<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 19, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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HOW2.COM, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 7375 75-2799130
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification Number)
Organization)
</TABLE>
3811 TURTLE CREEK BOULEVARD, SUITE 600
DALLAS, TEXAS 75219
(214) 521-3443
(Address, including zip code, and telephone number, including
area code, of the Registrant's principal executive offices)
---------------------
STEVEN B. SOLOMON
CHIEF EXECUTIVE OFFICER
HOW2.COM, INC.
3811 TURTLE CREEK BOULEVARD, SUITE 600
DALLAS, TEXAS 75219
(214) 521-3443
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
<TABLE>
<S> <C>
ALAN J. BOGDANOW, ESQ. JAN M. DAVIDSON, ESQ.
HUGHES & LUCE, L.L.P. KILPATRICK STOCKTON LLP
1717 MAIN STREET, SUITE 2800 1100 PEACHTREE STREET, SUITE 2800
DALLAS, TEXAS 75201 ATLANTA, GEORGIA 30309
(214) 939-5500 (404) 815-6500
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED MAXIMUM
TITLE OF SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE
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<S> <C> <C>
Common Stock ($0.01 par value)............ $125,000,000 $33,000
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</TABLE>
(1) Includes shares that the underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a).
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION
IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE
ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
PROSPECTUS (SUBJECT TO COMPLETION)
, 1999
SHARES
[HOW2.COM(TM) LOGO APPEARS HERE]
COMMON STOCK
---------------------
How2.com, Inc. is offering shares of its common stock. This is our
initial public offering and no public market currently exists for our shares. We
anticipate that our initial public offering price will be between $ and
$ per share. We intend to apply to list our common stock on the Nasdaq
National Market under the symbol "HWTO".
---------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 7.
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
---------------------
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<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount.......................................
Proceeds to How2.com........................................
</TABLE>
How2.com has granted the underwriters a 30-day option to purchase up to an
additional shares of common stock to cover over-allotments.
The underwriters are offering the shares on a firm commitment basis subject
to their right to reject orders in whole or in part and subject to other
conditions. The underwriters expect to deliver the shares of common stock to
purchasers on or about , 1999.
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THE ROBINSON-HUMPHREY COMPANY
, 1999
<PAGE> 3
DESCRIPTION OF ARTWORK
[The inside front cover includes a picture of the How2.com home page. Branched
out from the graphic of the homepage are pictures cascading of the four How2
channels (How2Work, How2Play, How2Home and How2Shop&Save). Above the picture of
the home page is an overall description of How2.com]
[The left gatefold includes a picture of the How2Home channel centered on the
top half of the page, and a picture of the How2Work channel centered on the
bottom half of the page. The right gatefold includes a picture of the How2Play
channel, centered on the top half of the page and a picture of the
How2Shop&Save channel centered on the bottom half of the page. Under each
picture is the title of the channel in bold. Under each title is a description
of the functionality of each channel]
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It is not complete and may not contain all of the information that you should
consider before investing in our common stock.
HOW2.COM
Our Business
How2.com, Inc. is an online digital marketplace where our e-partners(TM),
which include manufacturers, retailers, service organizations and content
providers, and our e-seekers(TM), consumers, come together to satisfy disparate
but interdependent market needs. Our marketplace is initially organized into
four channels that address e-partner needs and e-seeker interests, in a content
rich how2(TM) format. These channels include: How2Work(TM), How2Play(TM),
How2Home(TM), and How2Shop&Save. These channels provide a one stop source of
how2 information, community interaction, e-commerce opportunities and post-sale
customer care services. In addition, we collect accurate customer demographic
and psychographic profile information, which addresses both the personal
attributes and areas of interest of our e-seekers as well as post-sale product
installed base information, including the geographic location of products sold.
We offer Business-to-Business services to our e-partners including
post-sale customer care offerings, which are transactions that occur subsequent
to a product purchase, such as online rebate processing and in the future may
include online warranties and online manuals. We also offer our e-partners
content conversion services, which include the conversion of published how2 text
or video into an entertaining web-enabled how2 tutorial, for the purpose of
distributing their products or services through our online marketplace. Our
Business-to-Business service offerings provide demographic and psychographic
data mining services. Our marketplace attracts e-partners by offering a
low-risk, low-cost entry to an online marketplace where they can target their
products and services to e-seekers with specific interests. Additionally, by
reinventing fragmented post-sale customer care services online, we improve the
manufacturer's brand image.
Our Business-to-Consumer services include tutorial driven e-commerce in a
how2 format. Our e-seekers obtain entertaining and relevant information related
to everyday interests and topics with an opportunity to purchase related
products and services, communicate with other e-seekers with similar interests
through message boards and utilize the post-sale customer care services offered
in our marketplace. Our marketplace attracts e-seekers by offering a one-stop
destination for information, products and services related to their everyday
interests. Our objective is to save e-seekers time and money.
By offering services to businesses that facilitate the consumer commerce
and service cycle, we believe that we have launched a new online
Business-to-Business-to-Consumer, or B2B2C business model.
Our diversified revenue opportunities are generated primarily through
relationships with our e-partners, and include post-sale customer care services,
sponsorship revenue, content conversion services, demographic data mining
services and tutorial driven e-commerce. How2.com provides its e-partners the
ability to access highly defined e-seekers. We seek to jointly generate
incremental sales, to provide outsourced ancillary post-sale customer care
services, and to provide previously unavailable post-sale customer information.
Specifically, this post-sale information includes marketing efficacy data,
product installed base mapping, and accurate, product by product, customer
demographic and psychographic information.
How2.com's B2B2C Internet solution is designed to repeatedly drive
e-seekers to our online digital marketplace where How2.com and our e-partners
can offer them desired information, products and services. This objective is
achieved primarily through our Customer Acquisition, Retention and Extension, or
CARE, strategy.
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Customer Acquisition Retention and Extension
We strive to provide a new online distribution channel that satisfies our
e-partners' needs to retain their customers and extend their brand leadership.
We seek to accomplish this objective through our CARE strategy.
Our CARE strategy involves acquiring customers. We attract e-seekers to our
marketplace through marketing our how2 content, online electronic commerce
opportunities and post-sale customer care services. By attracting e-seekers with
specific interests, we believe that our marketplace will also attract e-partners
that seek to extend the reach of their brand and influence the buying decision
of a highly targeted audience. We believe that our post-sale customer care
offerings are also a powerful e-partner acquisition tool since they enable
e-partners to retain their customers and extend their brand leadership. By
offering them post-sale customer care opportunities such as online rebates,
warranties and manuals, we will provide our e-partners with the opportunity to
keep in contact with their customers after a sale as well as the opportunity to
sell additional products. We partner with these companies and share in online
commerce revenues, rather than rely on banner advertising revenues. We believe
that post-sale customer care services are a particularly attractive customer
acquisition tool for us because, unlike traditional marketing activities, we
derive revenues from performing the services.
Our Strategy
We seek to be the leading B2B2C online marketplace that leverages how2
information and that provides outsourcing of post-sale customer care services.
We will continue to provide a model that creates value for our e-partners and
e-seekers and facilitates their interdependent commerce. Our strategy includes:
- Strengthening our brand recognition and consumer awareness;
- Expanding our user base;
- Establishing and expanding multiple, under-penetrated revenue streams;
- Establishing further e-partner relationships to augment product and
service offerings;
- Empowering e-seekers in their purchase decision with high quality
content;
- Continuing to consider strategic acquisitions; and
- Expanding our site infrastructure to support growth.
RECENT DEVELOPMENTS
Acquisitions
In March 1999, we completed the acquisition of 2-Lane Media, Inc. The
recipient of numerous industry awards for interactive/multimedia communications,
2-Lane provided us with substantial web site and e-commerce design expertise. In
May 1999, we completed the acquisition of FCI Services, Inc. and its affiliates,
or Forward, a product rebate and promotional fulfillment operation. This
acquisition allowed us to provide our first post-sale customer care service. In
August 1999, we completed an acquisition of multimedia production and content
conversion assets from Broadcast Production Group, Inc., or BPG. In connection
with this acquisition, we employed some of the former members of the BPG
management team. This acquisition provided us with the ability to convert
content in traditional media formats to web-enabled content.
e-Partner Relationships
In July 1999, we entered into an agreement with Staples, Inc. to be the
exclusive provider of rebate services with respect to products sold by
participating vendors through its more than 800 office supply
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superstores in the United States. This agreement immediately facilitated
relationships for us with over 70 manufacturers including Compaq Computer
Corporation, Polaroid Corporation and Canon Inc.
Proposed Spin-off by Citadel
In January 1999, Citadel Technology, Inc. received 20,000,000 shares of our
common stock in consideration for a promissory note and sharing of Citadel's
resources, personnel and services through June 30, 1999. Citadel has announced,
subject to compliance with Securities and Exchange Commission regulations and
the expiration of a 180 day lock-up agreement with our underwriters, that it
intends to initiate a spin-off distribution of 3,000,000 shares of our common
stock owned by Citadel.
ABOUT HOW2.COM
We were incorporated in Delaware in January 1999. Our principal executive
offices are located at 3811 Turtle Creek Boulevard, Suite 600, Dallas, Texas
75219, and our telephone number is (214) 521-3443. Our World Wide Web site
address is www.how2.com. The information in our web site is not incorporated by
reference into this prospectus.
THE OFFERING
Common stock offered........................ shares
Common stock to be outstanding after our
initial public offering..................... shares
Use of proceeds............................. We intend to use the net
proceeds from our initial public
offering for sales and marketing
expenses to promote our brand
and for general corporate
purposes, including working
capital, research and
development, content development
and acquisition, and potential
strategic alliances and
acquisitions.
Proposed Nasdaq National Market symbol...... "HWTO"
SHARES THAT MAY BE ISSUED AFTER OUR INITIAL PUBLIC OFFERING
You should be aware that we are permitted, and in some cases obligated, to
issue shares of our common stock in addition to the common stock to be
outstanding after our initial public offering. If and when we issue these
shares, the percentage of our common stock that you own will be diluted. The
following is a summary of additional shares of common stock, that as of
September 30, 1999, we have approved for issuance after our initial public
offering:
- 16,244,750 shares issuable upon the exercise of options granted to our
employees, directors and consultants with a weighted average exercise
price of $1.27 per share, of which 2,799,445 are currently exercisable;
- Up to 6,000,000 shares issuable pursuant to future awards under our 1999
Stock Incentive Plan and up to 200,000 shares issuable pursuant to future
awards under our 1999 Non-Employee Directors' Stock Option Plan;
- 1,000,000 shares issuable upon the exercise of outstanding warrants, with
a weighted average exercise price of $1.08 per share, all of which are
currently exercisable; and
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- 800,000 shares issuable upon the exercise of outstanding warrants, with
an exercise price of $2.50 per share, issued in connection with our
acquisition of Forward, the exercisability of which are subject to
meeting earnout conditions.
In addition, we may be required to issue additional shares of our common
stock in connection with our purchase of assets from BPG if our common stock
does not trade at or above $10.00 per share at some point during the 30 days
following our initial public offering.
CONVENTIONS THAT APPLY TO THIS PROSPECTUS
Unless otherwise indicated, all information in this prospectus:
- has been adjusted to give effect to a four-for-one stock split completed
in July 1999;
- assumes no exercise of the underwriters' over-allotment option;
- assumes no exercise of outstanding options or warrants to purchase shares
after September 30, 1999; and
- assumes that the 1,200,000 shares of our common stock that are issued and
subject to meeting earnout conditions pursuant to the terms of our
acquisition of Forward will continue to be outstanding.
References in this prospectus to "How2.com", "we", "our" and "us" refer to
How2.com, Inc., a Delaware corporation. "How2.com", "How2Home", "How2Work",
"How2Play", "How to Shop and Save", "Headquarters for Living", "C.A.R.E.
Customer Acquisition Retension and Extension" are trademarks of ours for which
we have applied for Federal registration. Each trademark, tradename, name or
service mark if any other Company appearing in this prospectus belongs to its
holder.
This prospectus includes statistical data regarding the Internet industry.
We derived this data from information published by third-party sources,
including International Data Corporation, a provider of market and strategic
information for the technology industry. Although we believe that this
information is generally indicative of the matters reflected therein, such data
are inherently imprecise, and we caution you not to place undue reliance on such
data.
---------------------
This prospectus contains trademarks and names of persons other than
How2.com, which are the property of their respective owners.
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<PAGE> 8
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth our summary financial and operating data as
of June 30, 1999 and for the period from January 7, 1999 (inception) to June 30,
1999, and for our predecessor, Forward, as of December 31, 1997 and 1998 and May
20, 1999 and for the years ended December 31, 1997 and 1998 and the period from
January 1, 1999 through May 20, 1999. The financial data for all periods
presented were derived from audited financial statements. The data set forth
below in this table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our financial
statements.
<TABLE>
<CAPTION>
PREDECESSOR HOW2.COM
---------------------------------------------------------- ---------------
JANUARY 7, 1999
YEAR ENDED YEAR ENDED JANUARY 1, 1999 TO (INCEPTION) TO
DECEMBER 31, 1997 DECEMBER 31, 1998 MAY 20, 1999 JUNE 30, 1999
----------------- ----------------- ------------------ ---------------
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STATEMENT OF OPERATIONS DATA:
Net revenues............................. $2,171,978 $3,227,914 $ 2,234,473 $ 567,354
Revenues from acquired contracts(1)...... -- -- -- 305,199
---------- ---------- ----------- -----------
Total revenues........................... 2,171,978 3,227,914 2,234,473 872,553
Cost of revenues......................... 935,501 645,020 353,151 121,938
Cost of revenues from acquired
contracts.............................. -- -- -- 217,913
---------- ---------- ----------- -----------
Gross profit..................... 1,236,477 2,582,894 1,881,322 532,702
Operating expenses:
Selling, general and
administrative(2).................... 1,148,223 2,733,635 4,096,429 1,787,007
Stock-based compensation............... -- -- -- 417,666
Depreciation and amortization.......... 99,139 104,589 24,166 533,531
---------- ---------- ----------- -----------
Total operating expenses......... 1,247,362 2,838,224 4,120,595 2,738,204
---------- ---------- ----------- -----------
Loss from operations............. (10,885) (255,330) (2,239,273) (2,205,502)
Other income (expense):
Interest income........................ 23,596 33,714 27,234 49,639
Interest expense....................... (6,998) (5,258) (12,433) (3,161)
Miscellaneous income (expense)......... 16,258 9,670 (91,384) --
---------- ---------- ----------- -----------
Total other income (expense)..... 32,856 38,126 (76,583) 46,478
---------- ---------- ----------- -----------
Income (loss) before income taxes........ 21,971 (217,204) (2,315,856) (2,159,024)
Tax (benefit) provision................ 62,618 (25,518) (40,695) --
---------- ---------- ----------- -----------
Net loss......................... $ (40,647) $ (191,686) $(2,275,161) $(2,159,024)
========== ========== =========== ===========
Basic and diluted net loss per
share(3)............................... $ (0.07)
===========
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share............. 32,842,533
===========
SUPPLEMENTAL OPERATING DATA:
Gross revenues(4)........................ $2,978,121 $14,099,822 $15,535,495 $ 3,259,888
Number of rebates processed.............. 35,625 341,363 444,310 79,755
</TABLE>
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PREDECESSOR HOW2.COM
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DECEMBER 31
----------------------- PRO FORMA
1997 1998 MAY 20, 1999 JUNE 30, 1999 PRO FORMA(5) AS ADJUSTED(6)
---------- ---------- ------------ ------------- ------------ --------------
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BALANCE SHEET DATA:
Cash and cash equivalents........ $ 395,468 $ 329,280 $ 1,854 $ 5,532,629 $17,514,629
Working capital (deficit)........ 632,208 149,832 (2,080,087) 3,853,523 15,835,523
Total assets..................... 1,516,343 5,445,728 4,567,593 27,090,336 39,072,336
Long-term debt and capital lease
obligations, net of current
maturities..................... 24,377 198,840 151,657 155,390 155,390
Total stockholders' equity
(deficit)...................... $ 909,095 $ 636,555 $(1,629,453) $18,122,993 $32,354,993
</TABLE>
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(1) Represents revenues from contractual obligations in place at the time of our
acquisition of 2-Lane Media, Inc.
(2) Includes executive compensation expense representing bonuses paid during the
periods presented. Bonus expense represents amounts paid to the owners of
the predecessor under S Corporation status and is non-recurring in nature.
The expense totaled
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$425,000, $1,331,000 and $2,817,000 for the years ended December 31, 1997
and 1998, and the period from January 1, 1999 to May 20, 1999, respectively.
(3) Loss per share has not been included for the predecessor as the per share
amount would not be meaningful.
(4) Includes the face amount of the checks issued to customers for rebates
processed totaling approximately $806,000, $10,872,000, $13,301,000 and
$2,693,000 for the years ended December 31, 1997 and 1998, the period from
January 1, 1999 to May 20, 1999 and the period from January 7, 1999 to June
30, 1999, respectively. Gross revenues do not include revenues from acquired
contracts in the 2-Lane transaction.
(5) The pro forma data gives effect to the sale of shares in private placements
for the period from July 1, 1999 to September 30, 1999, in addition to stock
issued in connection with the acquisition of BPG and the exercise of stock
options during that same period.
(6) The pro forma as adjusted data gives effect to the sale of shares in private
placements for the period from July 1, 1999 to the date of this prospectus,
in addition to the sale of the shares of common stock that we are offering
under this prospectus at an assumed initial public offering price of $
per share after deducting the estimated underwriting discounts and
commissions and estimated offering expenses. See "Use of Proceeds" and
"Capitalization."
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RISK FACTORS
Our initial public offering and any investment in our common stock involves
a high degree of risk. You should carefully consider the following risks and the
other information contained in this prospectus before you decide to invest in
our common stock. The trading price of our common stock could decline due to any
of these risks, and you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS AND FUTURE PROSPECTS ARE EXTREMELY DIFFICULT TO EVALUATE BECAUSE
OUR OPERATING HISTORY IS VERY LIMITED.
Our company was formed in January 1999. We acquired our rebates operation
in May 1999. Our online marketplace began initial operations in September 1999.
As a result, we have only a limited operating history on which you can base an
investment decision. You should consider our prospects in light of the
uncertainties and difficulties frequently encountered by companies in their
early stages of development. These risks are heightened in new and rapidly
evolving industries such as e-commerce, and are further heightened by our use of
an unproven Business-to-Business-to-Consumer, or B2B2C, business model. To
address these risks and uncertainties, we must, among other things:
- develop and enhance our brand, and expand our tutorial content and
product and service offerings;
- establish and sustain e-commerce relationships with manufacturers,
retailers, service providers and content providers;
- generate revenues from multiple new sources, including e-commerce,
sponsorships, data mining services, extended warranty sales, content
conversion and online training services; and
- continue to develop and upgrade our technology infrastructure to support
our operations and the growth of our online marketplace.
We cannot assure you that our online digital marketplace concept will
receive market acceptance or that consumers, once on our site, will buy products
through our online marketplace. We expect to derive all of our long-term future
revenue from our online marketplace. Our online marketplace has produced only
minimal revenues and is not yet profitable. If we are unable to establish
pricing and revenue models acceptable to consumers, our e-seekers, and
manufacturers, retailers, service organizations and content providers, or our
e-partners, our online service may not be commercially successful.
We may not successfully accomplish any of our objectives. If we do not
successfully address these risks, our business would be materially adversely
affected.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO INCUR SUBSTANTIAL NET
LOSSES IN THE FUTURE.
We had a net loss and an accumulated deficit of approximately $2.2 million
for the period from our inception through June 30, 1999. We expect to incur
substantial operating losses for the foreseeable future. We may not have any
revenue growth in the future, and our revenues could decline. Moreover, we
expect to significantly increase our sales and marketing expenses as well as
general and administrative expenses. Over the longer term, we expect to derive a
substantial portion of our revenues from our non-rebate online services, but
these services are based on an unproven business model. As a consequence, we may
never be profitable.
WE ARE DEPENDENT ON STAPLES AND ITS VENDORS FOR A SUBSTANTIAL PORTION OF OUR
BUSINESS.
We are dependent upon our relationship with Staples and its vendors who
choose to participate in our online rebate services for a substantial portion of
our existing and anticipated revenues. We expect that we will continue to be
dependent upon Staples and its vendors for a significant portion of our revenues
in future periods. As a result of this concentration of sales, our business,
operating results or financial condition would suffer as a result of the
termination of or adverse change in our relationship with Staples
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or any of its material vendors. In addition, we cannot assure you that our
relationship with Staples and its vendors will continue, or if continued, will
increase in any future period. The initial term of our agreement with Staples
expires in July 2000. The agreement is renewable annually upon mutual agreement
between Staples and us. In addition, Staples' vendors may not use, or may
discontinue their use of, our rebate and related services. Therefore, we cannot
assure you that we will generate significant revenues in future periods from
Staples or its vendors. The loss of all or any part of our relationship with
Staples or its vendors would seriously harm our business.
OUR QUARTERLY OPERATING RESULTS WILL LIKELY VARY SIGNIFICANTLY IN THE FUTURE.
We expect that our revenues and operating results may vary significantly
from quarter to quarter. As a result, quarter-to-quarter comparisons of our
results of operations may not be meaningful. In some future quarter or quarters,
our operating results are likely to fall below expectations. Any shortfall will
likely adversely affect the price of our common stock in a manner that may be
unrelated to our long-term operating performance.
