokers, dealers or underwriters as principal and resale by
those purchasers for their own accounts under this prospectus;
o Market makers or into an existing market for the common stock;
o Transactions in options, swaps or other derivatives; or
o Any combination of the selling options described in this prospectus, or
by any other legally available means.
In addition, our stockholders may enter into hedging transactions with
broker-dealers, who may engage in short sales of our common stock in the course
of hedging the positions they assume. Finally, our stockholders may enter into
options or other transactions with broker-dealers that require the delivery of
our common stock to those broker-dealers. Subsequently, the shares may be resold
under this prospectus.
In their selling activities, our stockholders will be subject to applicable
provisions of the Securities Exchange Act of 1934 and its rules and regulations,
including Regulation M, which may limit the timing of purchases and sales of our
common stock by our stockholders.
Those of our stockholders and any broker-dealers involved in the sale or
resale of our common stock may qualify as "underwriters" within the meaning of
Section 2 (11) of the Securities Act of 1933. In addition, the broker-dealers'
commissions, discounts, or concessions may qualify as underwriters' compensation
under the Securities Act of 1933. If any broker-dealer or any of our
stockholders qualify as an "underwriter," they will be subject to the prospectus
delivery requirements of Section 153 of the Securities Act of 1933.
In conjunction with sales to or through brokers, dealers or agents, our
stockholders may agree to indemnify such brokers, dealers or agents against
liabilities arising under the Securities Act of 1933. We do not know of any
existing arrangements between our stockholders and any other stockholder,
broker, dealer, underwriter or agent relating to the sale or distribution of our
common stock.
In addition to selling their common stock under this prospectus, our
stockholders may:
o Transfer their common stock in other ways not involving market makers or
established trading markets, including by gift, distribution or other
transfer; or
o Sell their common stock under Rule 144 of the Securities Act, if the
transaction meets the requirements of Rule 144.
We have advised our stockholders that, during the time each is engaged in
distribution of their common stock, each must comply with Rule 10b-5 and
Regulation M under the Securities Exchange Act of 1934. They must do all of the
following under those rules:
o Not engage in any stabilization activity in connection with our common
stock;
o Furnish each broker who may be offering our common stock on behalf of our
stockholders the number of copies of this prospectus required by each
broker; and
38
<PAGE>
o Not bid for or purchase any of our common stock or attempt to induce any
person to purchase any of our common stock, other than as permitted under
the Securities Exchange Act of 1934.
Any of our stockholders who may be "affiliated purchasers," as defined in
Regulation M, have been further advised that they must coordinate their sales
under this prospectus with each other and us for the purposes of Regulation M.
To the extent required under the Securities Act, a supplemental prospectus
will be filed, disclosing:
o The name of any such broker-dealers;
o The number of securities involved;
o The price at which such securities are to be sold;
o The commissions paid or discounts or concessions allowed to such
broker-dealers, where applicable;
o That such broker-dealers did not conduct any investigation to verify the
information set out in this Prospectus, as supplemented; and
o Other facts material to the transaction.
We cannot be sure that any of our stockholders will sell any of our common
stock.
We have agreed to keep the registration statement relating to the offering
and sale by our stockholders continuously effective until the earlier of the
sale of all their common stock or 12 months from the date of this prospectus.
DESCRIPTION OF THE CAPITAL STOCK
Our authorized capital stock consists of 75,000,000 shares of our common
stock, par value $.01 per share, and 10,000,000 shares of our preferred stock,
par value $.01 per share as set forth below.
Our Amended and Restated Certificate of Incorporation, By-laws and the
Registration Rights Agreement described below are included as exhibits to the
Registration Statement of which this prospectus forms a part.
COMMON STOCK
Our authorized common stock consists of 75,000,000 shares of common stock.
As of April 14, 2000, we had issued and outstanding 11,982,402 shares of common
stock (including 500,000 shares of common stock that are being held in escrow
pending Predict It achieving certain milestones). As of April 14, 2000, there
were approximately 25 holders of record of our common stock. In addition, we
have reserved the following shares of common stock:
o 1,000,000 shares of our common stock for conversion of our issued and
outstanding Series A Preferred Stock;
o 4,300,000 shares of our common stock for conversion of our issued and
outstanding Series B Preferred Stock;
o 3,000,000 shares of our common stock under our 1999 Stock Option Plan;
o 206,750 shares of our common stock for existing options;
o 4,925,000 shares of our common stock for existing warrants; and
o 1,720,000 shares of our common stock for an existing unit purchase
option.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of our stockholders. Subject to
preferences that may be applicable to any outstanding shares of our preferred
stock, the holders of our common stock are entitled to receive ratably such
dividends as may be declared by the board of directors out of funds legally
available for such dividends. In the event of our liquidation, dissolution or
winding up, holders of our common stock will be entitled to share ratably in all
assets remaining after payment of liabilities and the liquidation preferences of
any outstanding shares of preferred stock. Holders of common stock have no
preemptive rights and no right to convert their common
39
<PAGE>
stock into any other securities. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and non-assessable. The rights, preferences and privileges
of holders of common stock are subject to the rights of holders of shares of any
series of preferred stock that we may designate and issue in the future.
PREFERRED STOCK
We are authorized to issue up to 10,000,000 shares of preferred stock, par
value $.01 per share. As of April 14, 2000, 1,000,000 shares of our Series A
Preferred Stock were issued and outstanding, held by approximately 15 registered
holders and 430,001 shares of our Series B Preferred Stock were issued and
outstanding, held by 21 registered holders.
The holders of our Series A Preferred Stock have no voting power except as
is expressly provided under Delaware law. In addition, the holders of Series A
Preferred Stock have a liquidation preference over the holders of our common
stock in the event of our liquidation, dissolution or winding up. Furthermore,
each share of our Series A Preferred Stock is convertible into one share of our
common stock at the option of the holders of Series A Preferred Stock. The
holders of our Series B Preferred Stock have the right to vote, together with
the holders of our common stock as one class, on all matters as to which holders
of our common stock shall be entitled to vote. In addition, the holders of our
Series B Preferred Stock have a liquidation preference over the holders of our
common stock and Series A Preferred Stock in the event of our liquidation,
dissolution or winding up in an amount in cash equal to $30.00 per share plus an
amount equal to accrued and unpaid dividends on each share of Series B Preferred
Stock. Furthermore, each share of our Series B Preferred Stock is convertible
into 10 shares of our common stock at the option of the holders of Series B
Preferred Stock. In addition each share of our Series B Preferred Stock is
automatically convertible upon the occurrence of specific events.
Pursuant to our articles of incorporation, our board of directors has the
authority, without further action by the stockholders, to issue shares of our
preferred stock in one or more series and to fix the designation, powers,
preferences, privileges and relative participating, optional or special rights
of such stock, and the qualifications, limitations or restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of redemption
and liquidation preferences, any or all of which may be greater than the rights
of the common stock. Our board of directors, without stockholder approval, may
issue preferred stock with voting, conversion of other rights that could
adversely affect the voting power and other rights of the holder of our common
stock. Therefore, our preferred stock may be issued quickly, with terms that may
delay or prevent a change in control or make removal of management more
difficult. Additionally, the issuance of preferred stock may have the effect of
decreasing the market price of the common stock and may adversely affect the
voting and other rights of the holders of common stock.
REGISTRATION RIGHTS
In connection with our acquisition of Virtual Stock Exchange, Messrs.
Cheng, Yen and Appleby, who received in the aggregate 2,700,000 shares of our
common stock (including 500,000 shares of common stock that are being held in
escrow pending Predict It achieving certain milestones) pursuant to such
acquisition, are entitled to certain rights with respect to the registration of
such shares under the Securities Act. They are entitled to certain demand
registration rights pursuant to which they may require Predict It to file a
registration statement under the Securities Act at our expense with respect to
all or a portion of the shares of common stock held by either of them, their
affiliates and permitted transferees, and we are required to use commercially
reasonable efforts to effect such registration. If Predict It proposes to
register any of its securities under the Securities Act, either for its own
account or for the account of other security holders (other than a registration
of our securities filed on Form S-4 or S-8 of the Securities Act), Messrs.
Cheng, Yen and Appleby are entitled to certain "piggy back" registration rights
pursuant to which they may require us to include all or a portion of their
shares in such registration. In addition, pursuant to his employment agreement,
Mr. Merkatz is entitled to certain "piggy back" registration rights pursuant to
which he may require us to include all or a portion of his shares in such
registration. All of these registration rights are subject to certain conditions
and limitations, among them the right of an underwriter of an offering to limit
the number of shares included in such registration, and our right not to effect
a demand registration during
40
<PAGE>
the period starting with the fourteenth day immediately preceding the date of an
anticipated filing by us of, and ending on a date ninety (90) days following the
effective date of, a registration statement pertaining to this offering.
OPTIONS
We have issued 39 options to purchase an aggregate of 2,058,025 shares of
our common stock representing the following:
o an option to purchase 125,000 shares of our common stock at an exercise
price of $.30 per share, which vested as of January 11, 1999;
o an option to purchase 100,000 shares of our common stock at an exercise
price of $.60 per share, vesting in quarterly amounts over a period of
one year, commencing April 28, 1999;
o an option to purchase 537,198 shares of our common stock at an exercise
price of $2.00 per share, of which one-third shall vest on May 19, 2000
and the remaining two-thirds shall vest every 6 months thereafter, in
one-sixth increments commencing May 19, 1999;
o an option to purchase 214,879 shares of common stock at an exercise price
of $3.75 per share, of which one-third shall vest on May 19, 2000 and the
remaining two-thirds shall vest every 6 months thereafter, commencing as
of May 19, 1999 in one-sixth increments;
o an option to purchase 100,000 shares of our common stock at an exercise
price of $2.30 per share, of which one-third shall vest on June 4, 2000
and the remaining two-thirds shall vest every 6 months thereafter,
commencing as of June 24, 1999 in one-sixth increments;
o an option to purchase 40,000 shares of our common stock at an exercise
price of $2.30 per share, of which one-third shall vest on June 4, 2000
and the remaining two-thirds shall vest every 6 months thereafter,
commencing as of June 24, 1999 in one-sixth increments;
o an option to purchase 27,250 shares of our common stock at an exercise
price of $2.30 per share, of which one-third shall vest on June 24, 2000
and the remaining two-thirds shall vest every 6 months thereafter,
commencing as of June 24, 1999 in one-sixth increments;
o an option to purchase 10,000 shares of our common stock at an exercise
price of $2.30 per share, of which one-third shall vest on November 23,
1999 and the remaining two-thirds shall vest every 6 months thereafter,
commencing as of June 24, 1999 in one-sixth increments;
o an option to purchase 81,750 shares of our common stock at an exercise
price of $.245 per share, vesting over 3 years, commencing as of
July 19, 1999;
o an option to purchase 168,006 shares of our common stock at an exercise
price of $2.62 per share, of which one-third shall vest on May 19, 2000
and the remaining two-thirds shall vest every 6 months thereafter, in
one-sixth increments.
o an option to purchase 30,000 shares of common stock at an exercise price
of $2.00 per share, of which one-third shall vest on July 21, 2000 and
the remaining two-thirds shall vest every 6 months thereafter, commencing
as of July 27, 1999 in one-sixth increments;
o an option to purchase 120,000 shares of our common stock at an exercise
price of $2.00 per share, of which one-third shall vest on July 26, 2000
and the remaining two-thirds shall vest every 6 months thereafter,
commencing as of July 27, 1999 in one-sixth increments;
o an option to purchase 4,000 shares of our common stock at an exercise
price of $2.00 per share, of which one-third shall vest on July 26, 2000
and the remaining two-thirds shall vest every 6 months thereafter,
commencing as of July 27, 1999 in one-sixth increments;
o an option to purchase 25,000 shares of common stock at an exercise price
$2.00 per share, of which one-twelfth shall vest on January 27, 2000 and
the remaining eleven-twelfths shall vest every 3 months thereafter,
commencing as of July 27, 1999 in one-twelfth increments;
41
<PAGE>
o an option to purchase 9,421 shares of our common stock at an exercise
price of $1.75 per share, of which one-third shall vest on May 19, 2000
and the remaining two-thirds shall vest every 6 months thereafter, in
one-sixth increments.
o an option to purchase 70,000 shares of our common stock at an exercise
price of $1.50 per share, of which one-third shall vest on September 27,
2000 and the remaining two-thirds shall vest every 6 months thereafter,
in one-sixth increments, commencing as of September 27, 1999;
o an option to purchase 35,000 shares of our common stock at an exercise
price of $1.50 per share, of which one-third shall vest on September 27,
2000 and the remaining two-thirds shall vest every 6 months thereafter,
in one-sixth increments, commencing as of September 27, 1999;
o three options to purchase 15,000 shares of our common stock at an
exercise price of $1.50 per share, of which one-third shall vest on
September 27, 2000 and the remaining two-thirds shall vest every 6 months
thereafter, in one-sixth increments, commencing as of September 27, 1999;
o two options to purchase 10,000 shares of our common stock at an exercise
price of $1.50 per share, of which one-third shall vest on September 27,
2000 and the remaining two-thirds shall vest every 6 months thereafter,
in one-sixth increments, commencing as of September 27, 1999;
o two options to purchase 5,000 shares of our common stock at an exercise
price of $1.50 per share, of which one-third shall vest on September 27,
2000 and the remaining two-thirds shall vest every 6 months thereafter,
in one-sixth increments, commencing as of September 27, 1999;
o an option to purchase 20,000 shares of our common stock at an exercise
price of $1.50 per share, of which one-third shall vest on October 15,
2000 and two-thirds shall vest every 6 months thereafter, in one-sixth
increments, commencing as of October 15, 1999;
o an option to purchase 15,971 shares of our common stock at an exercise
price of $2.00 per share, of which one-third shall vest on May 19, 2000
and the remaining two-thirds shall vest every 6 months thereafter, in
one-sixth increments;
o an option to purchase 15,000 shares of our common stock at an exercise
price of $2.00 per share, of which one-third shall vest on November 19,
1999 and the remaining two-thirds shall vest every 6 months thereafter in
one-sixth increments;
o an option to purchase 20,000 shares of our common stock at an exercise
price of $2.00 per share, of which one-third shall vest on November 19,
1999 and the remaining two-thirds shall vest every 6 months thereafter in
one-sixth increments;
o two options to purchase 25,000 shares of our common stock at an exercise
price of $1.375 per share, of which one-third shall vest on January 20,
2001 and the remaining two-thirds shall vest every 6 months thereafter in
one-sixth increments.
o an option to purchase 20,000 shares of our common stock at an exercise
price of $1.375 per share, of which one-third shall vest on January 20,
2001 and the remaining two-thirds shall vest every 6 months thereafter in
one-sixth increments.
o four options to purchase 15,000 shares of our common stock at an exercise
price of $1.375 per share, of which one-third shall vest on January 20,
2001 and the remaining two-thirds shall vest every 6 months thereafter in
one-sixth increments.
o an option granted to purchase 7,500 shares of our common stock at an
exercise price of $1.375 per share, of which one-third shall vest on
January 20, 2001 and the remaining two-thirds shall vest every 6 months
thereafter in one-sixth increments.
o an option granted to purchase 5,000 shares of our common stock at an
exercise price of $1.375 per share, of which one-third shall vest on
January 20, 2001 and the remaining two-thirds shall vest every 6 months
thereafter in one-sixth increments.
42
<PAGE>
o an option granted to purchase 10,000 shares of our common stock at an
exercise price of $1.375 per share, of which one-third shall vest on
January 20, 2001 and the remaining two-thirds shall vest every 6 months
thereafter in one-sixth increments.
o an option to purchase 62,050 shares of our common stock at an exercise
price of $1.38 per share, of which one-third shall vest on May 19, 2000
and the remaining two-thirds shall vest every six months thereafter in
one-sixth increments.
WARRANTS
We have issued warrants to purchase an aggregate of 4,925,000 shares of our
common stock representing the following:
o a warrant to purchase 156,250 shares of our common stock at an exercise
price of $1.60 per share, exercisable immediately and expiring on
December 8, 2004;
o a warrant to purchase 9,375 shares of our common stock at an exercise
price of $1.60 per share, exercisable immediately and expiring on
December 8, 2004;
o a warrant to purchase 53,906 shares of our common stock at an exercise
price of $1.60 per share, exercisable immediately and expiring on
December 8, 2004;
o two warrants to purchase 6,640 shares of our common stock at an exercise
price of $1.60 per share, exercisable immediately and expiring on
December 8, 2004;
o a warrant to purchase 1,562 shares of our common stock at an exercise
price of $1.60 per share, exercisable immediately and expiring on
December 8, 2004;
o a warrant to purchase 31,250 shares of our common stock at an exercise
price of $1.60 per share, exercisable immediately and expiring on
December 8, 2004;
o a warrant to purchase 46,875 shares of our common stock at an exercise
price of $1.60 per share, exercisable immediately and expiring on
December 8, 2004;
o a warrant to purchase 312,500 shares of our common stock at an exercise
price of $1.60 per share, exercisable immediately and expiring on
December 8, 2004.
o a warrant to purchase 2,500 shares of common stock at an exercise price
of $1.50 per share, exercisable immediately and expiring on April 14,
2007;
o three warrants to purchase 100,000 shares of common stock at an exercise
price of $1.50 per share, exercisable immediately and expiring on April
14, 2007;
o from warrants to purchase 500,000 shares of common stock at an exercise
price of $1.50 per share, exercisable immediately and expiring on April
14, 2007;
o two warrants to purchase 75,000 shares of common stock at an exercise
price of $1.50 per share, exercisable immediately and expiring on April
14, 2007;
o a warrant to purchase 850,000 shares of common stock at an exercise price
of $1.50 per share, exercisable immediately and expiring on April 14,
2007;
o six warrants to purchase 50,000 shares of common stock at an exercise
price of $1.50 per share, exercisable immediately and expiring on April
14, 2007;
o a warrant to purchase 86,250 shares of common stock at an exercise price
of $1.50 per share, exercisable immediately and expiring on April 14,
2007;
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<PAGE>
o two warrants to purchase 10,625 shares of common stock at an exercise
price of $1.50 per share, exercisable immediately and expiring on April
14, 2007;
o two warrants to purchase 300,000 shares of common stock at an exercise
price of $1.50 per share, exercisable immediately and expiring on April
14, 2007; and
o a warrant to purchase 40,000 shares of common stock at an exercise price
of $1.50 per share, exercisable immediately and expiring on April 14,
2007.
UNIT PURCHASE OPTION
We have issued a unit purchase option to our placement agent to purchase
8.6 units, consisting of 86,000 shares of Series B Preferred Stock, convertible
into 860,000 shares of common stock, and warrants to purchase 860,000 shares of
common stock at an exercise price of $1.50 per share, at an exercise price of
$100,000 per unit.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for Predict It's Common Stock is
Continental Stock Transfer & Trust, Inc. As neither the convertible preferred
stock nor the options is registered, Predict It acts as its own Transfer Agent
and Registrar as to such securities.
SHARES ELIGIBLE FOR FUTURE SALE
We currently have 11,982,402 (including 500,000 shares that are being held
in escrow pending Predict It achieving certain milestones) shares of common
stock outstanding, of which 9,000,000 shares are freely tradable without
restriction or further registration under the Securities Act of 1933. However,
any shares purchased by an affiliate of ours will be subject to the resale
limitations of Rule 144 under the Securities Act of 1933. An affiliate is a
person who has a control relationship with us. The remaining shares of common
stock are held by us. Rule 144 provides that a person who has satisfied a
one-year holding period for any restricted shares may sell within any
three-month period an amount of restricted shares that does not exceed the
greater of:
o one percent of that class of outstanding shares; or
o the average weekly trading volume of that class of securities during the
four calendar weeks prior to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about us.
In addition, under Rule 144, persons who are not affiliated with us and who have
held their restricted shares for at least two years are not subject to the
quantity limitations or the manner of sale restrictions.
In addition, 1,000,000 shares of our common stock underlying the shares of
Series A Preferred Stock will, upon conversion of the Series A Preferred Stock,
be freely tradable without restriction or further registration. Also, 206,750
shares of our common stock underlying the options will, upon exercise of the
options, be freely tradable without restriction or further registration. In
conjunction with our private offering of units, our officers, directors and 5%
holders of our capital stock have agreed not to sell or transfer
7,815,556 shares of common stock being registered under this registration
statement, during the period commencing on March 7, 2000 and ending on the later
of (i) the six month anniversary of the final closing of our private offering of
units and (ii) the effective date of this registration statement.
LEGAL MATTERS
The validity of the common stock offered under this prospectus will be
passed upon for us by our counsel, Camhy Karlinsky & Stein LLP, New York, New
York. An attorney affiliated with Camhy Karlinsky & Stein LLP is now a Managing
Director of Dawntreader Fund I LP, one of our principal stockholders.
44
<PAGE>
EXPERTS
This registration statement includes the consolidated financial statements
of Predict It Inc. and subsidiary, as of December 31, 1999, and for the years
ended December 31, 1999 and 1998, and the financial statements of Virtual Stock
Exchange, Inc. as of December 31, 1998 and for the period from January 7, 1997
(inception) through December 31, 1997 and for the year ended December 31, 1998,
which have been audited by Richard A. Eisner and Company, LLP, independent
certified public accountants. These financials have been included herein in
reliance upon the audit reports appearing elsewhere herein, given upon the
authority of said firm as experts in accounting and auditing.
DISCLOSURE OF COMPANY POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our certificate of incorporation and by-laws provide that we shall
indemnify all directors and officers of ours to the fullest extent permitted by
Delaware Law. Under such provisions, any director or officer, who in his
capacity as such is made or threatened to be made, party to any suit or
proceeding, shall be indemnified if it is determined that such director or
officer acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of Predict It. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and persons controlling Predict It pursuant to the foregoing
provision, or otherwise, we have been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable.
We maintain directors' and officers' liability insurance providing aggregate
coverage of $5,000,000.
45
<PAGE>
PREDICT IT INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONTENTS PAGE
- -------------------------------------------------------------------------------------------------------- ----
<S> <C>
PREDICT IT INC. AND SUBSIDIARY
Financial Statements
Independent auditors' report............................................................................ F-2
Balance sheet as of December 31, 1999................................................................... F-3
Statements of operations for the years ended December 31, 1999 and 1998................................. F-4
Statements of changes in stockholders' equity for the years ended December 31, 1999 and 1998............ F-5
Statements of cash flows for the years ended December 31, 1999 and 1998................................. F-6
Notes to financial statements........................................................................... F-7
VIRTUAL STOCK EXCHANGE, INC.