Our quarterly operating results, as well as our operating results
generally, may also vary depending on a number of other factors, including but
not limited to:
- demand for our rebate and related services and our other Internet
services;
- fluctuations in the average face amount of the rebates we process;
- seasonality in manufacturers' promotions that involve rebates;
- actions taken by our competitors, including new product introductions and
enhancements, or entry of new competitors into our markets;
- our ability to scale our network and operations to attract and support
large numbers of e-seekers, e-partners and transactions;
- our ability to develop, introduce and market new products and services
and enhancements to our existing products and services on a timely basis;
- changes in our pricing policies or those of our competitors;
- our ability to expand our sales and marketing operations, including
hiring additional sales personnel;
- size and timing of sales of our products and services;
- success in maintaining and enhancing our existing relationship with
Staples, Staples' vendors and our other e-partners, and developing new
relationships with additional e-partners;
- compensation policies that reward sales personnel based on achieving
quotas;
- our inability to control costs and fluctuations in operating expenses;
- technological changes in our markets;
- timing of new e-partner alliances;
- changes in accounting standards and revenue recognition policies;
- e-partner budget cycles and changes in those budget cycles;
- amortization of goodwill and other intangibles;
- seasonality of Internet use; and
- general economic conditions.
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In addition, because our increasing expense levels are based in part on
expectations of our future revenues, any decline in our revenues below our
expectations would have a disproportionately adverse impact on our operating
results.
OUR REBATE AND RELATED SERVICES HAVE ACCOUNTED FOR SUBSTANTIALLY ALL OF OUR
REVENUES SINCE INCEPTION, AND WE EXPECT TO DEPEND ON OUR REBATE AND RELATED
SERVICES FOR A SIGNIFICANT PORTION OF OUR REVENUES FOR THE FORESEEABLE FUTURE.
Our rebate and related services accounted for substantially all of our
revenues since inception. We anticipate that revenues from our rebate and
related services will continue to constitute a significant portion of our
revenues for the foreseeable future. Consequently, a decline in the demand for
our rebate and related services, or failure to achieve broad market acceptance
of our rebate services, would seriously harm our business. In addition, a
decrease in the amount of promotional dollars spent on rebate programs by our
e-partners would negatively impact our results of operations.
We bill our rebate e-partners for the full amount of the rebate checks that
we issue to consumers, plus a processing fee. However, some consumers never cash
these rebate checks. In the rebate industry, uncashed checks are referred as
"slippage." Slippage is recorded on our books as an increase to net revenues.
For the period from January 7, 1999 to June 30, 1999, our net revenues included
$269,000 of slippage, representing 47.4% of our net revenues for the period. Our
operating results could suffer if the slippage percentage decreases or if any
state is entitled to the slippage amounts as a result of its unclaimed property
or escheat laws. Furthermore, we expect that more consumers will cash their
rebate checks as a result of our online rebate process, which will further
reduce slippage. In addition, a decline in the amount of slippage that we retain
or a decrease in the rebate service fees we receive could decrease our net
revenues and negatively impact our results of operations.
IN THE FUTURE, WE WILL NEED TO RAISE ADDITIONAL CAPITAL, AND THIS CAPITAL MAY
NOT BE AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL.
We expect the net proceeds from our initial public offering will be
sufficient to meet our working capital and capital expenditure needs for at
least the next 12 months. After that, we will need to raise additional funds. In
addition, within the next 12 months we may need to raise additional funds in
order to take advantage of new business opportunities, to react to unforeseen
difficulties or to otherwise respond to pressures from our competitors. We
cannot assure you that we will be able to obtain additional financing on
favorable terms, if at all. If we cannot raise funds on acceptable terms, if and
when needed, our business will suffer.
OUR BRAND MAY NOT ACHIEVE THE BROAD RECOGNITION AND LOYALTY NECESSARY TO
SUCCEED.
We believe that broad recognition and favorable consumer perception of the
How2.com brand are essential to our future success. Accordingly, we are pursuing
an aggressive brand-enhancement strategy, which includes mass market and
multimedia advertising, promotional programs and public relations activities.
Successful positioning of our How2.com brand will largely depend upon:
- the success of our marketing, public relations and promotional efforts;
- the quantity and quality of our tutorial content;
- the technical performance and visual appearance of our online
marketplace; and
- our ability to provide high quality customer service, including online
and offline responses to customer inquiries regarding the status of their
rebates.
To increase awareness of the How2.com brand we will spend significant
amounts on marketing and promotions. These expenditures may not result in a
sufficient increase in net revenues to cover these marketing and promotion
expenses. In addition, even if brand recognition increases, the number of new e-
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seekers or the number of transactions on our online marketplace may not
increase. Also, even if the number of new e-seekers increases, those e-seekers
may not use our online marketplace on a regular basis.
WE DEPEND UPON STRATEGIC ALLIANCES TO DEVELOP CONTENT, CONDUCT E-COMMERCE, SELL
PRODUCTS AND IMPLEMENT OUR TECHNOLOGY SOLUTIONS.
We depend upon third parties for several critical elements of our business,
including content development, e-commerce sales and technology.
Content Development
The tutorial information on our online marketplace, or content, is
available for license from a limited number of resources. While currently less
than 20% of our tutorials are licensed from outside sources, we plan to increase
the amount of content we acquire from third-party sources in the future. In
addition, we rely on content licensed from third parties for other features
appearing on our online marketplace, such as news feeds, stock information and
horoscopes. If we are unable to successfully retain our currently licensed
content or negotiate license agreements with suitable content providers, we will
be required to develop all of our content internally and there can be no
assurance that we will be able to develop adequate quantity or quality of these
tutorials on our own.
e-Partners
Our ability to conduct e-commerce depends on our ability to successfully
enter into relationships with manufacturers, service organizations, retailers
and content providers that wish to distribute their products and services
through our online marketplace. We currently have strategic relationships with
only a limited number of e-partners. We anticipate that our distribution
arrangements will typically not be exclusive and will be subject to termination
upon short notice. In addition, we cannot assure you that these arrangements
will result in revenues or be profitable for us.
Technology
We have entered into material contracts with third parties, and plan to
continue to enter into material contracts with third parties, to manage,
maintain and expand the computer and communications equipment and software
needed for the day-to-day operations of our business.
These third parties provide important services to us, including the
following:
- managing the web server for our online marketplace;
- maintaining our communications lines;
- managing the network data centers where our network data is stored; and
- integrating and testing the compatibility of each web page on our online
marketplace.
If these third parties do not perform to our requirements, we would have to
obtain similar services from another provider or perform these functions
ourselves. We may not be able to successfully obtain or perform these services
on a timely and cost-effective basis. Due to the third party installation of the
computers, communications equipment and software needed for the day-to-day
operations of our online marketplace, we may be entirely dependent on that party
to manage, maintain and provide security for this technology. Any termination or
breach of these contracts could have a material adverse effect on our business.
IN ORDER TO MANAGE OUR GROWTH AND EXPANSION, WE WILL NEED TO IMPROVE AND
IMPLEMENT NEW SYSTEMS, PROCEDURES AND CONTROLS.
Since our formation, we have experienced significant expansion of our
operations. This expansion has placed a strain upon our management systems and
other resources. If we are unable to manage our growth
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and expansion, our business will be materially adversely affected. In addition,
we have recently hired a significant number of employees and plan to further
increase our total headcount. This expansion will continue to place substantial
demands on our management systems and other resources. Our ability to compete
effectively and to manage future expansion of our operations, if any, will
require us to continue to improve our financial and management controls,
reporting systems and procedures as well as expand, train and manage our
employee work force.
ADOPTION AND INTEGRATION OF OUR PRODUCTS AND SERVICES BY LARGE E-PARTNERS IS
COMPLEX, TIME CONSUMING AND EXPENSIVE.
We recruit e-partners to process their rebates, sponsor content and sell
goods and services on our online marketplace. The adoption and integration of
our products and services by large organizations is complex, time consuming and
expensive. In many cases, our e-partners must change established business
practices and conduct business in new ways. In addition, they must generally
consider a wide range of other issues before committing to use our services,
including benefits, ease of use, ability to work with existing systems,
functionality and reliability. Furthermore, we must educate potential e-partners
on the use and benefits of our services. In addition, we believe that the
purchase of our services is often discretionary. It frequently takes several
months to develop an e-partner relationship and requires approval at a number of
management levels within the e-partners' organization. These long cycles may
cause delays in our sales and we may spend a large amount of time and resources
on potential e-partners who decide not to use our services, which could
materially and adversely affect our business.
IF WE LOSE OUR KEY PERSONNEL OR CANNOT RECRUIT ADDITIONAL PERSONNEL, OUR
BUSINESS MAY SUFFER.
Since our formation, we have expanded from one employee to more than 180
employees. We also have employed many key personnel since our formation,
including Steven B. Solomon, our Chairman and Chief Executive Officer, Kenneth
R. Johnsen, our President and Chief Operating Officer, Juli C. Spottiswood, our
Chief Financial Officer and Corporate Secretary, Andrew F. Adams, our Chief
Technology Officer, Allan J. Steinmetz, our Executive Vice President of
Marketing Strategy, Kelly R. Melvin, our Director of Infrastructure Design and
Architecture, Mason Wright, our Director of Internet Platforms and Engineering,
and other key managerial, marketing, planning, financial, technical and
operations personnel. We expect to continue to add additional key personnel in
the near future. We do not have "key person" life insurance policies on any of
our key personnel. Our business could be negatively impacted if we were to lose
the services of one or more of these persons.
OUR BUSINESS IS VERY LABOR INTENSIVE AND, AS A RESULT, WE ARE DEPENDENT ON OUR
EMPLOYEE BASE.
Our future success depends on our continuing ability to attract, hire,
train and retain a substantial number of highly skilled managerial, creative,
technical, sales, marketing, research and customer support personnel. In
addition, we will need to add a significant number of new technical support and
operations personnel to support the operations of our online marketplace and our
rebate and related services. Competition for qualified personnel is intense, and
we may fail to attract or retain these personnel, in which case our business
would be negatively impacted.
Because labor costs are a significant portion of our costs, an increase in
wages, costs of employee benefits or employment taxes could seriously harm our
business. In addition, our facilities are located in areas, including Dallas,
Los Angeles, Silicon Valley and Seattle, with a high demand for technical and
other personnel and relatively low unemployment rates. It is more difficult and
costly to hire qualified personnel in these areas.
OUR MARKETS ARE HIGHLY COMPETITIVE.
The rebate and fulfillment industry is highly competitive and fragmented.
We expect competition to persist and to intensify in the future. Our competitors
include small firms offering specific promotion fulfillment applications,
divisions of larger entities and large independent firms, such as Young America
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Corporation and Continental Promotions Group. A number of competitors have or
may develop greater capabilities and resources than us. Similarly, additional
competitors with greater resources than us may enter the online rebate and
fulfillment industry. Our performance and growth could be negatively affected if
our existing or potential rebate e-partners decide to perform their own rebate
operations that are currently outsourced or use another provider. In addition,
competitive pressures from current or future competitors could cause our
services to lose market acceptance or result in significant price erosion. This
could result in a material adverse effect upon our business.
The market for our Internet tutorial, e-commerce, content conversion
services and corporate training is also intensely competitive, evolving and
subject to rapid technological change. We expect the intensity of competition to
increase in the future. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any one of which
could seriously harm our business. Our competitors vary in size and in the scope
and breadth of the products and services offered. We primarily encounter
competition with respect to different aspects of our business from tutorial,
corporate training, content conversion services and e-commerce from companies
such as Learn2.com, Inc. and eHow, Inc., as well as from Internet portals,
search engines and specific interest sites offered by companies such as Ask
Jeeves, Inc., Yahoo! Inc., Snap! LLC, Martha Stewart Living Omnimedia, LLC,
About.com, Inc., iVillage, Inc. and VerticalNet, Inc. In addition, we experience
competition from numerous sites doing e-commerce, such as Amazon.com, Inc.,
BuyItNow.com, L.L.C. and Xoom.com, Inc. Moreover, because there are low barriers
to entry in our markets, we expect additional competition from other established
and emerging companies, as the markets continue to develop and expand.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing, production and
other resources. In addition, some have significantly greater name recognition
and a larger existing base of customers, and many have well-established
relationships with our current and potential e-partners and have extensive
knowledge of our industry. Our current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address customer
needs. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. We also
expect that competition will increase as a result of industry consolidations. In
the event a larger company acquires one or more of our competitors, we would
face increased competition.
WE MAY NEED TO CONTINUE TO MAKE ACQUISITIONS IN ORDER TO REMAIN COMPETITIVE IN
OUR MARKET. OUR BUSINESS COULD BE ADVERSELY AFFECTED AS A RESULT OF ANY OF THESE
FUTURE ACQUISITIONS.
In order to obtain content, complementary technologies or other resources,
or to otherwise remain competitive, we may find it necessary to acquire
additional businesses, products, technologies, expertise or other resources. We
may not be able to identify suitable acquisition candidates. Even if we identify
an appropriate acquisition candidate, we may not be able to negotiate the terms
of the acquisition successfully, finance the acquisition or integrate the
acquired business, products, technologies, expertise or other resources into our
existing business and operations. Further, completing a potential acquisition
and integrating the acquired businesses or resources will cause significant
diversions of management time and resources. In addition to the acquisitions we
have completed to date, if we consummate one or more additional significant
acquisitions in which the consideration consists of stock or other equity
securities, your ownership could be significantly diluted. If we were to proceed
with one or more significant acquisitions in which the consideration includes
cash, we could have to use a substantial portion of our available cash,
including proceeds from our initial public offering, to consummate these
acquisitions. Acquisition financing may not be available on favorable terms, or
at all. In addition, we may be required to amortize significant amounts of
goodwill and other intangible assets in connection with past and future
acquisitions, which would adversely affect our results of operations.
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WE FACE POTENTIAL CONFLICTS OF INTERESTS RELATING TO CITADEL.
Because of our relationship with Citadel, which owns a substantial portion
of our common stock, and our interlocking directors, officers and stockholders,
we are likely to face potential conflicts of interest relating to Citadel.
Executives, employees and consultants associated with Citadel assisted in
the development of our business model. Steven B. Solomon is the Chief Executive
Officer and President of Citadel as well as founder, Chairman and Chief
Executive Officer of How2.com. In addition, Kenneth R. Johnsen, our President
and Chief Operating Officer, Lawrence Lacerte, Victor K. Kiam II, Mark Rogers,
Chris A. Economou and Edward A. Pierce serve as directors of both Citadel and
our company. Prior to or upon completion of our initial public offering, Messrs.
Johnsen, Kiam, Rogers and Economou intend to resign from the Citadel board of
directors.
Certain of our executive officers, key employees and directors also
beneficially own, or hold options or warrants to purchase, approximately 33.0%
of the outstanding common stock of Citadel as of September 30, 1999. Steven B.
Solomon owned approximately 13.0% of Citadel's common stock as of September 30,
1999. Upon the consummation of our initial public offering, Citadel will own
directly approximately % of our common stock. Accordingly, conflicts of
interest may arise from time to time between us and Citadel, particularly with
respect to the pursuit of overlapping business opportunities. We have not
adopted any formal plan or arrangement to address these potential conflicts of
interest and intend to review related-party transactions with Citadel on a
case-by-case basis.
Because we have interlocking directors and officers with Citadel, there may
be inherent conflicts of interest when these directors and officers make
decisions related to transactions between us and Citadel. Directors may be
required to abstain from voting with respect to matters involving both Citadel
and our company. We may lose valuable management input from these directors and
officers who have conflicts.
WE MAY BE SUED FOR INFORMATION RETRIEVED FROM OUR ONLINE MARKETPLACE OR FOR
PRODUCTS AND SERVICES OFFERED THROUGH OUR ONLINE MARKETPLACE.
We may be subject to claims for defamation, negligence, copyright or
trademark infringement, personal injury or other legal theories relating to the
information we publish on our online marketplace. These types of claims have
been brought, sometimes successfully, against online services, as well as print
publications, in the past. We could also be subjected to claims based upon the
content that is accessible from our online marketplace through links to other
web sites or through content and materials that members may post in our chat
rooms or on our bulletin boards. Our insurance, which covers commercial general
liability, may not adequately protect us against these types of claims. In
addition to monetary damages, any such claims could harm our reputation and
public image, causing serious harm to our business.
In addition, consumers may sue us if any of the products or services that
we or our e-partners sell online are defective, fail to perform properly or
injure the user. To date, we have had limited experience in the sale of products
online. We plan to develop relationships with our e-partners to offer a range of
products targeted specifically at the interests of our e-seekers, as
demonstrated by their viewing of related tutorials. This strategy involves
numerous risks and uncertainties. Any errors, defects or other performance
problems could result in financial or other damage to our e-seekers. A product
liability or other claim brought against us, even if not successful, would
likely be time consuming and costly and could seriously harm our business.
Liability claims could require us to spend significant time and money in
litigation or to pay significant damages. As a result, any of these claims,
whether or not successful, could seriously damage our reputation and our
business.
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IF THE PROTECTION OF OUR INTELLECTUAL PROPERTY IS INADEQUATE, OUR COMPETITORS
MAY GAIN ACCESS TO OUR CONTENT AND TECHNOLOGY.
We depend on our ability to develop and maintain the proprietary aspects of
our content and technology. To protect our proprietary content and technology,
we rely primarily on a combination of contractual provisions, confidentiality
procedures, trade secrets and patent, copyright and trademark laws.
We seek to avoid disclosure of our trade secrets through a number of means
including, but not limited to, requiring those persons with access to our
proprietary information to execute confidentiality agreements and restricting
access to our source codes. We seek to protect our content, software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. We cannot assure you that any of our
proprietary rights with respect to our services will be viable or of value in
the future because the validity, enforceability and type of protection of
proprietary rights in Internet-related industries are uncertain and still
evolving.
Although we have filed a provisional patent application with respect to our
proprietary online rebate systems and processes, we have not conducted searches
regarding the patentability of our application. We have no patents, and may not
receive a patent related to our proprietary online rebate applications. If we
receive a patent related to our proprietary rebate application, we may be unable
to claim the filing date of, and priority from our existing provisional patent
application. Our future patents, if any, may be successfully challenged,
rendering them invalid or unenforceable, or may not provide us with any
competitive advantages. We may not develop proprietary products or technologies
that are patentable and other parties may have prior claims. Additionally, other
parties may have equal rights to any patents issued to us, through claims of
inventorship or otherwise, and, if so, would be able to use the patented
technology or license it to others without our consent. The validity and
enforceability of our future patents, if any, may also be affected by future
legislative actions or judicial decisions, especially to the extent such future
patents may be deemed "method of doing business" patents.
Although we have filed trademark applications with respect to various
trademarks that we are using in connection with our business, we have not
conducted extensive searches regarding the availability of those trademarks. We
have received no trademark registrations, and may not receive any trademarks
from our filed trademark applications. Our trademarks may be successfully
challenged or may not provide us with any competitive advantages. None of our
trademarks may be registrable and other parties may have priority of use of such
trademarks or variants thereof.
We obtain our content from a number of sources for our tutorials. Our
efforts in securing rights to all of our content may be insufficient and, as a
result, we may be subject to claims of copyright infringement.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our content and other intellectual property or to
obtain and use information that we regard as proprietary. Policing unauthorized
use of our products is difficult, and while we are unable to determine the
extent to which piracy of our content or other intellectual property exists,
content piracy can be expected to be a persistent problem. In addition, the laws
of some foreign countries do not protect our proprietary rights as much as do
the laws of the United States. Our means of protecting our proprietary rights
may not be adequate and our competitors may independently develop similar
technology, duplicate our products or design around patents issued to us or our
content or other intellectual property.
There has been a substantial amount of litigation in the Internet industry
regarding intellectual property rights. It is possible that in the future third
parties may claim that we or our current or potential future content, products
or services infringe upon their intellectual property. We expect that developers
and providers of e-commerce solutions will increasingly be subject to
infringement claims as the number of products and competitors in this industry
segment grows and the functionality of products in different industry segments
overlaps. Any claims, with or without merit, could be time-consuming, result in
costly litigation, cause delays in implementation of our services or require us
to enter into royalty or licensing agreements. Royalty or licensing agreements,
if required, may not be available on terms acceptable to us, which could
seriously harm our business.
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WE ARE DEPENDENT ON OUR DOMAIN NAMES, AND WE COULD SUFFER LOSSES IF OUR DOMAIN
NAMES ARE NOT PROTECTED.
We currently own and control the Internet domain names "www.how2.com" and
"www.how2hq.com" as well as various other related names. Domain names generally
are regulated by international Internet regulatory bodies. The regulation of
domain names in the United States and in foreign countries is subject to change.
Regulatory bodies could establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names. As a result, we may not acquire or maintain the "www.how2.com" and
"www.how2hq.com" domain names in all of the countries in which we conduct
business.
The relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is unclear. Therefore, we
may be unable to prevent third parties from acquiring or using domain names that
infringe or otherwise decrease the value of our trademarks and other proprietary
rights.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF THE SYSTEMS WE OR OUR E-PARTNERS USE
ARE NOT YEAR 2000 COMPLIANT.
The risks posed by Year 2000 issues could adversely affect our business in
a number of significant ways. Although we believe that our internally developed
systems and technology are or will be Year 2000 compliant, our information
technology systems nevertheless could be substantially impaired or cease to
operate due to Year 2000 problems. Additionally, we rely on information
technology supplied by third parties, and our participating e-partners also are
heavily dependent on information technology systems and on their own third-party
vendor systems. Year 2000 problems experienced by us or any of these third
parties could materially affect our business. Additionally, the Internet could
face serious disruptions arising from the Year 2000 problem.