Financial Statements
Independent auditors' report............................................................................ F-16
Balance sheets as of December 31, 1998 and June 30, 1999 (unaudited).................................... F-17
Statements of operations for the period from January 7, 1997 (inception) through December 31, 1997, the
year ended December 31, 1998 and the six months ended June 30, 1998 (unaudited) and June 30, 1999
(unaudited)........................................................................................... F-18
Statements of changes in stockholders' equity (Capital Deficiency) for the period from January 7, 1997
(inception) through December 31, 1997, the year ended December 31, 1998 and the six months ended
June 30, 1999 (unaudited)............................................................................. F-19
Statements of cash flows for the period from January 7, 1997 (inception) through December 31, 1997, the
year ended December 31, 1998 and the six months ended June 30, 1998 (unaudited) and June 30, 1999
(unaudited)........................................................................................... F-20
Notes to financial statements........................................................................... F-21
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Unaudited pro forma statements of operations for the years ended December 31, 1999 and 1998 and the
notes thereto......................................................................................... F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Predict It Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of Predict It Inc.
and its wholly owned subsidiary as of December 31, 1999 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the two-year period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Predict It Inc. and
its wholly owned subsidiary as of December 31, 1999 and the results of their
operations and their cash flows for each of the years in the two-year period
then ended in conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
March 21, 2000, except for Note I,
as to which the date is April 14, 2000
F-2
<PAGE>
PREDICT IT INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.............................................................................................. $ 734,574
Accounts receivable, net of allowance of $14,000.................................................. 69,619
Prepaid expenses and other current assets......................................................... 77,565
Deferred promotion expense........................................................................ 250,000
------------
Total current assets................................................................................ 1,131,758
Capitalized software costs, net of accumulated amortization of $87,581............................ 1,017,976
Computer equipment, net of accumulated depreciation of $95,490.................................... 550,172
Registered user base, net of accumulated amortization of $244,676................................. 1,223,378
Other assets...................................................................................... 103,965
------------
$ 4,027,249
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable to stockholders, net of debt discount of $438,222................................... $ 561,778
Notes payable, stockholders....................................................................... 100,000
Accounts payable.................................................................................. 666,624
Accrued expenses.................................................................................. 420,200
Capital lease obligations--current portion........................................................ 64,142
------------
Total current liabilities........................................................................... 1,812,744
Long-term liabilities:
Capital lease obligations--noncurrent portion..................................................... 51,773
------------
1,864,517
------------
Commitments (Note H)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, 1,000,000 shares Series A issued and
outstanding (stated at liquidation preference)................................................. 3,000,000
Common stock, $.01 par value, 25,000,000 shares authorized, 11,303,448 shares issued and
outstanding (exclusive of 500,000 shares held in escrow)....................................... 113,034
Additional paid-in capital........................................................................ 3,595,529
Deficit............................................................................................. (3,788,609)
Unearned compensation............................................................................... (757,222)
------------
2,162,732
------------
$ 4,027,249
============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
PREDICT IT INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998
----------- ---------
<S> <C> <C>
Revenue:
User fees.................................................. $ 4,519 $ 7,712
Advertising................................................ 174,517 6,000
----------- ---------
179,036 13,712
----------- ---------
Costs and expenses:
Site development/maintenance............................... 406,778 177,783
Selling, general and administrative........................ 2,786,164 340,698
Amortization of acquired intangible........................ 244,676
Interest expense, net...................................... 856 3,000
----------- ---------
3,438,474 521,481
----------- ---------
Net loss..................................................... $(3,259,438) $(507,769)
=========== =========
Net loss per share--basic and diluted........................ $ (.37) $ (.21)
=========== =========
Weighted average number of shares outstanding................ 8,872,400 2,381,327
=========== =========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
PREDICT IT INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A SERIES B
SERIES A CONVERTIBLE CONVERTIBLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
PAR VALUE $.01 PAR VALUE $.01 PAR VALUE $.001 PAR VALUE $.001
--------------------- ---------------------- ----------------- -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- -------- --------- ---------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998.........
Issuance of common stock for
cash..............................
Issuance of common stock as
settlement for accrued interest...
Issuance of common stock for
nonemployee services..............
Issuance of preferred stock for
cash.............................. 250,000 $250
Issuance of preferred stock for
cash.............................. 183,338 $ 183
Net loss for the year ended
December 31, 1998.................
-------- ---- -------- ------
Balance at December 31, 1998....... 250,000 250 183,338 183
Issuance of preferred stock for
cash.............................. 149,726 150
Net loss for the year ended
December 31, 1999.................
Grant of options to employee by
stockholder.......................
Recapitalization in connection with
merger into WDC................... 5,000,000 $ 50,000 (250,000) (250) (333,064) (333)
Sale of preferred and common stock,
net of issuance costs............. 4,000,000 40,000 1,000,000 $3,000,000
Issuance of shares in connection
with acquisition, exclusive of
500,000 shares held in escrow..... 2,200,000 22,000
Unearned compensation relating to
grant of stock options............
Amortization of unearned
compensation......................
Issuance of shares in settlement of
accounts payable.................. 103,448 1,034
Warrants issued in connection with
loans from stockholders...........
Options issued to a consultant.....
---------- -------- --------- ---------- -------- ---- -------- ------
Balance at December 31, 1999....... 11,303,448 $113,034 1,000,000 $3,000,000 0 $ 0 0 $ 0
========== ======== ========= ========== ======== ==== ======== ======
<CAPTION>
COMMON STOCK
PAR VALUE $.001 ADDITIONAL
----------------- PAID-IN UNEARNED
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
-------- ------ ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998......... 135,000 $ 136 $ 39,864 $ (21,402) $ 18,598
Issuance of common stock for
cash.............................. 165,000 165 99,835 100,000
Issuance of common stock as
settlement for accrued interest... 578 1 657 658
Issuance of common stock for
nonemployee services.............. 14,678 15 14,663 14,678
Issuance of preferred stock for
cash.............................. 249,750 250,000
Issuance of preferred stock for
cash.............................. 249,817 250,000
Net loss for the year ended
December 31, 1998................. (507,769) (507,769)
-------- ------ ---------- ----------- ----------
Balance at December 31, 1998....... 315,256 317 654,586 (529,171) 126,165
Issuance of preferred stock for
cash.............................. 249,850 250,000
Net loss for the year ended
December 31, 1999................. (3,259,438) (3,259,438)
Grant of options to employee by
stockholder....................... 5,729 5,729
Recapitalization in connection with
merger into WDC................... (315,256) (317) (49,100) 0
Sale of preferred and common stock,
net of issuance costs............. (141,502) 2,898,498
Issuance of shares in connection
with acquisition, exclusive of
500,000 shares held in escrow..... 1,298,000 1,320,000
Unearned compensation relating to
grant of stock options............ 940,000 $ (940,000) 0
Amortization of unearned
compensation...................... 182,778 182,778
Issuance of shares in settlement of
accounts payable.................. 148,966 150,000
Warrants issued in connection with
loans from stockholders........... 464,000 464,000
Options issued to a consultant..... 25,000 25,000
-------- ------ ---------- ----------- ---------- ----------
Balance at December 31, 1999....... 0 $ 0 $3,595,529 $(3,788,609) $ (757,222) $2,162,732
======== ====== ========== =========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PREDICT IT INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................................. $ (3,259,438) $ (507,769)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization...................................................... 407,900 95,210
Stock issued for services.......................................................... 14,678
Compensation expense related to option grants...................................... 30,729
Amortization of unearned compensation.............................................. 182,778
Amortization of debt discount...................................................... 25,778
Changes, net of effects of acquisition, in:
Accounts receivable............................................................. (62,675)
Deferred promotion expense...................................................... (250,000)
Prepaid expenses and other assets............................................. (164,403) (13,203)
Accounts payable and accrued expenses......................................... 1,148,785 69,722
------------ ----------
Net cash used in operating activities................................................ (1,940,546) (341,362)
------------ ----------
Cash flows from investing activities:
Cost incurred to develop software.................................................. (1,041,062) (134,275)
Purchase of computer equipment..................................................... (480,478) (11,318)
Acquisition costs, net of cash acquired............................................ (34,051)
------------ ----------
Net cash used in investing activities................................................ (1,555,591) (145,593)
------------ ----------
Cash flows from financing activities:
Issuance of common and preferred stock, net........................................ 3,148,498 600,658
Loans from related parties......................................................... 1,000,000 60,000
Loan repayments to related parties................................................. (60,000)
Payments on capital lease obligation............................................... (31,559)
------------ ----------
Net cash provided by financing activities............................................ 4,116,939 600,658
------------ ----------
Net increase in cash................................................................. 620,802 113,703
Cash--beginning of year.............................................................. 113,772 69
------------ ----------
Cash--end of year.................................................................... $ 734,574 $ 113,772
============ ==========
Supplemental disclosure of cash flow information:
Interest paid during the year...................................................... $ 3,000
Supplemental disclosures of noncash investing and financing activities:
Issuance of common stock as settlement for accounts payable........................ $ 150,000
Issuance of common stock as settlement for interest................................ $ 658
Issuance of common stock for business combination.................................. $ 1,320,000
Granting of stock options to employee.............................................. $ 940,000
Issuance of common stock purchase warrants in connection with loan................. $ 464,000
Equipment purchased through capital leases......................................... $ 102,000
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
PREDICT IT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE A--THE COMPANY AND OPERATIONS
On April 28, 1999, Predict It Corp. ("PIC"), which was formed in August
1998 in connection with the reincorporation of Sportscappers, Inc. (which was
incorporated on September 2, 1997), was merged with and into WDC Development,
Inc. ("WDC"), a non-operating public shell company. In connection with the
merger, each of the common and preferred shares of PIC were exchanged for
5.5659453 shares of WDC's common stock, resulting in the issuance of 5,000,000
common shares of WDC. Immediately prior to the merger, the existing stockholders
of WDC held 4,000,000 common shares and 1,000,000 preferred shares. Accordingly,
upon completion of the merger, the stockholders of PIC owned 55.55% of the
outstanding common shares of WDC and the premerger stockholders of WDC owned
44.45% of the outstanding common shares of WDC. The 1,000,000 shares of
preferred stock owned by premerger stockholders of WDC are nonvoting and
convertible into 1,000,000 shares of common stock of WDC. Upon completion of the
merger, WDC's Board of Directors consisted of three members from PIC and two
members from WDC. WDC's assets at the date of the merger consisted of $2,898,498
in cash, representing the proceeds remaining from $3,000,000 received on April
28, 1999 in exchange for the issuance of 1,000,000 shares of preferred stock and
$37,200 received in February and March 1999 in exchange for the issuance of
3,720,000 shares of common stock. Following the merger, WDC changed its name to
Predict It Inc. (the "Company").
The merger has been accounted for as a recapitalization of PIC together
with the issuance of 3,720,000 common shares and 1,000,000 preferred shares in
exchange for net proceeds of $2,898,498. The remaining 280,000 common shares of
WDC outstanding at the date of the merger are recorded by a charge to additional
paid-in capital for their par value of $2,800. Retroactive effect has been given
to the recapitalization in the accompanying financial statements and all per
share amounts and numbers of shares have been adjusted to reflect the exchange
ratio.
The Company, which was in the development stage during 1997 and part of
1998, develops and distributes interactive Internet applications. The Company's
"prediction exchange" allows users to pick and exchange predictions with other
users. The Company's initial product offering, "Predict It! Sports", (originally
launched as Sportscappers in March 1998 and relaunched in September 1998) allows
users to pick and exchange predictions on sporting events with fellow users. The
database engine then calculates the accuracy of these predictions and allows
users to view the entries. Users may post predictions and view the predictions
of others free of charge. Revenues are principally earned by the sale of
advertisements either directly or on a revenue sharing basis with other websites
through which the product is marketed. In addition, through November 1998, users
were charged a transaction fee for accessing the predictions. Revenue is shared
with the users each time their predictions are viewed.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. REVENUE RECOGNITION:
Transaction fees from users were recognized as revenue at the time
predictions were accessed by users. Advertising revenue has been earned from
arrangements under which fees are based on the number of occasions a user views
an advertisement ("impression"). Revenue based on number of impressions is
recognized (i) at the time the guaranteed number of impressions occur or
(ii) as impressions occur over the term of the contract, where the contract
provides for the Company to earn a portion of the contract revenues based on the
number of impressions which occur as a percentage of the guaranteed number of
impressions. Revenue applicable to the portion of guaranteed impressions which
have not occurred at the balance sheet date is not recognized. Any revenues
which may be earned under fixed fee arrangements will be recognized in the month
the ads are exhibited.
F-7
<PAGE>
PREDICT IT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
2. BARTER ARRANGEMENT:
During 1999 the Company entered into an advertising barter transaction in
which the Company provided 875,000 impressions per month for three months and
the customer provided the same. As the Company has historically received or paid
cash for similar advertising transactions, it has recorded revenues at the lower
of the estimated fair value of the advertising surrendered or the estimated fair
value of the advertising received based on historical experience for similar
cash transactions. Barter advertising revenues, which amount to approximately
$28,800 in 1999, equal barter expenses. Barter expenses are included in selling,
general and administrative expenses in the accompanying statement of operations
for the year ended December 31, 1999.
3. COMPUTER EQUIPMENT:
Computer equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over an estimated useful
life of three years.
4. SOFTWARE COSTS:
In accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" issued in March 1999
and adopted by the Company, qualifying costs incurred during the application
development stage, consisting principally of external direct costs of materials
and services are capitalized. All other costs incurred in connection with
internal use software are expensed as incurred. Capitalized software costs are
being amortized on a straight-line basis over an estimated useful life of two
years. Amortization commenced when the computer software was ready for its
intended use. Amortization expense for the years ended December 31, 1999 and
1998 was approximately $82,000 and $90,000, respectively, and has been included
in site development/maintenance in the accompanying statements of operations.
Amortization for the year ended December 31, 1998, includes approximately
$49,000 for the write off of unamortized software costs which were deemed to be
impaired as a result of rebuilding the site through use of a new provider. Also,
site development/maintenance expense in 1998 includes compensation of $64,678
paid to the former source provider related to the transition to the new website.
5. REGISTERED USER BASE:
The registered user base, which was acquired through the purchase of
Virtual Stock Exchange, Inc. (see Note C), is being amortized on a straight-line
basis over three years.
6. IMPAIRMENT OF LONG-LIVED ASSETS:
The Company evaluates the recoverability of its identifiable intangibles
and other long-lived assets in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of". SFAS No. 121 requires recognition of
impairment of long-lived assets in the event the net book value of these assets
exceeds the estimated future undiscounted cash flows attributable to these
assets. The Company assesses potential impairment to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. Should an impairment exist, the impairment
loss would be measured based on the excess of the carrying value of the asset
over the asset's fair value.
7. LOSS PER SHARE:
Basic and diluted net loss per share is computed based on the weighted
average number of common shares outstanding for the years and gives retroactive
effect to the shares issued in the recapitalization. At December 31, 1999,
3,968,475 potential common shares resulting from exercise of outstanding options
and warrants,
F-8
<PAGE>
PREDICT IT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
conversion of preferred stock or issuance of contingent shares are not included
in the calculation of diluted net loss per share as their effect would be
anti-dilutive.
8. STOCK-BASED COMPENSATION:
The Company accounts for its stock-based compensation plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees." Under the provisions
of APB No. 25, compensation arising from the grant of stock options is measured
as the excess, if any, of the quoted market price of the Company's common stock
at the date of the grant over the amount an employee must pay to acquire the
stock.
9. ADVERTISING EXPENSE:
Advertising is expensed as incurred. Advertising expense amounted to
approximately $263,000 and $23,000 for the years ended December 31, 1999 and
1998, respectively.
10. 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.
11. COMPREHENSIVE INCOME:
The Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes all changes in stockholders' equity during a period
from nonowner sources. Comprehensive loss for the periods presented is the same
as net loss.
12. SEGMENT INFORMATION:
The Company adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS 131 requires public
companies to report financial and descriptive information about their reportable
operating segments. The Company identifies its operating segments based on how
management internally evaluates separate financial information, business
activities and management responsibility. The Company believes that its
operations constitute a single, reportable segment.
NOTE C--ACQUISITION
On June 30, 1999, the Company acquired Virtual Stock Exchange, Inc.
("VSE"), a company which develops and distributes interactive internet
applications where users manage hypothetical stock portfolios and conduct mock
trading. VSE's stockholders exchanged all of their outstanding common stock for
2,700,000 shares of the Company's common stock, including 500,000 shares to be
held in escrow with 50% of such shares being released as early as January 2000
and the remaining shares to be released in January 2001, upon the Company
attaining certain specified amounts of registered users and page views as of
December 31, 1999 and/or December 31, 2000, respectively. If the milestones are
not achieved, the shares will be returned to the Company and cancelled. The
milestones as of December 31, 1999 were not achieved, however the entire 500,000
shares may be released based on attaining cumulative amounts of registered users
as of December 31, 2000. The acquisition is being accounted for by the purchase
method. The 2,200,000 shares issued in the acquisition have been valued at $.60
per share representing fair value based on the proceeds received on the issuance
of shares in connection with the WDC transaction on April 28, 1999, which
coincides with the time when the terms of the
F-9
<PAGE>
PREDICT IT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE C--ACQUISITION--(CONTINUED)
acquisition were agreed to. The 500,000 shares held in escrow to the extent
issued will be accounted for as compensation based on the value of the shares
issued at such dates. The accounts of VSE, including its results of operations,
have been included in the accompanying financial statements from the date of
acquisition.
In connection with the acquisition, the Company entered into three-year
employment agreements with two former stockholders of VSE which provide for
aggregate annual base salaries of $150,000 and annual aggregate bonuses not to
exceed $30,000. Effective as of March 1, 2000, the two former stockholders
resigned from the Company.
The $1,368,000 purchase price, including costs related to the acquisition,
has been allocated as follows:
<TABLE>
<S> <C>
Cash............................................................................ $ 13,949
Accounts receivable............................................................. 6,944
Computer equipment.............................................................. 35,913
Registered user base............................................................ 1,468,054
Other assets.................................................................... 3,924
----------
Total assets.................................................................... 1,528,784
----------
Accounts payable and accrued expenses........................................... 17,542
Capital lease obligations....................................................... 31,242
Notes payable--stockholders..................................................... 100,000
Accrued interest................................................................ 12,000
----------
Total liabilities............................................................... 160,784
----------
$1,368,000
==========
</TABLE>
The following unaudited pro forma information for the years ended December
31, 1999 and 1998 give effect to the acquisition as though it occurred at
January 1, 1998 and reflects the effect of amortization of the acquired
intangibles over a 3-year period and compensation under the employment agreement
with two former stockholders of VSE.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Pro forma revenue................................................................ $ 268,426 $ 80,909
Pro forma net loss............................................................... $(3,708,690) $(1,149,133)
Pro forma net loss per share--basic and diluted.................................. $ (.37) $ (.25)
Pro forma weighted average number of shares outstanding.......................... 9,972,400 (a) 4,581,327(a)
</TABLE>
- ------------------
(a) reflects the 2,200,000 shares issued in the acquisition as if issued on
January 1, 1998
NOTE D--NOTES AND LOANS PAYABLE TO STOCKHOLDERS
[1] During 1998, the Company borrowed and repaid $60,000 from two of its
stockholders at rates of 12%--15%. Interest expense related to such loans
amounted to $3,000 in 1998. At December 31, 1999, the Company had
outstanding loans payable to two stockholders in the amount of $100,000 at
an interest rate of 8%. On March 3, 2000, the stockholders agreed to forgive
the interest and have the loan repaid in four equal monthly installments of
$25,000 beginning March 15, 2000. Interest expense on the loans for the year
ended December 31, 1999 was $4,000.
[2] On December 8, 1999, the Company entered into loan agreements with certain
existing stockholders and issued notes aggregating $1,000,000. The loan is
for a one-year term with interest at 10% compounded annually. At the option
of the holder, upon the first round of financing by the Company subsequent
to the issuance of these notes, the notes or any portion of the notes may be
converted into the securities offered in
F-10
<PAGE>
PREDICT IT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE D--NOTES AND LOANS PAYABLE TO STOCKHOLDERS--(CONTINUED)
such financing. The number of securities received upon conversion will equal
the dollar amount of principal and accrued interest divided by the offering
price paid by other investors in such financing. Interest is payable
semi-annually on June 8, 2000 and December 8, 2000 and is payable at the
holder's option in shares of common stock valued at $1.60 per share.
In connection with the loan agreements, the Company issued five year
warrants to purchase an aggregate of 625,000 shares of common stock at $1.60 per
share. The Company valued the warrants at $.74 per warrant based on a
Black-Scholes pricing model. The resultant value of $464,000 has been accounted
for as a debt discount and is being amortized to interest expense over the
one-year term of the loans.
In February and March 2000, the Company entered into agreements with
stockholders for additional loans aggregating $1,300,000 under the same terms
described above and issued warrants to purchase an aggregate of 812,500 shares
of common stock at $1.60 per share.
On April 14, 2000, the Company converted the $2,300,000 of loans into
230,000 shares of Series B Preferred Stock and warrants to purchase 230,000
shares of common stock (see Note I).
NOTE E--STOCK OPTIONS
On April 28, 1999, upon completion of the merger with WDC, the Company
adopted the 1999 Stock Option Plan which, is amended, provides for option grants
to key employees, officers and consultants to purchase up to 3,000,000 shares of
common stock at an exercise price not less than 85% of the fair market value on
the grant date. The options, which will have maximum terms of ten years, may be
either incentive stock options, which must be granted at no less than 100% of
market value or nonstatutory options. The plan terminates after ten years.
In October 1998 and January 1999, PIC granted options to purchase shares of
Series B Preferred stock to two officers at exercise prices equivalent to the
estimated fair value of the stock at date of grant. Upon the merger into WDC,
the options were converted, based on the exchange ratio, into options to
purchase 81,750 and 125,000 shares of the Company's common stock at exercise
prices of $.245 and $.30 per share, respectively. The options for 125,000
shares, which expire in January 2004, are exercisable upon grant and the options
for the 81,750 shares which expire in October 2003 become exercisable in three
equal installments on July 19, 1999, 2000 and 2001. Additionally, in January
1999, one of such officers was granted an option by a major stockholder to
purchase shares of Series B preferred stock, which upon the merger into WDC, was
converted into an option to purchase 104,167 shares of the Company's common
stock from such stockholder at an exercise price of $.245 per share.
Compensation expense of $5,729 was charged to operations in connection with such
grant.
See Note H for additional grants of stock options.
Activity related to stock options during the years ended December 31, 1999
and 1998, including options described in Note H, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998
--------------------- ------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year..................................... 81,750 $ 0.25
Granted.............................................................. 1,761,725 2.05 81,750 $ 0.25
--------- ------
Outstanding at end of year........................................... 1,843,475 1.97 81,750 0.25
========= ======
Exercisable.......................................................... 213,917 0.46
=========
</TABLE>
F-11
<PAGE>
PREDICT IT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE E--STOCK OPTIONS--(CONTINUED)
As set forth in Note B [8], the Company applies APB No. 25 in accounting
for its stock option incentive plans and, accordingly, recognizes compensation
expense for the difference between the fair value of the underlying common stock
and the exercise price of the option at the date of grant. Pro forma information
regarding net income and earnings per share is required by SFAS 123 "Accounting
for Stock-Based Compensation" determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS 123. The weighted
average fair value of options granted in 1999 and 1998 was approximately $1.45
and $.17, respectively. Such fair value was determined using the Black-Scholes
option-pricing model with the following assumptions: dividend yield of 0%,
volatility of 70%, risk free interest rates of 4.62%-5.88%, and expected lives
of three to five years. For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over the vesting period of the
options. Had the Company elected to recognize compensation expense based on SFAS
123, pro forma net loss and net loss per share for the years ended December 31,
1999 and 1998 would have been approximately $(3,727,000) and $(513,000) and
$(.42) and $(.22), respectively.
NOTE F--INCOME TAXES
The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires deferred tax assets and
liabilities to be recognized for the future tax consequences attributable to net
operating loss carryforwards and for differences between the financial statement
carrying amounts and tax bases of assets and liabilities. The Company is on a
cash basis for tax purposes. Deferred tax assets are reduced, if necessary, by a
valuation allowance if it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
The Company elected to be taxed as an S corporation under the Internal
Revenue Code and accordingly, the Company was not subject to federal, state or
local corporate income taxes as taxable income or loss flowed through directly
to its stockholders. The Company terminated its S corporation status in August
1998 when it issued preferred stock and accordingly, effective at such time, the
Company's income tax status was converted from a S corporation to that of a C
corporation.
As of December 31, 1999, the Company has a net operating loss carryforward
of approximately $2,571,000 which expires in 2019, the utilization of which may
be subject to limitations as a result of changes in stock ownership.
The tax effects of significant items comprising the Company's net deferred
tax assets and liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Deferred tax assets:
Net operating loss carryforward................................................................... $1,131,000
Deferred compensation............................................................................. 94,000
Excess of liabilities over assets resulting from use of cash basis for tax purposes............... 303,000
----------
1,528,000
Deferred tax liability:
Excess of book basis over tax basis of registered user base....................................... (538,000)
----------
Net deferred assets................................................................................. 990,000
Less valuation allowance............................................................................ (990,000)
----------
$ 0
==========
</TABLE>
F-12
<PAGE>
PREDICT IT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE F--INCOME TAXES--(CONTINUED)
The following presents the income tax benefit and related increase in the
valuation allowance. For the period prior to August 1998, when the Company was
taxed as an S corporation, the amounts are pro forma as if the Company was
taxable as a C corporation:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
- ---------------------------------------------------------------------------------------- ---------
<S> <C> <C>
Deferred:
Federal............................................................................... $(547,000) $(142,000)
State................................................................................. (365,000) (81,000)
--------- ---------
Total income tax benefit......................................................... (912,000) (223,000)
Valuation allowance..................................................................... 912,000 223,000
--------- ---------
Income tax benefit...................................................................... $ 0 $ 0
========= =========
</TABLE>
NOTE G--PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue 5,000,000 shares of authorized preferred stock in one or
more series and to fix the designation, powers, preferences, privileges and
rights of such stock, and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences. The 1,000,000 shares of Series A
Preferred Stock, which were issued for $3,000,000 by WDC prior to the merger,
has a liquidation preference of $3.00 per share or $3,000,000, is nonvoting,
does not provide for any dividend and is convertible into 1,000,000 shares of
common stock on a share for share basis.