We cannot guarantee that any of our e-partners or other Internet vendors
will be Year 2000 compliant in a timely manner, or that there will not be
compatibility problems among information technology systems. We also cannot
guarantee that e-seekers and e-partners will be able to use our online
marketplace without serious disruptions arising from the Year 2000 problem.
Given the pervasive nature of the Year 2000 problem, we cannot guarantee that
disruptions in other industries and market segments will not adversely affect
our business. Moreover, our costs related to Year 2000 compliance, which thus
far have not been material, could ultimately be significant. In the event that
we experience disruptions as a result of the Year 2000 problem, our business
could be materially adversely affected.
CAPACITY CONSTRAINTS AND SYSTEM FAILURES COULD HARM OUR BUSINESS.
If we cannot expand our systems to cope with increased demand, or our
technology systems fail to perform, we could experience:
- unanticipated disruptions in service;
- slower response times;
- decreased e-partner service and satisfaction;
- decreased e-seeker service and satisfaction; or
- delays in the introduction of new products and services.
Any of these factors could impair our reputation, damage the How2.com brand
and materially and adversely affect our business.
We use internally developed and third party systems to operate our online
marketplace, including transaction processing and order management systems
designed to be scalable. We do not know whether we will be able to accurately
project the rate or timing of any increases to allow us to upgrade our systems
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and infrastructure in a timely manner to accommodate these increases. In
addition, e-seekers will depend on Internet service providers,
telecommunications companies and the efficient operation of their computer
networks and other computer equipment for access to our online marketplace. Each
of these has experienced significant outages in the past and could experience
outages, delays and other difficulties due to system failures unrelated to our
systems. Any delays in response time or performance problems could cause
e-seekers to perceive our service as not functioning properly and, therefore,
cause them to use other online services.
Our ability to facilitate transactions successfully and provide high
quality e-seeker service also depends on the efficient and uninterrupted
operation of our computer and communications hardware systems. Our online
marketplace may experience periodic system interruptions from time to time. Our
systems and operations are also vulnerable to damage or interruption from human
error, natural disasters, power loss, telecommunication failures, break-ins,
sabotage, computer viruses, intentional acts of vandalism and similar events.
While we plan to establish redundant servers and a mirror site to provide
limited service during system disruptions, we do not have fully redundant
systems, a formal disaster recovery plan, alternative providers of hosting
services or a mirror site. Any system failure that causes an interruption in
service or decreases the responsiveness of our online marketplace could impair
our reputation, damage our brand name and materially adversely affect our
business.
Our business is highly dependent on our computer and telephone equipment
and software systems. While we maintain backup systems, the temporary or
permanent loss of any of these equipment or systems, through casualty loss due
to events such as fire, flood, earthquake or tornado, or operating malfunction,
could seriously harm our business. While we have property and business
interruption insurance, our insurance may not adequately compensate us for all
losses.
RISKS RELATED TO THE INTERNET AND REBATE INDUSTRIES
ABANDONED PROPERTY LAWS MAY REQUIRE US TO SURRENDER UNCLAIMED REBATE PAYMENTS TO
A STATE.
The unclaimed property and escheat laws of each state provide that under
circumstances defined in the state's statutes, holders of unclaimed or abandoned
property, possibly including rebate checks that consumers do not cash, also
called "slippage", must surrender that property to the state. As a result, any
state into which we send rebate checks could assert that it is entitled to
unclaimed rebate checks that we have issued to consumers in that state. In 1999,
we recognized slippage of approximately ten percent of the face amount of checks
issued to consumers. If one or more states into which we send a significant
number of rebate checks sought to collect these rebate checks under their
escheat laws, our business could be materially adversely affected.
WE DEPEND ON INCREASING USE OF THE INTERNET AND ON THE GROWTH OF E-COMMERCE. IF
THE USE OF THE INTERNET AND E-COMMERCE DO NOT GROW AS ANTICIPATED, OUR BUSINESS
WILL BE MATERIALLY ADVERSELY AFFECTED.
Our services depend on the increased acceptance and use of the Internet as
a medium of commerce. Rapid growth in the use of the Internet is a recent
phenomenon. As a result, acceptance and use may not develop at projected rates
and a sufficiently broad base of e-seekers may not adopt the Internet as a
medium of commerce. Demand and market acceptance for recently introduced
services and products over the Internet are subject to a high level of
uncertainty, and there exist few proven services and products.
Our business would be materially adversely affected if:
- use of the Internet does not continue to increase or increases, more
slowly than expected; or
- the Internet does not create a viable commercial marketplace, inhibiting
the development of e-commerce and reducing the demand for our products
and services.
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The Internet may not be accepted as a viable long-term commercial
marketplace for a number of reasons, including:
- potentially inadequate development of the necessary communication and
computer network technology, particularly if rapid growth of the Internet
continues;
- delayed development of enabling technologies and performance
improvements;
- delays in the development or adoption of new standards and protocols;
- increased governmental regulation; and
- concerns about security and confidentiality.
INCREASED GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR, OR IMPOSE SALES AND
OTHER TAXES ON THE SALE OF, OUR PRODUCTS AND SERVICES OR ON PRODUCTS AND
SERVICES PURCHASED THROUGH OUR ONLINE MARKETPLACE.
As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as user privacy, pricing,
content and quality of products and services. It is possible that legislation
could expose companies involved in e-commerce to liability, which could limit
the growth of e-commerce. Legislation could dampen the growth in Internet usage
and decrease its acceptance as a communication and commercial medium. If
enacted, these laws, rules or regulations could limit the market for our
products and services.
We do not collect sales or other similar taxes for goods and services
purchased through our online marketplace. However, one or more states may seek
to impose sales tax collection obligations on out-of-state companies like us
that engage in or facilitate e-commerce. A number of proposals have been made at
the state and local level that would impose additional taxes on the sale of
goods and services over the Internet. These proposals, if adopted, could
substantially impair the growth of e-commerce and could adversely affect our
opportunity to derive financial benefit from such activities. Moreover, a
successful assertion by one or more states or any foreign country that we should
collect sales or other taxes on the exchange of goods and services through our
online marketplace could seriously harm our business.
ONLINE SECURITY BREACHES COULD HARM OUR BUSINESS.
The secure transmission of confidential information over the Internet is
essential in maintaining consumer and supplier confidence in our online
marketplace. Substantial or ongoing security breaches of our system or other
Internet-based systems could significantly harm our business. It is possible
that advances in computer capabilities, new discoveries or other developments
could result in a compromise or breach of the technology used by us to protect
e-seeker transaction data.
We will incur substantial expense to protect against and remedy security
breaches and their consequences. A party that is able to circumvent our security
systems could steal proprietary information or cause interruptions in our
operations. Security breaches also could damage our reputation and expose us to
a risk of loss or litigation and possible liability. Our insurance policies
limits may not be adequate to reimburse us for all losses caused by security
breaches. We cannot guarantee that our security measures will prevent any
potential security breaches.
We also face risks associated with security breaches affecting third
parties conducting business over the Internet. Consumers generally are concerned
with security and privacy on the Internet and any publicized security problems
could inhibit the growth of the Internet and, therefore, our online marketplace
as a means of conducting commercial transactions. In the past, computer viruses,
software programs that disable or impair computers, have been distributed and
have rapidly spread over the Internet. Computer viruses could be introduced into
our systems or those of our e-seekers, e-partners or suppliers, which could
disrupt our online marketplace or make it inaccessible to e-seekers, e-partners
or suppliers.
17
<PAGE> 21
WE ARE HEAVILY DEPENDENT ON TELEPHONE, POSTAL AND DELIVERY SERVICES.
We materially rely on services provided by various local and long distance
telephone companies in connection with our rebate and related services. A
significant increase in the cost of telephone services that we cannot recover
through an increase in the pricing of our rebate and related services, or any
significant interruption in telephone services, could have a material adverse
effect on our business.
Our business is also materially dependent on the United States Postal
Service and, to a lesser degree, on private delivery companies. Postal and
delivery service rate increases affect the cost of our mailings and shipments to
consumers. Any increase in postal and other delivery service rates, including
the elimination of existing discounts, could have a material adverse effect on
our business.
RISKS RELATING TO OUR INITIAL PUBLIC OFFERING
OUR MANAGEMENT HAS BROAD DISCRETION REGARDING THE USE OF THE NET PROCEEDS FROM
OUR INITIAL PUBLIC OFFERING.
Our management will retain broad discretion as to the allocation of the net
proceeds from our initial public offering, and investors will be relying on the
judgment of our management regarding the application of these proceeds as
described in "Use of Proceeds". Presently, anticipated uses include funding
sales and marketing expenses to build our brand and general corporate purposes,
including working capital, research and development, content development and
acquisition and potential strategic alliances or acquisitions. We have not yet
determined the amount of the net proceeds to be used specifically for each of
the foregoing purposes.
OUR STOCK PRICE IS LIKELY TO BE VERY VOLATILE.
Prior to our initial public offering, you could not buy or sell our common
stock publicly. Although our initial public offering price was determined based
on several factors, the market price after the offering may vary significantly
from the initial offering price. The market price of our common stock is likely
to be highly volatile and could be subject to wide fluctuations in response to
factors such as the following, some of which are beyond our control:
- quarterly variations in our operating results;
- operating results that vary from the expectations of securities analysts
and investors;
- changes in expectations as to our future financial performance, including
financial estimates by securities analysts and investors;
- mix of revenue streams with varying gross margin percentages;
- changes in market valuations of other Internet or online service
companies;
- announcements by us or our competitors of technological innovations or
new services;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- changes in the status of our intellectual property rights;
- termination of strategic relationships with technology providers, Staples
or another major e-partner;
- announcements by third parties of significant claims or proceedings
against us;
- additions or departures of key personnel;
- future sales of our common stock or other securities;
- stock market price and volume fluctuations; and
- average face amount of rebates processed.
18
<PAGE> 22
Domestic and international stock markets often experience extreme price and
volume fluctuations. Market fluctuations, as well as general political and
economic conditions, such as a recession or interest rate or currency rate
fluctuations, could adversely affect the market price of our common stock.
The market prices for stocks of Internet-related and technology companies,
particularly following an initial public offering, frequently increase to levels
that bear no relationship to the operating performance of these companies. Those
market prices generally are not sustainable and are subject to wide variations.
If our common stock trades at levels significantly above our initial public
offering price, our common stock likely will experience a material decline.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of their
securities. In the future, we may be the target of similar litigation.
Securities litigation could result in substantial costs and divert management's
attention and resources.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
Our initial public offering price of our common stock will be substantially
higher than the book value per share of the outstanding common stock. As a
result, you will experience immediate and substantial dilution of $ in
the net tangible book value per share of our common stock from our initial
public offering price. In the past, we issued options and warrants to acquire
common stock at prices significantly below our initial public offering price. In
addition, we plan to reserve 6,200,000 shares available for future grants under
our stock incentive plans. If and when the holders exercise these options and
warrants, you will experience further dilution.
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS THAT COULD MAKE IT MORE DIFFICULT
FOR A THIRD PARTY TO ACQUIRE US.
Some provisions of our Amended and Restated Certificate of Incorporation,
as well as some provisions of Delaware law, could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders. These provisions include the ability to issue blank check
preferred stock on terms and at a price determined by our board, a staggered
board of directors, advance notice requirements for board nominations or other
actions to be taken by our stockholders at annual meetings and restrictions on
the ability of our stockholders to remove directors, fill vacancies on our board
or increase the size of our board. In addition, we are subject to statutory
provisions of Delaware law that restrict the ability of large stockholders to
effect transactions with us. These provisions may discourage possible acquirers
from attempting to acquire us.
OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS CONTROL US
AND COULD LIMIT THE ABILITY OF OUR OTHER STOCKHOLDERS TO INFLUENCE THE OUTCOME
OF DIRECTOR ELECTIONS AND OTHER TRANSACTIONS SUBMITTED FOR A VOTE OF OUR
STOCKHOLDERS.
Upon completion of our initial public offering, our executive officers,
directors and principal stockholders, including Citadel, will beneficially own,
in the aggregate, approximately % of our outstanding common stock. Citadel
owns 20,000,000 shares of our common stock, or approximately % of our
outstanding common stock after our initial public offering. As a result, these
stockholders will be able to exercise control over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions that could have the effect of delaying or
preventing a third party from acquiring control over us.
WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE NEAR FUTURE.
We have never declared or paid a cash dividend on our common stock. We do
not anticipate paying cash dividends on our common stock in the foreseeable
future.
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<PAGE> 23
SHARES ELIGIBLE FOR FUTURE SALE AFTER OUR INITIAL PUBLIC OFFERING COULD
ADVERSELY AFFECT OUR STOCK PRICE.
Sales of a substantial number of shares of our common stock in the public
market after our initial public offering could depress the market price of the
common stock and could impair our ability to raise capital through the sale of
additional equity securities. Given the likely volatility that will exist for
our common stock, significant sales could cause the market price of the common
stock to decline.
Upon completion of our initial public offering, we will have
shares of common stock outstanding, and we will have reserved an additional
18,044,750 shares of common stock for issuance pursuant to the exercise of
outstanding options and warrants, of which warrants to purchase 800,000 shares
become exercisable subject to earnout provisions related to our acquisition of
Forward.
In addition, we have agreed to issue additional shares in connection with
the acquisitions of Forward and BPG in the event our common stock does not trade
at more than $2.50 and $10.00 per share, respectively, at some point during the
30 days after our initial public offering.
All of the shares sold in our initial public offering will be freely
transferable without restriction or registration under the Securities Act,
except for any shares purchased by one of our "affiliates", as that term is
defined in Rule 144 under the Securities Act. The remaining 43,625,788 shares of
outstanding common stock are "restricted shares", as defined in Rule 144,
subject to restrictions on the timing, manner and volume of sales of those
shares.
We, our directors and executive officers and stockholders, including
Citadel, have each agreed, subject to certain exceptions, not to directly or
indirectly sell, offer to sell or otherwise dispose of any shares of common
stock for a period of 180 days after the date of this prospectus, without the
prior written consent of The Robinson-Humphrey Company, LLC. Subject to the
foregoing, approximately 180 days after the completion of our initial public
offering, we intend to file a registration statement covering the resale of up
to 15,924,468 shares of common stock outstanding as of September 30, 1999. Upon
effectiveness of registration, shares may be freely sold without restriction
under the Securities Act. We also intend to file a registration statement on
Form S-8 covering 15,744,750 shares reserved for issuance under stock options
granted to our management, directors and consultants as of September 30, 1999,
and the 6,200,000 shares we plan to reserve for issuance under our 1999 Stock
Incentive Plan and 1999 Non-Employee Directors' Stock Option Plan, in each case
approximately 30 days after the closing of our initial public offering. That
Form S-8 registration statement will become effective immediately upon filing.
In addition, the 20,000,000 shares of our common stock held by Citadel,
including 3,000,000 shares that Citadel intends to distribute to its
shareholders as a spin-off dividend to be initiated approximately 180 days after
completion of our initial public offering, will become available for sale after
completion of our initial public offering subject to the restrictions of Rule
144 and the expiration of the 180 day lock-up agreement between Citadel and our
underwriters.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary", "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Business", and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.
In some cases, you can identify forward-looking statements by terminology
such as "may", "will", "should", "expects", "plans", "anticipates", "believes",
"estimates", "predicts", "potential", "continue" or the negative of these terms
or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform these statements to actual results.
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<PAGE> 24
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock
offered hereby are approximately $ million, assuming an initial public
offering price of $ per share, after deducting estimated offering expenses
of $ and underwriting discounts and commissions payable by us. If the
underwriters' over-allotment option is exercised in full, the net proceeds to us
will include an additional $ million.
We intend to use the net proceeds from this offering for sales and
marketing expenses to promote our brand and for general corporate purposes,
including working capital, research and development, development and acquisition
of content and potential strategic alliances and acquisitions. We are not
currently a party to any contracts or letters of intent with respect to any
material business acquisitions. As of the date of this prospectus, we cannot
specify with certainty all of the particular uses for the net proceeds we will
have upon completion of the offering. Accordingly, management will have
discretion over the use and investment of the net proceeds of the offering.
Pending these uses, we intend to invest the net proceeds from our initial
public offering in short-term, investment grade, interest-bearing securities. We
reserve the right to increase or decrease the size of our initial public
offering and the price per share of the shares offered.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
presently intend to retain future earnings, if any, to finance the expansion of
our business and we do not expect to pay any cash dividends in the foreseeable
future.
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<PAGE> 25
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. The
pro forma information gives effect to the sale of shares of common stock in
private placements for the period from July 1, 1999 to September 30, 1999 in
addition to stock issued in connection with the acquisition of BPG and the
exercise of stock options during that same period. The pro forma as adjusted
information reflects the foregoing as well as the sale of the shares of common
stock in our initial public offering, at an assumed initial public offering
price of $ per share, and the receipt of the net proceeds from the sale of
common stock after deducting the estimated offering expenses and underwriting
discounts and commissions payable by us. You should read this table with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the related notes thereto.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
Long-term debt and capital lease obligations, net of
current maturities.................................. $ 155,390 $ 155,390 $ 155,390
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; no shares issued or outstanding......... -- --
Common stock, $0.01 par value; 120,000,000 shares
authorized; 40,056,988 shares issued and outstanding
(actual); 43,625,788 shares issued and outstanding
(pro forma); shares issued and outstanding (pro
forma as adjusted).................................. 400,570 436,258
Additional paid-in capital............................ 26,712,615 40,908,927
Accumulated other comprehensive income................ 946 946 946
Accumulated deficit................................... (2,159,024) (2,159,024) (2,159,024)
Notes receivable from officers and affiliates......... (124,250) (124,250) (124,250)
Deferred compensation................................. (6,707,864) (6,707,864) (6,707,864)
----------- ----------- -----------
Total stockholders' equity.................. 18,122,993 32,354,993
----------- ----------- -----------
Total capitalization.................................. $18,278,383 $32,510,383 $
=========== =========== ===========
</TABLE>
22
<PAGE> 26
DILUTION
The pro forma net tangible book value of our common stock as of June 30,
1999 was $3.6 million or approximately $0.09 per share. Pro forma net tangible
book value per share represents the amount of our stockholders' equity, less
intangible assets, divided by 40,056,988 shares of common stock outstanding.
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in our initial public offering made hereby and the pro forma net tangible
book value per share of common stock immediately after completion of our initial
public offering. After giving effect to the sale by us of shares of common
stock in our initial public offering at an assumed initial offering price of
$ per share, and after deducting the estimated underwriting discounts and
commissions and estimated offering expenses and the application of the estimated
net proceeds, our pro forma net tangible book value as of June 30, 1999, would
have been $ million, or $ per share. This represents an immediate
increase in net tangible book value of $ per share to existing stockholders
and an immediate dilution in net tangible book value of $ per share to
purchasers of common stock in our initial public offering, as illustrated in the
following table:
<TABLE>
<S> <C>
Assumed initial public offering price per share............. $ --
Pro forma net tangible book value per share as of June 30,
1999...................................................... $0.09
Increase per share attributable to new investors............ --
Pro forma net tangible book value per share after our
initial public offering................................... --
Net tangible book value dilution per share to new
investors................................................. $ --
</TABLE>
The following table sets forth, on a pro forma basis, as of June 30, 1999,
the number of shares of common stock purchased from How2.com, the total
consideration paid or to be paid and the average price per share paid or to be
paid by existing stockholders and by new investors at an assumed initial
offering price of $ per share, before deducting the estimated offering
expenses and underwriting discounts and commissions payable by How2.com:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------- ------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. % %
New stockholders......................
100% 100%
=== ===
</TABLE>
As of September 30, 1999, there were options outstanding to purchase a
total of 16,244,750 shares of common stock at a weighted average exercise price
of $1.27 per share. In addition, as of September 30, 1999, there were
outstanding warrants to purchase a total of 1,000,000 shares of common stock at
a weighted average exercise price of $1.08 per share, and warrants to purchase a
total of 800,000 shares of common stock at an exercise price of $2.50 per share
which become exercisable subject to earnout provisions. After September 30,
1999, we authorized 6,200,000 shares for issuance under our 1999 Stock Incentive
Plan and our 1999 Non-Employee Directors' Stock Option Plan. In addition, we may
be required to issue additional shares in connection with the acquisitions of
Forward and BPG in the event our common stock does not trade at or above $2.50
and $10.00 per share, respectively, at some point during the 30 days after our
initial public offering. To the extent outstanding options or warrants are
exercised, or shares issuable upon earnouts or price guarantees related to
acquisitions are required to be released or issued, there will be further
dilution to new investors. See Note 12 of Notes to Financial Statements.
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<PAGE> 27
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial and operating data for
How2.com (the "Company") as of June 30, 1999 and for the period from January 7,
1999 (inception) to June 30, 1999, and for its Predecessor, Forward
Communications, Inc., FCI Services, Inc. and Forward Freight, Inc. (collectively
"Forward" or the "Predecessor"), as of December 31, 1997 and 1998 and May 20,
1999 and for the years ended December 31, 1997 and 1998 and the period from
January 1, 1999 through May 20, 1999. The financial data for all periods were
derived from audited financial statements. The data set forth below in this
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Financial Statements
of the Company.
<TABLE>
<CAPTION>
PREDECESSOR HOW2.COM
---------------------------------------------------------- ---------------
JANUARY 7, 1999
YEAR ENDED YEAR ENDED JANUARY 1, 1999 TO (INCEPTION) TO
DECEMBER 31, 1997 DECEMBER 31, 1998 MAY 20, 1999 JUNE 30, 1999
----------------- ----------------- ------------------ ---------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................... $2,171,978 $3,227,914 $ 2,234,473 $ 567,354
Revenues from acquired contracts(1)........ -- -- -- 305,199
---------- ---------- ----------- -----------
Total revenues............................. 2,171,978 3,227,914 2,234,473 872,553
Cost of revenues........................... 935,501 645,020 353,151 121,938
Cost of revenues from acquired contracts... -- -- -- 217,913
---------- ---------- ----------- -----------
Gross profit....................... 1,236,477 2,582,894 1,881,322 532,702
Operating expenses:
Selling, general and administrative(2)... 1,148,223 2,733,635 4,096,429 1,787,007
Stock-based compensation................. -- -- -- 417,666
Depreciation and amortization............ 99,139 104,589 24,166 533,531
---------- ---------- ----------- -----------
Total operating expense............ 1,247,362 2,838,224 4,120,595 2,738,204
---------- ---------- ----------- -----------
Loss from operations............... (10,885) (255,330) (2,239,273) (2,205,502)
Other income (expense):
Interest income.......................... 23,596 33,714 27,234 49,639
Interest expense......................... (6,998) (5,258) (12,433) (3,161)
Miscellaneous income (expense)........... 16,258 9,670 (91,384) --
---------- ---------- ----------- -----------
Total other income (expense)....... 32,856 38,126 (76,583) 46,478
---------- ---------- ----------- -----------
Income (loss) before income taxes.......... 21,971 (217,204) (2,315,856) (2,159,024)
Tax (benefit) provision.................. 62,618 (25,518) (40,695) --
---------- ---------- ----------- -----------
Net loss........................... $ (40,647) $ (191,686) $(2,275,161) $(2,159,024)
========== ========== =========== ===========
Basic and diluted net loss per share(3).... $ (0.07)
===========
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share............... 32,842,533
===========
SUPPLEMENTAL OPERATING DATA:
Gross revenues(4).......................... $2,978,121 $14,099,822 $15,535,495 $ 3,259,888
Number of rebates processed................ 35,625 341,363 444,310 79,755
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR HOW2.COM
-------------------------------------- ---------------------------------------------
DECEMBER 31,
----------------------- PRO FORMA
1997 1998 MAY 20, 1999 JUNE 30, 1999 PRO FORMA(5) AS ADJUSTED(6)
---------- ---------- ------------ ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...... $ 395,468 $ 329,280 $ 1,854 $ 5,532,629 $17,514,629
Working capital (deficit)...... 632,208 149,832 (2,080,087) 3,853,523 15,835,523
Total assets................... 1,516,343 5,445,728 4,567,593 27,090,336 39,072,336
Long-term debt and capital
lease obligations, net of
current maturities........... 24,377 198,840 151,657 155,390 155,390
Total stockholders' equity
(deficit).................... $ 909,095 $ 636,555 $(1,629,453) $18,122,993 $32,354,993
</TABLE>
- ---------------
(1) Represents revenues from contractual obligations in place at the time of our
acquisition of 2-Lane Media, Inc.
(2) Includes executive compensation expense representing bonuses paid during the
periods presented. Bonus expense represents amounts paid to the owners of
the predecessor under S corporation status and is non-recurring in nature.
The expense totaled $425,000, $1,331,000 and $2,817,000 for the years ended
December 31, 1997 and 1998 and the period from January 1, 1999 to May 20,
1999, respectively.
24
<PAGE> 28
(3) Loss per share has not been included for the predecessor as the per share
amount would not be meaningful.
(4) Includes the face amount of the checks issued to customers for rebates
processed totalling approximately $806,000, $10,872,000, $13,301,000 and
$2,693,000 for the years ended December 31, 1997 and 1998, the period from
January 1, 1999 to May 20, 1999 and the period from January 7, 1999 to June
30, 1999, respectively. Gross revenues do not include revenues from acquired
contracts in the 2-Lane Media, Inc. transaction.
(5) The pro forma data gives effect to the sale of shares in private placements
for the period from July 1, 1999 to September 30, 1999, in addition to stock
issued in connection with the acquisition of BPG and the exercise of stock
options during that same period.
(6) The pro forma as adjusted data gives effect to the sale of shares in private
placements for the period from July 1, 1999 to the date of this prospectus,
in addition to the sale of the shares of common stock that we are offering
under this prospectus at an assumed initial public offering price of $
per share after deducting the estimated underwriting discounts and
commissions and estimated offering expenses. See "Use of Proceeds" and
"Capitalization."
25
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Company's financial
statements and the notes thereto and other financial information included
elsewhere in this prospectus.
OVERVIEW
The Company was formed for the purpose of developing an online digital
marketplace at which our e-partners which include manufacturers, retailers,
service organizations, content providers and e-seekers can come together to
satisfy interdependent market needs. The Company offers our e-partners, the
opportunity to selectively associate their company with tutorials, editorials or
current events appearing on our online marketplace in order to reach a highly
targeted audience in a non-threatening environment. We also offer e-seekers
entertaining and relevant tutorial information in a how2 format combined with
e-commerce opportunities. The Company's online marketplace consists of everyday
topics divided into four initial channels: How2Home, How2Play, How2Work and
How2Shop&Save. These channels provide a comprehensive source of how2
information, community interaction, e-commerce opportunities and post-sale
customer care services. In addition, our How2Shop&Save channel provides
e-seekers with the opportunity to process rebates online through our Rebate
Headquarters.
The Company has completed several acquisitions since its inception. On
March 17, 1999, the Company acquired 2-Lane Media, Inc. ("2-Lane"), an
award-winning interactive/multimedia communications firm. The principal asset
acquired in this transaction was the technical expertise of the 2-Lane
personnel, who, prior to the acquisition, offered web site and e-commerce design
services for a diverse client roster. On May 20, 1999, the Company completed its
acquisition of FCI Services, Inc., Forward Communications, Inc. and Forward
Freight, Inc. (collectively, "Forward"), a product rebate and promotional
fulfillment operation that offered its clients solutions for designing,
implementing and fulfilling merchandise and consumer rebate programs. In
addition to processing rebates, Forward handled fulfillment assignments for
e-commerce, high technology and other companies. Forward is referred to herein
as the "Predecessor" for periods prior to the date of acquisition.
The Company's revenues currently consist primarily of rebate processing
fees, design and production related to rebate tear pads, freight on promotional
fulfillment jobs and shipping of rebate tear pads and in 1997 and 1998, included
revenue generated from the production of videos. The Company has entered into
contractual agreements with rebate e-partners to process rebates, as well as
provide payment of the face amount of the rebates to consumers. In turn, the
Company bills its e-partners and recognizes revenues for the processing fee
associated with the rebates. In addition, the Company typically retains funds
underlying any rebate checks that are not cashed. These uncashed checks are
referred to as "slippage" in the rebate industry. The estimated amount of
slippage is included in net revenue in our financial statements. We anticipate
that these revenues will continue to constitute a significant portion of our
revenues for the foreseeable future. It is possible that the states into which
we send rebate checks could successfully claim the funds underlying the checks
that are not cashed under their escheat laws. See "Risk Factors --. Abandoned
property laws may require us to surrender unclaimed rebate payments to a state."
The seasonality of the Company's revenues depends on the timing of clients'
rebate programs, as well as the type of product offered and the amount of the
rebates.
We anticipate that revenues from our non-rebate related online services
will represent an increasingly significant portion of our revenue. These
services include shared revenues from products sold through our online
marketplace, revenues from sponsorships, content conversion and data mining
services.
Cost of revenues of the Company primarily represent expenses related to
printing, fulfillment and shipping services associated with rebates and
promotional fulfillment and in 1997 and 1998 includes cost of revenues generated
from the production of videos. In addition, the Company's operating expenses
consist of selling, general and administrative ("SG&A") expense, and
depreciation and amortization expense. SG&A expenses consist primarily of
salaries and related expenses of management, occupancy fees, professional fees
and general corporate and administrative expenses. Depreciation and amortization
expense
26
<PAGE> 30
includes depreciation of furniture and equipment, and information systems
hardware and software over periods ranging from three to five years.
Amortization expense includes the amortization of goodwill and other
identifiable intangible assets relating to the Company's acquisitions incurred
during the period from January 7, 1999 to June 30, 1999.
Since its inception, the Company has incurred net losses and an accumulated
deficit of approximately $2.2 million. The net losses and accumulated deficit
resulted from our lack of substantial revenues in our start-up phase, the costs
of the significant infrastructure and other costs incurred for the development
and initial rollout of our online marketplace. The Company believes that its
future success will depend on (i) strengthening brand recognition and consumer
awareness, (ii) building strategic relationships with e-partners and content
providers and (iii) providing our e-seekers with high quality content along with
unique features and tools. Accordingly, the Company intends to invest heavily in
sales and marketing, site development and technology and operating
infrastructure development. As a result, the Company expects to incur net losses
for at least the next 24 months.
RESULTS OF OPERATIONS -- THE COMPANY
January 7, 1999 (Inception) to June 30, 1999
Net Revenues and Revenues from Acquired Contracts. Since its inception on
January 7, 1999 to June 30, 1999, the Company has recognized net revenues of
approximately $567,000. The gross rebate face amount for rebates processed from
January 7, 1999, to June 30, 1999 was approximately $2,693,000. Slippage of
$269,000, or approximately 10% of the gross face amount of the rebates, is
included in the Company's net revenues for the period from January 7, 1999 to
June 30, 1999. During this period, the Company processed approximately 80,000
rebates and recognized approximately $100,000 in processing fees. For the period
from January 7, 1999 to June 30, 1999, the Company also recognized revenue of
approximately $305,000 relating to revenues received from contracts acquired in
the acquisition of 2-Lane on March 17, 1999. The employees retained after the
2-Lane acquisition currently commit a small portion of their time to completing
these pre-acquisition projects.
Cost of Revenues and Cost of Revenues from Acquired Contracts. During the
period from January 7, 1999 to June 30, 1999, the Company recognized cost of
revenues of approximately $122,000, resulting in a gross profit margin of
approximately 78.5% excluding the gross profit from acquired contracts for the
period from January 7, 1999 to June 30, 1999. Cost of revenues from contracts
acquired totaled approximately $218,000 for the period from January 7, 1999 to
June 30, 1999. These costs primarily represented salary and contract labor
expenses paid to those employees involved in the completion of these contracts.
Operating Expenses. For the period from January 7, 1999 to June 30, 1999,
total operating expenses were $2,738,000, representing approximately 313.8% of
revenues. SG&A expenses for the period from January 7, 1999 to June 30, 1999,
totaled approximately $1,787,000 and represented approximately 204.8% of
revenues. The Company expects general and administrative expenses to increase as
we expand our management team and staff and incur additional costs relating to
the growth and development of our business. In addition, as the Company
continues to vamp its business operations, we expect to incur significant costs
related to sales and marketing. During the period from January 7, 1999 to June
30, 1999, the Company did not incur significant sales and marketing
expenditures. However, the Company began incurring significant sales and
marketing costs in September 1999 and expects to continue to incur significant
costs in this area.
For the period from January 7, 1999 to June 30, 1999, the Company recorded
deferred compensation expense associated with options granted to employees with
an exercise price below the fair market value of the underlying common stock on
the date of grant. The amortization of stock-based compensation over the vesting
period of the options totaled $276,000. In addition, the Company issued 40,000
shares of common stock valued at $50,000 to two employees as a signing bonus and
139,097 shares of common stock valued at $91,000 to consultants.
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At June 30, 1999, the Company's assets included net goodwill of $11,051,000
and net intangibles of $3,481,000. For the period from January 7, 1999 to June
30, 1999, the Company recognized depreciation expense of $72,000 and
amortization expense of $462,000 related primarily to the acquisitions of
Forward and 2-Lane. The Company anticipates that depreciation and amortization
expense will increase as the Company continues to expand its operations through
acquisitions.
Other Income (Expense). The Company recorded interest income of
approximately $50,000 for the period from January 7, 1999 to June 30, 1999
earned primarily on cash received from private equity offerings. Interest
expense of approximately $3,200 resulted primarily from a note payable assumed
in the acquisition of Forward. We pay interest on the note at an interest rate
of 8.0% per annum.
Tax (Benefit) Provision. No provision for income taxes has been recorded as
we have incurred net operating losses from our inception on January 7, 1999 to
June 30, 1999, and we expect to incur net operating losses through the remainder
of 1999. These losses will be available to offset future taxable income, if any.
We have recorded a valuation reserve for all of our net deferred tax benefit for
the period ended June 30, 1999 due to uncertainty that we will generate
sufficient taxable income during the carryforward period to realize the benefit
of our net deferred tax asset.
RESULTS OF OPERATIONS -- PREDECESSOR
Period from January 1, 1999 to May 20, 1999 and Year Ended December 31, 1998
Net Revenues. Net revenues for the Predecessor were $3,228,000 for the year
ended December 31, 1998 and $2,234,000 for the period from January 1, 1999 to
May 20, 1999. The average monthly revenues increased approximately $178,000, or
66.1%, from $269,000 for the year ended December 31, 1998 to $447,000 for the
period from January 1, 1999 to May 20, 1999. This increase primarily reflected
an increase in revenues associated with additional rebates processed due to a
significant growth of Predecessor's customer base. During the year ended
December 31, 1998, Predecessor processed approximately 341,000 rebates, as
compared to 444,000 rebates processed during the period from January 1, 1999 to
May 20, 1999. The gross face amount of all rebates and average face amount per
rebate totaled $10,872,000 and $32, respectively, and $13,301,000 and $30,
respectively, for the year ended December 31, 1998 and for the period from
January 1, 1999 to May 20, 1999, respectively. Slippage recorded for the year
ended December 31, 1998 and the period from January 1, 1999 to May 20, 1999 was
$1,774,000 and $1,330,000, respectively.
Cost of Revenues. Cost of revenues for the Predecessor was $645,000 for the
year ended December 31, 1998 and $353,000 for the period from January 1, 1999 to
May 20, 1999. Gross profit margin increased from 80.0% to 84.2% for the year
ended December 31, 1998 and the period from January 1, 1999 to May 20, 1999,
respectively. The increase in gross profit as a percentage of revenues was
attributable to the increase in revenue related to rebate programs, as rebate
revenues have higher margins than other revenue streams of Forward.
Operating Expenses. Operating expenses were $2,838,000 for the year ended
December 31, 1998 and $4,121,000 for the period from January 1, 1999 to May 20,
1999. As a percentage of revenues, operating expenses increased from 87.9% to
184.4% for the year ended December 31, 1998 and the period from January 1, 1999
to May 20, 1999, respectively. The dollar increase in operating expenses for the
period ended May 20, 1999 was primarily a result of the executive bonus paid to
the Predecessor's executive officers totalling $2,817,000 for the period ended
May 20, 1999 as compared to $1,331,000 for the year ended December 31, 1998.
Other Income (Expense). Total other expense increased to $77,000 for the
period from January 1, 1999 to May 20, 1999 primarily due to losses recorded
related to the sale of assets.
Tax (Benefit) Provision. For the period from January 1, 1999 to May 20,
1999, of the Forward Companies elected to be taxed pursuant to Subchapter S of
the Internal Revenue Code and, as a result, income tax benefits and liabilities
passed through to its shareholders. The tax benefit of $41,000 principally
represents recoveries for federal and state income taxes paid in the prior years
when Forward Freight was
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taxed as a C Corporation. The tax benefit of 26,000 for the year ended December
31, 1998 represents taxes computed at the statutory rate on the separate loss of
Forward Freight.
Years Ended December 31, 1998 and 1997
Net Revenues. Net revenues for the Predecessor increased approximately
$1,056,000, or 48.6%, from $2,172,000 to $3,228,000 for the years ended December
31, 1997 and December 31, 1998, respectively. Included in the Predecessor's net
revenues for the year ended December 31, 1997 is approximately $1,529,000
related to video production as compared to $524,000 for the year ended December
31, 1998. In 1997, the Predecessor's predominant revenue stream was generated
from the production of videos. However, as the revenue streams from the rebate
business began to develop, the Predecessor began to phase out of the video
business. As a result, the decrease in revenues from the video production
business was offset by an increase in revenues of $2,061,000 related to the
growth of the rebate business.
The gross face amount of rebates and average face amount totaled $806,000
and $23, respectively and $10,872,000 and $32, respectively for the years ended
December 31, 1997 and 1998, respectively. In 1997, Forward processed
approximately 35,600 rebates compared to 341,400 rebates in fiscal year 1998. In
addition, included in net revenues is slippage of $161,000 and $1,774,000 for
the years ended December 31, 1997 and December 31, 1998, respectively.
Cost of Revenues. Cost of revenues decreased approximately $291,000, or
31.1%, from $936,000 to $645,000 for the years ended December 31, 1997 and
December 31, 1998, respectively. The dollar decrease in cost of revenues related
primarily to the decrease in graphic and promotional materials related to video
production, as these costs decreased due to the lower revenue generated from
these types of services. Gross profit margin increased from 56.9% to 80.0% for
the year ended December 31, 1997 as compared to the year ended December 31,
1998. The increase in gross profit as a percentage of revenues was attributable
to the increase in revenues related to rebate processing which have higher
margins than warehousing and fulfillment services or promotional fees for
graphic and video promotional materials.
Operating Expenses. Operating expenses increased approximately $1,591,000,
or 127.6%, from $1,247,000 to $2,838,000 for the year ended December 31, 1997
and December 31, 1998, respectively. As a percentage of net revenues, operating
expenses increased from 57.4% to 87.9% for the year ended December 31, 1997 as
compared to the year ended December 31, 1998. The dollar increase in operating
expenses for the year ended December 31, 1998 was primarily a result of an
increase in executive compensation relating to bonuses paid to the Predecessor's
executives, in addition to an increase in payroll related expenses associated
with additional employees hired to handle rebate processing. Depreciation
expense increased slightly in fiscal year 1998 as a result of additional
equipment acquired.
Other Income (Expense). Other income (expense) increased approximately
$5,000, or 15.2%, for the year ended December 31, 1998 as compared to the year
ended December 31, 1997.
Tax (Benefit) Provisions. For the years ended December 31, 1997 and 1998,
the Forward Companies, except for Forward Freight, elected to be taxed pursuant
to Subchapter S of the Internal Revenue Code, and, as a result, income tax
provision (benefit) passed through to its shareholders. The provision of $63,000
recorded for the year ended December 31, 1997 represents taxes computed at the
statutory rate on the separate income of Forward Freight. The tax benefit of
$26,000 for the year ended December 31, 1998 represents the benefit recorded on
the taxable loss of Forward Freight.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods presented certain unaudited
statements of operations data and, supplemental operating data for each of the
two quarters in the period from January 7, 1999 to June 30, 1999. Such data has
been derived from How2.com's unaudited consolidated financial statements which,
in the opinion of How2.com's management, have been prepared on substantially the
same basis as the audited financial statements and include all adjustments,
consisting of normal recurring adjustments, that we consider necessary for a
fair presentation of such information when read in conjunction with our
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financial statements. The operating results in any quarter are not necessarily
indicative of the results that may be expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31, JUNE 30,
1999 1999
--------- ----------
<S> <C> <C>
Net revenues................................................ $ -- $ 567,354
Revenues from acquired contracts............................ 50,000 255,199
------- ----------
Total revenues.............................................. 50,000 822,553
------- ----------
Cost of revenue............................................. -- 121,938
Cost of revenues from acquired contracts.................... 40,000 177,913
------- ----------
Gross profit.............................................. 10,000 522,702
======= ==========
Gross profit margin....................................... 20.0% 63.6%
Gross profit margin excluding acquired contracts.......... -- 78.5%
SUPPLEMENTAL OPERATING DATA:
Gross Revenues............................................ -- 3,259,888
Number of rebates processed............................... -- 79,755
</TABLE>
Revenues for the quarter ended March 31, 1999 include only the revenues
from acquired contracts subsequent to the March 17, 1999 acquisition of 2-Lane.
Revenues for the quarter ended June 30, 1999 include a full quarter of revenues
from acquired contracts of 2-Lane in addition to net revenues related to rebate
and related services subsequent to the May 20, 1999 acquisition of Forward.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company's inception the Company has funded its operations
primarily through the private placement of its common stock. Through September
30, 1999, the Company has raised over $27 million through private equity
offerings. We have had significant negative cash flows from operating activities
quarterly period to date. Our principal uses of cash have been to fund working
capital requirements, capital expenditures, business acquisitions and operating
losses. The Company expects that its continued growth and development will
require additional sales and marketing expenditures in addition to capital
expenditures and direct operating costs and expenses. As a result, the Company
expects to incur net losses and use cash in operating activities for at least
the next 24 months. As of June 30, 1999, the Company had cash and cash
equivalents of $5.5 million and working capital of $3,900,000.
Operating activities used cash of approximately $766,000 from inception to
June 30, 1999. Cash used in operating activities during this period was
primarily to fund the net loss of $2,200,000. Included in the net loss are
noncash charges for depreciation and amortization and stock-based compensation
totaled approximately $533,500 and $418,000, respectively. Additionally, the
growth in accounts receivable of approximately $829,000 since our inception was
more than offset by the increase of approximately $1,313,000 in our various
payables.