NOTE H--COMMITMENTS
1. LEASE AGREEMENTS:
The Company had two month-to-month agreements to sublease office space
through September 1999.
On July 6, 1999, the Company entered into a six year and two months lease
for office space expiring August 2005 which provides for average monthly
payments over the term of the lease of approximately $13,000. The Company also
purchased equipment under capital leases which expire through 2002. At
December 31, 1999, future minimum lease payments under the leases are as
follows:
<TABLE>
<CAPTION>
OFFICE CAPITAL
DECEMBER 31, SPACE LEASES
- ---------------------------------------------------------------------- -------- --------
<S> <C> <C>
2000.................................................................. $145,707 $ 75,401
2001.................................................................. 150,084 52,424
2002.................................................................. 154,590 3,103
2003.................................................................. 159,228
2004.................................................................. 164,004
Thereafter............................................................ 111,784
-------- --------
$885,397 130,928
========
Amount representing interest.......................................... 15,013
--------
Capital lease obligation.............................................. 115,915
Current portion....................................................... 64,142
--------
Long-term portion..................................................... $ 51,773
========
</TABLE>
F-13
<PAGE>
PREDICT IT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE H--COMMITMENTS--(CONTINUED)
At December 31, 1999, assets recorded under capital leases and related
accumulated amortization amounted to approximately $137,000 and $17,000,
respectively. Amortization of assets recorded under capital leases is included
in depreciation expense.
Rent expense was approximately $77,000 and $14,000 for the years ended
December 31, 1999 and 1998, respectively. Other assets in the accompanying
balance sheet include a security deposit for the lease of approximately $86,000.
Prepaid expenses at December 31, 1999 includes approximately $36,000 of prepaid
rent.
2. EMPLOYMENT AGREEMENTS:
In May 1999, the Company executed a three year employment agreement with
its President. The agreement provides for an annual salary of $140,000, subject
to increases at the discretion of the Compensation Committee of the Board of
Directors. The agreement also provides for a discretionary performance bonus as
determined by the Board. In connection with the employment agreement, the
Company granted options to the President to purchase 537,158 shares of common
stock at an exercise price of $2.00 per share, which price was less than the
market value on date of grant. The options vest in equal annual installments
over three years and have anti-dilution protection. As a result of the
anti-dilution protection, upon the consummation of the acquisition of VSE, the
President was granted options to purchase an additional 168,006 shares of common
stock at an exercise price of $2.62 per share. In addition, in August 1999, as a
result of the Company's grant of stock options to employees, the President was
granted options to purchase an additional 9,421 shares at an exercise price of
$1.75 per share. All such options vest in equal annual installments over three
years. Compensation expense of approximately $940,000 related to the option
grant at $2.00 has been deferred and is being charged to operations ratably over
the vesting period. Compensation expense charged to operations for the year
ended December 31, 1999 was $182,778. In addition, the President was granted
five year performance based options to purchase 214,879 shares of common stock
of the Company at an exercise price of $3.75 per share. Vesting of the options
occurs as to 50% on May 1, 2000 and 50% on May 1, 2001 based on the number of
registered users and page views exceeding certain targets by such dates.
On June 9, 1999, the Company entered into a three-year employment agreement
with an employee which, as amended, provides for an annual base salary of
$130,000 and an annual bonus not to exceed $20,000. In addition, the employee
was granted an option to purchase 100,000 shares of common stock at an exercise
price of $2.30. The option will vest in equal annual installments over three
years.
3. CONSULTING AND OTHER AGREEMENTS:
On April 28, 1999, the Company entered into an agreement with the Company's
current Chairman (formerly the President and Chief Executive Officer), in
connection with his resignation. The agreement provides for payments aggregating
$62,500 and also provides for an option to purchase 100,000 shares of common
stock at $.60 per share which exercise price represented the fair value of the
common stock at date of grant. Accordingly, the option, which was granted for
services to be rendered as Chairman, did not result in a charge to operations
for the year ended December 31, 1999. The option vests quarterly through May
2000.
On May 1, 1999, the Company executed a two year consulting agreement with
Verus Capital Inc. ("Verus"), a stockholder of the Company, to provide business
advisory and consulting services for a monthly fee of $10,000. Consulting fees
of $80,000 were charged to operations for the year ended December 31, 1999.
4. LICENSE AND PROMOTION AGREEMENT:
In November 1999, the Company entered into a three year agreement with an
on-line content provider (the "provider"). The Company will design, produce,
host, operate, maintain and support three different versions of the Company's
website on behalf of the provider. The provider will then sell advertising on
the co-branded versions. The agreement provides for the Company to make annual
payments to the provider of $250,000. The
F-14
<PAGE>
PREDICT IT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE H--COMMITMENTS--(CONTINUED)
payments are being accounted for as deferred promotion expenses and are being
amortized over a twelve-month period. The Company shall receive net advertising
revenue, as defined, generated in association with the agreement up to the
$250,000 (the "annual recoupment") during the twelve-month periods immediately
following the launch. If the net advertising revenue satisfies the annual
recoupment during any of the twelve-month periods, the parties will share net
advertising revenue on a 50/50 basis until the next anniversary of the launch
date. In addition, the provider will promote the co-branded website within its
network over the three year term. The agreement also provides for the Company to
pay expenses related to the marketing platform outside of the provider's network
up to a maximum of $250,000 over the three year term.
NOTE I--SUBSEQUENT EVENTS
In January 2000, the Company agreed to settle with a consultant for
development work performed to launch Version 3 of the Company's website, which
services were performed in 1999. The Company issued 178,954 shares of its common
stock in full settlement of amounts owed to the consultant. The value of the
shares, amounting to approximately $247,000 ($1.38 per share) based on a 30 day
average of the Company's closing market price, will be included in capitalized
software costs.
In March 2000, the Company entered into an agreement with China Interactive
Media Group ("CIMG") to establish an on-line prediction company to be known as
Predict It China. Under the terms of the agreement, CIMG will provide initial
financing, management and operating infrastructure for Predict It China while
the Company will contribute its proprietary technology and intellectual capital
to the venture. The Company will own 30% of the outstanding equity of the
venture and will receive an ongoing technology licensing fee from Predict It
China.
In March 2000, the Company commenced an offering of up to 80 Units (a
minimum of 40 Units), each Unit consisting of 10,000 shares of Series B
convertible preferred stock ("Series B Stock"), having a stated value of $10.00
per share and seven-year warrants to purchase 100,000 shares of the Company's
common stock at an exercise price of $1.50 per share, subject to certain
adjustments. The purchase price per Unit is $100,000. Each share of Series B
Stock is convertible at any time into 10 shares of common stock, subject to
certain anti-dilution protection, entitled to one vote for each share of common
stock issuable upon conversion and has a liquidation value of $30.00 per share
ranking pari passu with the Company's Series A preferred stock. The Series B
Stock will automatically convert into common stock upon the occurrence of
certain events, including a public offering of the Company's securities. On
April 14, 2000, the Company completed the offering of 43 units of which, 23
units were issued upon conversion of $2,300,000 in loans and 20 units were sold
for net proceeds of approximately $1,684,000.
On April 3, 2000, the Company increased the number of authorized common
shares from 25,000,000 to 75,000,000 and the number of preferred shares from
5,000,000 to 10,000,000.
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Virtual Stock Exchange, Inc.
New York, New York
We have audited the accompanying balance sheet of Virtual Stock Exchange, Inc.
as of December 31, 1998 and the related statements of operations, changes in
stockholders' equity (capital deficiency) and cash flows for the year then ended
and for the period from January 7, 1997 (inception) through December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of Virtual Stock Exchange, Inc. as of
December 31, 1998 and the results of its operations and its cash flows for the
year then ended and for the period from January 7, 1997 (inception) through
December 31, 1997 in conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
July 27, 1999
F-16
<PAGE>
VIRTUAL STOCK EXCHANGE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
--------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 39,570 $ 13,949
Accounts receivable, net.......................................................... 16,532 6,944
--------- ---------
Total current assets.............................................................. 56,102 20,893
Capitalized software costs, net of accumulated amortization of $13,500 and
$18,000........................................................................ 4,500
Computer equipment, net of accumulated depreciation of $3,281 and $9,220.......... 19,374 35,913
Other assets...................................................................... 3,647 3,924
--------- ---------
$ 83,623 $ 60,730
========= =========
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses............................................. $ 1,303 $ 17,542
Accrued interest.................................................................. 12,000
Capitalized lease obligation--current portion..................................... 6,187 13,529
--------- ---------
Total current liabilities......................................................... 7,490 43,071
Capitalized lease obligation...................................................... 6,964 17,713
Notes payable--stockholders....................................................... 100,000 100,000
Accrued interest.................................................................. 8,000
--------- ---------
122,454 160,784
--------- ---------
Commitments
Capital deficiency:
Common stock, $10 par value, 1,500 shares authorized, 100 shares in 1998 and 107
shares in 1999 issued and outstanding.......................................... 1,000 1,070
Additional paid-in capital........................................................ 17,000 103,284
Accumulated deficit............................................................... (56,831) (204,408)
--------- ---------
(38,831) (100,054)
--------- ---------
$ 83,623 $ 60,730
========= =========
</TABLE>
See notes to financial statements
F-17
<PAGE>
VIRTUAL STOCK EXCHANGE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JANUARY 7, 1997
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ----------------------------
1997 1998 1998 1999
--------------- ------------ --------------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
User fees......................................... $ 19,149 $ 16,461 $ 15,082 $ 7,097
Advertising....................................... 50,736 10,949 59,093
--------- -------- --------- ---------
19,149 67,197 26,031 66,190
--------- -------- --------- ---------
Costs and expenses:
Site development/maintenance...................... 25,305 49,460 35,504 167,027
Selling, general and administrative............... 10,663 48,981 16,032 39,451
Interest expense, net............................. 2,000 6,768 2,000 7,288
--------- -------- --------- ---------
37,968 105,209 53,536 213,766
--------- -------- --------- ---------
Net loss............................................ $ (18,819) $(38,012) $ (27,505) $(147,576)
========= ======== ========= =========
</TABLE>
F-18
<PAGE>
VIRTUAL STOCK EXCHANGE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
COMMON STOCK
PAR VALUE $10 ADDITIONAL
---------------- PAID-IN
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Issuance of common stock for services.................... 100 $1,000 $ 17,000 $ 18,000
Net loss for the period January 7, 1997 (inception)
through December 31, 1997........................... $ (18,819) (18,819)
---- ------ -------- --------- ---------
Balance at December 31, 1997............................. 100 1,000 17,000 (18,819) (819)
Net loss for the year ended December 31, 1998.......... (38,012) (38,012)
---- ------ -------- --------- ---------
Balance at December 31, 1998............................. 100 1,000 17,000 (56,831) (38,831)
Issuance of common stock for services.................... 7 70 86,284 86,354
Net loss for the six months ended June 30, 1999........ (147,577) (147,577)
---- ------ -------- --------- ---------
Balance at June 30, 1999 (unaudited)..................... 107 $1,070 $103,284 $(204,408) $(100,054)
==== ====== ======== ========= =========
</TABLE>
See notes to financial statements
F-19
<PAGE>
VIRTUAL STOCK EXCHANGE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 7, 1997
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------
1997 1998 1998 1999
---------------- ------------ -------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net loss.............................................. $(18,819) $(38,012) $(27,505) $(147,576)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization...................... 4,969 11,812 5,906 10,438
Issuance of common stock for services.............. 86,354
Changes in:
Accounts receivable.............................. (16,532) (5,497) 9,588
Other assets..................................... (3,647) (2,840) (277)
Accrued expenses and accrued interest............ 2,625 6,678 4,042 20,239
-------- -------- -------- ---------
Net cash used in operating activities................... (11,225) (39,701) (25,894) (21,234)
-------- -------- -------- ---------
Cash flows from investing activities:
Purchase of computer equipment........................ (2,414) (6,242)
-------- --------
Cash flows from financing activities:
Loans from stockholders............................... 50,000 50,000
Repayments on capital lease obligations............... (848) (4,387)
-------- ---------
Net cash provided by financing activities............... 50,000 49,152 (4,387)
-------- -------- ---------
Net increase (decrease) in cash......................... 36,361 3,209 (25,894) (25,621)
Cash--beginning of period............................... 36,361 36,361 39,570
-------- -------- ---------
Cash--end of period..................................... $ 36,361 $ 39,570 $ 10,467 $ 13,949
======== ======== ======== =========
Supplemental disclosure of cash flow information:
Interest paid during the period....................... $ 768
Supplemental disclosures of noncash investing and
financing activities:
Issuance of common stock for services................. $ 18,000 $ 86,354
Purchase of equipment through capital lease........... $ 13,999 $ 22,478
</TABLE>
See notes to financial statements
F-20
<PAGE>
VIRTUAL STOCK EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND FOR THE PERIODS ENDED
JUNE 30, 1999 AND JUNE 30, 1998 IS UNAUDITED)
NOTE A--THE COMPANY AND OPERATIONS
Virtual Stock Exchange, Inc. ("VSE"), which was formed in January 1997,
develops and distributes interactive internet application where individuals
create and manage hypothetical stock portfolios, conduct mock trading, and
compete with other members for prize money based on their portfolio performance.
The web site also provides quotes and research on U.S. financial markets through
links to other sites and provides a forum for individuals to exchange ideas with
other members on a variety of investment topics.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. REVENUE RECOGNITION:
The Company offers a basic service which, starting in 1998, is free to
users. In addition, starting in 1998, the Company offers users a premium service
as an upgrade to the basic service, for a monthly user fee. User fees are
recognized as revenue pro rata over the subscription period.
Advertising revenue is earned from both fixed fee arrangements and fees
based on the number of occasions a user views an advertisement ("impression").
Revenues under fixed fee arrangements, which provide for ads being shown
month-to-month are recognized in the month the ads are exhibited. Revenue based
on number of impressions is recognized at the time the guaranteed number of
impressions occur, and thereafter in the period the impressions occur.
2. COMPUTER EQUIPMENT:
Computer equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over an estimated useful
life of three years.
3. SOFTWARE COSTS:
In accordance with Statement of Position 98-1, of the American Institute of
Certified Public Accountants "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" issued in March 1998 and adopted by the
Company, qualifying costs incurred during the application development stage,
consisting of external direct costs of materials and services incurred and
payroll and related benefits for employees who devoted time in connection with
obtaining or developing internal use software were capitalized. All other costs
incurred in connection with internal use software are expended as incurred.
Capitalized software costs are being amortized on a straight-line basis over an
estimated useful life of two years.
Amortization expense for the year ended December 31, 1998 and the period
from January 7, 1997 through December 31, 1997 was approximately $9,000 and
$4,500, respectively and has been included in site development/maintenance in
the accompanying financial statements. Amortization expense for the six months
ended June 30, 1999 and 1998 was $4,500 for each period.
4. 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.
5. UNAUDITED FINANCIAL STATEMENTS:
The financial information presented as of June 30, 1999 and for the
six-month periods ended June 30, 1999 and 1998 is unaudited, but in the opinion
of management contains all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of such financial information.
Results of operations for interim periods are not necessarily indicative of
those to be achieved for full fiscal years.
F-21
<PAGE>
VIRTUAL STOCK EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND FOR THE PERIODS ENDED
JUNE 30, 1999 AND JUNE 30, 1998 IS UNAUDITED)
NOTE C--RELATED PARTY TRANSACTIONS
The Company borrowed an aggregate of $108,000 from its founders at an
interest rate of 8% per annum. Interest expense related to such loans amounted
to $2,000 (1997), $6,000 (1998), $2,000 (6 months--1998) and $4,000 (6
months--1999). Interest is payable semi-annually beginning January 1, 2000 and
the principal is due on June 1, 2002.
NOTE D--LEASE AGREEMENT
The Company had a lease for office space that expired on June 30, 1999. The
Company is continuing to lease the space on a month to month basis. Rent expense
was approximately none (1997), $7,000 (1998), $2,000 (6 months--1998) and $4,000
(6 months--1999). Other assets in the accompanying balance sheets include
security deposits for the leases of $3,647.
NOTE E--OBLIGATION UNDER CAPITAL LEASE
Minimum future lease payments under a capital lease agreement for each of
the remaining years and in the aggregate are:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ---------
<S> <C> <C>
1999................................................................ $ 9,690
2000................................................................ 8,075 $20,220
2001................................................................ 12,948
2002................................................................ 6,611
-------- -------
Total minimum lease payments........................................ 17,765 39,779
Less amounts representing interest.................................. 4,614 8,537
-------- -------
Present value of minimum lease payments............................. 13,151 31,242
Less current portion of capital lease obligation.................... 6,187 13,529
-------- -------
Capital lease obligation, noncurrent................................ $ 6,964 $17,713
======== =======
</TABLE>
Interest expense on capital lease obligations was approximately $1,000 for
the year ended December 31, 1998 and $3,000 for the six months ended June 30,
1999.
NOTE F--INCOME TAXES
The Company has elected to be taxed as an S corporation for federal and
state income tax purposes. The Company is subject to New York City corporate
income tax. Federal and state income taxes on the Company's income are the
responsibility of the individual stockholders.
NOTE G--SUBSEQUENT EVENT
On June 30, 1999, VSE was acquired by Predict It Inc.
F-22
<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
1999 AND DECEMBER 31, 1998
The unaudited pro forma statements of operations for the years ended
December 31, 1999 and December 31, 1998 are presented as if the acquisition of
Virtual Stock Exchange, Inc. ("VSE"), which was acquired on June 30, 1999 in a
transaction accounted for as a purchase, occurred at the beginning of the
periods presented. The pro forma statements have been prepared based on the
audited and unaudited financial statements of the Company and VSE, which are
included elsewhere in this Registration Statement. These pro forma financial
statements are not intended to be indicative of the results that would have
occurred on the dates indicated or which may be realized in the future.
F-23
<PAGE>
PREDICT IT INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VIRTUAL
STOCK ADJUSTED
PREDICT IT INC. EXCHANGE, INC. PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS CONSOLIDATED
--------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue:
User fees........................................... $ 7,712 $ 16,461 $ 24,173
Advertising......................................... 6,000 50,736 56,736]
----------- -------- ------------
13,712 67,197 80,909
----------- -------- ------------
Costs and expenses:
Site development/maintenance........................ 177,783 49,460 227,243
Selling, general and administrative................. 340,698 48,981 $ 114,000(b) 503,679
Amortization of acquired intangible................. 489,352(a) 489,352
Interest expense.................................... 3,000 6,768 9,768
----------- -------- --------- ------------
521,481 105,209 603,352 1,230,042
----------- -------- --------- ------------
Net loss.............................................. $ (507,769) $(38,012) $(603,352) $ (1,149,133)
=========== ======== ========= ============
Net loss per share.................................... $ (0.21) $ (.25)
=========== ============
Weighted average number of shares outstanding......... 2,381,327 4,581,327(c)
=========== ============
</TABLE>
F-24
<PAGE>
PREDICT IT INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
VIRTUAL
STOCK ADJUSTED
PREDICT IT INC. EXCHANGE, INC. PRO FORMA PRO FORMA
HISTORICAL HISTORICAL(1) ADJUSTMENTS CONSOLIDATED
--------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue:
User fees........................................... $ 4,519 $ 7,097 $ 11,616
Advertising......................................... 174,517 59,093 233,610
----------- ---------- ------------
179,036 66,190 245,226
----------- ---------- ------------
Costs and expenses:
Site development/maintenance........................ 406,778 167,027 573,805
Selling, general and administrative................. 2,786,164 39,451 $ 57,000(b) 2,882,615
Amortization of acquired intangible................. 244,676 244,676(a) 489,352
Interest expense (income)........................... 856 7,288 8,144
----------- ---------- ----------- ------------
3,438,474 213,766 301,676 3,953,916
----------- ---------- ----------- ------------
Net loss.............................................. $(3,259,438) $ (147,576) $ (301,676) $ (3,708,690)
=========== ========== =========== ============
Net loss per share.................................... $ (0.37) $ (0.37)
=========== ============
Weighted average number of shares outstanding......... 8,872,400 9,972,400(c)
=========== ============
</TABLE>
- ------------------
(1) For period from January 1, 1999 through June 30, 1999.
F-25
<PAGE>
PREDICT IT INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(a) Represents amortization expense of intangible resulting from the
acquisition, which is being amortized over a period of 3 years.
(b) Represents the impact of employment agreements with two former
stockholders of VSE entered into upon consummation of the acquisition.
(c) Does not include 500,000 shares held in escrow which are issuable to
former VSE stockholders upon certain conditions being met.
F-26
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The registrant's articles of incorporation eliminate the personal liability
of directors to the registrant or its stockholders for monetary damages for
breach of fiduciary duty to the extent permitted by Delaware law. The
registrant's articles of incorporation and by-laws provide that the registrant
shall indemnify its officers and directors to the extent permitted by Delaware
law, which authorizes a corporation to indemnify directors, officers, employees
or agents of the corporation in non-derivative suits if such party acted in good
faith and in a manner such party reasonably believed to be in or not opposed to
the best interest of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The Delaware General Corporation Act further provides that indemnification shall
be provided if the party in question is successful on the merits or otherwise.
The Company also has insurance policies which covers acts by directors and
officers of the Company.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses, payable in
connection with the sale of the common stock being registered hereby. Except for
the Commission's registration fee, all expenses are estimated.
<TABLE>
<CAPTION>
ITEM AMOUNT
- ----------------------------------------------------------- -----------
<S> <C>
Registration fees.......................................... $ 5,348.09
Printing and engraving expenses............................ $ 80,000.00
Legal fees and expenses.................................... $100,000.00
Auditors' accounting fees and expenses..................... $100,000.00
-----------
Miscellaneous expenses..................................... $ 14,651.91
-----------
Total.................................................... $300,000.00
===========
</TABLE>
In addition, holders of the shares being registered under this registration
statement will be responsible for all selling commissions, transfer taxes and
related charges in connection with the offer and sale of the shares offered.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On April 14, 2000, certain accredited investors and existing stockholders
purchased 43 units consisting of an aggregate of 430,001 shares of Series B
Preferred Stock, convertible into 4,300,010 shares of common stock, and warrants
to purchase an aggregate of 4,300,000 shares of our common stock for a total of
$4,300,000. The warrants have an exercise price of $1.50 per share. Of these
units, 23 units were issued to Dawntreader Fund I LP, Commonwealth Associates,
L.P., Falk Family Foundation, Michael Falk, Asia World Holdings Ltd., Ed Shea,
Robert Priddy, Robert O'Sullivan Family Trust, Keith Rosenbloom and Robert H.
Lessin Venture Capital LLC, existing security holders, as a result of the
conversion of their notes totalling $2,300,000. In connection with these
issuances of shares and warrants to accredited investors and existing
stockholders, we relied on the statutory exemptions provided by Section 4(2) of
the Securities Act of 1933 and Regulation D promulgated thereunder, because
these issuances did not involve public offerings.
On March 15, 2000, certain accredited investors made a bridge loan to us in
the aggregate amount of $1,000,000. The loan was evidenced by one-year
promissory notes in the aggregate amount of $1,000,000, plus interest, which
shall accrue at a rate of 10% per year, compounded annually. In conjunction with
the bridge loan, we issued warrants to purchase an aggregate of 625,000 shares
of our common stock at an exercise price of $1.60 per share. In connection with
these issuances of warrants to existing stockholders, we relied on the statutory
exemptions provided by Section 4(2) of the Securities Act of 1933, because these
issuances did not involve public offerings.