Cash used in investing activities for the Company consists primarily of
business acquisitions completed by the Company from inception to June 30, 1999,
resulting in a net use of cash of approximately $8.1 million. In addition, the
Company purchased certain computer software and equipment to support its
operations of approximately $705,000 during this period.
Cash flows from financing activities primarily represented proceeds
received by the Company from the issuance of its common stock in private equity
offerings. From inception through June 30, 1999 the Company has raised cash from
these private offerings of approximately $15.6 million.
The Company's opportunity to grow will depend on its ability to expand and
improve its operations and the effectiveness of its sales and marketing efforts.
The Company believes that the net proceeds from the common stock of the Company
offered hereby, together with existing sources of liquidity, will be sufficient
to fund its sales and marketing expenses, capital expenditures, working capital
and other cash
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requirements for at least the next 12 months. If this offering is not
consummated, we believe that we could support operating and capital outlays for
at least the next 12 months with our current cash balances, proceeds from the
private equity financings closed since June 30, 1999 and the sale and leaseback
of property and equipment. It would be necessary for us to reduce our sales and
marketing expenses from the level anticipated if the offering is not completed.
On a long term basis, the Company may need to raise additional funds in order to
take advantage of new business opportunities, to react to unforeseen
difficulties or to otherwise respond to pressures resulting from our
competitors.
As of September 30, 1999, the Company has raised an additional $11,982,000
in capital for general corporate purposes through the issuance of 2,368,800
shares of common stock, with prices ranging from $2.50 to $8.00, in private
equity offerings subsequent to June 30, 1999.
INFLATION
The Company believes that inflation will not have a material effect on the
Company's results of operations.
YEAR 2000 READINESS
The Year 2000 issue is the result of computer programs being written using
two digits, rather than four, to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it will not be
required to modify or replace significant portions of its software and hardware
so that those systems will properly utilize dates beyond December 31, 1999,
since the Company has recently purchased Year 2000 compliant applications. The
Company is replacing components of older systems obtained through acquisitions
with Year 2000 compatible Internet-centric applications and expects to complete
the replacements before December 31, 1999. The Company presently believes that,
with the new software purchased and replacement of software obtained through
acquisitions, the Year 2000 issue can be mitigated. However, if such
replacements are not made, or are not completed timely, the Year 2000 issue
could have a material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 issue involves the following
four phases: assessment, replacement, testing and implementation. To date, the
Company has fully completed its assessment of all systems that could be
significantly affected by the Year 2000. The completed assessment indicated that
most of the Company's significant information technology systems would not be
affected, as the applications are represented as Year 2000 compliant by the
applicable vendor. In addition, the Company has gathered information about the
Year 2000 compliance status of its significant suppliers and subcontractors and
continues to monitor their compliance.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
For its information technology exposures that are currently related to
custom programs written to support the Company's rebate operations at its
Coppell location, the Company is approximately 30% complete on the replacement
phase. The Company expects to complete software reprogramming and replacement
for those applications no later than December 31, 1999. Once the software is
reprogrammed or replaced for a system, the Company begins testing and
implementation. The Company has not begun the testing and implementation of the
replacement of this system. Completion of the testing phase for this system is
expected by December 1, 1999, with the system expected to be fully tested and
implemented by December 31, 1999.
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Nature and Level of Importance of Third Parties and their Exposure to the Year
2000
The Company does not have any significant systems that interface directly
with third-party vendors. The Company is in the process of querying its
significant suppliers and subcontractors, or external agents, that do not share
information systems with the Company. The Company is not aware of any external
agent with a Year 2000 issue that would materially impact the Company's results
of operations, liquidity or capital resources. However, the Company has no means
of ensuring that all external agents will be Year 2000 ready. The inability of
external agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-compliance by
external agents is not currently determinable.
Costs
The Company will utilize both internal and external resources to replace,
test and implement the software and operating equipment to achieve Year 2000
compliance. The Company does not expect the total cost of its Year 2000
compliance to be significant, as the Company's key business strategy requires
the Company to build an Internet-centric rebate processing system and the
replacement of the acquired systems has not been accelerated specifically for
the Year 2000 issue. The total cost of the Company's Year 2000 compliance to
date has not been significant.
Risks
The Company believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Company has not yet
completed all necessary phases of the Year 2000 program. In the event that the
Company does not complete any additional phases, the Company may be unable to
process rebates, invoice customers or collect payments. In addition, disruptions
in the economy generally resulting from Year 2000 issues could also materially
adversely affect the Company. The Company could be subject to litigation for
computer systems product failure, for example, equipment shutdown or failure to
properly date business records. The amount of potential liability and lost
revenue cannot be reasonably estimated at this time.
Contingency Plans
The Company has contingency plans for its internally developed rebate
application. These contingency plans involve, among other actions, manual
workarounds and adjusting staffing strategies. The Company is currently working
on contingency plans should it experience problems with its third-party software
or hardware.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
All of our current contracts are denominated in United States dollars and
we do not currently invest in derivative financial instruments. However, we
invest our excess cash balances in money market accounts which are subject to
market risk. We believe the effect on our financial position, results of
operations and cash flows of any reasonably likely changes in interest rates
would not be material.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. It also provides
guidance for accounting changes in the fair value of the derivative (i.e., gains
and losses). SFAS 133 is effective for all fiscal years beginning after June 15,
1999. The Company does not expect the adoption of SFAS 133 will have a material
effect on its financial statements.
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BUSINESS
INDUSTRY OVERVIEW
The Internet and electronic commerce are growing rapidly.
The Internet has become an important alternative to traditional media,
enabling millions of consumers to seek information, communicate with one another
and execute commercial transactions electronically. According to International
Data Corporation, the number of web users is expected to grow from approximately
100 million in 1998 to approximately 320 million by 2002. The Internet is
distinct from traditional media in that it offers real-time access to dynamic
and interactive content and instantaneous communication among users. These
characteristics, combined with the fast growth in users of the Internet, have
created a powerful, rapidly expanding direct marketing and sales channel. The
Internet offers online merchants the ability to reach a vast audience and
operate with lower costs and greater economies of scale, while offering
consumers greater selections, lower prices and heightened convenience compared
to conventional retailing. International Data Corporation estimates that annual
worldwide commerce over the Internet will increase from approximately $32.0
billion in 1998 to approximately $425.0 billion by 2002.
Internet users desire a more intelligent, value-added Internet experience.
We believe that many consumers look to the Internet to improve their lives
by saving them time and money. However, the rapid growth of information
available on the Internet presents significant challenges for users seeking
specific information and resources. While businesses continue to add vast
amounts of information product offerings to the Internet, the quality of this
content varies significantly. In addition, content is often found dispersed
across a multitude of sites, causing the end user to visit a number of
unaffiliated sites in order to access the comprehensive, high-quality content
desired. While a number of approaches, including Internet portals, directories
and search engines, enable users to find desired information and product
offerings, these services often force consumers to "do it themselves" by
conducting time consuming research to sort through the large amount of
information and product offerings retrieved. We believe that consumers would
prefer information services that "do it for them" by anticipating their search
needs, aggregating relevant information and product offerings regarding these
needs and presenting the results in an entertaining, usable and organized
format.
Internet users seek a sense of community.
Many Internet users seek organized online communities where they can
interact with individuals who share similar interests and where they can find
information, products and services related to these interests. In response, many
web sites now offer chat rooms, message boards, membership and customization,
which address this desire for a sense of community. We believe these
"communities" are also attractive to businesses with products or services
related to the interests of the members of the communities because they provide
these businesses with rich, targeted marketing opportunities.
Internet users seek easy, turnkey Internet solutions.
Many consumers look to the Internet to improve their lives by saving them
time and money. As a result, Internet businesses such as eBay, which enables
consumers to participate in online auctions directly from their home, or
E*Trade, which enables consumers to buy and sell stock over their personal
computer, or drkoop.com, which enables consumers to better manage their personal
health, have become popular. In many other areas, consumers are forced to seek
information related to their interests and online commerce opportunities related
to these interest from multiple online sources. This defeats the purpose of
utilizing the Internet by adding time and effort to consumer's research and
procurement process.
Businesses seek access to demographically and psychographically desirable
Internet consumers.
The Internet has allowed businesses to cost effectively access target
consumers for delivery of goods and services. Certain web sites attract a
specific type of consumer allowing businesses direct access to a
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pre-qualified audience. Sites that accurately obtain demographic as well as
psychographic profiles are of particular appeal to businesses.
Businesses seek to use the Internet to access consumers and other businesses.
Businesses increasingly are capitalizing on their ability to interact
online with other businesses. The Internet provides the opportunity for
businesses to partner and pursue joint lead generation, to share revenue on
transactions, to pursue joint promotions and marketing and to provide better
overall customer service for the consumer. The potential benefits from such
partnerships include reduced marketing costs, better brand exposure, new
prospective customers and better service to their customers.
Businesses and consumers are frustrated with the rebate process.
We believe that manufacturers and retailers are frustrated by the rebate
process because it often leads to customer complaints and, as a result, the
degradation of their brand. While manufacturers spend significant amounts on
rebates and other point of sale promotions each year, they are often unable to
evaluate the effectiveness of their programs. Currently, there is not an
effective way for these manufacturers to obtain information on the demographic
and psychographic characteristics of the consumers who redeem the rebates or
information on the retailers or stores that are implementing successful rebate
promotions. In addition, we believe that manufacturer rebates have become a
customer service problem for many retailers. Consumers frequently direct their
complaints about the rebate process to the retailer where the consumer purchased
the product. The fulfillment of rebate redemption is managed by the manufacturer
and, in most cases, is outsourced to a third party, yet the impact on the
retailer's brand image can be immense. Retailers often feel that they must solve
the problems with the current rebate process and will even, at their own
expense, issue an in-store credit to satisfy their customers.
We also believe that many consumers are frustrated with the manner in which
rebates are currently processed. Currently, the average length of time consumers
are required to wait for their rebates to be processed was approximately 8-12
weeks. We believe that consumers' primary complaints regarding the rebate
process include:
- that they do not know how to find out what rebates are currently being
offered;
- that they do not know how to check the status of a rebate claim;
- that they do not receive their rebate checks in a timely fashion if at
all; and
- that they do not know who to contact when they do not receive their
rebate check.
Businesses have used the Internet to improve many business processes.
Due to its interactive capabilities, the Internet allows companies to
improve many business processes. For example, traditional offline companies such
as Dell Computer Corporation and Cisco Systems, Inc. have used the Internet to
establish a new channel through which to sell their products and services,
eliminating the need for a retail intermediary. In addition, online companies
have used the Internet to enable consumers to conduct business more efficiently.
For example, Amazon.com, Inc. revolutionized the way books and music are sold by
offering them online to retail customers; eBay Inc. helped to establish a new,
more efficient method of selling used goods through Internet auctions; and
E*TRADE Group, Inc. was a pioneer in bringing discount brokerage services to the
Internet connected personal computer user.
THE HOW2.COM SOLUTION
We offer a new online marketplace for information, products and services
related to everyday interests of our e-seekers. Our online marketplace features
free how2 information, targeted e-commerce opportunities and post-sale customer
care products and services that we provide in combination with our e-partners.
We believe that this marketplace addresses both business and consumer needs. We
seek to satisfy
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the needs of businesses by offering them the opportunity to target their
products and services towards a highly targeted group of consumers in a
non-threatening environment. We further seek to satisfy the needs of businesses
by improving post-sale customer service functions such as rebate services. We
address the needs of consumers by offering them a single destination where they
can obtain free how2 information related to their everyday interests and
efficiently conduct related online commerce transactions. We further address
consumers' needs through offering post-sale customer care offerings such as
rebate service.
By providing services to businesses and allowing businesses to reach
consumers through our marketplace, we believe that we have launched a new online
Business-to-Business-to-Consumer, or B2B2C, business model.
Customer Acquisition, Retention and Extension
Our ultimate objective is to satisfy our e-partners' needs to retain their
customers, extend their brand leadership, and access a new online distribution
channel. We accomplish this objective through our Customer Acquisition,
Retention and Extension (CARE) strategy.
Our CARE strategy involves acquiring customers. We seek to attract
e-seekers to our marketplace through marketing our how2 lifestyle content,
online electronic commerce opportunities and post-sale customer care services.
By attracting e-seekers with specific lifestyle interests, we believe that our
marketplace will also attract e-partners that seek to extend the reach of their
brand and influence the buying decision of a highly targeted audience. We
believe that our post-sale customer care offerings are also a powerful e-partner
acquisition tool since they enable e-partners to retain their customers and
extend their brand leadership. By offering them post-sale customer care
opportunities such as online rebates, we provide our e-partners with the
opportunity to keep in contact with their customers after a sale as well as the
opportunity to sell additional products. We partner with these companies and
share in online commerce revenues, rather than rely on banner advertising
revenues. We believe that post-sale customer care services are a particularly
attractive customer acquisition tool because, unlike traditional marketing
activities, we derive revenues from performing the services.
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[GRAPH DEPICTING CARE STRATEGY]
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Our Vision of the "Business-to-Business-to-Consumer" Online Marketplace
We embrace a B2B2C business model in which we act as an intermediary
through which our e-partners reach e-seekers in a highly targeted interactive
online marketplace. We embrace, rather than segment, the interdependence of the
Business-to-Business and the Business-to-Consumer models in this B2B2C model.
Our model seeks to create value for and satisfy the needs of exporters and
e-seekers. We believe that How2.com is a unique online network that unites
manufacturers, retailers, content providers and service organizations with
consumers in one medium where they can coexist and leverage their best assets to
mutual benefit.
The following is a graphical example of our proposed B2B2C model:
[GRAPHIC DEPICTION OF B2B2C MODEL]
[CHART]
This example of our proposed B2B2C model begins with the purchase of a
product that has a rebate either from a traditional retail store or online at an
e-commerce site. Through our relationships with manufacturers, How2.com provides
the outsourced rebate processing services for this product. During the process
of initiating the rebate, How2.com has the opportunity, together with our
retail, product and service partners, to bring a new selling opportunity to the
consumer. Based on the product and purchase source, How2.com in the future may
be able to offer the consumer the opportunity to apply their earned rebate to
the purchase of additional products and/or services. Specifically, in the
future, the customer may be able to automatically deposit the rebate amount to
an online bank account, apply the rebate to an extended warranty or preventative
maintenance program, apply the rebate to add-on products or service packs or
apply the rebate to a gift certificate offered by one of our e-partners. Any of
these future outcomes may result in extension of the customer relationship and
incremental revenue to us. While performing this unique service, How2 acquires a
customer demographic profile and the beginning of a customer pscychographic
profile for its database.
THE HOW2.COM STRATEGY
Strengthen brand recognition and consumer awareness
We seek to be a one-stop destination where our e-seekers can learn, be
entertained, easily find and procure products and services related to their
interests and execute post-sale transactions. We will focus
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heavily on promoting our brand as a one-stop lifestyle destination for valuable
information, products and services. We will seek to implement this strategy
through the following methods:
Strategic alliances -- We leverage our strategic alliances to help promote
our brand. We anticipate that our rebate e-partners will conduct additional
marketing and promotion on our behalf. For example, Staples will display our
rebate pads with our web address in their stores nationwide. We will also ask
e-partners to sponsor tutorials, chat rooms or other features of our online
marketplace, to participate in cooperative marketing programs and to include our
web address in their marketing materials.
Marketing and advertising -- We use traditional advertising such as radio,
television, newspapers and outdoor advertising to promote our brand. We also
advertise on the Internet, placing ads on search engines and portal sites to
attract e-seekers.
Direct marketing -- We will promote our online marketplace through direct
marketing to special targeted audience segments. During the online rebate
program, e-seekers provide us with accurate demographic information and the
beginnings of preference data, which will allow us to further define our target
audience.
Promotional Merchandising -- We will attempt to drive consumers to our
online marketplace through comprehensive promotional marketing and merchandising
programs such as sponsorships of events, in-store point of sale displays,
contests and loyalty programs.
Affiliations -- We seek to build affiliate programs with well-established
brands. We believe that entering into online commerce alliances and sponsorship
alliances with leading brands will assist us in establishing our brand.
Establish and expand multiple, under-penetrated online revenue streams
We believe our B2B2C business model presents many online revenue
opportunities that presently are under-penetrated including:
- tutorial driven e-commerce;
- post-sale customer care;
- sponsorships;
- content conversion; and
- data mining services.
Tutorial driven e-commerce -- We will offer our e-seekers the opportunity
to purchase How2 related products and services at the end of How2 tutorials. For
example, in connection with a tutorial on "how2 be organized at work" we could
include a hyperlink to an affiliated online office supplier to buy an electronic
organizer.
Post-sale customer care -- We provide post-sale customer service to
consumers through our online rebate services and, in the future, possibly
through offering online warranties and online manuals. We seek to become a
post-sale relationship extension for manufacturers and retailers, who often lose
touch with their customer after a sale is complete. Through our online rebate
services, manufacturers and retailers who partner with us can stay in touch with
their customers and capitalize on the opportunity to promote related products
and services to these customers as they seek rebates in our online marketplace.
For example, when an e-seeker tracks an online rebate relating to a recently
purchased computer, the manufacturer of the computer could sponsor a tutorial on
a related product offering with additional rebate offers or with product
savings.
Sponsorships -- We plan to offer e-partners the opportunity to align their
brand with the everyday needs of our e-seekers by sponsoring tutorials, related
products, message boards or chat rooms on our online marketplace. We believe
that these sponsorship opportunities fit well with our tutorial offerings. For
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instance, a car manufacturer could sponsor a tutorial on "how2 lease a car,"
with an opportunity at the end of the tutorial to link to their site to search
for a car. We believe that these sponsorships will provide a stronger return on
investment to our sponsors than would traditional click through advertising. We
offer our sponsors the ability to target their marketing expenditures to persons
seeking information related to their products, thereby more cost effectively
extending their brand awareness.
Content conversion -- We provide content conversion services to our
e-partners. Many of our e-partners have sales, marketing and tutorial material
in traditional media formats. We have the ability to convert this material into
web-enabled content complete with animation, sound and custom illustrations if
requested. For example, a manufacturer of scanners could have instructional
videos on how to operate its product in VHS cassette format. We could offer to
convert this VHS cassette into a web-enabled content, with the possibility of it
becoming a how2 tutorial. This provides e-seekers a "try before you buy"
opportunity in a non-threatening, low pressure environment and provides the
manufacturer more exposure for its product.
Data mining services -- As part of our rebate services, we offer retailers
and manufacturers flash reports regarding rebate promotions. We will also offer
an additional fee-based service that enables these e-partners to access further
demographic and profile data. For example, a dishwasher manufacturer that has
partnered with us for online rebate processing may want to know the demographic
and profile of the individuals that purchased its product for marketing efficacy
reasons. Furthermore, it might want to know where its products are installed so
that it can appropriately follow up with the manufacturer's affiliate service
organization or to target a preventative maintenance service offering.
Establish further e-partner relationships to augment product and service
offerings
We will solve to enter into additional strategic alliances with industry
leaders in order to provide our e-seekers with additional information and
resources that address their everyday needs. By offering multiple product and
service offerings at a single Internet destination under a common brand, we hope
to establish our online marketplace as a one-stop destination to solve the
everyday needs of our e-seekers.
Empower e-seekers in their purchase decision with high quality content
We intend to continue to add tutorial content to our online marketplace
that addresses the everyday interests of our e-seekers and assists them to make
informed purchase decisions. We are developing proprietary content internally
and repurposing selected content through alliances with major content companies.
We plan to select these partners based on their reputation, quality, national
presence and the ability of their content to attract a network of e-partners
that offer related products and services.
Continue to consider strategic acquisitions
We intend to consider strategic acquisitions of businesses that allow us to
enter a market or business line more quickly or efficiently than we could
through internal growth.
Expand site infrastructure to support growth
We intend to invest in technologies and site infrastructure to enhance the
functionality of our online marketplace and continue to provide robust platforms
to support growth.
THE HOW2.COM ONLINE MARKETPLACE
Our online marketplace, which is located on the Internet at www.how2.com,
is organized into four initial channels: How2Home, How2Play, How2Work and
How2Shop&Save. The channels act as a source of how2 information, community
interaction, e-commerce opportunities, post-sale customer care services,
accurate customer demographic and preference information and post-sale installed
base information. In September 1999, we also launched RebatesHeadquarters under
our How2Shop&Save channel. RebatesHeadquarters is an online service that allows
our e-seekers to search for rebates prior to shopping
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and to process and check the status of rebates after shopping. In the future, we
anticipate that RebatesHeadquarters will also offer e-seekers the opportunity to
open a bank account or buy another item with the proceeds of rebates that they
process online.
As of September 30, 1999, we had approximately 500 tutorials available
online with approximately 2,000 additional tutorials scheduled for completion
within the following 90 days. We have targeted our online tutorials to appeal to
a mass consumer audience, ranging from new Internet users to those individuals
who use the Internet regularly. In addition to the daily features and tutorials
available on our online marketplace, e-seekers can retrieve past tutorials and
features from a searchable archive library of topics. We also offer stock
quotes, news and horoscopes.