On February 18, 2000, we issued to Andrew P. Merkatz, our President and
Chief Executive Officer, an option to purchase 62,500 shares of our common stock
at an exercise price of $1.38 per share. In connection with the issuance of this
stock option to our President and Chief Executive Officer, we relied on the
statutory exemption provided by Section 4(2) of the Securities Act of 1933,
because this issuance did not involve a public offering. In connection with the
issuance of this stock option to our President and Chief Executive Officer, we
II-1
<PAGE>
relied on the statutory exemptions provided by Section 4(2) of the Securities
Act of 1933, because this issuance did not involve public offerings.
On February 14, 2000, Dawntreader Fund I LP, an existing shareholder, made
a bridge loan to us in the amount of $300,000. The loan was evidenced by a
one-year promissory note in the amount of $300,000, plus interest, which shall
accrue at the rate of 10% per year, compounded annually. In conjunction with the
bridge loan, we issued warrants to purchase an aggregate of 187,500 shares of
our common stock at an exercise price of $1.60 per share. In connection with
these issuances of warrants to existing stockholders, we relied on the statutory
exemptions provided by Section 4(2) of the Securities Act of 1933, because these
issuances did not involve public offerings.
On January 20, 2000, we issued to each of Lee Nesser and Sherri Holloway,
employees, options to purchase 25,000 shares of our common stock at an exercise
price of $1.375 per share. In addition, we issued to Justin Model, an employee,
an option to purchase 20,000 shares of our common stock at an exercise price of
$1.375 per share. We also issued to each of Kristina Frantz, John Pavlakis,
Abraham Liu and Helene Kim, employees, options to purchase 15,000 shares of our
common stock at an exercise price of $1.375 per share. We also issued to
Yitzchok Aaronson, an employee, an option to purchase 7,500 shares of our common
stock at an exercise price of $1.375 per share. We also issued to Nomi Altabef,
an employee, an option to purchase 5,000 shares of our common stock at an
exercise price of $1.375 per share. Furthermore, we issued to Deborah Margulies,
an employee, an option to purchase 10,000 shares or our common stock at an
exercise price of $1.375 per share. In connection with the issuances of these
stock options, we relied on the statutory exemptions provided by Section 4(2) of
the Securities Act of 1933, because these issuances did not involve public
offerings.
In January 2000, we issued to Vision Consulting International Inc., one of
our vendors, 178,954 shares of common stock in exchange for services rendered.
In connection with this issuance, we relied upon the statutory exemptions
provided by Section 4(2) of the Securities Act of 1933, because this issuance
did not involve a public offering.
On December 8, 1999, we issued to Keith Rosenbloom, who was serving as a
director at such time and who is an existing shareholder, and various other
existing stockholders, including Dawntreader Fund I LP, Robert O'Sullivan, Falk
Family Foundation, Michael Falk, Commonwealth Associates, L.P., Robert Priddy
and Asia World Holdings Ltd., immediately exercisable warrants to purchase an
aggregate of 625,000 shares of our common stock at an exercise price of $1.60
per share. In connection with the issuances of these stock options to one of our
former directors and certain existing stockholders, we relied on the statutory
exemptions provided by Section 4(2) of the Securities Act of 1933, because these
issuances did not involve public offerings.
On November 19, 1999, we issued to Andrew P. Merkatz, our President and
Chief Executive Officer, an option to purchase 15,971 shares of our common stock
at an exercise price of $2.00 per share. We also issued to Harry Charles, an
employee, an option to purchase 15,000 shares of our common stock at an exercise
price of $2.00 per share. In addition, we issued to Kossi Kpante, an employee,
an option to purchase 20,000 shares of our common stock at an exercise price of
$2.00 per share. In connection with the issuances of these stock options to our
employees, we relied on the statutory exemptions provided by Section 4(2) of the
Securities Act of 1933, because these issuances did not involve public
offerings.
On October 15, 1999, we issued to Kenneth Su, an employee, an option to
purchase 20,000 shares of our common stock at an exercise price of $1.50 per
share. In connection with the issuance of this stock option to an employee, we
relied on the statutory exemptions provided by Section 4(2) of the Securities
Act of 1933, because this issuance did not involve a public offering.
On October 14, 1999, we issued to Vision Consulting International Inc., one
of our vendors, 103,448 shares of our common stock in exchange for services
rendered. In connection with this issuance we relied upon the statutory
exemptions provided by Section 4(2) of the Securities Act of 1933, because this
issuance did not involve a public offering.
On September 27, 1999, we issued to Desmond Glass, our Corporate
Controller, an option to purchase 70,000 shares of our common stock at an
exercise price of $1.50 per share. We also issued to Drew Ruscil, an employee,
an option to purchase 35,000 shares of our common stock at an exercise price of
$1.50 per share. In addition, on September 27, 1999, we issued to each of Bill
Levine, Brian Stack and Geordie Pace, all employees, options to purchase 15,000
shares of our common stock at an exercise price of $1.50 per share. Furthermore,
on
II-2
<PAGE>
September 27, 1999, we issued to each of Jihan Kim and Miranda Langan, both
employees, options to purchase 10,000 shares of our common stock at an exercise
price of $1.50 per share. Finally, on September 27, 1999, we issued to each of
Waisum Tam and Brendan McGovern, both employees, options to purchase 5,000
shares of our common stock at an exercise price of $1.50 per share. In
connection with the issuances of these stock options to our employees, we relied
on the statutory exemptions provided by Section 4(2) of the Securities Act of
1933, because these issuances did not involve public offerings.
On August 18, 1999, we issued to Andrew P. Merkatz, our President and Chief
Executive Officer, an option to purchase 9,421 shares of our common stock at an
exercise price of $1.75 per share. In connection with the issuance of this stock
option to our President and Chief Executive Officer, we relied on the statutory
exemption provided by Section 4(2) of the Securities Act of 1933, because this
issuance did not involve a public offering.
On July 27, 1999, we issued to Miranda Langan, an employee, an option to
purchase 30,000 shares of our common stock at an exercise price of $2.00 per
share. On July 27, 1999, we also issued to Alana Oldham, an employee, an option
to purchase 120,000 shares of our common stock at an exercise price of $2.00 per
share. In addition, on July 27, 1999, we issued to Joanne Van Wranken, an
employee, an option to purchase 4,000 shares of our common stock at an exercise
price of $2.00 per share. Finally, on July 27, 1999, we issued to Peter Norris,
an employee, an option to purchase 25,000 shares of our common stock at an
exercise price of $2.00 per share. In connection with the issuances of these
stock options to our employees, we relied on the statutory exemption provided by
Section 4(2) of the Securities Act of 1933, because these issuances did not
involve public offerings.
On June 30, 1999, we acquired Virtual Stock Exchange, Inc. from its 3
stockholders, and in exchange for the business of Virtual Stock Exchange, we
issued to them an aggregate of 2,700,000 shares of our common stock. In
connection with private exchange of our common stock for a privately-held
business, we relied on the statutory exemption provided by Section 4(2) of the
Securities Act of 1933, because these issuances did not involve public
offerings.
On June 30, 1999, we issued to Andrew P. Merkatz, our President and Chief
Executive Officer, an option to purchase 168,006 shares of our common stock at
an exercise price of $2.62 per share. In connection with the issuance of this
stock option to our President and Chief Executive Officer, we relied on the
statutory exemption provided by Section 4(2) of the Securities Act of 1933
because this issuance did not involve a public offering.
On June 24, 1999, we issued to Robert Jacobs, an employee, an option to
purchase 27,250 shares of our common stock at an exercise price of $2.30 per
share. On June 24, 1999, we also issued to Brendan McGovern, an employee, an
option to purchase 10,000 shares of our common stock at an exercise price of
$2.30 per share. In addition, on June 24, 1999, we issued to Geordie Pace, an
employee, an option to purchase 100,000 shares of our common stock at an
exercise price of $2.30 per share. Finally, on June 24, 1999, we issued to Jihan
Kim, an employee, an option to purchase 40,000 shares of our common stock at an
exercise price of $2.30 per share. In connection with the issuances of these
stock options to our employees, we relied on the statutory exemption provided by
Section 4(2) of the Securities Act of 1933, because these issuances did not
involve public offerings.
On April 28, 1999, we completed a merger with Predict It Corp. pursuant to
which we acquired the business of Predict It Corp. In connection with the
merger, we converted all of the outstanding capital stock of Predict It Corp.
into an aggregate of 5,000,000 shares of our common stock. In connection with
the exchange of Predict It Corp. stock, we relied on the statutory exemption
provided by Section 4(2) of the Securities Act of 1933, because these issuances
did not involve public offerings. On April 28, 1999, we completed an offering of
1,000,000 shares of our Series A Preferred Stock to several institutional
investors. We raised $3,000,000 from that offering, which was made pursuant to
the exemption from registration provided by Rule 506 of Regulation D,
promulgated under the Securities Act of 1933 as an offering solely to accredited
investors not involving any public offering.
On March 4, 1999, we completed an offering of 713,600 shares of our common
stock to several institutional investors. We raised $7,136 from that offering
which was made pursuant to the exemption from registration provided by Rule 504
of Regulation D, promulgated under the Securities Act of 1933 as an offering
solely to accredited institutional investors not involving any public offering.
On February 25, 1999, we completed an offering of 25,000 shares of our
common stock to 2 individuals and 1 entity in return for consulting services
provided to us. The offering was made pursuant to the exemption from
registration provided by Rule 504 of Regulation D, promulgated under the
Securities Act of 1933 as an offering solely to accredited investors not
involving any public offering.
II-3
<PAGE>
On February 19, 1999, we completed an offering of 3,006,400 shares of our
common stock to several institutional investors. We raised $30,064 from that
offering which was made pursuant to the exemption from registration provided by
Rule 504 of Regulation D, promulgated under the Securities Act of 1933 as an
offering solely to institutional accredited investors not involving any public
offering.
On January 11, 1999, our predecessor, Predict It Corp., issued to Tom
Courts, our former President and Chief Executive Officer, an option to purchase
22,458 shares of Series B Preferred Stock at an exercise price of $1.6697 per
share. In connection with the issuance of this stock option to our former
President and Chief Executive Officer, we relied on the statutory exemption
provided by Section 4(2) of the Securities Act of 1933, because the issuance did
not involve a public offering. In connection with the reverse acquisition of
Predict It Corp., the option was converted into an option to acquire 125,000
shares of our common stock at an exercise price of $.30 per share. The option is
exercisable at any time and expires on January 11, 2004.
On October 3, 1998, Predict It Corp. issued to Robert Jacobs, an employee,
an option to purchase 14,678 shares of Series B Preferred Stock at an exercise
price of $1.3636 per share. In connection with the issuance of this stock option
to an employee, we relied on the statutory exemption provided by Section 4(2) of
the Securities Act of 1933, because the issuance did not involve a public
offering. In connection with the reverse acquisition of Predict It Corp., the
option was converted into an option to acquire 81,750 shares of our common stock
at an exercise price of $.245 per share. The option is exercisable in three
equal amounts on each of July 19, 1999, July 19, 2000 and July 19, 2001.
On January 15, 1996, we issued 255,000 shares of our common stock to the
three original members of the Board of Directors. We raised $255 from that
issuance. In connection with the original issuance of stock to our initial Board
members, we relied on the statutory exemption provided by Section 4(2) of the
Securities Act of 1933, because these issuances did not involve public
offerings.
ITEM 27. EXHIBITS.
The following exhibits are filed as part of this registration statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger by and between Predict It Corp. and WDC Development, Inc.*
2.2 Agreement and Plan of Merger and Reorganization by and among the Registrant, PII Acquisition Corp.,
Virtual Stock Exchange, Inc., Gary Cheng, Howard Yen and Scott Appleby.*
3.1 Certificate of Incorporation of the Registrant, as amended.*
3.2 By-Laws of the Registrant.*
4.1 Certificate of Designation of Series A Preferred Stock.*
4.2 Specimen of Registrant's Common Stock.*
4.3 Registration Rights Agreement by and among the Registrant, Gary Cheng, Howard Yen and Scott Appleby.*
4.4 Form of Promissory Note, dated December 8, 1999, February 14, 2000 and March 15, 2000.*
4.5 Form of Warrant, dated December 8, 1999, February 14, 2000 and March 15, 2000.*
4.6 Certificate of Designation of Series B Preferred Stock.**
4.7 Unit Purchase Option to Commonwealth Associates, L.P.**
5.1 Opinion and Consent of Camhy Karlinsky & Stein LLP.*
10.1 1999 Stock Option Plan, as amended.*
10.2 Employment Agreement between Registrant and Andrew Merkatz.*
10.3 Employment Agreement between Registrant and Howard Yen.*
10.4 Transition Agreement between Registrant and Tom Courts.*
10.5 Employment Agreement between Registrant and Gary Cheng.*
10.6 Employment Agreement between Registrant and Geordie Pace.*
10.7 Agreement by and between the Registrant and Vision Consulting International Inc.*
10.8 License and Promotion Agreement by and between Registrant and SportsLine USA, Inc.*
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -------------------------------------------------------------------------------------------------------
<S> <C>
10.9 License Agreement by and between Registrant and Predict It China, LLC**
10.10 Form of Subscription Agreement by and between Registrant and the subscribers of units.**
23.1 Consent of Camhy Karlinsky & Stein LLP.**
23.2 Consent of Richard A. Eisner & Company, LLP.**
24 Power of Attorney.*
</TABLE>
- ------------------
* previously filed
** filed herewith
ITEM 28. UNDERTAKINGS.
1. To file, during any period in which offers or sales of the securities
are being made, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered may be reflected in the form of
prospectus filed with the Commission under Rule 424(b) if, in aggregate,
the changes in the volume and price represent no more than a 20% change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any additional or changed material information on the
plan of
distribution.
2. That, for the purpose of determining liability under the Securities Act
or 1933, it shall treat each post-effective amendment as a new registration
statement of the securities offered, and treat the offering of the securities at
that time as an initial bona fide offering.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remains unsold at the termination of
the offering.
To the extent that indemnification for liabilities arising under the
Securities Act or 1933 may be permitted to directors, officers and controlling
persons of the company pursuant to the provisions described in Item 15, or
otherwise, the company has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
In the event a claim for indemnification against such liabilities, other
than the payment by the company of expenses incurred or paid by a director,
officer of controlling person of the company in the successful defense of any
action, suit or proceeding, is asserted by such director, officer or controlling
person the shares being registered hereby, the company will, unless, in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question as to whether such
indemnification by the company against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM SB-2 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF NEW YORK, STATE OF NEW YORK, ON THE 18TH DAY OF APRIL 2000.
PREDICT IT INC.
By: _______/s/ ANDREW P. MERKATZ______
Andrew P. Merkatz
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ----------------------------------------------- ---------------
<S> <C> <C>
/s/ ANDREW P. MERKATZ* President and Director (Principal Executive April 18, 2000
- ------------------------------------------ Officer)
Andrew P. Merkatz
/s/ DESMOND GLASS* Corporate Controller (Principal Accounting April 18, 2000
- ------------------------------------------ Officer)
Desmond Glass
/s/ ANDREW P. MERKATZ* Director April 18, 2000
- ------------------------------------------
Andrew Weissman
/s/ ANDREW P. MERKATZ* Director April 18, 2000
- ------------------------------------------
Ajmal Khan
/s/ ANDREW P. MERKATZ* Director April 18, 2000
- ------------------------------------------
Carol Lee
- ------------------------------------------
* By power of attorney
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ --------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger by and between Predict It Corp. and WDC Development, Inc.*
2.2 Agreement and Plan of Merger and Reorganization by and among the Registrant, PII Acquisition Corp.,
Virtual Stock Exchange, Inc., Gary Cheng, Howard Yen and Scott Appleby.*
3.1 Certificate of Incorporation of the Registrant, as amended.*
3.2 By-Laws of the Registrant.*
4.1 Certificate of Designation of Series A Preferred Stock.*
4.2 Specimen of Registrant's Common Stock.*
4.3 Registration Rights Agreement by and among the Registrant, Gary Cheng, Howard Yen and Scott Appleby.*
4.4 Form of Promissory Note, dated December 8, 1999, February 14, 2000 and March 15, 2000.*
4.5 Form of Warrant, dated December 8, 1999, February 14, 2000 and March 15, 2000.*
4.6 Certificate of Designation of Series B Preferred Stock.**
4.7 Unit Purchase Option to Commonwealth Associates, L.P.**
5.1 Opinion and Consent of Camhy Karlinsky & Stein LLP.*
10.1 1999 Stock Option Plan, as amended.*
10.2 Employment Agreement between Registrant and Andrew Merkatz.*
10.3 Employment Agreement between Registrant and Howard Yen.*
10.4 Transition Agreement between Registrant and Tom Courts.*
10.5 Employment Agreement between Registrant and Gary Cheng.*
10.6 Employment Agreement between Registrant and Geordie Pace.*
10.7 Agreement by and between the Registrant and Vision Consulting International Inc.*
10.8 License and Promotion Agreement by and between Registrant and SportsLine USA, Inc.*
10.9 License Agreement by and between Registrant and Predict It China, LLC**
10.10 Form of Subscription Agreement by and between Registrant and the subscribers of units.**
23.1 Consent of Camhy Karlinsky & Stein LLP.**
23.2 Consent of Richard A. Eisner & Company, LLP.**
24 Power of Attorney.*
</TABLE>
- ------------------
* Previously filed
** Filed herewith
- ------------------
<PAGE>
Page 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
-----------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
DESIGNATION OF "PREDICT IT INC.", FILED IN THIS OFFICE ON THE TENTH DAY OF
APRIL, A.D. 2000, AT 4:30 O'CLOCK P.M.
A FILE COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
[SEAL OF THE SECRETARY OF THE STATE OF DELAWARE]
/s/ Edward J. Freel
--------------------------------------
Edward J. Freel, Secretary of State
2578786 8100 AUTHENTICATION: 0374349
001184150 DATE: 04/11/00
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES B CONVERTIBLE
PREFERRED STOCK
-OF-
PREDICT IT INC.
Predict It Inc., a corporation organized and existing under the laws of
the State of Delaware (the "Company"), by its President and Secretary, does
hereby certify that, pursuant to authority conferred upon the Board of Directors
by Article Fourth of the Certificate of Incorporation, as amended, of the
Company, authorizing a class of 5,000,000 shares of preferred stock of the
Company, the Board of Directors of the Company, by unanimous written consent,
has duly adopted resolutions providing for the issuance out of such class of a
series of up to 1,440,000 shares of Series B Convertible Preferred Stock and
setting forth the voting powers, designation, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions thereof, with resolution is as follows:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Company in accordance with the provisions of its Certification
of Incorporation, as amended, there be, and hereby is, created out of the class
of 5,000,000 shares of preferred stock of the Company authorized in Article
Fourth of its Articles of Incorporation, as amended, a series of preferred stock
of the Company with the following voting powers, designation, preferences and
relative, participating, optional and other special rights, and qualifications,
limitations and restrictions:
1. Designation and Number of Shares. 1,440,000 shares of preferred
stock (the "Shares") are hereby designated as Series B Convertible Preferred
Stock (the "Series B Preferred Stock").
2. Liquidation. Upon any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary ("Liquidation"), the holders of record
of the shares of the Series B Preferred Stock shall be entitled to receive,
before and in preference to any distribution or payment of assets of the Company
or the proceeds thereof may be made or set apart for the holders of Common Stock
of the Company, par value $0.01 per share (the "Common Stock") or any other
security junior to the Series B Preferred Stock in respect of distributions upon
Liquidation out of the assets of the Company legally available for distribution
to its stockholders, an amount in cash equal to the $30.00 per share (subject to
adjustment if the Series B Preferred Stock has been adjusted pursuant to
Paragraph 6 hereof) (the "Liquidation Amount") plus an
1
<PAGE>
amount equal to accrued and unpaid dividends on each share of Series B Preferred
Stock on the date fixed for the distribution of assets of the Company (the
"Liquidation Preference"). The merger or sale of all or substantially all of the
assets of the Company and the resulting conversion of the Series B Preferred
Stock into Common Stock pursuant to Section 4(B) shall not be deemed a
Liquidation.
3. Dividends. Subject to the rights of any other series of Preferred
Stock that may from time to time come into existence, the holders of shares of
Series B Preferred Stock shall be entitled to receive dividends, out of any
assets legally available therefor, ratably with any declaration or payment of
any dividend with holders of the Series A Preferred Stock, Common Stock or other
junior securities of the Corporation, when, as and if declared by the Board of
Directors, based on the number of shares of Common Stock into which each share
of Series B Convertible Preferred Stock is then convertible.
4. Conversion Rights. Each holder of record of shares of the Series B
Preferred Stock shall have the right to convert all or any part of such holder's
share of Series B Preferred Stock into Common Stock as follows:
(A) Optional Conversion. Subject to and upon compliance with the
provisions of this Section 4, the holder of any shares of Series B Preferred
Stock shall have the right at such holder's option, at any time or from time to
time, to convert any of such shares of Series B Preferred Stock into the number
of fully paid and nonassessable shares of Common Stock (the "Conversion Shares")
as is determined pursuant to Section (4)(c) below.
(B) Automatic Conversion. Each outstanding share of Series B Preferred
Stock shall automatically be converted, without any further act of the
Corporation or its stockholders, into fully paid and nonassessable shares of
Common Stock at the Conversion Price then in effect upon: (1) the closing of a
public offering or private placement of the Company's securities raising gross
proceeds in excess of $15 million at a per share price of more than $4.00, as
adjusted, for any stock split, stock dividend, recapitalization or other similar
transactions (a "Qualified Offering"); (ii) the closing of a merger or
consolidation of the Company with or into another entity or a sale of all or
substantially all of the assets of the Company or the purchase by a single
entity or person or group of affiliated entities or persons of more than 50% of
the voting stock of the Company; or (iii) at such time as the closing bid or
sales price, as applicable, for the Common Stock of the Company has equaled at
least four times the Conversion Price for a period of 20 consecutive trading
days, provided that the Common Stock of the Company is trading on a national
securities exchange, the Nasdaq SmallCap or National Market System, and the
Conversion Shares are fully registered for resale and not subject to any lock-up
provisions.
2
<PAGE>
(C) Conversion Price. Each share of the Series B Preferred Stock shall
be convertible into that number of fully paid and non-assessable shares of
Common Stock of the Company equal to $10.00 divided by the conversion price in
effect at the time of conversion (the "Conversion Price"), determined as
hereinafter provided. The Conversion Price shall initially be $1.00 per share.
The number of shares of Common Stock into which each share of Preferred Stock is
convertible is herein referred to as the "Conversion Rate" and the number of
shares of Common Stock into which all the outstanding shares of the Series B
Preferred Stock are convertible into are referred to herein as the "Conversion
Shares." The Conversion Price shall be subject to adjustment as set forth in
Section 6 hereof.
(D) Mechanics of Conversion. Before any holder of Series B Preferred
Stock shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the office of the Company or of any transfer agent for the Series B Preferred
Stock, and shall give written notice to the Company at its principal corporate
office, of the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock are to
be issued. The Company shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series B Preferred Stock, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled as aforesaid.
Conversion shall be deemed to have been effected on the date when delivery of
notice of an election to convert and certificates for shares is made or on the
date of the occurrence of the event specified in Section 5(B), as the case may
be, and such date is referred to herein as the "Conversion Date." All Common
Stock which may be issued upon conversion of the Series B Preferred Stock will,
upon issuance, be duly issued, fully paid and non-assessable and free from all
taxes, liens, and charges with respect to the issuance thereof. At all times
that any shares of Series B Preferred Stock are outstanding, the Company shall
have authorized and shall have reserved for the purpose of issuance upon such
conversion into Common Stock of all Series B Preferred Stock, a sufficient
number of shares of Common Stock to provide for the conversion of all
outstanding shares of Series B Preferred Stock at the then effective Conversion
Rate. Without limiting the generality of the foregoing, if, at any time, the
Conversion Price is decreased, the number of shares of Common Stock authorized
and reserved for issuance upon the conversion of the Series B Preferred Stock
shall be proportionately increased.