How2Work
Our How2Work channel provides information and products related to the
personal and career development interests of our e-seekers. We target these
tutorials to professionals who wish to learn more about their profession or
other business topics, students who wish to start a career, persons wishing to
enter a new career or start their own business or other e-seekers wishing simply
to improve their personal skills and professional work environment. In addition
to free tutorials, we plan to offer pay-per-view training courses. In the
future, we plan to provide a training management system that allows e-seekers to
participate in online training, track the courses they have attended, as well as
their progress in those courses. This will be targeted primarily at e-seekers
wishing to obtain career certification or ongoing updates, such as continuing
professional education for the accounting, insurance, legal or information
technology professions.
How2Play
Our How2Play channel allows our e-seekers to obtain information, products
and services related to sports, games, crafts, entertaining, fitness, travel,
music and the arts. How2Play provides a wide range of tutorials from the
beginner to the advanced level, covering numerous areas of popular interest and
related e-commerce opportunities. The How2Play channel provides novel and
entertaining diversions to enhance an e-seeker's leisure time.
How2Home
Our How2Home channel provides e-seekers with the opportunity to obtain
information and related products geared towards improving their personal life
around the home, including tutorials on cooking, home improvement, decorating,
automotive, parenting, kids, teens, health and safety, pets, weddings and
gardening. This channel also features seasonal topics, such as Halloween
tutorials, for both parents and kids.
How2Shop&Save
Our How2Shop&Save channel provides our e-seekers with information and
online commerce opportunities that assist our e-seekers in saving money by
shopping wisely. This channel also includes RebatesHeadquarters, which we intend
to follow with WarrantiesHeadquarters, ManualsHeadquarters and
PromotionsHeadquarters.
RebatesHeadquarters -- We provide the back end processing of rebates for
our e-partners. RebatesHeadquarters allows an e-seeker to register for a rebate
online after the purchase of an item. Our e-seekers will be directed to our site
from the rebate form displayed in the retail locations or from a hyperlink on an
affiliated site. Instead of filling out a form to mail via the postal service,
RebatesHeadquarters will generate a printed form for the e-seeker to mail to our
processing facility in Coppell, Texas along with the product receipt and UPC bar
code. Although a paper transaction is still required by the manufacturer, the
e-seekers will now have the ability to check the status of their rebate online
at any time. We believe that our online rebate processing will decrease the
number of weeks it takes to receive a rebate check by up to 50%. We believe that
this is an exclusive feature in the rebate
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industry. In addition, our rebate e-partners, manufacturers of the products and
the retailers that sell them, can run reports and obtain data related to the
effectiveness of their rebate progress. We intend to offer through
RebatesHeadquarters a paperless online rebate fulfillment solution in the
future.
We are also assembling a database of current manufacturer's rebate
offerings. Our e-seekers can conduct free searches of the database prior to
shopping in order to identify the rebate they desire before purchasing a product
online or in a store.
WarrantiesHeadquarters/ManualsHeadquarters/PromotionsHeadquarters -- In
addition, we plan to provide channels that offer extended manufacturers'
warranties on products, manufacturers' product manuals and promotions on
WarrantiesHeadquarters, ManualsHeadquarters and PromotionsHeadquarters. We plan
to offer manufacturers' product manuals online under our How2Shop&Save channel.
We anticipate that ManualsHeadquarters will provide our e-seekers with the
chance to locate a manual for a specific product, or to buy only a specific
section or even a page of a larger manual. We plan to provide manuals in either
PDF or ASCII format to provide for ease of access and printing. We anticipate
that ManualsHeadquarters will have a search function allowing the e-seeker to
search by company name or product.
REBATE AND RELATED SERVICES
We currently perform rebate services for more than 70 manufacturers
including Compaq Computer Corporation, Polaroid Corporation and Canon Inc. In
addition, Staples has exclusively partnered with us to address their rebate
process needs. We provide all of the processing for these e-partners out of our
Coppell, Texas processing facility. In addition to our online rebate services,
we offer rebate and fulfillment services through conventional, offline methods.
Our rebate services are our initial post-sale customer care entry point
into the interdependent circle of commerce opportunities offered through our
B2B2C business model. We believe that our rebate services will drive consumers
to our online marketplace. In addition, we believe that our rebate services are
a particularly advantageous customer acquisition method because, unlike other
methods that often require substantial expenditures, we will derive revenues
from performing these services. Our online rebate services serve as the model
for our planned additional post-sale customer care offerings, such as online
warranties and manuals.
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E-PARTNERS
We seek to establish strategic relationships with industry leading
manufacturers, retailers, service organizations and content providers that wish
to sponsor content or distribute products or services through our online
marketplace. In addition, we seek to partner with manufacturers and retailers
that desire to use our post-sale customer care services such as our rebate
services. Below is a list of our current e-partners:
<TABLE>
<CAPTION>
REBATES
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
3M*** Delta Millenium Inc.* Marcal Paper Mills*
A.T. Cross Dunston Leathers* Maxell Corporation of America*
ACCO Brands* Eagle OPG* Memtek Products(Memorex)*
Acer Peripherals America eMachines MGI Software*
American Covers, Inc.* Esselte* *** Microsoft Press*
American Map Distribution Expert Software, Inc.* Microtek
Co.*
American Power Converters*** Falcon Safety Products* Mips Dataline***
Aplio, Inc.* Fellowes* NDC/Sohoware Inc.
Asante' Technologies, Inc. GBC/Quartet* NEC Technologies*
At-A-Glance Group* Georgia Pacific* Netgear, Inc.*
Avenues in Leather* Hauppage! Network Associates, Inc.*
Belkin Components* Hewlett Packard** Newell Office Products*
Binney & Smith* Hitachi Koki Imaging Systems* Pacific Bell
BrandsMart USA Hunt Corporation* Panasonic*
Canon U.S.A.* IDG Books Worldwide* Peachtree Software*
Case Dunlap** Imation Enterprises Corp.* Pentel of America, Ltd*
Case Logic Inc.* Intelogis Philips Lighting*
Casio Inc.* Interact Computer Pilot Corporation of America*
Accessories*
Command Communications, Inc.* Iris USA* PK Electronics*
Compaq* K-Byte Plantronics Inc.*
Corel Corporation* Kensington*** PNY Technologies, Inc.*
Corex Technologies Kodak*** Polaroid*
Correl Inc* L & H Software*** Polycom, Inc.*
Cosmi Corporation* Learning Company*** Preferred Consumer Network Card Services**
Cross Computing Linksys* Prima Games/Levy Home Enter.*
Curtis Computer Products* Logitech* Primecom Interactive*
Dana Lighting* MacMillian Publishing* Royal Consumer Business Products*
Deflecto* MANCO* Samsung America Inc.*
SPONSORSHIP
- ---------------------------------------------------------------------------------------------------------
CBS Cable - TNN and Fruit of the Loom MP3
Country Music Television
Digital Work
CONTENT
- ---------------------------------------------------------------------------------------------------------
Digital Work Isong Practical Guide
Fascinating Earth MP3
AFFILIATE
- ---------------------------------------------------------------------------------------------------------
2thanku.com Discover Nature International Collectors
800-trekker.com Drugstore.com Isong
Amazon.com eDiets Jobsonline
Art.com Food.com LandscapeUSA
AutoAccessories.com Fragrancenet.com Liquor By Wire
beadroom.com FTD Moret Online
Chipshot.com General Magic OmahaSteaks.com, Inc.
cooking.com Gift Express Optical Site
Countdown Time GiftCertificates.com Pets.com
Dell Gotitdirect.com Publishers Clearing House (pch.com)
Designer Outlet ibaby.com SelfCare
Digital Work illuminations.com shades.com
<CAPTION>
REBATES
- ----------------------------- -------------------------------
<S> <C>
3M*** Sanford Corp.*
A.T. Cross Sentry Group*
ACCO Brands* Sharp Systems*
Acer Peripherals America SIIG
American Covers, Inc.* Smead Manufacturing*
American Map Distribution Smith Micro Software
Co.*
American Power Converters*** Sony Media Solutions*
Aplio, Inc.* Southwestern Bell Business
Asante' Technologies, Inc. Southwestern Bell Consumer
At-A-Glance Group* Southwestern Bell Wireless**
Avenues in Leather* Southworth***
Belkin Components* Staedtler, Inc.*
Binney & Smith* Staples
BrandsMart USA Steeline*
Canon U.S.A.* Targus, Inc.*
Case Dunlap** Team Mouse Inc.*
Case Logic Inc.* Tekera Group LLC*
Casio Inc.* The Gillette Company*
Command Communications, Inc.* Third Generation Marketing Co.*
Compaq* Trend Enterprises*
Corel Corporation* Tripplite*
Corex Technologies Umax
Correl Inc* Va Commonwealth Trading***
Cosmi Corporation* Viagrafix
Cross Computing Visioneer*
Curtis Computer Products* Wilhelmina**
Dana Lighting* Xerox***
Deflecto* Xirlink***
- ---------------------------------------------------------------------------------------------------------
CBS Cable - TNN and United Distillers & Vintners
Country Music Television
Digital Work
- ---------------------------------------------------------------------------------------------------------
Digital Work Webball
Fascinating Earth
- ---------------------------------------------------------------------------------------------------------
2thanku.com Smartkids.com
800-trekker.com Smoke Shop
Amazon.com Stress Less, Inc.
Art.com Superbuild.com
AutoAccessories.com Sweet Lobster
beadroom.com Swiss Army Depot
Chipshot.com The Sharper Image
cooking.com uBid
Countdown Time Veritec, Inc.
Dell WholeFoods.com
Designer Outlet winfreestuff.com, Inc.
Digital Work WizCity, Inc.
</TABLE>
- ---------------
* Through our Staples relationship only
** Promotional fulfillment only
*** Currently servicing vendor through our Staples relationship, but our
contract has not been finalized
To many of our e-partners, our online marketplace offers a low-cost,
low-risk entry onto the Internet and represents a new distribution channel for
their products and services. We believe that we offer our
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e-partners opportunities for brand extension, opportunities for revenue
enhancement and the opportunity to stay connected with their customers
post-sale. Our e-partners offer us a diverse group of revenue opportunities
including e-commerce, post-sale customer care services, content conversion,
sponsorship, and data mining services.
CONTENT ACQUISITION AND DEVELOPMENT
We regard the quality of tutorial content on our online marketplace as
critical to our success. We seek to publish high quality, informative tutorials
that address the everyday topics that are of greatest interest to our e-seekers.
Our tutorials typically include multiple pages or "lessons" and are accompanied
by original illustrations or animations that are designed to provide an
entertaining experience for our e-seekers. We accompany our tutorials with
related licensed information that we believe is of interest to our e-seekers
including news feeds, stock information, horoscopes and columns that accompany
our channels.
We obtain our tutorial content both through in-house development and
through acquisition or licensing from third parties. To date, more than 80% of
our tutorial content has been developed internally by our creative staff of 47
editors, writers, art directors and designers, members of which have won
numerous web-related awards . We challenge our creative teams to continually
develop new ideas that support and strengthen the high quality tutorials already
appearing on our online marketplace. From these ideas our editors select the
topics that they regard as being the most relevant to the everyday needs of our
e-seekers. Our creative team then researches, writes, edits and illustrates
tutorials that address these topics and publishes them on our online
marketplace. Our creative staff seeks to preserve the unique look associated
with our brand throughout the tutorials that they prepare.
In addition to developing content internally, we acquire or license how2
information from third parties. Once we obtain this information, our in-house
editorial staff, together with in-house and outside teams of multimedia
professionals and illustrators, convert, or re-purpose, this content into
digital web-enabled tutorials in the how2 format. Finally, we solicit feedback
on our tutorial content from e-seekers so that we are continually up to date
with respect to everyday questions that are most relevant to them.
SALES AND MARKETING
Sales
As of September 30, 1999, we had a direct sales organization, consisting of
seven sales professionals with an average of 12 years of experience. Our sales
organization consults regularly with rebate providers, traditional fulfillment
customers and potential e-partners. In addition, our sales team calls on
advertisers and agencies on design and placement of our web-based advertising,
provides customers with rebate and Internet services analysis and focuses on
providing a high level of customer satisfaction. Our intent is to become a true
marketing partner and advisor to our e-partners.
We believe that our relations with e-partners will assist us in gaining
broad market acceptance as well as enhance our marketing, sales and distribution
capabilities. These companies have worked with us and participated in joint
sales calls to several of our large accounts.
Marketing
We employ a variety of methods to promote the How2.com brand and to attract
traffic and new e-seekers. These methods include advertising in targeted
publications, radio stations, television, billboards, direct mail and on other
leading Internet sites, engaging in public relations, pursuing cross promotional
arrangements to secure advertising and engaging in other promotional activities,
such as in-store promotions and merchandising.
We have deployed a comprehensive, integrated communications strategy
directed towards both e-seekers and e-partners using multiple media and
promotional avenues. We have engaged leaders in the advertising and marketing
fields. For example, we have engaged GSD&M in Austin, Texas, an operating
division of Omnicom, as our lead advertising agency. We have also engaged
Ketchum Communications, an
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Omnicom company, as our public relations agency to assist us in public relations
and publicity for consumer, business and investor relations' activity. In
addition, we have engaged KBA Marketing, a division of Draft Communications and
Interpublic Group of Companies, to assist us with post sponsorship and alliance
promotions, in-store merchandising, events and grass roots marketing activities.
TECHNOLOGY
We have developed and implemented a broad array of technologies including
site management, transaction processing, chat, message boards and customer
feedback using a combination of our own proprietary technologies and
commercially available, licensed technologies. Approximately 80% of the
technology we currently use is licensed while the remaining 20% is proprietary.
For example, we recently developed an application available on our web site
which allows our e-seekers to process, and track the status of, manufacturer and
retail rebates. We also are in the process of finalizing our e-commerce
capabilities which are being developed on BEA Weblogic and Theory Center
technologies. Our current strategy is to license commercially available
technology whenever possible rather than seek internally developed systems. We
expect that commercially available technology will continue to be available at
reasonable costs.
Scalability -- The scalable structure of our hardware and software is
designed to allow for rapid deployment of additional transaction processing and
page serving capabilities with no noticeable impact to the e-seeker experience
at our site. In the rapidly changing Internet environment, the ability to update
an application to stay current with new technologies is important. Our systems'
multiple servers, supported by key application server technology, as well as the
redundancy and disaster recovery capabilities designed into the architecture,
allow for the addition, modification or replacement of web site based
applications in a cost efficient and expeditious manner.
Reliability and Security -- We use Checkpoint's Firewall-1 software to
protect our web-servers. We also use a combination of Netscape and BEA Weblogic
application servers. Our production servers, predominantly Sun Microsystems
E250, E450 and E4500 are hosted at Exodus Communications, Inc., which provides
professional data center hosting facilities and redundant high-speed Internet
connectivity. Exodus provides monitoring and support 24 hours a day, seven days
a week.
We utilize a commercially available content management tool to facilitate
the maintenance and updating of the content within our site. These tools allow
our editors to update our site from remote locations throughout the day.
CUSTOMER SERVICE AND SUPPORT
We believe that customer satisfaction is essential for our long-term
success, and we offer customer assistance programs. Our support service provides
dependable and timely resolution of inquiries and is available to customers,
through our site, by telephone or by electronic mail. We use a customer service
automation system to track each customer inquiry until it is resolved.
RESEARCH AND DEVELOPMENT
We began to operate our online marketplace in September 1999 and continue
to enhance to our Internet site platform on an ongoing basis. As of September
30, 1999, our research and development department was comprised of ten full time
employees, two contract employees and 13 professional consultants.
Our research and development operations focus on our online digital
marketplace, including its rebate applications. Our online marketplace
organization has four teams, which include Internet applications and design,
platform and infrastructure engineering, operations, quality assurance and
documentation.
Our Internet applications development team includes a number of key members
from engineering organizations that have developed Internet applications and
services and have extensive experience with
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Java programming. We believe a technically skilled and highly productive
development organization is a key component for the success of new product
offerings. We must attract and retain highly qualified employees to further our
research and development efforts. We are currently planning to hire a
significant number of additional Internet applications employees to maintain and
further develop the technological infrastructure of our online marketplace.
We expect that most of our enhancements to our web site will be developed
internally. However, we currently license certain externally developed
technologies and will continue to evaluate externally developed technologies to
integrate with our solutions.
COMPETITION
We believe that no other online businesses currently focus on offering
post-sale customer care services similar to How2.com and that few online
businesses currently focus on offering online commerce and sponsorship
opportunities for consumers seeking everyday information. However, we face
competition with respect to various aspects of our B2B2C business model.
Rebate programs -- Although we are not aware of any other businesses
offering online processing of manufacturer's rebate programs, there are
currently numerous companies offering offline processing of rebates, including
Young America Corporation and Continental Promotion Group, Inc. Many of our
competitors have longer operating histories, significantly greater financial,
technical, marketing and other resources than we do. They also have
significantly greater name recognition and more users or customers than we do.
In addition, many of our rebate competitors have well-established relationships
with our current and potential customers and have more extensive knowledge of
the industry than us. We believe that competition in the rebate and fulfillment
industry is based primarily on pricing and quality of service.
Tutorials and online training -- We compete directly against a number of
public and private companies offering online information, including Learn2.com,
Inc., eHow, Inc., Martha Stewart Living Omnicom, LLC and iVillage.com, Inc., and
indirectly with a number of large computer-based training vendors, including CBT
Group PLC and NETg, Inc. most of whom we expect to enter the multimedia training
business, as well as numerous distance learning providers. Many of these
companies have larger technical staffs, greater brand recognition and market
presence, more established and larger marketing and sales organizations, and
substantially greater financial resources than we do. In addition, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. We also face competition from Internet
portals such as Yahoo! Inc. and Snap! LLC, search engines such as Ask Jeeves,
Inc. and directory services such as About.com, Inc.
We believe that competition in our industry is based primarily on:
- the quality and market acceptance of tutorial content;
- brand recognition; and
- the quality and market acceptance of new enhancements to current content,
features and tools.
Although our competitive position in our market as compared to our
competitors is difficult to characterize due principally to the variety of
current and potential competitors and the emerging nature of the market, we
believe that we presently compete favorably with respect to these factors.
However, we believe that our markets are still evolving, and we cannot assure
you that we will compete successfully in the future.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We depend on our ability to develop and maintain the proprietary aspects of
our technology. To protect our proprietary technology, we rely primarily on a
combination of contractual provisions, confidentiality procedures, trade secrets
and patent, copyright and trademark laws.
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We seek to avoid disclosure of our trade secrets through a number of means,
including but not limited to, requiring those persons with access to our
proprietary information to execute confidentiality agreements with us and
restricting access to our source code. We seek to protect our software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection.
We intend to pursue U.S. patent applications for certain of our processes.
We filed in August 1999 a provisional patent application relating to obtain a
patent on our proprietary online rebate program technologies. It is possible
that the patents that we will apply for or our potential future patents may be
successfully challenged or that no patent will be issued from our patent
applications.
We rely on technology that we license from third parties, including
software that is integrated with internally developed software and used in our
How2.com web site to perform key functions. For example, we license merchant
transaction software from a software supplier. In addition, we license content
from third parties for use in our how2 tutorials.
We have applied for registration of "How2.com", "e-seekers", "e-partners",
"C.A.R.E. Customer Acquisition, Retention and Extension", "Headquarters for
Living" and other marks as service marks in the United States. In addition, we
may also seek to have some of these trademarks registered in one or more foreign
countries. We have filed numerous other trademark applications in the United
States for other aspects of our online marketplace.
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. 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 against 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, goods to
users worldwide, foreign jurisdictions may claim that we are required to comply
with their laws. In some jurisdictions, we will be required to collect
value-added taxes on our fees. Our failure to comply with foreign laws could
subject it to penalties ranging from fines to bans on our ability to offer our
services. In addition to government regulations relating to the Internet, our
rebate and fulfillment operations are subject to numerous state regulations
including laws dealing with escheat. See "Risk Factors -- Abandoned Property
Laws May Require Us to Surrender Unclaimed Rebate Payments to a State".
EMPLOYEES
As of September 30, 1999, we had over 180 employees. None of our employees
are represented by a collective bargaining agreement, nor have we experienced
any work stoppage. We consider our relations with our employees to be good. We
plan to add a significant number of new technical support and operations
personnel to support the technological infrastructure and operations of our
online marketplace and our rebate operations.
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FACILITIES
Our principal sales, marketing, research and development and administrative
office occupies approximately 14,600 square feet in Dallas, Texas, under a lease
that expires in July 2001. In addition, we lease approximately 67,000 square
feet of warehouse and office space in Coppell, Texas (near the Dallas/ Fort
Worth International Airport) for our rebate and related operations. We also
lease offices for our creative and content conversion personnel in the
metropolitan areas of Los Angeles and San Jose, California, and for our Internet
technology team in Seattle, Washington. We believe that our facilities are
adequate for our needs for the immediate future.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings. We may from time to
time become a party to various legal proceedings arising in its business.
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<PAGE> 51
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY PERSONNEL
The executive officers, directors and other key personnel of How2.com, and
their ages as of October 15, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS & DIRECTORS
Steven B. Solomon........ 34 Chief Executive Officer and Chairman of the Board of
Directors
Kenneth R. Johnsen....... 46 President, Chief Operating Officer and Director
Juli C. Spottiswood...... 33 Chief Financial Officer and Corporate Secretary
Andrew F. Adams.......... 34 Chief Technology Officer
David A. Wood............ 35 General Counsel
Allan J. Steinmetz....... 47 Executive Vice President -- Marketing Strategy
Edward C. Krupa.......... 38 Executive Vice President -- Sales
Wesley K. Whittington.... 41 Executive Vice President -- Business Development/Content
Mark C. Mirken........... 54 Executive Vice President -- Partners and Strategic
Alliances
Lawrence Lacerte......... 47 Vice Chairman of the Board of Directors
Chris A. Economou........ 44 Director
Michael Hammer, Ph.D..... 51 Director
Victor K. Kiam II........ 72 Director
David S. Lundeen......... 37 Director
Robert E. Pickering, 47 Director
Jr. ...................
Edward L. Pierce......... 42 Director
Mark Rogers.............. 40 Director
John W. Thompson......... 50 Director
OTHER KEY PERSONNEL
Mary A. Conwell.......... 35 Vice President -- Acquisitions and Business Development
Jack W. Doxey............ 43 Vice President -- Rebate Partners and Alliances
Henry Exall IV........... 36 Deputy General Counsel and Vice President -- Acquisitions
David S. Lane............ 29 Director -- Production
Kelly R. Melvin.......... 30 Director -- Infrastructure Design and Architecture
Lindsay Nix.............. 43 Vice President -- Rebate and Fulfillment Operations
Edward L. Olsen III...... 41 Vice President -- Creative Services
Mason Wright............. 30 Director -- Internet Platforms and Engineering
</TABLE>
Steven B. Solomon has served as our Chairman of the Board of Directors and
Chief Executive Officer since our formation in January 1999, and is the founder
of How2.com. Mr. Solomon has served as the President and Chief Executive Officer
of Citadel since May 1997, and as a director of Citadel since February 1996.
From February 1996 through April 1997, Mr. Solomon served as Chief Operating
Officer of Citadel. He was the President and a director of LoneStar Hospitality
Corp., a predecessor of Citadel that owned and operated Miami Subs franchised
restaurants in Dallas and Houston, Texas, from its inception in February 1992
until its merger with Citadel in February 1996 and was Chairman of the Board of
Directors of LoneStar from December 1994 until February 1996. During his tenure
at LoneStar, Mr. Solomon also served as developer and executive producer of
SportsWaves!, a division of LoneStar that produced syndicated television
programs covering the National Football League and other professional and
collegiate sports.
Kenneth R. Johnsen has served as our President and Chief Operating Officer
and as a director since June 1999. Prior to joining us, since October 1998, Mr.
Johnsen served as President, Chief Operating Officer and a director of Metamor
Worldwide Inc., a publicly traded technology services company specializing in
e-business with annual revenues of approximately $850 million in fiscal year
1998. He also served as Executive Vice President of Metamor and President of
Metamor Solutions, a division of
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Metamor specializing in technology solutions, from May 1997 until October 1998.
Prior to joining Metamor, Mr. Johnsen spent 22 years with IBM Corporation in
numerous general management positions, including Vice President of Worldwide
Commercial Operations for IBM PC Company from October 1996 through April 1997,
Vice President of Business Services for IBM Global Services from January 1995 to
September 1996, Vice President of Marketing for IBM Global Services from June
1993 to December 1994, and General Manager of IBM China/Hong Kong from September
1991 to June 1993. Mr. Johnsen has served as a director of Citadel since October
1997. Mr. Johnsen will resign from Citadel's board of directors upon completion
of our initial public offering.
Juli C. Spottiswood has served as our Chief Financial Officer and Corporate
Secretary since June 1999. Prior to joining How2.com, Ms. Spottiswood served as
Vice President of Corporate Financial and Strategic Planning at Excel
Communications Inc., a division of Teleglobe, Inc., a global communications
provider with $3.4 billion in revenues in fiscal year 1998. Ms. Spottiswood
served in various accounting and financial capacities during her tenure with
Excel from December 1995 to June 1999. Prior to joining Excel, Ms. Spottiswood
served from January 1994 to October 1995 as Controller and Corporate Secretary
of National Record Mart, Inc., a publicly traded national music retailer, and
had responsibility for accounting and finance, including SEC reporting and
investor relations. Ms. Spottiswood spent five years in the audit division of
Arthur Andersen LLP. Ms. Spottiswood is a Certified Public Accountant.
Andrew F. Adams has served as our Chief Technology Officer since July 1999.
From August 1998 until joining How2.com, Mr. Adams served as Chief Technology
Officer for Metamor. Prior to joining Metamor, from April 1997 to July 1998, Mr.
Adams served as Vice President of Consulting Services for Mentor Consulting, the
international consulting division of Mentor Graphics Corp, an electronic design
automation software company. Prior to joining Mentor Graphics, Mr. Adams served
as Consulting Director for BSG Alliance/IT, Inc., a technology consulting
organization, from June 1993 until April 1997. Prior to joining BSG, Mr. Adams
spent seven years in management consulting with Andersen Consulting and Coopers
& Lybrand, where he focused on delivering highly complex technology solutions.
David A. Wood has served as our General Counsel since June 1999. From July
1997 until joining How2.com, Mr. Wood was a partner in Wood, Exall & Bonnet,
L.L.P., a Dallas based law firm specializing in corporate finance and mergers
and acquisitions. Prior to founding Wood, Exall & Bonnet, Mr. Wood was General
Counsel of Citadel from May 1996 to June 1997. From September 1989 to April
1996, Mr. Wood practiced in the Corporate Section of Hughes & Luce, L.L.P.
During his private practice, Mr. Wood specialized in representing companies and
underwriters in connection with public and private offerings of securities,
mergers and acquisitions and a variety of general business issues.
Allan J. Steinmetz has served as our Executive Vice President of Marketing
Strategy since July 1999. From October 1998 to the present, Mr. Steinmetz has
served as the Founder of Inward Strategic Consulting, a strategic marketing firm
based in Boston, Massachusetts. Mr. Steinmetz has over 26 years' experience in
strategic marketing, advertising and communications. From October 1993 until
establishing Inward Strategic Consulting in October 1998, he served as a Senior
Vice President and Corporate Director of Marketing for Arthur D. Little, a
management and technology consulting firm. Prior to joining Arthur D. Little, he
served as Worldwide Director of Marketing and Communications for Andersen
Consulting at their headquarters in Chicago for two years, and a Senior Vice
President with the advertising agency Young & Rubicam for ten years.
Edward C. Krupa has served as our Executive Vice President of Sales since
May 1999, and has over 14 years of senior sales and management experience. From
August 1995 until joining How2.com, Mr. Krupa was in senior sales positions with
Tivoli Systems, Inc., a wholly-owned subsidiary of IBM Corporation specializing
in systems management software. While with Tivoli, Mr. Krupa served as Worldwide
Director of Global Enterprise Partner Sales, Director of Business Partner Sales,
North America, Manager of Business Partner Sales, and Sales Executive South
Central Region. Prior to joining Tivoli, Mr. Krupa served as Director of South
Central Region for Logicworks, Inc. from February 1995 to July 1995 and as
National Sales Manager for Autotester, Inc. from July 1992 until February 1995.
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Wesley K. Whittington has served as our Executive Vice President of
Business Development/Content since August 1999. From July 1996 until joining
How2.com, Mr. Whittington served as President and Chief Executive Officer of The
Edge Marketing Group, a Dallas, Texas based sales and marketing outsourcing
company that he founded. Prior to founding The Edge Marketing Group, Mr.
Whittington was Chief Executive Officer and President of Diversified Personnel
Group, a firm specializing in executive recruiting, temporary staffing, employee
training and professional employer services, from September 1994 until April
1995. Mr. Whittington served as a General Manager of Staffing Resources, Inc.
after Staffing Resources acquired Diversified in April 1995 until he founded The
Edge Marketing Group.
Mark C. Mirken has served as our Executive Vice President of Partners and
Strategic Alliances since June 1999. From October 1996 to June 1999, he served
as Executive Vice President and, from June 1992 to October 1996, as Senior Vice
President of the Sports Division of KSL Media, Inc., an independent media
management company. While at KSL, Mr. Mirken was responsible for new business
development and strategic alliances. Prior to joining KSL, Mr. Mirken was Senior
Vice President of The Trump Organization from 1989 to 1991, where he was
responsible for the organization's retail development in Trump Tower in New York
and its hotel and casino properties in Atlantic City.
Lawrence Lacerte has served as our Vice Chairman of the Board of Directors
since March 1999 and as a director of Citadel since January 1999. Mr. Lacerte
has served as President of Lacerte Technologies, Inc., a Dallas based investment
firm, since July 1998. From 1978 until July 1998, Mr. Lacerte served as Chairman
and Chief Executive Officer of Lacerte Software Corporation, a tax and
accounting software company. Lacerte Software was acquired by Intuit Corporation
in June 1998. Mr. Lacerte also serves on the board of directors of Universal
Display Corporation, a public company engaged in the research and development of
flat panel displays.
Chris A. Economou has served as a director of How2.com since its formation
in January 1999 and has served as a director of Citadel since February 1996, and
as a director of LoneStar from its inception in 1992 until its merger with
Citadel. He has been engaged in the private practice of law in Fort Lauderdale,
Florida, primarily in the transactional and corporate areas since 1988. He
served as Executive Vice President, Secretary and General Counsel of Miami Subs
Corporation from August 1992 until June 1994 and director from 1989 to 1994. Mr.
Economou will resign from Citadel's board of directors upon completion of our
initial public offering.
Michael Hammer, Ph.D. has served as a director of How2.com since June 1999.
Since 1982, Dr. Hammer has served as President of Hammer and Company, Inc., a
management education and consulting company. Dr. Hammer is the author of several
books on reengineering businesses and is the originator of both reengineering
and process-centering management theories. A prominent lecturer, Dr. Hammer also
serves as an advisor to numerous companies worldwide. Dr. Hammer is the author
of numerous articles and of three books: Reengineering the Corporation: A
Manifesto for Business Revolution (1993); The Reengineering Revolution: A
Handbook (1995); and Beyond Reengineering: How the Process-Centered Organization
is Changing Our Work and Our Lives (1996). Dr. Hammer was a professor of
Computer Science at the Massachusetts Institute of Technology from 1973 to 1982,
and he is a founder and director of several private high technology firms. He
was named by Business Week in 1992 as one of the four preeminent management
thinkers of the 1990's, and in 1996 he was named by Time magazine to its list of
America's 25 most influential individuals.
Victor K. Kiam II has served as a director of How2.com since July 1999, and
as a director of Citadel since July 1996, most recently as Chairman since
January 1998. Mr. Kiam is Chairman of Remington Products, L.L.C., a
manufacturer, distributor and marketer of electrical shavers and other consumer
products, and has served in various managerial capacities at Remington since
1979. From 1988 to 1992, Mr. Kiam was Chairman of the New England Patriots
Football Team. Mr. Kiam also serves on the boards of directors of several other
consumer product companies (including Ronson, plc, a marketer of lighters and
consumer products). Mr. Kiam will resign from Citadel's board of directors upon
completion of our initial public offering.
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David S. Lundeen has served as a director of How2.com since March 1999, as
well as a consultant to Citadel and LoneStar Hospitality, Citadel's predecessor,
since inception in 1992 until 1996. Since March 1999, Mr. Lundeen has been
managing general partner of Watershed Capital, a venture capital firm based in
Mountain View, California, that is one of our stockholders. From August 1998 to
February 1999, Mr. Lundeen managed his personal investments and acted as a
consultant and venture capital advisor for various businesses. From July 1995 to
August 1998, he served as Chief Financial Officer and Executive Vice President
of BSG Corporation, an information technology company. Prior to that, Mr.
Lundeen served as President of Blockbuster Entertainment Corporation's
Technology Division, and as the director of Blockbuster Entertainment
Corporation's Mergers and Acquisition Group, from February 1990 until February
1995. Since April 1998, Mr. Lundeen has served as a director of Perficient Inc.,
a publicly-traded virtual professional services organization that plans, manages
and executes the installation or implementation of complex software products.
Mr. Lundeen also serves on the board of directors of several private companies.
Prior to 1990, Mr. Lundeen was an investment banker with Drexel Burnham Lambert.
Robert E. Pickering, Jr. has served as a director of How2.com since July
1999. Mr. Pickering has served as Chief Executive Officer of Origin B.V., a
European based information technology consulting firm with operations in several
continents, since February 1998. Prior to joining Origin, Mr. Pickering founded
Transform IT, an information technology services company, in September 1997 and
served as its Managing Director until January 1998. From January 1994 until
September 1997, Mr. Pickering served as President of BSG/Alliance IT, Inc., a
technology consulting organization.
Edward L. Pierce has served as a director of How2.com since July 1999. He
has served as Chief Financial Officer of Metamor since April 1996 and a director
since October 1999. In addition, he served as Executive Vice President from
August 1999 to the present, as Senior Vice President of Finance from September
1996 to August 1999, and as Vice President from April 1996 to September 1996.
Mr. Pierce served Metamor as Vice President of Finance from May 1995 to April
1996 and as Vice President of Controller from November 1994 to May 1995. Prior
to joining Metamor, Mr. Pierce served in various financial management capacities
with American Oil and Gas Corporation, most recently as Corporate Controller.
Mr. Pierce has also been a director of Citadel since July 1999.
Mark Rogers has served as a director of How2.com since its formation in
January 1999 and has served as a director of Citadel since July 1996. Since
1989, Mr. Rogers has served as partner and Chief Operating Officer of NFT
Ventures, a venture capital fund established by Ray Noorda, the founder of
Novell, Inc. In connection with his position at NFT Ventures, Mr. Rogers advises
several computer software companies in Texas, Utah, and Silicon Valley, with
respect to various strategic and developmental matters. Mr. Rogers also serves
on the board of directors of Cytation.com Incorporated, an online college
application assistance company. Mr. Rogers will resign from Citadel's board of
directors upon completion of our initial public offering.
John W. Thompson has served as a director of How2.com since July 1999.
Since May 1999, Mr. Thompson has served as President, Chief Executive Officer
and Chairman of the Board of Directors of Symantec Corporation, a publicly
traded company that provides utility software for business and personal
computing. Mr. Thompson joined Symantec after 28 years at IBM Corporation. In
his most recent position as General Manager of IBM Americas, he was responsible
for sales and support of IBM's technology products and services in the United
States, Canada and Latin America. Prior to his position with IBM Americas, he
was General Manager, Personal Software Products, responsible for the development
and marketing of O/S2, IBM's operating systems and other products. Mr. Thompson
is a member of the board of directors of NiSource Inc. (formerly Northern
Indiana Public Service Company), a publicly traded utility holding company.
Mary A. Conwell has served as our Vice President of Acquisitions and
Business Development since June 1999. Prior to joining How2.com, from September
1998 until June 1999, Ms. Conwell was a consultant with and director of MCM
Capital Group, advising technology companies on a variety of issues relating to
acquisitions. From September 1996 to June 1998, she served as an acquisitions
consultant to Metamor. Prior to working with Metamor, Ms. Conwell served as a
Strategic Planning Consultant for
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AmeriGyn, Inc., a physicians' practice management company from June 1996 to
August 1996. From August 1986 until June 1995, Ms. Conwell worked in the mergers
and acquisitions division of Lazard Freres & Co., most recently as a Vice
President.
Jack W. Doxey has served as our Vice President of Rebate Partners and
Alliances since August 1999. Prior to joining How2.com, Mr. Doxey served Citadel
as its Vice President of Marketing since August 1998, and Vice President of
Sales and Marketing from October 1997 to May 1998. Mr. Doxey has 10 years
experience in the field of software sales and marketing including in the retail
and VAR channels of distribution. From November 1996 until October 1997, he
served as Vice President of Sales and Marketing for Visual Applications, a
privately held software manufacturer based in Kansas City, MO. From March 1995
until November 1996, Mr. Doxey served as an independent sales and marketing
consultant to software and hardware manufacturers including: Attachmate
Corporation, MicroHelp, Eicon Technology Corporation, Penumbra Group, and
smaller start-up manufacturers. From September 1994 until March 1995, he helped
found MindShare Associates, an out-source marketing company for software and
hardware manufacturers, where he served as Vice President.
Henry Exall IV has served as our Deputy General Counsel and Vice President
of Acquisitions since June 1999. From July 1997 until joining How2.com, Mr.
Exall was a partner in Wood, Exall & Bonnet, L.L.P., a Dallas based law firm
specializing in corporate and securities transactional work. Prior to founding
Wood, Exall & Bonnet, L.L.P., Mr. Exall practiced law for eight years with Locke
Purnell Rain Harrell (a Professional Corporation), a predecessor of Locke Lidell
& Sapp, LLP. During his private practice, Mr. Exall specialized in representing
underwriters and companies in connection with public and private offerings of
securities, mergers and acquisitions, and a variety of general business issues.
David S. Lane has served as our Director of Production since March 1999.
From January 1993 until joining How2.com, Mr. Lane was Chief Executive Officer
of 2-Lane Media, Inc., an award winning web site design and development firm
that he founded. 2-Lane was responsible for the design and development of
numerous websites, including websites for Nestle S.A., The Disney Company and
Transamerica Corporation. How2.com acquired 2-Lane in March 1999.
Kelly R. Melvin has served as our Director of Infrastructure Design and
Architecture since February 1999. From February 1998 to January 1999, Mr. Melvin
served as a senior architect for IBM Global Services, a division of IBM
Corporation. From August 1994 to February 1998, Mr. Melvin served as a senior
architect for network design and engineering for Washington Mutual Inc.
Lindsay Nix has served as our Vice President of Rebate and Fulfillment
Operations since September 1999. Prior to his employment with How2.com, Mr. Nix
served as a Production Section Manager with Hitachi Semiconductor (America),
Inc. from January 1995 to July 1999. Mr. Nix served as a General Foreman with
Cyprus Semiconductor Corp. from August 1987 to December 1994. Mr. Nix has more
than 10 years experience in supervising and managing high technology production
lines.
Edward L. Olsen III has served as our Vice President of Creative Services
since July 1999. From May 1995 until May 1999, Mr. Olsen served as Vice
President and Creative Director of Broadcast Production Group, Inc., an award
winning interactive multimedia company. From April 1992 until May 1995, Mr.
Olsen was Creative Director of AVTEX Interactive Media, a maker of interactive
CD-ROM products. Prior to joining AVTEX, Mr. Olsen worked with BRC Imagination
Arts as a producer of Space Center Houston, a 180,000 square foot NASA
interactive museum in Houston, Texas, and as a producer at Universal Studios,
where he produced, designed and wrote for several film and video productions. In
August 1999, How2.com acquired some of the assets of BPG.
Mason Wright has served as our Director of Internet Platforms and
Engineering since February 1999. He is responsible for managing the technical
staff supporting network and systems design, implementation and support for
How2.com. From February 1998 to February 1999, Mr. Wright served as a system and
network architect for IBM Global Services, a division of IBM Corporation. From
July 1997 to February 1998, Mr. Wright served as a systems and network designer
and architect for Washington Mutual Inc. From February, 1997 to July 1997, Mr.
Wright served as a network engineer for Great Western Bank, and,
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from January 1991 to February 1997, he served as a network engineer for Korg
USA, Inc., a national musical instrument manufacturer and distributor.
How2.com currently has eleven directors. Our officers serve at the
discretion of the board of directors. There are no family relationships among
our directors and officers, except that Mr. Solomon and Mr. Wood are
brothers-in-law.
TERMS OF DIRECTORS
Our board of directors is divided into three classes designated as Class I,
Class II and Class III. At the 1999 annual meeting of stockholders, which we
anticipate will take place prior to the closing of our initial public offering,
the term of office of the Class I directors will expire and our stockholders
will elect Class I directors for a full term of three years. At the 2000 annual
meeting of stockholders, the term of office of the Class II directors will
expire and our stockholders will elect Class II directors for a full term of
three years. At the 2001 annual meeting of stockholders, the term of office of
the Class III directors will expire and our stockholders will elect Class III
directors for a full term of three years. At each succeeding annual meeting of
stockholders, our stockholders will elect directors for a full term of three
years to succeed the directors of the class whose terms expire at such annual
meeting. The Class I directors are Messrs. Solomon, Johnson, Lacerte and
Lundeen; the Class II directors are Messrs. Hammer, Pierce and Kiam; and the
Class III directors are Messrs. Rogers, Economou, Thompson and Pickering.
The number of directors is determined by our board of directors. To the
extent there is an increase in the number of directors, the new directors will
be distributed among the three classes so that, as nearly as possible, each
class will consist of an equal number of directors.
BOARD COMMITTEES
The board of directors has appointed an audit committee, a compensation
committee and an executive committee.
Audit Committee
The audit committee makes recommendations to the board of directors
regarding the selection of independent accountants, reviews the results and
scope of audit and other services provided by our independent accountants,
reviews and evaluates the our audit and control functions and reviews the terms
of transactions between us and our officers, directors and significant
shareholders. The audit committee currently consists of Mr. Lacerte, Mr. Pierce
and Mr. Rogers, none of whom are employees of How2.com.
Compensation Committee
The compensation committee reviews and makes recommendations regarding our
stock plans and makes decisions concerning salaries and incentive compensation
for our employees and consultants. The compensation committee currently consists
of Mr. Economou, Mr. Rogers and Mr. Lundeen, none of whom are employees of
How2.com.
Executive Committee
The executive committee acts in lieu of the board of directors on matters
requiring immediate attention and has been delegated authority to act on behalf
of the board. The executive committee currently consists of Mr. Solomon, Mr.
Johnsen, Mr. Lacerte and Mr. Economou.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Rogers and Mr. Economou serve as members of our compensation committee
and also serve as members of the board of directors and, in the case of Mr.