5. Priority. The Company may issue, in the future, without the consent
of holders of the Series B Preferred Stock, other series of preferred stock
which rank junior to the Series B Preferred Stock as to dividend and/or
liquidation rights. In accordance with Paragraph 7(C) hereof, the consent of the
holders of a majority of the outstanding shares of the Series B
-3-
<PAGE>
Preferred Stock is required for the issuance of any series of preferred
stock which is senior or pari passu as to dividend and/or liquidation
rights to the Series B Preferred Stock.
6. Anti-Dilution Provisions. The Conversion Price in effect at any time
and the number and kind of securities issuable upon the conversion of the Series
B Preferred Stock shall be subject to adjustment from time to time upon the
happening of certain events as follows:
(A) In case the Company shall hereafter (i) declare a dividend or make
a distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Conversion Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the
Conversion Price by a fraction, the denominator of which shall be the number of
shares of Common Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action. Such adjustment shall be made successively
whenever any event listed above shall occur.
(B) In case the Company shall fix a record date for the issuance of
rights or warrants to all holders of its Common Stock entitling them to
subscribe for or purchase shares of Common Stock (or securities convertible into
Common Stock) at a price (the "Subscription Price") (or having a conversion
price per share) less than the current market price on such record date, the
Conversion Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
the date of such issuance by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding on the record date mentioned
below and the number of additional shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so offered (or the
aggregate conversion price of the convertible securities so offered) would
purchase at such current market price per share of the Common Stock, and the
denominator of which shall be the sum of the number of shares of Common Stock
outstanding on such record date and the number of additional shares of Common
Stock offered for subscription or purchase (or into which the convertible
securities so offered are convertible). Such adjustment shall be made
successively whenever such rights or warrants are issued and shall become
effective -4-
<PAGE>
immediately after the record date for the determination of shareholders entitled
to receive such rights or warrants; and to the extent that shares of Common
Stock are not delivered (or securities convertible into Common Stock are not
delivered) after the expiration of such rights or warrants the Conversion Price
shall be readjusted to the Conversion Price which would then be in effect had
the adjustments made upon the issuance of such rights or warrants been made upon
the basis of delivery of only the number of shares of Common Stock (or
securities convertible into Common Stock) actually delivered.
(C) In case the Company shall hereafter distribute to the holders of
its Common Stock evidences of its indebtedness or assets (excluding cash
dividends or distributions and dividends or distributions referred to in
Subsection (A) above) or subscription rights or warrants (excluding those
referred to in Subsection (B) above), then in each such case the Conversion
Price in effect thereafter shall be deteremined by multiplying the Conversion
Price in effect immediately prior thereto by a fraction, the numerator of which
shall be a total number of shares of Common Stock outstanding multiplied by the
current market price (as defined in Subsection (H) below) per share of Common
Stock, less the fair market value (as determined by the Company's Board of
Directors) of said assets or evidences of indebtedness so distributed or of such
rights or warrants, and the denominator of which shall be the total number of
shares of Common Stock outstanding multiplied by such current market price per
share of Common Stock. Such adjustment shall be made successively whenever such
record date is fixed. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of shareholders entitled to receive such
distribution.
(D) In case the Company shall hereafter issue shares of its Common
Stock (excluding shares issued (i) in any of the transactions described in
Subsection (A) above, (ii) upon exercise of options granted to the Company's
officers, directors, employees and consultants under a plan or plans adopted by
the Company's Board of Directors and approved by its shareholders, if such
shares would otherwise be included in this Subsection (D), (but only to the
extent that the aggregate number of shares excluded hereby and issued after the
date hereof, shall not exceed 20% of the Company's Common Stock outstanding, on
a fully diluted basis, at the time of any issuance), (iii) upon exercise of
options, warrants, convertible securities and convertible debentures outstanding
as of the final closing of the Offering (as defined in the Agency Agreement
between the Company and Commonwealth Associates, L.P., dated April , 2000), (iv)
to shareholders of any corporation which merges into the Company in proportion
to their
- 5 -
<PAGE>
stock holdings of such corporation immediately prior to such merger, upon such
merger, (v) in a private placement through Commonwealth Associates, L.P., as
placement agent, or upon exercise or conversion of any securities issued in or
in connection with such a private placement (including agent, consulting or
advisory warrants), (vi) in a private placement where the Offering Price (as
defined below) is at least 90% of the current market price, (vii) issued in a
bona fide public offering pursuant to a firm commitment underwriting, or (viii)
issued in connection with an acquisition of a business or technology which has
been approved by a majority of the Company's outside directors but only if no
adjustment is required pursuant to any other specific subsection of this Section
6 (without regard to Subsection (I) below) with respect to the transaction
giving rise to such rights) for a consideration per share (the "Offering Price")
less than the current market price, the Conversion Price shall be adjusted
immediately thereafter so that it shall equal the price determined by
multiplying the Conversion Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares and the number of shares of Common Stock which the aggregate
consideration received for the issuance of such additional shares would purchase
at such current market price per share of Common Stock, and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
after the issuance of such additional shares. Such adjustment shall be made
successively whenever such an issuance is made.
(E) In case the Company shall hereafter issue any securities
convertible into or exchangeable for its Common Stock (excluding securities
issued in transactions described in Subsections (B), (C) and (D)(i) through
(viii) above) for a consideration per share of Common Stock (the "Exchange
Price") initially deliverable upon conversion or exchange of such securities
(determined as provided in Subsection (G) below) less than the current market
price, the Conversion Price shall be adjusted immediately thereafter so that it
shall equal the price determined by multiplying the Conversion Price in effect
immediately prior thereto by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding immediately prior to the
issuance of such securities and the number of shares of Common Stock which the
aggregate consideration received for such securities would purchase at such
current market price per share of Common Stock, and the denominator of which
shall be the sum of the number of shares of Common Stock outstanding immediately
prior to such issuance and the maximum number of shares of Common Stock of the
Company deliverable upon conversion of
-6-
<PAGE>
or in exchange for such securities at the initial conversion or exchange price
or rate. Such adjustment shall be made successively whenever such an issuance is
made.
(F) Whenever the Conversion Price is adjusted pursuant to Subsections
(A), (B), (C), (D) and (E) above and (J) below, the number of Conversion Shares
issuable upon conversion of the Series B Preferred Stock shall simultaneously be
adjusted by multiplying the number of Conversion Shares initially issuable upon
conversion of the Series B Preferred Stock by the Conversion Price in effect on
the date hereof and dividing the product so obtained by the Conversion Price, as
adjusted.
(G) For purposes of any computation respecting consideration received
pursuant to Subsections (D) and (E) above and (J) below, the following shall
apply.
(i) in the case of the issuance of shares of Common Stock for
cash, the consideration shall be the amount of such cash, provided that
in no case shall any deduction be made for any commissions, discounts
or other expenses incurred by the Company for any underwriting of the
issue or otherwise in connection therewith;
(ii) in the case of the issuance of shares of Common Stock for
a consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the fair market value thereof as
determined in good faith by the Board of Directors of the Company
(irrespective of the accounting treatment thereof), whose determination
shall be conclusive; and
(iii) in the case of the issuance of securities convertible
into or exchangeable for shares of Common Stock, the aggregate
consideration received therefor shall be deemed to be the consideration
received by the Company for the issuance of such securities plus the
additional minimum consideration, if any, to be received by the Company
upon the conversion or exchange thereof (the consideration in each case
to be determined in the same manner as provided in clauses (A) and (B)
of this Subsection (G)). Upon the expiration or termination of any such
securities convertible into or exchangeable for shares of Common Stock,
the Conversion Price shall be automatically readjusted to the
Conversion Price that would have been obtained had such convertible or
exchangeable securities not been issued.
-7-
<PAGE>
(H) For the purpose of any computation under Subsection (C) above, the
current market price per share of Common Stock at any date shall be determined
as follows:
(i) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such
exchange or listed for trading on the Nasdaq National Market
System, the current market price per share of Common Stock at
any date shall be the higher of (a) the average of the last
reported sales prices of the Common Stock on such exchange for
the 20 consecutive trading days before such date, and (b) the
last reported sales price on the trading day immediately
preceding such date; provided that if no such sale is made on
a day within such period or no closing sale price is quoted,
that day's market price shall be the average of the closing
bid and asked prices for such day on such exchange or system;
or
(ii) If the Common Stock is not so listed or admitted to unlisted
trading privileges, but is traded on the Nasdaq SmallCap
Market, the current market price per share of Common Stock on
any date shall be the higher of (a) the average of the closing
bid and asked prices for the 20 consecutive trading days
before such date on such market, and (b) the last reported bid
price on the trading day immediately preceding such date on
such market, and if the Common Stock is not so traded, the
current market price per shares of Common Stock on any date
shall be the higher of (x) the mean of the last reported bid
and asked prices reported by the NASD Over the Counter
Bulletin Board for the 20 consecutive trading days before such
date, and (y) the last reported bid price on the trading day
immediately preceding such date reported by the NASD Over the
Counter Bulletin Board; or
(iii) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so
reported, the current market price per share of Common Stock
on any date shall be an amount
-8-
<PAGE>
determined in a reasonable manner by the Board of Directors of
the Company.
(I) No adjustment in the Conversion Price shall be required unless such
adjustment would require an increase or decrease of at least five cents ($0.05)
in such price; provided, however, that any adjustments which by reason of this
Subsection (I) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment required to be made hereunder. All
calculations under this Section 6 shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be. Anything in this Section 6
to the contrary notwithstanding, the Company shall be entitled, but shall not be
required, to make such changes in the Conversion Price, in addition to those
required by this Section 6, as it shall determine, in its sole discretion, to be
advisable in order that any dividend or distribution in shares of Common Stock,
or any subdivision, reclassification or combination of Common Stock, hereafter
made by the Company shall not result in any Federal Income tax liability to the
holders of Common Stock or securities convertible into Common Stock.
(J) Notwithstanding the provisions of this Section 6, in the event that
the Company shall at any time issue securities under Subsections (B), (D) or (E)
(other than securities issued in transactions described in subsection (D)(i)
through (viii) above) having an Offering Price, Subscription Price or Exchange
Price less than the Conversion Price, then the Conversion Price shall be
immediately reset to equal such lower Offering Price, Subscription Price or
Exchange Price. Furthermore, in the event that the average closing bid or sales
price, as applicable, of the Common Stock for the 20 consecutive trading days
immediately prior to the second anniversary of the final closing of the Private
Placement is less than the Conversion Price, the Conversion Price shall be
immediately reset to equal such average closing bid or sales price, as
applicable.
(K) No adjustment under Subsections (B), (C), (D) or (E) shall be
required for issuances below the current market price if either (i) the current
market price is at least 300% of the Conversion Price then in effect and (ii) a
registration statement covering the Conversion Shares is in effect and remains
in effect for the 90 days after such issuance or Rule 144(k) under the
Securities Act of 1933, as amended (the "Act") is available for resale of all of
the Conversion Shares. Furthermore, no adjustment under Subsections (B), (C),
(D), (E) or (J) shall be required unless either (i) the shareholders of the
Company have approved the terms of this Designation or
-9-
<PAGE>
(ii) such adjustments will not result in a violation of any qualitative listing
criteria of The Nasdaq Stock Market, Inc.
(L) Whenever the Conversion Price is adjusted, as herein provided, the
Company shall promptly but no later than 10 days after any request for such an
adjustment by the Holder, cause a notice setting forth the adjusted Conversion
Price and adjusted number of Conversion Shares issuable upon exercise of each
share of Series B Preferred Stock, and, if requested, information describing the
transactions giving rise to such adjustments, to be mailed to the Holders at
their last addresses appearing in the Share Register, and shall cause a
certified copy thereof to be mailed to its transfer agent, if any. The Company
may retain a firm of independent certified public accountants selected by the
Board of Directors (who may be the regular accountants employed by the Company)
to make any computation required by this Section 6, and a certificate signed by
such firm shall be conclusive evidence of the correctness of such adjustment,
absent manifest error.
(M) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (A) above, the Holders of the Series B Preferred Stock
thereafter shall become entitled to receive any shares of the Company, other
than Common Stock, thereafter the number of such other shares so receivable upon
conversion of the Series B Preferred Stock 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 Subsections (A) to (J),
inclusive above.
7. Voting Rights
(A) In addition to any other rights provided for herein or by law, the
holders of Series B Preferred Stock shall be entitled to vote, together with the
holders of Common Stock as one class, on all matters as to which holders of
Common Stock shall be entitled to vote, in the same manner and with the same
effect as such Common Stock holders. In any such vote each share of Series B
Preferred Stock shall entitle the holder thereof to the number of votes per
share that equals the number of whole shares of Common Stock into which each
such share of Series B Preferred Stock is then convertible, calculated to the
nearest whole share.
-10-
<PAGE>
(B) In the event the holders of the Series B Preferred Stock are
required to vote as a class, the affirmative vote of holders of not less than a
majority of the outstanding shares of Series B Preferred Stock shall be required
to approve each such matter to be voted upon and if any matter is approved by
such requisite percentage of holders of Series B Preferred Stock, such matter
shall bind all holders of Series B Preferred Stock.
(C) So long as any shares of Series B Preferred Stock remain
outstanding, the consent of the holders of a majority of the then outstanding
Series B Preferred Stock, voting as one class, together with any other series of
preferred stock then entitled to vote on such matter, regardless of series,
either expressed in writing or at a meeting called for that purpose, shall be
necessary to permit, effect or validate the creation and issuance of any series
of preferred stock of the Company which is senior or pari passu as to
liquidation and/or dividend rights to the Series B Preferred Stock.
(D) So long as any shares of Series B Preferred Stock remain
outstanding, the consent of a majority of the holders of the then outstanding
Series B Preferred Stock, voting as one class, either expressed in writing or at
a meeting called for that purpose, shall be necessary to repeal, amend or
otherwise change this Certificate of Designation, Preferences and Rights or the
Articles of Incorporation of the Company, as amended, in a manner which would
alter or change the powers, preferences, rights privileges, restrictions and
conditions of the Series B Preferred Stock so as to adversely affect the
Preferred Stock.
(E) Each share of the Series B Preferred Stock shall entitle the holder
thereof to one vote on all matters to be voted on by the holders of the Series B
Preferred Stock, as set forth above.
8. Covenants of Company. The Company covenants and agrees that, so long
as the Shares are outstanding, it will perform the obligations set forth in this
Section 8:
(A) Maintenance of Existence. The Company will do or cause to be done
all things reasonably necessary to preserve and keep in full force and effect
its corporate existence, rights and franchises and comply with all laws
applicable to the Company, except where the failure to comply would not have a
material adverse effect on the Company;
-11-
<PAGE>
(B) Maintenance of Property. The Company will at all times maintain,
preserve, protect and keep its property used or useful in the conduct of its
business in good repair, working order and condition, and from time to time make
all needful and proper repairs, renewals, replacements and improvements thereto
as shall be reasonably required in the conduct of its business;
(C) Insurance. The Company will, to the extent necessary for the
operation of its business, keep adequately insured by financially sound
reputable insurers, all property of a character usually insured by similar
corporation and carry such other insurance as is usually carried by similar
corporations
(D) Books and Records. The Company will at all times keep true and
correct books, records and accounts reflecting all of its business affairs and
transactions in accordance with GAAP; and;
9. Rank
The Series B Preferred Stock shall rank: (i) junior to any other class
or series of capital stock of the Corporation hereafter created specifically
ranking by its terms senior to the Series B Preferred Stock (the "Senior
Securities"); (ii) prior to all of the Corporation's Common Stock; (iii) prior
to any class or series of capital stock of the Corporation hereafter created not
specifically ranking by its terms senior to or on parity with the Series B
Preferred Stock (collectively, with the Common Stock, "Junior Securities"); and
(iv) on parity with the Series A Preferred Stock of the Corporation and any
class or series of capital stock of the Corporation hereafter specifically
ranking by its terms on parity with the Series B Preferred Stock (the "Parity
Securities"), in each case as to the distribution of assets upon liquidation,
dissolution or winding up of the Corporation.
(10) Miscellaneous.
(A) There is no sinking fund with respect to the Series B Preferred
Stock.
(B) The shares of the Series B Preferred Stock shall not have any
preferences, voting powers or relative, participating, optional, preemptive or
other special rights except as set forth
-12-
<PAGE>
(C) The holders of the Series B Preferred Stock shall be entitled to
receive all communications sent by the Company to the holders of the Common
Stock.
IN WITNESS WHEREOF: Predict It Inc. has caused this Certificate to be
signed by its Chief Executive Officer, on this 10th day of April, 2000, and such
person hereby affirms under penalty of perjury that this Certificate is the act,
and deed of Predict It Inc. and that the facts stated herein are true and
correct.
PREDICT IT INC.
By: /s/ Andrew Merkatz;
Andrew Merkatz
Chief Executive Officer
Attest:
/s/ Robert Jacob, SVP
Robert Jacob
Senior Vice President
<PAGE>
THIS OPTION AND THE WARRANTS, SHARES OF COMMON STOCK AND SHARES OF PREFERRED
STOCK ISSUABLE UPON EXERCISE OF THIS OPTION AND THE WARRANTS AND CONVERSION OF
THE PREFERRED STOCK HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT") AND MAY NOT BE TRANSFERRED IN VIOLATION OF ANY
APPLICABLE SECURITIES LAWS. THIS OPTION IS ALSO SUBJECT TO THE RESTRICTIONS ON
TRANSFER SET FORTH IN SECTION 3 HEREOF. THIS LEGEND SHALL BE ENDORSED UPON ANY
OPTION ISSUED IN EXCHANGE FOR THIS OPTION AND, UNLESS SUCH SECURITIES HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT, ON ANY WARRANTS, SHARES OF COMMON STOCK OR
SHARES OF PREFERRED STOCK ISSUABLE UPON EXERCISE OF THIS OPTION AND THE WARRANTS
OR UPON CONVERSION OF THE PREFERRED STOCK.
OPTION TO PURCHASE UNITS CONSISTING OF
WARRANTS AND PREFERRED STOCK
OF
PREDICT IT INC.
This is to certify that, FOR VALUE RECEIVED, Commonwealth Associates,
L.P. or assigns ("Holder"), is entitled to purchase, subject to the provisions
of this Option, from Predict It Inc., a Delaware corporation (the "Company"),
Eight and six-tenths (8.6) Units, each Unit consisting of (a) 10,000 fully paid,
validly issued and non-assessable shares (the "Preferred Shares") of Series B
Convertible Preferred Stock of the Company ("Preferred Stock"), each share of
Preferred Stock convertible into 10 shares of common stock, par value $.O1 per
share (the "Common Stock") and (b) 7-year warrants (the "Warrants") to purchase
100,000 shares of Common Stock at an exercise price of $1.50 per share of Common
Stock, at an exercise price of $100,000 per Unit (the "Exercise Price"). The
number of Preferred Shares, the conversion rate of the Preferred Stock and the
number of shares of Common Stock issuable upon exercise and the exercise price
of the Warrants are subject to adjustment upon the occurrence of certain events
as set forth in Section 5 hereof.
This Option is exercisable at any time or from time to time during the
seven year period commencing on the date hereof and terminating at 5:00 p.m. New
York City time on April 14, 2007 (the "Exercise Period"). The aggregate number
shares of Common Stock issuable upon exercise of the Warrants and conversion of
the Preferred Stock deliverable upon exercise of this Option, as adjusted from
time to time, are hereinafter sometimes referred to as "Underlying Shares." This
Option was originally issued pursuant to an Agency Agreement (the "Agency
Agreement") dated April 14, 2000 between the Company and Commonwealth
Associates, L.P. ("Commonwealth"), for nominal consideration.
The shares of Preferred Stock issuable upon exercise of this Option are
to be authorized and issued pursuant to the provisions of a Certificate of
Designations, Preferences and Rights of Series B Convertible Preferred Stock
(the "Certificate of Designation") filed with the Secretary of State
<PAGE>
of the State of Delaware on April 11, 2000. The Warrants issuable upon exercise
of this Option are to be authorized and issued pursuant to that certain Warrant
Agreement, dated April 14, 2000, between the Company and Commonwealth (the
"Warrant Agreement").
(1) EXERCISE OF OPTION.
(a) The rights represented by this Option may be exercised at any
time during the Exercise Period, in whole or in part, by (i) the surrender of
this Option (with the purchase form at the end hereof properly executed) at the
principal executive office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the Holder at the address of
the Holder appearing on the books of the Company); and (ii) payment to the
Company of the exercise price then in effect for the number of Units specified
in the above-mentioned purchase form together with applicable stock transfer
taxes, if any. This Option shall be deemed to have been exercised, in whole or
in part to the extent specified, immediately prior to the close of business on
the date this Option is surrendered and payment is made in accordance with the
foregoing provisions of this Section 1, and the person or persons in whose name
or names the certificates for the Preferred Shares and Warrants shall be
issuable upon such exercise shall become the holder or holders of record of such
Preferred Shares and Warrants at that time and date. The certificates for the
Preferred Shares and Warrants so purchased shall be delivered to the Holder as
soon as practicable but not later than seven (7) days after the rights
represented by this Option shall have been so exercised. If this Option should
be exercised in part only, the Company shall, upon surrender of this Option for
cancellation, execute and deliver a new Option evidencing the rights of the
Holder thereof to purchase the balance of the Units purchasable thereunder.
(b) At any time during the Exercise Period, the Holder may, at its
option, exchange this Option, in whole or in part (an "Option Exchange"), into
the number of Units determined in accordance with this Section (b), by
surrendering this Option at the principal office of the Company or at the office
of its stock transfer agent, if any, accompanied by a notice stating such
Holder's intent to effect such exchange, the number of Units subject to the
Option Exchange and the date on which the Holder requests that such Option
Exchange occur (the "Notice of Exchange"). The Option Exchange shall take place
on the date specified in the Notice of Exchange or, if later, the date the
Notice of Exchange is received by the Company (the "Exchange Date").
Certificates for the Preferred Shares and Warrants issuable upon such Option
Exchange and, if applicable, a new Option of like tenor evidencing the balance
of the Units remaining subject to this Option, shall be issued as of the
Exchange Date and delivered to the Holder within seven (7) days following the
Exchange Date. In connection with any Option Exchange, this Option shall
represent the right to subscribe for and acquire the number of Units (rounded to
the next highest integer) equal to (x) the number of Units specified by the
Holder in its Notice of Exchange up to the maximum number of Units subject to
this Option (the "Total Number") less (y) the number of Units equal to the
quotient obtained by dividing (A) the product of the Total Number and the
existing Exercise Price by (B) the Fair Market Value of a Unit. "Fair Market
Value of a Unit" shall by the sum of the
2
<PAGE>
current market value of the Underlying Shares represented by such Unit (as
adjusted in accordance with Section 5 hereof) less the exercise price associated
with the exercise of the Warrants which are part of such Unit. The current
market value of the Underlying Shares of Common Stock shall be determined as
follows:
(i) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such
exchange or listed for trading on the Nasdaq National Market
System ("NMS"), the current market value shall be the average of
the last reported sale price on such exchange or system for the 10
trading days prior to the Exchange Date; provided that if no sale
is made on a day within such period or no closing sale price is
quoted, that day's market value shall be the average of the
closing bid and asked prices for such day on such exchange or
system; or
(ii) If the Common Stock is not so listed or admitted to unlisted
trading privileges, but is traded on the Nasdaq SmallCap Market,
the current market value shall be the average of the closing bid
and asked prices for the 10 trading days prior to the Exchange
Date on such market and if the Common Stock is not so traded, the
current market value shall be the mean of the last reported bid
and asked prices reported by the NASD Electronic Bulletin Board
for the 10 trading days prior to the Exchange Date; or
(iii) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported,
the current market value shall be an amount determined in a
reasonable manner by the Board of Directors of the Company.
(2) RESERVATION OF SHARES. The Company shall at all times reserve for
issuance and/or delivery upon exercise of this Option such number of shares of
its Preferred Stock and the number of shares of Common Stock as shall be
required for issuance and delivery upon exercise of this Option in full and the
exercise in full of the Warrants and conversion of all the shares of Preferred
Stock issuable upon exercise of this Option.
(3) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF OPTION. This Option is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Options of different denominations entitling the holder
thereof to purchase in the aggregate the same number of shares of Preferred
Stock and Warrants purchasable hereunder. This Option may be assigned or
transferred only to a direct or indirect affiliate of Commonwealth or an
employee of or consultant to Commonwealth (a "Permitted Transferee"). Upon
surrender of this Option to the Company at its principal office or at the office
of its stock transfer agent, if any, with the Assignment Form annexed hereto
duly executed and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Option in the name of the Permitted
Transferee named in such instrument
3
<PAGE>
of assignment and this Option shall promptly be canceled. This Option may be
divided or combined with other Options which carry the same rights upon
presentation hereof at the principal office of the Company or at the office of
its stock transfer agent, if any, together with a written notice specifying the
names and denominations in which new Options are to be issued and signed by the
Holder hereof. The term "Option" as used herein includes any Options into which
this Option may be divided or exchanged. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this Option,
and (in the case of loss, theft or destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Option, if
mutilated, the Company will execute and deliver a new Option of like tenor and
date. Any such new Option executed and delivered shall constitute an additional
contractual obligation on the part of the Company, whether or not this Option so
lost, stolen, destroyed, or mutilated shall be at any time enforceable by
anyone.
(4) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Option and
are not enforceable against the Company except to the extent set forth herein.
(5) ANTI-DILUTION PROVISIONS.
(a) Upon exercise of this Option, the terms of the shares of
Preferred Stock and Warrants issuable hereunder shall be adjusted to give effect
to any anti-dilution adjustments which would have been made pursuant to Section
6 of the Certificate of Designation or Section 8 of the Warrant Agreement, as
the case may be, if such shares of Preferred Stock and Warrants had been issued
on the date hereof it being the intent of the parties that the shares of
Preferred Stock and Warrants issuable upon exercise of this Option shall be
convertible into or exercisable for the number of shares of Common Stock or such
other securities, and at an exercise price, as the holder hereof would have
received had this Option been exercised and the Preferred Stock and Warrants
been issued on the date hereof.
(b) In case the Company shall hereafter (i) declare a dividend or
make a distribution on its outstanding shares of Preferred Stock in shares of
Preferred Stock, (ii) subdivide or reclassify its outstanding shares of
Preferred Stock into a greater number of shares, (iii) combine or reclassify its
outstanding shares of Preferred Stock into a smaller number of shares, (iv)
effect any other reclassification, capital reorganization or change of
outstanding shares of Preferred Stock, (v) consolidate or merge the Company with
or into another corporation (other than a merger with a subsidiary in which
merger the Company is the continuing corporation and which does not result in
any reclassification, capital reorganization or other change of outstanding
shares of Preferred Stock) or (vi) sell, lease or convey to another corporation
all or substantially all of the property of the Company (collectively, a
"Transaction"), the Company shall, as a condition precedent to such transaction,
cause effective provisions to be made so that upon exercise of this Option the
Holder shall receive the kind and amount of securities and property which would
have been received by such
4
<PAGE>
Holder had this Option been exercised, and, if applicable, the Preferred Stock
converted and the Warrants exercised, immediately prior to such Transaction and
the Holder received the benefits conferred on the holders of such securities and
property as a result of such Transaction. Any such provision shall include
provision for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Option.
(c) If any event or condition occurs as to which other provisions
of this Section 5 are not strictly applicable or if strictly applicable would
not fairly protect the exercise or purchase rights of Options and the Preferred
Stock and Warrants issuable hereunder in accordance with the essential intent
and principles of such provisions, or which might materially and adversely
affect the exercise or purchase rights of the Holder hereunder, then the Company
shall make an adjustment in the application of such provisions, or if necessary
the applicable provisions of the Preferred Stock and Warrants, so as to preserve
without dilution the rights of the Holder. In no event shall any adjustment
under this paragraph 5 have the effect of increasing the Exercise Price of this
Option.
(6) NOTICES.
(a) Whenever this Option shall be adjusted as required by the
provisions of the foregoing Section, the Company shall forthwith file in the
custody of its Secretary or an Assistant Secretary at its principal office and
with its stock transfer agent, if any, an officer's certificate showing the
adjustments determined as herein provided, setting forth in reasonable detail
the facts requiring such adjustment and the manner of computing such adjustment.
Each such officer's certificate shall be made available at all reasonable times
for inspection by the Holder and the Company shall, forthwith after each such
adjustment, mail a copy by certified mail of such certificate to the Holder or
any such holder.
(b) So long as this Option shall be outstanding, (i) if the
Company shall pay any dividend or make any distribution upon the Preferred Stock
or Common Stock or (ii) if the Company shall offer to the holders of Preferred
Stock or Common Stock for subscription or purchase by them any share of any
class or any other rights, (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, or (iv) if the Company is required to notify
the holders of Preferred Stock pursuant to the terms of the Certificate of
Designation or the holders of warrants pursuant to the terms of the Warrant
Agreement or for any reason determines to notify the holders of Preferred Stock
or such warrants, then in any such case, the Company shall cause to be mailed by
certified mail to the Holder, in the case of (i), (ii) or (iii) above, at least
fifteen days prior the date specified in (x) or (y) below, as the case may be, a
notice containing a brief description of the proposed action and stating the
date on which (x) a record is to be taken for the purpose of such dividend,
distribution or rights, or (y) such reclassification, reorganization,
consolidation, merger, conveyance, lease, dissolution, liquidation or winding up
is to take place and the date, if any is to
5
<PAGE>
be fixed, as of which the holders of Preferred Stock or other securities shall
receive cash or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation or
winding up or in the case of (iv) on the date such notice is sent to the holders
of Preferred Stock or warrants.
(7) REGISTRATION UNDER THE SECURITIES ACT OF 1933. The Company agrees
to register the Underlying Shares for resale under the Securities Act of 1933,
as amended (the "Act") on the terms and subject to the conditions set forth in
Article IV of the Subscription Agreement between the Company and each of the
investors in the offering contemplated by the Agency Agreement, which
Subscription Agreement is included as Exhibit A to the Confidential Private
Placement Memorandum, dated March 13, 2000, prepared by the Company in
connection with such offering, it being the intent of the parties that the
holder of this Option shall have all the rights of a holder of Securities under
Article IV of the Subscription Agreement and that the Underlying Shares shall be
treated as "Reserved Shares" under Article IV of the Subscription Agreement.
GOVERNING LAW. This Option shall be governed by and in accordance
with the laws of the State of New York, without giving effect to the principles
of conflicts of law thereof.
PREDICT IT INC.
By: /s/ Andrew P. Merkatz
----------------------------
Name: Andrew P. Merkatz
Title: President and Chief
Executive Officer
Dated: April 14, 2000
6
<PAGE>
PURCHASE FORM
-------------
Dated___________
The undersigned hereby irrevocably elects to exercise the within
Option to the extent of purchasing _____ Units and hereby
/ / makes payment of $ _____________ in payment of the actual exercise
price thereof
or
/ / elects to effect an Option Exchange in accordance with Section
1(b) on [DATE].
INSTRUCTIONS FOR REGISTRATION OF UNITS
--------------------------------------
Name
----------------------------------------
(Please typewrite or print in block letters)
Address
-------------------------------------
Signature
-----------------------------------
<PAGE>
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, _____________________ hereby sells, assigns
and transfers unto
Name
-----------------------------------------
(Please typewrite or print in block letters)
Address
---------------------------------------
the right to purchase Preferred Stock and Warrants represented by this Option to
the extent of Units as to which such right is exercisable and does hereby
irrevocably constitute and appoint as Attorney, to transfer the
same on the books of the Company with full power of substitution in the
premises.
Date
-------------------------------
Signature
--------------------------
<PAGE>
PREDICT IT, INC.
LICENSE AGREEMENT
-----------------
This License Agreement (the "Agreement") effective as of this 2nd day of March,
2000 (the "Effective Date") by and between Predict It China, LLC, a limited
liability company organized under the laws of the State of Delaware with offices
at 995 Ashokan Road, Kingston, New York 12401 ("Licensee"), and Predict It,
Inc., a Delaware corporation with offices at 268 West 44th Street, New York, NY
10036 ("Licensor").
RECITALS
A. Licensee plans to develop and operate, using certain technology
owned or controlled by Licensor, a Web-based service targeted and marketed to
Persons (including without limitation in the Chinese or English languages) in
The Peoples Republic of China (including Hong Kong) (the "PRC").
B. Licensor is willing to grant Licensee certain rights in the Licensed
Technology (as defined below) and Licensee desires to obtain a license to use,
translate and modify such Licensed Technology for use on Licensee's services
subject to the terms and conditions set forth in this Agreement.
NOW, THEREFORE in consideration of the mutual promises and undertakings
herein contained, it is hereby agreed:
1. DEFINITIONS
When used in this Agreement, the following defined terms shall have the
meanings set forth below. Additional terms are defined throughout this
Agreement.
"CIMG" means China Interactive Media Group, LLC, a Delaware limited
liability company.
"Derivative Works" means all modifications, translations or
enhancements of the Licensed Technology created by or on behalf of Licensee in
accordance with the terms of this Agreement, including without limitation, all
Chinese language translation of text content contained within the Licensed
Technology (such translated text, the "Derivative Content"); however,
"Derivative Works" and "Derivative Content" shall not include or mean (i) any
Licensee Website or any domain name with respect thereto, except to the extent
that such Licensee Website contains Derivative Works or Derivative Content or
such domain name contains, in whole or in part, a Licensor Mark, or (ii)
residuals resulting from access to or work with the Licensed Technology,
provided that Licensee shall maintain the confidentiality of such residuals as
the Confidential Information of Licensor. The term "residuals" means ideas,
concepts and know-how, in non-tangible form, which may be retained by Licensor
through access to the Licensed Technology. Notwithstanding the foregoing,
however, Licensee shall not be deemed, by virtue of clause (ii) of this
paragraph, to have been granted any license under any Intellectual Property
Rights of Licensor.
"Government" shall mean (or in the case of "Governmental" shall refer
to):
(i) the governments of the United States of America and any country
wherein the Licensee engages in business;
(ii) the government of any state, province, county, municipality, city,
town or district of any such country; and
(iii) any ministry, agency, department, authority, commission,
administration, corporation, bank, court, magistrate, tribunal, arbitrator,
instrumentality or political subdivision of, or within the geographical
jurisdiction of, any government described in the foregoing clauses (i) and
(ii).
<PAGE>
"Initial Service Date" means such date on which Licensed Technology is
first made available through the Licensee Service in non-beta form.
"Licensed Technology" means the interactive, online technology
specified and described in Schedule A attached hereto (including, without
limitation, all Licensor proprietary software (including the source code
therefor), methods of operation, hardware designs and interfaces), together with
all modifications, translations or enhancements of the Licensed Technology
created by or on behalf of Licensor during the Term and all flowcharts,
programmers' notes and such other materials as may be reasonably necessary for a
competent programmer to modify and maintain all of the foregoing. Such flow
charts, programmers' notes and other materials shall be delivered to Licensee as
soon as practicable following, or concurrent with, the delivery of the Licensed
Technology to Licensee, but in no event later than one hundred and twenty (120)
days following such delivery of the Licensed Technology. "Licensed Technology"
does not include, and Licensor shall not provide, third party software or
technology, the licensing of which is necessary for the operation and
functionality of the Licensed Technology ("Third Party Software"), provided,
however, that such Third Party Software, as of the date hereof, shall be listed
on Schedule A.
"Licensee Service" means all Web-based or other on-line services owned,
operated, maintained or hosted by Licensee utilizing, in whole or in part, the
Licensed Technology that are targeted and marketed solely to Persons (whether in
the Chinese or English languages) in the PRC (including without limitation the
Websites located at www. ).
"Licensee Website" shall mean any Website (whether in the Chinese or
English languages) created or developed by or for Licensee (whether using the
Licensed Technology or other technology or software), including without
limitation the text content of any Website developed or owned by or for
Licensee. However, any website having a Uniform Resource Locator (URL) in the
English language shall be subject to the prior approval of Licensor, which
approval shall not be unreasonably withheld.
"Licensee Website Implementation Requirements" shall mean and shall be
deemed to have been satisfied when the following actions have been substantially
completed:
(i) "Phase I": the Operational Date of the Project shall have occurred
on or before August 31, 2001; and
(ii) "Phase II": the Licensee Service shall have at least 100,000
registered users and the Licensee Website shall have received at least five
million page views by users per month for each of at least three
consecutive months ending on or before March 31, 2003.
Licensee shall use commercially reasonable efforts to achieve and satisfy the
Licensee Website Implementation Requirements.
"Operational Date of the Project" shall mean that Licensee Website has
been launched and is substantially operational, a core management team and
employees are in place at the Licensee and all necessary published Governmental
licenses and approvals for the operation of the Licensee Website and the
Licensee Service have been obtained in a manner consistent with prevailing
practices in the PRC.
"Person" shall mean shall mean: any corporation, partnership, joint
venture, trust, unincorporated association or organization, business,
enterprise, or other entity; any individual; and any Government.
"Simplified Chinese Characters" means the characters of the Chinese
language that have been simplified from their ancient counterparts.
"Year 2000 Compliant" shall mean the software is capable of accurately
processing, calculating, manipulating, storing and exchanging date/time data
from, into, and between the twentieth
<PAGE>
and twenty-first centuries, including, without limitation, the years 1999 and
2000 and any leap year calculations, provided that all other information
technology used in combination with such software, properly exchanges date/time
date with such software.
"Web" means a global, interactive, dynamic, cross-platform,
distributed, graphical hypertext information system that runs over the Internet
that is known as the World Wide Web and any successor thereto.
2. GRANT OF LICENSE
2.1 License. Licensor hereby grants to Licensee, and Licensee hereby
accepts, for the Term of this Agreement and subject to its terms and conditions,
the limited right, license and privilege to use, reproduce, modify, translate,
archive, display, perform, market, publish, distribute, transmit and operate the
Licensed Technology, solely in connection with the Licensee Service, as well as
the right to promote the Licensed Technology, solely in connection with the
promotion of the Licensee Service (including without limitation screenshots and
other graphics contained in same) within content provided by Licensee and other
content providers, in each case by any method or means or in any medium now
known. Licensee may make such copies of the Licensed Technology, as applicable,
as may be reasonably necessary for Licensee's needs, provided that such copies
contain any copyright, trademark or other protective notices that are contained
on or within the original copy of such Licensed Technology.
2.2 Trademark Usage. Licensor hereby grants to Licensee a license
during the term of this Agreement to use any and all current and future
trademarks, service marks, design marks or trade names associated with Licensor
and the Licensed Technology, set forth on Schedule B (collectively, the
"Licensor Marks") in connection with and for the use, marketing and promotion of
the Licensed Technology, Derivative Works and the Licensee Service, subject to
the terms and conditions and as otherwise contemplated by this Agreement.
Licensee acknowledges and agrees that: (a) the Licensor Marks, are owned
exclusively by Licensor; and (b) except as set forth in this Agreement, Licensee
has no rights, title or interest in or to the Licensor Marks. Licensee agrees:
(w) not to apply for registration of the Licensor Marks (or any mark confusingly
similar thereto) anywhere in the world; (x) not to engage, participate or
otherwise become involved in any activity or course of action that diminishes
and/or tarnishes the image and/or reputation of Licensor or any Licensor Mark;
(y) not to use any of the Licensor Marks except as authorized by Licensor; and
(z) not to challenge Licensor's rights in the Licensor Marks. Licensor in its
sole discretion may withdraw specific or general permission to use Licensor
Marks upon twenty four (24) hours written notice to Licensee. Upon expiration of
such notice period, Licensee shall immediately discontinue use of the applicable
Licensor Marks.
<PAGE>
2.3 Ownership.
(a) By Licensor. Licensee recognizes that Licensor retains all rights,
title and interest in and to the Licensed Technology, including without
limitation, all Derivative Works thereof and the Derivative Content, and all
modifications to the Licensed Technology, as well as any and all tangible and
intangible rights, copyrights, moral rights, trademark, trade secret rights,
patents, industrial property rights, and all other proprietary rights and/or
common law intellectual property rights (collectively, "Intellectual Property
Rights") of every kind as well as all registrations, technologies, renewals,
extensions, continuations, divisions, or reissues of the foregoing, now or
hereafter in force with respect thereto. With respect to all Derivative Content
and Derivative Works created by Licensee, the development and creation by
Licensee of such Derivative Content and Derivative Works, pursuant to or under
rights granted by this Agreement or otherwise, such development and creation
shall be considered "works made for hire" on behalf of Licensor under the United
States copyright laws and made pursuant to this Agreement. In the event any
Derivative Content or Derivative Works do not fall within the specifically
enumerated works that constitute "works made for hire" under the United States
copyright laws or the ownership of all of the Intellectual Property Rights in
and to any such Derivative Content or Derivative Works does not vest, solely and
exclusively, in Licensor pursuant to the previous sentence, Licensee hereby
agrees to assign and, upon their authorship or creation (or upon the Effective
Date, whichever occurs later), expressly and automatically assigns all
Intellectual Property Rights in and to such Derivative Content and Derivative
Works to Licensor. Licensee agrees to render all reasonably required assistance
to Licensor to protect the rights hereinabove described. To the extent
applicable, copies of all Derivative Content and Derivative Works created or
developed by Licensee at any time shall be delivered to Licensor, together with
copies of all applicable commented source code. Licensee agrees that it shall
not claim any title to or right to the Licensed Technology, Derivative Content
and Derivative Works except for the specific rights granted by Licensor pursuant
to this Agreement, and it shall not at any time attack or challenge the right of
Licensor or its grantor(s) in and to the Licensed Technology, Derivative Content
and Derivative Works. Licensee acknowledges that all use of Licensor's Marks
hereunder inures to the benefit of Licensor or its grantor(s).
(b) By Licensee. Licensee shall be responsible for the design of the
Licensee Service and the Licensee Website, and retains all of the rights, title
and interest in and to the Licensee Service and the Licensee Website, including,
but not limited to the domain names owned by Licensee, as well as all graphical
designs, icons, interfaces and other design elements (e.g. the selection and
arrangement of materials therein and the "look and feel" thereof), subject, in
all cases to the rights of Licensor hereunder. Any information regarding the
users of the Licensee Service or the Licensee Website generated by Licensee's
use of the Licensed Technology shall be the exclusive property of Licensee and,
as such, may be used at the sole discretion of Licensee.
2.4 Restrictions on Use. In any identification of Licensor, the
Licensed Technology or the Licensor Marks, Licensee shall not alter or otherwise
impair the branding or other identification of Licensor, nor alter or remove any
copyright, trademark or other protective notices of Licensor. Licensee may not
alter the color, size or similar attributes of the Licensor Marks without the
prior consent of Licensor. The right of Licensee to place advertising,
promotional or any other information or materials visible with, near or
surrounding or within the Licensed Technology or the Licensor Marks is limited
to those which will not impair or adversely affect the name, reputation or
goodwill of Licensor, and those which will not tarnish, dilute or be confusingly
similar to the Licensor Marks.
2.5 Exclusivity. For the Term of this Agreement, Licensor shall not
permit: (i) the Licensed Technology to be deployed by any Person (including
without limitation Licensor and its affiliates) other than Licensee for the
purpose of targeting or marketing to Persons in the PRC (whether in the Chinese
or English languages); or (ii) Simplified Chinese Characters to be deployed or
utilized in connection with the Licensed Technology by any Person (including
without limitation Licensor and its affiliates) other than Licensee. For the
avoidance of doubt, nothing contained in the Agreement shall be construed to
prevent Licensor from deploying the Licensed Technology for the purpose of
targeting or marketing to Persons in
<PAGE>
the Republic of China (Taiwan) (whether in the Chinese or English languages) or
Chinese speaking Persons anywhere else in the world (other than the PRC) that do
not utilize Simplified Chinese Characters. The rights granted to Licensee under
this Agreement shall be exclusive also as against Licensor.
3. DELIVERY AND TRANSLATION
3.1 Creation of Chinese Language Versions. Licensee shall be solely
responsible for the creation of a localized Chinese-language version of the
Licensed Technology and all text strings contained within the Licensed
Technology for use in connection with the Licensee Service. Licensee shall
translate all such text strings into Chinese, and shall deliver a copy of these
translations to Licensor. Licensee shall be solely responsible for completing
all work necessary to integrate the translated text strings into the Licensed
Technology and complete any additional localization procedures.
3.2 Installation and Integration. Licensor shall deliver to Licensee in
electronic form all source code, and all HTML, Java text and other formatted
files employed in the Licensed Technology. Licensor shall make available to
Licensee via telephone, during Licensor's regular business hours, a senior
engineer of Licensor to provide such assistance as Licensee may reasonably
require with installing, integrating and testing the Licensed Technology on
Licensee's systems and designing and implementing links, interfaces, and
operating features for the Licensed Technology, for an aggregate total of ten
(10) days (eighty (80) hours) during the three (3) month period following
delivery of the items specified in the first sentence of this Section 3.2. Any
additional assistance required by Licensee shall be charged by Licensee at
Licensor's then-prevailing rates for time and materials. In the event that
Licensee requests that an engineer or other employee of Licensor visit the
premises of Licensee in order to provide services under this Section 3.2 or
Section 3.3, all expenses reasonably incurred in connection with such visit,
including without limitation, travel and lodging expenses, shall be payable
directly by Licensee. Licensor shall also provide to Licensee all documentation
that is available in order to assist in using, maintaining, modifying and
improving the Licensed Technology.
3.3 Maintenance and Support. Licensor shall deliver to Licensee, within
thirty (30) days following the conclusion of each calendar quarter during the
Term, as soon as practicable and at no charge to Licensee, all new releases,
corrections, bug fixes, upgrades and improvements, to the Licensed Technology
which were developed and released by Licensor during the preceding calendar
quarter. Upon delivery to Licensee, all such releases, corrections, bug fixes,
upgrades and improvements shall be deemed Licensed Technology for all purposes
of this Agreement. To the extent applicable, any text content contained in such
new releases or modifications shall be translated to Chinese in the same manner
as the original Licensed Technology. In addition to the services and assistance
under Section 3.2 hereof, Licensor shall use commercially reasonable efforts to
provide, at no charge to Licensee, telephone assistance, not to exceed four (4)
hours per month, during normal business hours of Licensor to answer questions
related to the Licensed Technology, to assist Licensee to cause the Licensed
Technology to perform in accordance with the documentation and specifications
with respect thereto and to cause the Licensed Technology to conform to the
warranties set forth in this Agreement, including, but not limited to,
diagnosing whether a problem is related to hardware or to the Licensed
Technology. In connection with the foregoing telephone assistance, Licensor
shall respond within four (4) hours after Licensor receives, during Licensor's
normal business hours, notice from Licensee of any problem with the Licensed
Technology. Any additional assistance required by Licensee shall be charged to
Licensee at Licensor's then-prevailing rates for time and materials.
4. COMPENSATION
4.1 Royalty. Within thirty (30) days following the conclusion of each
calendar quarter during the Term, Licensee shall remit to Licensor an amount
equal to [RTC] (including without limitation, the market value of any "barter"
arrangements) received by Licensee in the previous calendar quarter through or
in connection with the Licensee Service (the "Royalty"). Such
<PAGE>
remittance shall be accompanied by a report, in detail reasonably acceptable to
Licensor, specifying the calculation of Royalty, and a written certification by
an officer of Licensee, indicating that the calculation is true and correct.
4.2 Audit Rights. Licensee agrees to keep and to maintain for a period
of three (3) years after the end of the year to which they pertain, sufficient
books, records and accounts regarding Licensee's business activities in order to
calculate and confirm the Royalty payment obligations. Licensor will have the
right, exercisable not more than once every twelve (12) months, and only after
giving Licensee notice of not less than five (5) business days' written notice,
to appoint an independent representative to examine and audit such books,
records and accounts during Licensee's business hours to verify the Royalty
payment obligations to Licensor under this Agreement, subject to such
independent representative's being bound to reasonable terms of confidentiality.
The cost of any such audit shall be paid by Licensor; provided, however, that if
any such review shall reveal an underpayment in excess of the greater than five
percent (5%) of monies due to Licensor from Licensee, Licensee shall promptly
pay to Licensor the reasonable costs of such review. The results of any such
audit shall be final, binding and conclusive as between the parties.
5. TERM AND TERMINATION
5.1 Term. This Agreement shall commence on the Initial Service Date and
shall continue in full force and effect for a period of three (3) years, unless
terminated earlier in accordance with this Agreement. Provided that the Licensee
Website Implementation Requirements have been met, this Agreement will be
automatically renewed, at Licensee's option, in perpetuity (the initial term and
such renewal, collectively, the "Term"). In the event that the Licensee Website
Implementation Requirements have not been met for the initial term, the parties
may nevertheless agree, in writing, to extend the Term as if the Licensee
Website Implementation Requirements have been met, or as otherwise as mutually
agreed by the parties.
5.2 Termination. If at any time a party is in material breach of this
Agreement, then in addition to all other rights and remedies available under
applicable law or in equity, the other party shall have the right to terminate
this Agreement, unless such breach shall have been remedied within thirty (30)
days after such notice has been received by such party; however, except in the
case of a termination by Licensor resulting from a breach of this Agreement by
Licensee, any such termination shall not be effective prior to one hundred and
eighty (180) days following such notice. Notwithstanding the foregoing, however,
the restrictions of Licensor contained in Section 2.5 above shall terminate upon
the commencement of any such one hundred and eighty (180) day period. In
addition, (i) this Agreement shall terminate automatically and without further
notice if Phase I of the Licensee Website Implementation Requirements has not
been timely achieved and (ii) Licensor may terminate this Agreement, upon ninety
(90) days' notice, if Phase II of the Licensee Website Implementation
Requirements is not timely achieved; however, the right of termination under
this clause (ii) shall not be effective if the requirements of Phase II are
satisfied as of the end of any consecutive three-month period ending subsequent
to March 31, 2003 and prior to giving of any such notice of termination.
5.3 Rights Upon Termination. Unless the rights of Licensee pursuant to
Section 5.4 below are exercised, upon the effective date of any termination or
expiration hereof, Licensee shall immediately cease any and all use of the
Licensed Technology, the Derivative Works, the Derivative Content and the
Licensor Marks, including without limitation, all promotion, reproduction,
distribution and archiving of the Licensed Technology, Derivative Works and
Derivative Content, and each party shall promptly return to the other party all
Confidential Information (as defined below) received from such other party and
Licensee shall return to Licensor all copies of the Licensed Technology, the
Derivative Works and the Derivative Content in the possession of Licensee.
Notwithstanding the foregoing, sections that by their nature survive expiration
or termination shall survive any expiration or termination of this Agreement. No
such expiration or termination shall affect the right of Licensee to continue
the Licensee Service or to use
<PAGE>
the Licensee Website based on other technology or software, utilizing content
other than Derivative Works and Derivative Content and utilizing trademarks and
other indicia other than Licensor Marks.
5.4 License Purchase Option. In the event of any expiration of the Term
due to failure to meet the Licensee Website Implementation Requirements (but not
in the event of any other expiration or any termination), Licensee shall have
the option, to be exercised within fifteen days following the effective date of
such expiration, upon written notice to Licensor and the payment of one million
dollars ($1,000,000), to purchase the license conferred pursuant to Section 2.1
above, in perpetuity, with respect to the Licensed Technology, as such Licensed
Technology exists as of the effective date of expiration. SUCH LICENSE, IF
PURCHASED BY LICENSEE, SHALL BE "AS IS" WITHOUT WARRANTIES OF ANY KIND AND,
WITHOUT LIMITATION, LICENSOR SHALL HAVE NO FURTHER OBLIGATION TO SUPPORT OR
MAINTAIN SUCH LICENSED TECHNOLOGY, OR UNDER SECTION 8.1 HEREOF.
6. CONFIDENTIALITY
Licensor and Licensee agree that all information (whether in writing,
orally or in any other format) disclosed by each of them to the other during the
negotiation of this Agreement or to be disclosed during the Term, including
without limitation, business plans, product ideas, marketing concepts, financial
information and projections, shall constitute "Confidential Information";
provided, however, Confidential Information does not include information that is
or becomes publicly known through no wrongful act of either party (or any of its
employees), has been approved for release by written authorization of the
originating party, or has been disclosed pursuant to a requirement of a
government agency or of law. During the term and at all times thereafter, the
party to whom Confidential Information has been imparted shall maintain such
information as confidential and shall not disclose or permit the same to be
disclosed to any Person. Each party shall take all reasonable steps to prevent
unauthorized disclosure of Confidential Information that it uses to protect its
own confidential information of a similar nature. Each of the parties further
agrees that the unauthorized disclosure by it of Confidential Information
received from the other will cause irreparable harm and significant injury to
the other which may be difficult to ascertain. Accordingly, each party agrees
that the other shall be entitled to equitable relief, including, without
limitation, an immediate injunction enjoining any breach by it of this Section
6, in addition to all other remedies available to such party at law or in
equity.
7. REPRESENTATIONS
7.1 By Licensor. Licensor represents and warrants that: (i) it has the
full power and authority to enter into this Agreement, carry out its obligations
hereunder and grant the rights granted to Licensee herein; (ii) it is the sole
owner or is a valid licensee of the Licensed Technology, and it has secured all
necessary licenses, consents, authorizations and waivers for the use of the
Licensed Technology as contemplated by this Agreement, including without
limitation, all text, logos and copy contained in all Licensed Technology and
there are no conflicting claims with respect to Licensor's rights thereto; (iii)
no part of the Licensed Technology violates or infringes upon any third party's
Intellectual Property Rights; (iv) Licensor has not previously and will not
grant any rights in the Licensed Technology to any third party which are
inconsistent with Licensor's obligations and the rights granted to Licensee
under this Agreement; (v) Licensor has not otherwise made or entered into, and
will not make or enter into during the term of this Agreement, any commitment or
obligation in conflict with its obligations and rights under this Agreement;
(vi) the Licensed Technology is the most recent version thereof; (vii) the
Licensed Technology is Year 2000 Compliant and, when delivered to Licensee, will
be free of any and all computer viruses, copy protect mechanisms or any other
features which may disable it or render it incapable of operation (whether after
a certain time, after transfer to another central processing unit, or
otherwise); (viii) except for Third Party Software, the Licensed Technology
includes all items, components, and services necessary to provide all processing
capabilities and functional characteristics represented by Licensor as being
included in the Licensed Technology, as set forth in the documentation and
specifications provided by Licensor to Licensee, and necessary to establish and
operate the Licensee Website in a manner comparable to the website operated by
Licensor in the United States, as of the Effective Date; however, the
representation and warranty contained in this clause (viii) is made by
<PAGE>
Licensor with respect to Third Party Software only to the best knowledge of
Licensor; (ix) the unmodified Licensed Technology shall be free from material
defects in materials and workmanship and shall operate in accordance with
documentation and specifications with respect thereto during the period
commencing upon the Effective Date and ending upon the earlier of August 31,
2001 and the achievement of the Phase I portion of the Licensee Website
Implementation Requirements (the "Initial Warranty Period"), and, thereafter,
for a period of ninety (90) days following delivery thereof by Licensor to
Licensee; and (x) all services provided by Licensor under this Agreement shall
be performed in a competent and professional workmanlike manner, equal to or
above the standards of the software development industry. During the Term,
Licensor shall promptly notify Licensee in writing of any material event or
change in circumstance which would reasonably make, or threaten to make, the
foregoing representations and warranties untrue or inaccurate. For the avoidance
of doubt, (a) the representation and warranty contained in clause (ix) above
shall apply to all new releases, corrections, bug fixes, upgrades and
improvements for a period of ninety (90) days following delivery thereof by
Licensor to Licensee (or for the Initial Warranty Period, if applicable), but
shall not apply to any other portion of the Licensed Technology, unless the
Initial Warranty Period is in effect or such representation and warranty is
otherwise independently applicable thereto and (b) such representation and
warranty shall be conditioned upon the Licensee's implementation of all new
releases, corrections, bug fixes, upgrades and improvements provided by
Licensor, if such implementation would have avoided any alleged breach of such
representation and warranty.
7.2 By Licensee. Licensee represents, warrants and covenants as
follows: (i) Licensee has the full power and authority to enter in this
Agreement and to carry out its obligations hereunder; (ii) all materials and
services provided by Licensee hereunder are owned by Licensee or are in the
public domain; (iii) Licensee has not made or entered into and during the term
of this Agreement will not make or enter into, any commitment or obligation in
conflict with its obligations and rights under this Agreement; (iv) no addition
to the Licensed Technology contained in the Derivative Content and no Derivative
Works will violate or infringe upon any third party's Intellectual Property
Rights; and, (v) Licensee has received (and shall maintain until the expiration
of the Term) all approvals, consents, authorizations, and waivers from
governmental and other regulatory agencies (including without limitation, the
United States Department of State Office of Defense Trade Controls, the United
States Department of Commerce Bureau of Export Administration, the United States
Department of the Treasury and all analogous governmental and regulatory
agencies in and of the PRC) required and published with respect to import and
export restrictions, or restrictions on trans-border data flow, relating to the
distribution or use of the Licensed Technology outside the United States and
into and within the PRC. During the term of this Agreement, Licensee shall
promptly notify Licensor in writing of any material event or change in
circumstance which would reasonably make, or threaten to make, the foregoing
representations and warranties untrue or inaccurate.
7.3 EXCEPT AS SPECIFICALLY SET FORTH HEREIN, EACH PARTY DISCLAIMS ANY
AND ALL WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION,
ANY WARRANTIES OF FITNESS FOR ANY PARTICULAR PURPOSE OR MERCHANTABILITY. EXCEPT
IN CONNECTION WITH THE FULFILLMENT OF ITS OBLIGATIONS UNDER SECTION 8 OR ARISING
OUT OF A BREACH BY A PARTY OF ITS OBLIGATIONS UNDER SECTION6, IN NO EVENT SHALL
EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY LOST PROFITS OR OTHER
INDIRECT, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES RELATING TO THE SUBJECT
MATTER OF THIS AGREEMENT.
8. INDEMNITIES
8.1 By Licensor. Licensor shall indemnify, defend, and hold harmless
Licensee and Licensee's directors, officers, employees, agents, consultants, and
distributors from and against all claims, actions, liabilities, losses,
expenses, damages and costs (including, but not limited to, reasonable
attorneys' fees) that may at any time be incurred by reason of any claim arising
out of or related to (i) any breach or alleged breach of, or any claim that is
otherwise inconsistent with, the representations and warranties
<PAGE>
contained in Section 7.1, above; (ii) the infringement of a third party's
Intellectual Property Rights by the Licensed Technology or Licensor's Marks
(other than any of the foregoing if modified without the consent of Licensor);
OR (iii) any gross negligence or willful misconduct by Licensor, or any employee
or agent thereof.
8.2 By Licensee. Licensee shall indemnify, defend and hold harmless
Licensor and Licensor's directors, officers, employees, agents, or consultants
from and against all claims, actions, liabilities, losses, expenses, damages and
costs (including without limitation, reasonable attorneys' fees) that may at any
time be incurred by any claim arising out of or related to (i) any breach or
alleged breach of, or any claim that is otherwise inconsistent with, the
representations and warranties contained in Section 7.2 above; (ii) Licensee's
actions in reproducing, marketing and distributing the Licensed Technology and
the Derivative Content to the extent not authorized herein; (iii) the
infringement of a third party's Intellectual Property Rights by the Licensee
Service or any modifications made to the Licensed Technology by or on behalf of
Licensee without the consent of Licensor; (iv) the use or misuse of the personal
information of any individual by Licensee, or any Person to whom Licensee
provided any such information or (v) any gross negligence or willful misconduct
by Licensee, or any employee or agent thereof.
8.3 Procedures. The indemnifying party ("Indemnifying Party") shall
notify the indemnified party ("Indemnified Party") in writing of the claim
promptly upon becoming aware of such claim; and shall give the Indemnified Party
sole control of the defense and all related settlement negotiations, provided
however that the Indemnifying Party shall not settle any claim or proceeding
unless the Indemnified Party shall have consented to such settlement in writing,
and provided further the Indemnified Party provides the Indemnifying Party with
all commercially reasonable assistance, information and authority to perform the
above at the Indemnifying Party's expense. Notwithstanding the foregoing, in the
event that the Indemnified Party shall fail to promptly notify the Indemnifying
Party of any claim for which the Indemnified Party is entitled to
indemnification hereunder, the obligations of the Indemnifying Party hereunder
shall be relieved only to the extent that such Indemnifying Party is actually
prejudiced by such failure
9. GENERAL
9.1 Notices. Any notices or consents required or permitted by this
Agreement shall be in writing and delivered in person or by registered or
certified mail, postage prepaid, return receipt requested, or by a reputable
courier delivery service, or by facsimile during regular business hours
(provided that a confirmation copy follows any other method of delivery
permitted under this Section 9.1), as follows unless such address is changed by
written notice hereunder, and such notice shall be deemed given for purposes of
this Agreement on the day that such writing is sent to the intended recipient
thereof in accordance with this section:
<PAGE>
If to Licensor: If to Licensee:
Predict It, Inc. Predict It China LLC
Attn: Andrew P. Merkatz 995 Ashokan Road
268 West 44th Street Kingston, New York 12401
New York, NY 10036 Attention: Keith Abell
Telephone: (212) 217-1200 Telephone: (212) 816-8531
Fax: (212) 217-1201 Fax: (212) 816-0166
with copies to:
Keith Abell via e-mail
at: [email protected]
Dechert Price & Rhoads
30 Rockefeller Plaza
New York. New York 10112
Attention: Ronald R. Jewell
Fax: (212) 698-3599
9.2 Publicity. During the Term, either party may use the other party's
name in news releases, articles, brochures, marketing materials, advertisements
and other publicity or promotions, subject to the other party's prior written
approval; provided that no advance approval shall be required for use of
Licensor's name and Licensor's Marks on the Licensee Service.
9.3 Confidentiality of Agreement. Both Licensor and Licensee agree that
the terms and conditions of this Agreement, including the general existence of
this Agreement, shall be treated as Confidential Information and that no
reference to the terms and conditions of this Agreement or to activities
pertaining thereto can be made in any form without the prior written consent of
the other party; provided, however, that either party may disclose the terms and
conditions of this Agreement (i) as required by any court or other governmental
body, (ii) as otherwise required by law, (iii) to legal counsel of the parties,
(iv) in confidence, to accountants, banks, proposed investors, and financing
sources and their advisors, (v) in confidence, in connection with the
enforcement of this Agreement or rights under this Agreement; or (vi) in
confidence, in connection with a merger or acquisition or proposed merger or
acquisition, or the like.
9.4 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, provided that no party may assign, delegate or otherwise
transfer any of its rights or obligations under this Agreement without the prior
written consent of the other party hereto which consent shall not be
unreasonably be withheld. Notwithstanding anything in this Agreement to the
contrary, either party may assign this Agreement (i) to any entity in which the
party has a greater than fifty percent (50%) equity ownership interest or of
which the party has voting control, or (ii) to any entity which acquires more
than fifty percent (50%) of that party's equity ownership interests (whether by
merger or otherwise) or substantially all that party's assets.
9.5 Force Majeure. Neither party shall have any obligation to the other
party for acts of God or events beyond the reasonable control of such party
which affect such party's ability to perform its obligations hereunder,
provided, however, that each party agrees to use its best efforts, respectively,
to minimize the extent and the impact of the inability to perform properly
<PAGE>
9.6 Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of New York, the United States, without
reference to choice of law principles, including all matters of construction,
validity and performance. The parties agree that jurisdiction and venue of all
matters relating to this Agreement shall be vested exclusively in the federal or
state courts located within the State and County of New York.
9.7 Headings. The headings used in this Agreement are for convenience
of reference only and shall not affect the construction or interpretation of any
of the provisions hereof.
9.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereon were upon the same instrument.
9.9 Waivers and Amendments. The failure by either party to insist upon
strict enforcement of any terms and conditions of this Agreement shall not be
construed as a waiver or relinquishment of the right to assert or rely upon any
such terms on any future occasion. No modification, amendment, renewal,
extension, or waiver of this Agreement or any of its provisions shall be binding
unless made in writing and signed by authorized representatives of each party.
9.10 Relationship of the Parties. The relationship of Licensee and
Licensor established by this Agreement is that of independent contractors, and
nothing contained in this Agreement will be construed to constitute the parties
as partners, joint venturers, co-owners or otherwise as participants in a joint
or common undertaking and neither party shall have any authority to obligate the
other party.
9.11 Severability. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
this Agreement.
9.12 Reliance and Benefit. This Agreement is intended for the sole and
exclusive benefit of the parties hereto and is not intended to confer any
benefit upon any other Persons whatsoever. Except for the parties hereto, no
other Person shall have any right to rely upon this Agreement for any purpose
whatsoever, absent the written consent of the party to be charged with such
9.13 Entire Agreement. This Agreement, together with the schedules
attached hereto and the other documents referred to herein, constitutes the sole
and entire understanding between and among the parties with respect to the
subject matter hereof and supersedes all prior agreements and understandings
among the parties with respect to such subject matter.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be duly executed as of the day and year first above written.
PREDICT IT CHINA LLC ("Licensee") PREDICT IT INC. ("Licensor")
By: China Interactive Media
Group, LLC, a Member
By: /s/ Keith Abell By: /s/ Andrew P. Merkatz
----------------------------------- --------------------------
Keith Abell Andrew P. Merkatz
Member President
<PAGE>
SCHEDULE A
DESCRIPTION OF LICENSED TECHNOLOGY
3rd Party Software that is required and recommended
o Oracle 8 (Required)
o ATG Dynamo (Required)
o Veritas Volume Manager (Recommended)
o Veritas NetBackup (Recommended)
o Netscape Enterprise Server or Apache. (Netscape Recommended)
o Toad (Tool for Oracle Application Developers - Recommended
http://www.quest.com/ )
o MS Access is recommended in order to use the back office reporting tool.
Documentation on these products must be obtained from the vendor directly.
What will be delivered by Predict It USA
Database
Predict It China will receive database creation scripts to execute on their
instance of Oracle 8 or Oracle 8i. This script will create the database, table
spaces, and all tables, indexes, constraints, primary and foreign keys, stored
procedures, and triggers necessary. Predict It China will also receive a file
containing Oracle configuration parameters based on Predict It USA's hardware
specification. SQL scripts that are run manually by the DBA for maintenance will
also be included and documented.
This database will not contain any of Predict It, USA's data. We will provide a
script to create Initialization data for the tables that require it.
Source Code
A release of java source code and jhtml will be provided for the functions and
features listed below, as well as the relational views file that contains all of
the database SQL queries.
Functions and Features
o Administration screens for the creation of events, entities, and domains.
o Administration screens for the scoring of events.
o Proposition Types for Against the Spread (ATS), Over-Under, Straight-Up,
Futures.
o Distributor code. Distributor types, palettes, default domains.
o Earnings per page view code.
o User performance, User profile, registration, log-in, User past, pending,
future picks.
o Most Active Events code.
o Intelligence Report code.
o Advanced Search code
o Top Analysts code
o Back office reports to show number of page views, earnings by distributor.
<PAGE>
Delivery
The code will be delivered to Predict It China on a CD along with documentation
that will outline the recommended hardware platform, and the 3rd Party software
required by the Predict It application. The following documentation in English
will be included:
1. Object Model
2. Data Model
3. Stored Procedures Documentation
4. Documentation of any sql scripts that are run manually by the DBA for
maintenance.
5. Data Model and Data Definition Document
6. Predict It USA Server and Network Specification Document
7. Data Flow Documentation
8. Commented Code
9. Data Feed Documentation (If applicable. See Sports Ticker Feeds Below)
10. System Architecture Overview
Additional Information:
ESPN Sports Ticker Data Feed Parsers
We have written parsers in perl to recognize schedules, scores, and lines from
the ESPN Sports Ticker Data Feed. The sports that we currently parse from Sports
Ticker are NFL, MLB, NHL, NCAA Football, and NCAA Men's Basketball. All other
sports that we offer such as Soccer, Rugby, Horse Racing, Golf, Tennis, and
Boxing are inserted into the database manually through the use of an
administration screen. These administration screens will be provided to Predict
It China, for the creation of sports events in the Predict It China database.
Technical Staffing Recommendations:
Predict It USA recommends that Predict It China make the following critical
technical hires as soon as possible.
Oracle 8 or Oracle 8i Database Administrator. This person should have experience
writing stored procedures in PL/SQL.
Java Programmers. These persons should have experience with Java servlets, Java
beans, and SQL.
Unix Systems Administrator. This person should have experience building and
maintaining a 24/7 internet production environment. Knowledge of Netscape
Enterprise Server or Apache is recommended. He or She must have strong Solaris
experience.
<PAGE>
SCHEDULE B
LICENSOR MARKS
SERVICE MARKS
PredictIt *
Predict It *
Can You Predict It *
Predict The Madness
Predict It Sports
Predict It Stocks
Predict It Entertainment
Predict It Politics
Predict It Pro
Predict It Pro Plus
My Predict It
Virtual Stock Exchange
*Existing Service Mark
<PAGE>
PREDICT IT INC.
SUBSCRIPTION AGREEMENT made as of this __ day of ________ , 2000
between Predict It Inc., a corporation organized under the laws of the State of
Delaware with offices at 268 West 44th Street, New York, New York 10036 (the
"Company"), and the undersigned (the "Subscriber").
WHEREAS, the Company desires to issue a minimum of 40 units ("Units")
and a maximum of 80 Units in a private placement (the "Offering"), each Unit
consisting of: (i) 10,000 shares (the "Preferred Shares") of Series B
Convertible Preferred Stock (the "Preferred Stock"), each Preferred Share
initially convertible into ten shares of the Company's common stock, $0.01 par
value (the "Common Stock") as described in the Certificate of the Designations,
Powers, Preferences and Rights ("Certificate of Designations") attached as
Exhibit B to the Confidential Private Placement Memorandum dated March 13, 2000
(together with all the Exhibits thereto, the "Memorandum"); and (ii) 7-year
warrants (the "Warrants") to purchase 100,000 shares of Common Stock in the form
attached as Exhibit C to the Memorandum, all on the terms and conditions
hereinafter set forth;
WHEREAS, up to twenty-three (23) Units will be purchased by holders of
the Company's outstanding indebtedness and will be paid for by delivering the
notes representing such indebtedness to the Company; and
WHEREAS, the Subscriber desires to acquire the number of Units set
forth on the signature page hereof on the terms and conditions hereinafter set
forth.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto do hereby agree as follows:
I. SUBSCRIPTION FOR UNITS AND REPRESENTATIONS BY AND COVENANTS OF
SUBSCRIBER
1.1 Subject to the terms and conditions hereinafter set forth,
the Subscriber hereby subscribes for and agrees to purchase from the Company
such number of Units as is set forth upon the signature page hereof at a price
equal to $100,000 per Unit and the Company agrees to sell such Units to the
Subscriber for said purchase price subject to the Company's right to sell to the
Subscriber such lesser number of Units, or no Units, as the Company may, in its
sole discretion, deem necessary or desirable. The purchase price is payable by
certified or bank check made payable to "American Stock Transfer & Trust
Company, as Escrow Agent for Predict It Inc." or by wire transfer of funds or by
delivery of notes evidencing indebtedness of the Company, in each case
contemporaneously with the execution and delivery of this Subscription
Agreement. The Preferred Shares and Warrants will be delivered by the Company
within 10 days following the consummation of the Offering as set forth in
Article III hereof.
1.2 The Subscriber recognizes that the purchase of Units
involves a high degree of risk in that (i) the Company has incurred substantial
losses from operations; (ii) an investment in the Company is highly speculative
and only investors who can afford the loss of their entire
<PAGE>
investment should consider investing in the Company and the Units; (iii) an
investment in the Units is illiquid; and (iv) transferability of the securities
comprising the Units is extremely limited, as well as other risk factors as more
fully set forth in the Memorandum.
1.3 The Subscriber represents and warrants that he is an
"accredited investor" as such term is defined in Rule 501 of Regulation D
promulgated under the Securities Act of 1933, as amended (the "Act"), as
indicated by his responses to the Investor Questionnaire, and that he is able to
bear the economic risk of an investment in the Units. The Subscriber further
represents and warrants that the information furnished in the Investor
Questionnaire is accurate and complete in all material respects.
1.4 The Subscriber acknowledges that he has prior investment
experience, including investment in non-listed and non-registered securities and
that he recognizes the highly speculative nature of this investment.
1.5 The Subscriber acknowledges receipt and careful review of
the Memorandum and all other documents furnished in connection with this
transaction (collectively, the "Offering Documents") and hereby represents that
he has been furnished by the Company during the course of this transaction with
all information regarding the Company which he has requested or desires to know,
and that such information and documents have, in his opinion, afforded the
Subscriber all of the same information that would be provided him in a
registration statement filed under the Act; that he has been afforded the
opportunity to ask questions of and receive answers from duly authorized
officers or other representatives of the Company concerning the terms and
conditions of the Offering, and any additional information which he had
requested.
1.6 The Subscriber acknowledges that this offering of Units
may involve tax consequences and that the contents of the Memorandum do not
contain tax advice or information. The Subscriber acknowledges that he must
retain his own professional advisors to evaluate the tax and other consequences
of an investment in the Units.
1.7 The Subscriber acknowledges that this offering of Units
has not been reviewed by the United States Securities and Exchange Commission
("SEC") or any state securities administrator because the Company is relying on
an exemption from registration provided by Regulation D promulgated under the
Act and the resulting exemption from state securities or "blue sky" laws. The
Subscriber represents that the Preferred Shares arid Warrants comprising his
Units are being purchased for his own account, for investment and not for
distribution or resale to others. The Subscriber agrees that he will not sell or
otherwise transfer the Preferred Shares or the Warrants unless they are
registered under the Act or unless an exemption from such registration is
available.
1.8 The Subscriber understands that there is no public market
for the Preferred Stock or the Warrants and that only a limited public market
exists for the Common Stock. The Subscriber understands that Rule 144 (the
"Rule") promulgated under the Act requires, among other conditions, a one year
holding period prior to the resale (in limited amounts) of securities acquired
in a non-public offering without having to satisfy the registration requirements
under the Act. The
<PAGE>
Subscriber understands that the Company makes no representation or warranty
regarding its fulfillment in the future of any reporting requirements under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or its
dissemination to the public of any current financial or other information
concerning the Company, as is required by the Rule as one of the conditions of
its availability and that to date the Company is not subject to the reporting
requirements of the Exchange Act. The Subscriber understands and hereby
acknowledges that the Company is under no obligation to register the Securities
under the Act, with the exception of certain registration rights set forth in
Article IV herein. The Subscriber agrees that the Company may, if it desires,
permit the transfer of the Preferred Shares, the shares of Common Stock issuable
upon conversion of the Preferred Shares (the "Conversion Shares"), the Warrants
or the shares of Common Stock issuable upon exercise of the Warrants (the
"Warrant Shares" and, together with the Preferred Shares, Conversion Shares and
Warrants, the "Securities") out of his name only when his request for transfer
is accompanied by an opinion of counsel reasonably satisfactory to the Company
that neither the sale nor the proposed transfer results in a violation of the
Act or any applicable state "blue sky" laws (collectively "Securities Laws").
1.9 The Subscriber hereby agrees that, without the prior
consent of Commonwealth Associates, L.P. (the "Placement Agent"), the Subscriber
will not sell, transfer or otherwise dispose of the Securities or any other
securities of the Company held by Subscriber until the later of (i) the six
month anniversary of the final closing of the Offering or (ii) the date the
registration statement required by Section 4.1 hereof is declared effective by
the SEC (the "Lock-Up Period").
1.10 The Subscriber consents to the placement of a legend on
any certificate or other document evidencing the Securities or any other
securities of the Company held by Subscriber stating that they have not been
registered under the Act and setting forth or referring to the restrictions on
transferability and sale thereof, and to the issuance of stop transfer
instructions with respect thereto.
1.11 The Subscriber acknowledges that if he is a Registered
Representative or an affiliated person of an NASD member firm, he must give such
firm the notice required by the NASD's Rules of Fair Practice, receipt of which
must be acknowledged by such firm on the signature page hereof.
1.12 If the undersigned Subscriber is a partnership,
corporation, trust or other entity, such partnership, corporation, trust or
other entity further represents and warrants that: (i) it was not formed for the
purpose of investing in the Company; (ii) it is authorized and otherwise duly
qualified to purchase and hold the Units; and (iii) that this Subscription
Agreement has been duly and validly authorized, executed and delivered and
constitutes the legal, binding and enforceable obligation of the undersigned.
1.13 The Subscriber hereby represents that the address of
Subscriber furnished by him at the end of this Subscription Agreement is the
undersigned's principal residence if he is an individual or its principal
business address if it is a corporation or other entity.
<PAGE>
1.14 The Subscriber hereby represents that, except as set
forth in the Offering Documents, no representations or warranties have been made
to the Subscriber by the Company or any agent, employee or affiliate of the
Company, including the Placement Agent, and in entering into this transaction,
the Subscriber is not relying on any information, other than that contained in
the Offering Documents and the results of independent investigation by the
Subscriber.
1.15 The Subscriber acknowledges that at such time as the
Reserved Shares (as defined in Section 2.1 (d) hereof) are registered, sales of
such securities will be subject to state securities laws, including those of
states which may require any securities sold therein to be sold through a
registered broker-dealer or in reliance upon an exemption from registration.
1.16 The Subscriber acknowledges that the maximum number of
Units to be sold in the Offering may be increased by up to 40 Units ($4,000,000)
without notice to Subscribers.
1.17 The Subscriber represents and warrants that the
Subscriber did not learn of the Offering directly or indirectly through any
general solicitation or advertising, including, but not limited to, learning of
the Company or the Offering as a result of viewing any press release or similar
types of publicly available information which directly or indirectly resulted in
the Subscriber subscribing for Units in the Offering. The Subscriber further
understands that the Company is relying, in part, on this representation to
ensure compliance with the federal securities laws.
1.18 The Subscriber acknowledges that the Placement Agent and
a committee to be designated by the Placement Agent whose members hold in the
aggregate not less than 20 % of the outstanding Preferred Shares (the
"Committee") may consent to any amendments, modifications or waivers with
respect to the Preferred Shares, thereby binding the Subscriber to any such
amendment, modification or waiver. The Subscriber hereby authorizes the
Placement Agent and the Committee to act on the Subscribers' behalf and grants
the Placement Agent and the Committee an irrevocable proxy to vote for any
amendment or waiver to the Certificate of the Designations to effect the
foregoing; provided, however, no amendment or waiver may decrease the number of
shares of Common Stock issuable upon conversion of the Preferred Stock or
increase the Conversion Price of the Preferred Stock without the requisite vote
required by the Certificate of Designations. The Subscriber agrees that neither
the Placement Agent nor any of its directors, officers, employees or agents nor
the Committee or any of its members shall be liable to any Subscriber for any
action taken or omitted to be taken by it in connection therewith, except for
wilful misconduct or gross negligence. The Subscriber acknowledges that one or
more members of the Committee may be affiliated with the Placement Agent. Any
transferee of the Preferred Shares shall agree to he bound by this Section 1.18.
<PAGE>
II. REPRESENTATIONS BY THE COMPANY
2.1 The Company represents and warrants to the Subscriber that
prior to the consummation of this offering, at the Initial Closing and at each
subsequent closing date:
(a) The Company and each of its subsidiaries (each a
"Subsidiary") is a corporation duly organized, existing and in good standing
under the laws of its jurisdiction of incorporation and has the corporate power
to conduct the business which it conducts and proposes to conduct.
(b) The execution, delivery and performance of this
Subscription Agreement by the Company will have been duly approved by the Board
of Directors of the Company and all other actions required to authorize and
effect the offer and sale of the Units and the Securities will have been duly
taken and approved.
(c) The Preferred Shares and Warrants have been duly and
validly authorized and when issued and paid for in accordance with the terms
hereof, will be duly and validly issued and fully paid and non assessable. The
Conversion Shares and Warrant Shares when issued upon conversion of the
Preferred Stock and exercise of the Warrants in accordance with their terms will
be duly and validly issued and fully paid and non assessable.
(d) The Company will at all times have authorized and
reserved a sufficient number of Conversion Shares and Warrant Shares
(collectively, the "Reserved Shares") to provide for conversion of the Preferred
Shares and exercise of the Warrants.
(e) The Company and each Subsidiary has, to the best of the
Company's knowledge, obtained, or is in the process of obtaining, all licenses,
permits and other governmental authorizations necessary to the conduct of its
respective business; such licenses, permits and other governmental
authorizations obtained are in full force and effect; and the Company and each
Subsidiary is in all material respects complying therewith; except where such
failure to obtain comply with, or have in full force and effect licenses,
permits and other governmental authorizations would not have a material adverse
effect on the Company's or any Subsidiary's business, property, financial
condition or operations.
(f) The Company knows of no pending or threatened legal or
governmental proceedings to which the Company or any Subsidiary is a party which
could materially adversely affect the business, property, financial condition or
operations of the Company or any Subsidiary.
(g) Neither the Company nor any Subsidiary is in violation
of or default under, nor will the execution and delivery of this Subscription
Agreement, the issuance of the Preferred Shares, the Warrants or the Unit
Purchase Option (as hereinafter defined), the incurrence of the obligations set
forth herein and therein and the consummation of the transactions contemplated
hereby or thereby, result in a violation of, or constitute a default under, the
Company's
<PAGE>
or any Subsidiary's certificate of incorporation or by-laws, any material
obligations, agreement, covenant or condition contained in any bond, debenture,
note or other evidence of indebtedness or in any material contract, indenture,
mortgage, loan agreement, lease, joint venture or other agreement or instrument
to which the Company or any Subsidiary is a party or by which any of them or any
of their properties may be bound or any material order, rule, regulation, writ,
injunction, or decree of any government, governmental instrumentality or court,
domestic or foreign; except where such violation or default would not have a
material adverse effect on the Company's or any Subsidiary's business, property,
or financial condition or operations.
(h) The financial information contained in the Memorandum
presents fairly the financial condition of the Company and its Subsidiaries as
of the dates and for the periods indicated.
III. TERMS OF SUBSCRIPTION
3.1 The subscription period will begin as of March 13, 2000
and will terminate at 11:59 PM Eastern time on May 1, 2000, unless extended by
the Company and the Placement Agent until May 31, 2000 (the "Termination Date").
Such extension may be effected without notice to the Subscribers. The first 40
Units will be offered on a "best efforts - all or none" basis and the remaining
Units will be offered on a "best efforts" basis. The maximum number of Units
which may be sold in the Offering may be increased by up to 40 Units
($4,000,000) at the discretion of the Placement Agent in the event of
over-subscription.
3.2 As compensation for its services, the Placement Agent will
receive: (i) a sales concession equal to 7% of the aggregate purchase price of
the Units sold; (ii) a structuring fee equal to 3% of the aggregate purchase
price of the Units; provided, however, (x) the sales concession fees shall not
be payable with respect to the purchase of Units upon the conversion of up to
$1.3 million of outstanding indebtedness and certain other bridge debt incurred
prior to the Initial Closing and (y) a combined sales concession and structuring
fee equal to 6.5% of the aggregate purchase price of the Units sold shall be
payable with respect to investments by certain individuals and entities agreed
to by the Placement Agent and the Company; (iii) reimbursement of up to $100,000
of accountable expenses of which $25,000 has been paid to the Placement Agent;
and (iv) a 7-year option (the "Unit Purchase Option") to purchase from the
Company up to the number of Units equal to 20% of the total number of Units sold
in the Offering (including Units sold in the event of an over-subscription) at
an exercise price equal to $100,000 per Unit. The Company shall also pay all
expenses in connection with the qualification of the Units and the Securities
under the securities or Blue Sky laws of the states which the Placement Agent
shall designate, including reasonable legal fees and filing fees.
3.3 Pending the sale of the Units, all funds paid hereunder
shall be deposited by the Company in escrow with American Stock Transfer &
Trust Company. If the Company shall not have obtained subscriptions (including
this subscription) for purchases of 40 Units on or before the Termination Date,
then this subscription shall be void and all funds paid hereunder by the
Subscriber shall be promptly returned to the Subscriber, without interest,
subject to paragraph 3.5
<PAGE>
hereof. If 40 Units are subscribed for at or prior to the Termination Date, then
all subscription proceeds shall be paid over to the Company within ten business
days thereafter at an initial closing (the "Initial Closing"). In such event,
placements of additional Units may continue until the Termination Date, with
subsequent releases of funds to be at the mutual consent of the Company and the
Placement Agent. At the Initial Closing and each subsequent closing, payment for
the Units issued and sold by the Company shall be made against delivery of the
Preferred Shares and Warrants comprising such Units. All funds received from a
Subscriber whose subscription for Units is not accepted will be returned to the
Subscriber, without interest and without any deduction, subject to paragraph 3.5
hereof.
3.4 The Subscriber hereby authorizes and directs the Company
to deliver certificates representing the Securities to be issued to such
Subscriber pursuant to this Subscription Agreement either (a) to the residential
or business address indicated in the Confidential Purchaser Questionnaire or (b)
directly to the Subscriber's account maintained with the Placement Agent, if
any.
3.5 The Subscriber hereby authorizes and directs the Company
to return any funds for unaccepted subscriptions to the same account from which
the funds were drawn, including any customer account maintained with the
Placement Agent.
3.6 If the Subscriber is not a United States person, such
Subscriber hereby represents that it has satisfied itself as to the full
observance of the laws of its jurisdiction in connection with any invitation to
subscribe for the securities comprising the Units or any use of this
Subscription Agreement, including (i) the legal requirements within its
jurisdiction for the purchase of the Units, (ii) any foreign exchange
restrictions applicable to such purchase, (iii) any governmental or other
consents that may need to be obtained, and (iv) the income tax and other tax
consequences, if any, that may be relevant to the purchase, holding, redemption,
sale or transfer of the securities comprising the Units. Such Subscriber's
subscription and payment for, and his or her continued beneficial ownership of
the Units, will not violate any applicable securities or other laws of the
Subscriber's jurisdiction.
IV. REGISTRATION RIGHTS
4.1 Required Registration. The Company hereby agrees with the
holders of the Securities or their transferees (collectively, the "Holders") to
prepare and file with the SEC no later than the six month anniversary of the
final closing of the Offering, a registration statement under the Act covering
the resale of the Reserved Shares and to use its best efforts to cause such
registration statement to become effective as soon as practicable thereafter and
to keep such registration statement effective until such time as the Reserved
Shares have been sold or may be sold under Rule 144 without volume limitation.
4.2 "Piggyback" Registration Rights. If the Company shall at
any time determine to proceed with the actual preparation and filing of a
registration statement under the Act in connection with a proposed offer and
sale of any of its equity securities by it or any of its security
<PAGE>
holders (other than a registration statement on Form S-4, S-8 or other limited
purpose form), the Company will give written notice of its determination to all
record holders of the Securities. Upon the written request from any Holders,
within 15 days after receipt of any such notice from the Company, the Company
will, except as herein provided, cause all such Reserved Shares with respect to
which a request for inclusion has been received to be included in such
registration statement, all to the extent required to permit the sale or other
disposition by the prospective seller or sellers of the Reserved Shares to be so
registered; provided, further, that nothing herein shall prevent the Company
from, at any time, abandoning or delaying any registration. If any registration
pursuant to this Section 4.2 shall be underwritten in whole or in part, the
Company may require that the Reserved Shares requested for inclusion pursuant to
this Section 4.2 be included in the underwriting on the same terms and
conditions as the securities otherwise being sold through the underwriters. In
such event, the Holders requesting inclusion in the registration statement
shall, if requested by the underwriters, execute an underwriting agreement
containing customary representations and warranties by selling stockholders and
a lock-up on shares not being sold. If in the good faith judgment of the
managing underwriter of such public offering the inclusion of all of the
Reserved Shares originally covered by a request for registration (the "Requested
Stock") would reduce the number of shares which could be sold by the Company or
interfere with the successful marketing of the shares of stock offered by the
Company, the number of shares of Requested Stock otherwise to be included in the
underwritten public offering may be reduced pro rata (by number of shares) among
the holders thereof requesting such registration pursuant to the "piggyback"
registration rights herein or excluded in their entirety if so required by the
underwriter. To the extent only a portion of the Requested Stock is included in
the underwritten public offering, those shares of Requested Stock which are thus
excluded from the underwritten public offering shall be withheld from the market
by the holders thereof for a period, not to exceed 90 days, which the managing
underwriter reasonably determines is necessary in order to effect the
underwritten public offering.
The obligation of the Company under this Section 4.2 shall not
apply to Reserved Shares that at such time are eligible for immediate resale
pursuant to Rule 144(k) under the Act.
4.3 Registration Procedures. In connection with any
registration statement filed pursuant to Section 4.1 or in which any Requested
Stock is included, the Company shall:
(a) use its best efforts to cause such registration
statement to become and remain effective;
(b) prepare and file with the SEC such amendments to such
registration statement and supplements to the prospectus contained therein as
may be necessary to keep such registration statement effective;
(c) furnish to the Holders participating in such
registration and to the underwriters, if any, of the securities being registered
such reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such underwriters may
reasonably request in order to facilitate the public offering of such
securities;
<PAGE>
(d) use its best efforts to register or qualify the
securities covered by such registration statement under the state securities or
blue sky laws of such jurisdictions as the Holders may reasonably request in
writing within 20 days following the original filing of such registration
statement, except that the Company shall not for any purpose be required to
execute a general consent to service of process or to qualify to do business as
a foreign corporation in any jurisdiction wherein it is not so qualified;
(e) notify the Holders, promptly after it shall receive
notice thereof, of the time when such registration statement has become
effective or a supplement to any prospectus forming a part of such registration
statement has been filed;
(f) notify the Holders promptly of any request by the SEC
for the amending or supplementing of such registration statement or prospectus
or for additional information;
(g) prepare and file with the SEC, promptly upon the request
of any Holders, any amendments or supplements to such registration statement or
prospectus which, in the opinion of counsel for such Holders (and concurred in
by counsel for the Company), is required under the Act or the rules and
regulations thereunder in connection with the distribution of Common Stock by
such Holders;
(h) prepare and promptly file with the SEC, and promptly
notify the Holders of the filing of, any amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Act, any event shall have
occurred as the result which any such prospectus or any other prospectus as then
in effect includes or would include an untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein, in the
light of the circumstances in which they were made, not misleading; and
(i) advise the Holders, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of any stop order by the SEC
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued.
The Holders shall cooperate with the Company in providing the
information necessary to effect the registration of their Reserved Shares,
including completion of customary questionnaires.
<PAGE>
5.2 This Subscription Agreement shall not be changed, modified
or amended except by a writing signed by the parties to be charged, and this
Subscription Agreement may not be discharged except by performance in accordance
with its terms or by a writing signed by the party to be charged; provided that
no modification or amendment may be made to Section 1.18 hereof without the
consent of the Committee.
5.3 This Subscription Agreement shall be binding upon and
inure to the benefit of the parties hereto and to their respective heirs, legal
representatives, successors and assigns. This Subscription Agreement sets forth
the entire agreement and understanding between the parties as to the subject
matter thereof and merges and supersedes all prior discussions, agreements and
understandings of any and every nature among them.
5.4 Notwithstanding the place where this Subscription
Agreement may be executed by any of the parties hereto, the parties expressly
agree that all the terms and provisions hereof shall be construed in accordance
with and governed by the laws of the State of New York without regard to such
State's laws regarding conflicts of laws. The parties hereby agree that any
dispute which may arise between them arising out of or in connection with this
Subscription Agreement shall be adjudicated before a court located in New York
City and they hereby submit to the exclusive jurisdiction of the courts of the
State of New York located in New York, New York and of the federal courts in the
Southern District of New York with respect to any action or legal proceeding
commenced by any party relating to or arising out of this Subscription Agreement
or any acts or omissions relating to the sale of the securities hereunder, and
irrevocably waive any objection they now or hereafter may have respecting the
venue of any such action or proceeding brought in such a court or respecting the
fact that such court is an inconvenient forum and consent to the service of
process in any such action or legal proceeding by means of registered or
certified mail, return receipt requested, in care of the address specified in
Section 5.1 hereof or by notice given in accordance with Section 5.1 hereof.
5.5 This Subscription Agreement may be executed in
counterparts. Upon the execution and delivery of this Subscription Agreement by
the Subscriber, this Subscription Agreement shall become a binding obligation of
the Subscriber with respect to the purchase of Units as herein provided;
subject, however, to the right hereby reserved to the Company to enter into the
same agreements with other subscribers and to add and/or to delete other persons
as subscribers.
5.6 The holding of any provision of this Subscription
Agreement to be invalid or unenforceable by a court of competent jurisdiction
shall not affect any other provision of this Subscription Agreement, which shall
remain in full force and effect.
5.7 It is agreed that a waiver by either party of a breach of
any provision of this Subscription Agreement shall not operate, or be construed,
as a waiver of any subsequent breach by that same party.
5.8 The parties agree to execute and deliver all such further
documents, agreements and instruments and take such other and further action as
may be necessary or appropriate to carry out the purposes and intent of this
Subscription Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Subscription
Agreement as of the day and year first written above.
<TABLE>
<CAPTION>
<S> <C>
SUBSCRIBER**: CO-SUBSCRIBER**:
--------------------------------------- ----------------------------------------
Signature of Subscriber Signature of Co-Subscriber
--------------------------------------- ----------------------------------------
Name of Subscriber [please print] Name of Co-Subscriber [please print]
--------------------------------------- ----------------------------------------
Address of Subscriber Address of Co-Subscriber
--------------------------------------- ----------------------------------------
Social Security or Taxpayer Social Security or Taxpayer Identification
Identification Number of Subscriber Number of Co-Subscriber
--------------------------------------- ----------------------------------------
Name of Holder(s) as it should appear on the
security certificates* [please print]
<CAPTION>
* Please provide the exact names that you wish to see on the certificates
(1) For individuals, print full name of subscriber.
(2) For joint, print full name of subscriber and all co-subscribers.
(3) For corporations, partnerships, LLC, print full name of entity, including "& ", "Co. ", "Inc.", "etc",
"LLC ", "LP", etc.
(4) For Trusts, print trust name (please contact your trustee for the exact name that should appear on the
certificates.)
(5) For IRA account maintained at Commonwealth, print "Wexford Clearing Corp as C/F FBO [client name]".
<S> <C>
LRX- Subscription Accepted:
----------------------- Predict It, Inc.
Subscriber's Account Number at
Commonwealth Associates, if applicable By:
--------------------------------
Name:
Dollar Amount of Units Subscribed For: Title:
$
-----------------------------
$
------------------------------------
Amount of Unit Subscription Accepted
The undersigned NASD member firm acknowledges
**If Subscriber is a Registered Representative receipt of the notice required by Rule 3050 of the
with an NASD member firm or an affiliated NASD Conduct Rules.
person of an NASD member firm, have the
acknowledgment to the left signed by the
appropriate party: -------------------------------
Name of NASD Member Firm
By:
----------------------------
Authorized Officer
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF COUNSEL
We hereby consent to the reference to our firm under the caption "Legal
Matters" in the Prospectus contained in the Registration Statement on Form SB-2,
as originally filed on August 13, 1999. In giving this consent, we do not hereby
admit that we are in the category of persons whose consent is required pursuant
to Section 7 of the Securities Act of 1333, as amended, or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
CAMHY KARLINSKY & STEIN LLP
New York, New York
April 18, 2000
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this Amendment No. 3 to the Registration
Statement on Form SB-2 (File No. 333-85163) of our report dated March 21, 2000
(April 14, 2000 as to Note I) on the consolidated financial statements of
Predict It Inc. and subsidiary and of our report dated July 27, 1999 on the
financial statements of Virtual Stock Exchange, Inc. We also consent to the
reference to our firm under the caption "Experts" in the Prospectus.
RICHARD A. EISNER & COMPANY, LLP
New York, New York
April 17, 2000