Rogers, the compensation committee of Citadel. Mr. Solomon is the Chief
Executive Officer and President and a director of Citadel and serves as our
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Chief Executive Officer and Chairman of the Board of Directors. None of our
executive officers serve as members of the board of directors or compensation
committee of any entity that has one or more executive officers who serve on our
board or compensation committee. See "Certain Transactions" for information
regarding transactions with members of the compensation committee.
DIRECTOR COMPENSATION
Our directors currently do not receive any cash compensation from How2.com
for their services as members of the board of directors, although we reimburse
members for expenses in connection with attendance at board of directors and
committee meetings. In 1999, How2.com granted nonqualified stock options to
purchase 200,000 shares of How2.com common stock at exercise prices between
$0.25 and $2.50 per share (at least the fair market value at the date of grant)
to each non-employee director for his service as director, in connection with
his appointment to the board of directors, in each case subject to a two or
three-year vesting schedule. Furthermore, in connection with the founding of
How2.com, we granted options to purchase an additional 400,000 shares to each of
Mr. Economou, Mr. Kiam and Mr. Rogers at an exercise price of $0.25 per share
with a two-year quarterly vesting schedule. These options were not granted
pursuant to any formal plan.
The 1999 Non-Employee Directors' Stock Option Plan, which will become
effective upon the completion of our initial public offering, provides for an
initial grant of a nonqualified option to purchase 5,000 shares of common stock
to each of our non-employee directors who first join the board of directors
after the date of the initial public offering. Further, the 1999 Non-Employee
Directors' Stock Option Plan provides that each of our non-employee directors
will receive an option to purchase 5,000 shares of common stock on the day of
each annual meeting of our stockholders, beginning with the 2000 annual meeting
of stockholders. Up to 200,000 shares of common stock are reserved for issuance
under the 1999 Non-Employee Directors' Stock Option Plan. The exercise price per
share of each option will be the fair market value of the common stock on the
date the option is granted. Each option granted under the 1999 Non-Employee
Directors' Stock Option Plan is immediately exercisable as to 33% of the shares
subject to the option, exercisable as to 66% of the shares subject to the option
on the first anniversary of the day the option was granted and exercisable as to
100% of the shares subject to the option on the second anniversary of the day
the option was granted. All options under the 1999 Non-Employee Directors' Stock
Option Plan will become fully exercisable upon the occurrence of: (1) the death
of the holder of an option, (2) the disability of the holder of an option, (3) a
change in control of How2.com, or (4) a unanimous determination by the
compensation committee that a particular option or options are to become fully
exercisable.
Each of our non-employee directors may from time to time be awarded, in the
sole discretion of the entire board of directors, nonqualified stock options and
related stock appreciation rights under the 1999 Stock Incentive Plan, in
amounts and upon terms as are determined by the board of directors. The exercise
price for any stock option to a non-employee director will be determined by the
board of directors, which must be equal to the fair market value of the stock on
the grant date or at a discount not to exceed 25% of the fair market value on
the grant date. Generally, stock options granted to non-employee directors by
the board of directors may not be exercised prior to six months from the option
grant date except in certain circumstances, including termination of
directorship or change in control of How2.com. Each non-employee director is
also automatically eligible to elect prior to the beginning of each calendar
year to convert the annual cash retainer and meeting fees, if any, payable by us
to the non-employee director in the next calendar year to stock options under
the 1999 Stock Incentive Plan, on the same basis as eligible executive.
Non-employee directors may elect to convert up to 100% of their compensation
paid by us in increments of 10%, but may not convert less than 50% of
compensation if they choose to convert any compensation. See "-- 1999 Stock
Incentive Plan".
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
Under an employment agreement dated January 7, 1999, Steven B. Solomon
agreed to be our Chief Executive Officer and Chairman of the Board of Directors.
Under this employment agreement,
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Mr. Solomon receives a base salary of $200,000 per year (which salary commenced
on July 1, 1999, prior to which Mr. Solomon was paid by Citadel) and a
discretionary bonus based on his performance and our overall performance, at the
sole discretion of the compensation committee. The employment agreement has an
initial term of five years. If Mr. Solomon is terminated for any reason other
than for cause, he is entitled to a severance payment equal to three times his
base salary and up to three times his bonus. Mr. Solomon's employment agreement
contains a one-year covenant not to compete.
Under an employment agreement dated June 15, 1999, Kenneth R. Johnsen
agreed to be our Chief Operating Officer and President. Under the employment
agreement, Mr. Johnsen is entitled to receive an annual salary of $150,000, and
an annual bonus of up to $250,000 based on attainment of mutually agreed
objectives, and he received a $250,000 signing bonus. The employment agreement
has an initial term of two years. If Mr. Johnsen is terminated for any reason
other than for cause, he is entitled to a severance payment equal to two times
his base salary and bonus. Mr. Johnsen's employment agreement does not contain a
covenant not to compete.
In addition, we have entered into employment agreements with each of our
executive officers and the following key employees: Ms. Conwell, Mr. Exall, Mr.
Lane and Mr. Olsen. Under these employment agreements, the employees are
entitled to receive up to one times their annual salary and bonus in the event
of a termination by the Company other than for cause.
We may enter into employment agreements with new executive officers, but no
terms have been established. In addition, we are in the process of developing a
bonus program that will be based on company performance targets.
From time to time, through September 30, 1999, How2.com granted
nonqualified options to purchase shares of our common stock to some of our
employees, directors and consultants. Since inception, How2.com has granted
options to purchase an aggregate of 23,544,750 shares of common stock at a
weighted average exercise price of $0.89 per share. Of these options, options to
purchase 7,300,000 shares have been exercised. Vesting of the shares of common
stock subject to these options held by executive officers and other key
employees automatically accelerate in connection with some changes in control of
How2.com.
1999 STOCK INCENTIVE PLAN
The board of directors adopted the 1999 Stock Incentive Plan to be
effective upon the completion of the initial public offering. A majority of our
stockholders have also approved the plan. The plan authorizes the compensation
committee, which administers the plan, to grant stock options, stock
appreciation rights, restricted stock and deferred stock awards to our officers,
other key employees and consultants.
A total of 6,000,000 shares of common stock are available and reserved for
issuance under the terms of the 1999 Stock Incentive Plan. In the event of any
sale of assets, merger, reorganization, consolidation, recapitalization, stock
dividend or other change in corporate structure affecting the stock, the
compensation committee may make an equitable substitution or adjustment in the
aggregate number of shares reserved for issuance under the plan. We have not
granted any awards under the 1999 Stock Incentive Plan as of the date of this
prospectus.
Option Grants
The 1999 Stock Incentive Plan permits the granting of incentive stock
options, as defined by the Internal Revenue Code, and nonqualified stock
options. Incentive stock options may only be granted to our employees. The term
of any stock option is set by the compensation committee, but cannot exceed ten
years in the case of incentive stock options. Stock options become exercisable,
in full or in installments, for shares of common stock at the time determined by
the compensation committee, but generally a stock option will not be exercisable
prior to six months from the date of the grant of a stock option. The exercise
price per share of stock options is determined by the compensation committee at
the time of grant, but must be equal to 100% of the fair market value of our
common stock on the date of grant.
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Stock Appreciation Rights
Stock appreciation rights may be granted in conjunction with nonqualified
stock options granted under the 1999 Stock Incentive Plan to our officers,
employees and consultants. Stock appreciation rights may only be exercised at
such time and to the extent the underlying options are exercisable. These stock
appreciation rights entitle the holder, upon exercise of the stock appreciation
right, to receive an amount in any combination, of cash or our unrestricted
common stock equal in value to the excess of the fair market value on the date
of exercise of the stock appreciation rights of one share of our common stock
over the exercise price per share of the connected stock option multiplied by
the number of shares for which the stock appreciation right is exercised. Each
stock appreciation right will terminate upon the termination of the related
option.
Restricted Stock Awards
The compensation committee may also award non-transferable restricted
shares of our common stock to our officers and key employees. Such restricted
shares will be subject to such conditions and restrictions as the compensation
committee may determine. The compensation committee will determine to whom
restricted shares will be granted, the number of shares to be awarded, the
price, if any, to be paid by the recipient, the times within which such awards
may be subject to forfeiture and all other conditions of the award. During the
restriction period set by the compensation committee, the recipient may not
sell, transfer, pledge or assign restricted shares awarded to the recipient
under the 1999 Stock Incentive Plan. If a recipient of restricted stock
terminates employment for any reason other than death, disability or retirement
prior to the end of the restriction period determined by the compensation
committee, the participant will forfeit all shares still subject to restriction
in exchange for the amount, if any, that the participant paid for them.
Deferred Stock Awards
Deferred stock awards may be made under the 1999 Stock Incentive Plan by
the compensation committee to any of our officers, key employees and consultants
it determines. These awards entitle the recipient to receive unrestricted shares
without any payment in cash or property in one or more installments at a future
date or dates, as determined by the compensation committee. Each deferred stock
award will be confirmed by and subject to the terms of a deferred stock award
agreement executed by us and the recipient and may generally not be sold,
assigned, transferred, pledged or otherwise encumbered during the period
specified by the compensation committee. Receipt of deferred stock may be
conditioned on such matters as the compensation committee may determine,
including continued employment or attainment of performance goals. All rights
under a deferred stock award will generally terminate upon the participant's
termination of employment prior to the receipt of unrestricted shares.
Executive Compensation Conversion Stock Options
Under the 1999 Stock Incentive Plan, each year the Chairman of the Board of
Directors or the compensation committee will designate those executives eligible
to convert salary and bonus to stock options for the next year. These eligible
executives may then, prior to the beginning of the next calendar year, elect to
convert up to 25% of their next year's salary and 25% of their next year's bonus
(in either 5% or $10,000 increments) into stock options under the plan. On the
last day of each calendar year, the total amount of salary, bonus and
compensation an eligible executive elected to convert into stock options for
that calendar year will be converted into stock options. The number of shares of
common stock subject to stock options that are converted from salary, bonus or
compensation will be the total dollar amount an eligible executive has elected
to convert into stock options divided by the per share value of a stock option
on the last day of that year, as determined by the compensation committee using
any recognized option valuation model it selects. Options converted from salary,
bonus or compensation are generally exercisable, cumulatively, as to 10%
commencing on each of the first through tenth anniversaries of the day the
option is converted.
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The exercise price per share of common stock under stock options obtained
by conversion of salary, bonus or compensation will, at the election of the
holder of the option prior to the year for which the option is converted from
salary, bonus or cash, be either 100% of the fair market value on the last day
of the year when the option is obtained or a lesser percentage determined by the
compensation committee from time to time, but not less than 75% of the fair
market value on the last day of the year when the option is obtained.
Change of Control
The 1999 Stock Incentive Plan provides that in the event of a change of
control of How2.com, unless otherwise determined by the compensation committee
prior to the change of control, and, to the extent expressly provided by the
compensation committee, in the event of a potential change of control, the
following will occur:
- Any stock appreciation rights and any stock options that are not
previously exercisable and vested will become fully exercisable and
vested;
- The restrictions and deferral limitations on restricted stock and
deferred stock awards will lapse and these shares and awards will become
fully vested; and
- The value of all outstanding stock options, stock appreciation rights,
restricted stock and deferred stock awards will, to the extent determined
by the compensation committee, be settled on the basis of the change of
control price as of the date the change of control occurs.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Pursuant to our Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws, we are required to indemnify our officers and
directors to the fullest extent allowed under Delaware law for claims brought
against them in their capacities as officers or directors. Indemnification is
not allowed if the officer or director does not act in good faith and in a
manner reasonably believed to be in our best interests, or if the officer or
director had no reasonable cause to believe his conduct was lawful. Accordingly,
indemnification may occur for liabilities arising under the Securities Act. We
also intend to enter into indemnification agreements with our officers and
directors. In addition, we have obtained directors and officers liability
insurance.
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CERTAIN TRANSACTIONS
Since our inception on January 7, 1999, we have issued and sold common
stock to the following persons who are our principal stockholders, executive
officers or directors:
<TABLE>
<CAPTION>
SHARES OF AGGREGATE VALUE
COMMON PURCHASE OF
INVESTOR STOCK(1) PRICE SHARES(2)
- -------- ---------- ---------- ---------
<S> <C> <C> <C>
Lawrence Lacerte................................ 2,400,000 $4,000,000
David S. Lundeen(3)............................. 1,040,000 5,060,000
Edward L. Pierce................................ 20,000 25,000
Citadel Technology, Inc. ....................... 20,000,000 191,000(4)
Michael A. Ruff(5).............................. 2,000,000 3,000,000
Edward C. Krupa................................. 40,000 60,000
</TABLE>
- ---------------
(1) Does not include shares issued pursuant to the exercise of options.
(2) Based on the assumed initial public offering price of $ per share.
(3) Includes 1,000,000 shares owned by Watershed Capital I, L.P. of which Mr.
Lundeen is the managing general partner.
(4) $141,000 of which represents an intercompany payable for services performed
by and expenditures paid by Citadel in support of How2.com's initial
operations, which amount was converted into equity subsequent to June 30,
1999.
(5) Represents shares owned by Icarus Investments I, Ltd., of which Mr. Ruff is
the president of the general partner. Mr. Ruff is also a director of
Citadel.
Shares held by all affiliated persons and entities have been aggregated.
See the notes to the table on beneficial ownership in "Principal Stockholders"
for more information regarding the beneficial ownership of the shares held by
these purchasers.
We sold the shares of our common stock to finance our development
activities, operations and acquisitions. We issued the shares of common stock to
Citadel on January 7, 1999 in a private transaction for a promissory note plus
the provision of services including administrative, personnel, facilities and
financial services through June 30, 1999. We issued other shares of common stock
between February 1, 1999 and September 30, 1999 in private transactions to a
limited number of individuals and institutional investors at a per share
purchase price ranging from $1.25 to $8.00, resulting in aggregate proceeds to
us of approximately $28.0 million. None of the investors were affiliated with
How2.com prior to purchasing these shares, other than Mr. Lacerte, who served as
a director of Citadel at the time, and Mr. Ruff, also a director of Citadel.
In addition, some of our directors and executive officers have exercised
options. We granted options to purchase 6,600,000 shares of common stock to Mr.
Solomon (5,000,000 of which have been exercised at a weighted average exercise
price of $0.07 per share), 3,800,000 shares to Mr. Johnsen (2,000,000 of which
have been exercised at a weighted average exercise price of $0.025 per share),
600,000 shares to Mr. Economou (100,000 of which have been exercised at a
weighted average exercise price of $0.25 per share), 600,000 shares to Mr.
Rogers (100,000 of which have been exercised at a weighted average exercise
price of $0.25 per share) and 800,000 to Mr. Wood (100,000 of which have been
exercised at a weighted average exercise price of $0.25 per share). See
"Management -- Director Compensation" and "Principal Stockholders."
We intend to enter into an indemnification agreement with each of our
executive officers and directors.
We loaned an aggregate of $700,000 to Steven B. Solomon, our Chairman and
Chief Executive Officer, which loans have been repaid. These loans bore interest
at five percent per annum, had a maturity of less than two years, were full
recourse and were secured by a pledge of 4,000,000 shares of our stock owned by
Mr. Solomon. In addition, in July 1999 after repayment of the $700,000 in loans,
we loaned $250,000 to Mr. Solomon, which has been repaid in full. This loan
which bore interest at five percent per
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annum was full recourse, had a maturity of less than three months, and was
secured by a pledge of 1,000,000 shares of our common stock owned by Mr.
Solomon.
We loaned $50,000 to Kenneth R. Johnsen, our President and Chief Operating
Officer, which loan has been repaid. This loan bore interest at five percent per
annum, had a maturity of less than two years, was full recourse and was secured
by a pledge of 2,000,000 shares of our common stock owned by Mr. Johnsen. In
addition, after repayment of the $50,000 loan, we loaned $750,000 to Mr.
Johnsen, which we anticipate will be repaid prior to the completion of our
initial public offering. This loan bears interest at five percent per annum, is
full recourse, has a maturity of less than two years and is secured by a pledge
of all of the shares of our common stock owned by Mr. Johnsen.
All material future transactions, including loans, between us and our
officers, directors, principal stockholders and their affiliates will be
approved by the audit committee of our board of directors, including a majority
of the independent and disinterested outside directors.
CERTAIN TRANSACTIONS WITH CITADEL
As of September 30, 1999, Citadel owned approximately 46.0% of our
outstanding shares of common stock. Through June 30, 1999, the Company received
various services provided by Citadel, including the services of a number of its
executives and employees. In consideration for these services, Citadel allocated
a portion of its overhead costs related to such services to How2.com. These
allocated expenses, totaling approximately $141,000, were contributed to
How2.com as a portion of the consideration for the shares issued to Citadel.
Management of How2.com believes that the amounts allocated to How2.com have been
no less favorable to it than the expenses it would have incurred to obtain such
services on its own or from unaffiliated third parties. None of these services
have been provided to How2.com pursuant to any written agreement between
How2.com and Citadel. In addition, Citadel has guaranteed the obligation of
How2.com under our lease in Santa Monica, California.
In the past, Citadel has borrowed cash from How2.com to cover short term
cash requirements. How2.com has made those loans to Citadel, totaling
approximately $451,000, pursuant to a promissory note secured by 300,000 shares
of our common stock owned by Citadel. The note is due upon demand and bears
interest at five percent per annum.
Citadel has announced that, subject to compliance with Commission
regulations and the expiration of a lock-up agreement with our underwriters, it
intends to initiate a spin-off distribution of 3,000,000 of the shares of our
common stock that it owns, approximately 180 days after the consummation of our
initial public offering.
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<PAGE> 63
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of September 30, 1999, by the following persons:
- each person or entity who we know to own beneficially more than five
percent of our common stock;
- each of our directors; and
- all of our directors and executive officers as a group.
The number of shares of common stock outstanding after our initial public
offering includes shares of common stock being offered for sale by us in
our initial public offering. The percentage of beneficial ownership for the
following table is based on 43,625,788 shares of common stock outstanding as of
September 30, 1999, and shares of common stock outstanding after the
completion of our initial public offering assuming no exercise of the
underwriters' over-allotment option.
Under the rules of the Commission, beneficial ownership includes voting or
investment power with respect to securities and includes the shares issuable
under stock options and warrants that are exercisable within 60 days after
September 30, 1999. Shares issuable under stock options and warrants are deemed
outstanding for computing the percentage of the person holding options or
warrants but are not outstanding for computing the percentage of any other
person. Accordingly, the following table includes information regarding shares
issuable under stock options and warrants exercisable within 60 days for the
persons indicated and for all directors and executive officers as a group.
Unless otherwise indicated, the address for each listed stockholder is c/o
How2.com, Inc., 3811 Turtle Creek Boulevard, Suite 600, Dallas, Texas 75219. To
our knowledge, except as indicated in the footnotes to this table and under
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT BENEFICIALLY OWNED(1)
OWNED --------------------------------
NAME OF BENEFICIAL OWNER NUMBER(1) BEFORE OFFERING AFTER OFFERING
- ------------------------ ------------ --------------- --------------
<S> <C> <C> <C>
Steven B. Solomon(2)........................................ 25,200,000 57.5% %
Kenneth R. Johnsen(3)....................................... 2,327,333 5.2
Lawrence Lacerte(4)......................................... 2,737,500 6.2
David S. Lundeen(5)......................................... 1,123,333 2.6
Mark Rogers(6).............................................. 327,500 *
Chris A. Economou(7)........................................ 287,500 *
Michael Hammer Ph.D.(8)..................................... 16,667 *
John W. Thompson(8)......................................... 16,667 *
Edward L. Pierce(9)......................................... 36,667 *
Robert E. Pickering, Jr.(8)................................. 16,667 *
Victor K. Kiam II(10)....................................... 166,667 *
Michael A. Ruff(11)
8144 Walnut Hill Ln., Suite 172
Dallas, Texas 75321....................................... 3,000,000 6.7
Citadel Technology, Inc.
3811 Turtle Creek Blvd., Suite 770
Dallas, Texas 75219....................................... 20,000,000 45.8
All Directors and Executive Officers as a Group (18
persons)(12).............................................. 33,154,001 71.4%
</TABLE>
- ---------------
* Less than 1%.
(1) Excludes a pro rata portion of the 3,000,000 shares as to which Citadel
intends to initiate a spin-off dividend approximately 180 days after our
initial public offering, upon expiration of a lock-up agreement between
Citadel and our underwriters.
(2) Includes 20,000,000 shares owned by Citadel of which Mr. Solomon serves as
President, Chief Executive Officer and a director. Mr. Solomon disclaims
ownership of these shares. Also includes, 200,000 shares issuable pursuant
to options that are currently exercisable or exercisable within 60 days.
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<PAGE> 64
(3) Includes 833,333 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days. Excludes 20,000,000 shares owned
by Citadel of which Mr. Johnsen serves as a director. Mr. Johnsen disclaims
ownership of the Citadel shares.
(4) Includes 337,500 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days. Excludes 20,000,000 shares owned
by Citadel of which Mr. Lacerte serves as a director. Mr. Lacerte disclaims
ownership of the Citadel shares.
(5) Includes 1,000,000 shares owned by Watershed Capital I, L.P., of which Mr.
Lundeen is the managing general partner, and 83,333 shares issuable
pursuant to options that are currently exercisable or exercisable within 60
days.
(6) Includes 187,500 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days. Excludes 20,000,000 shares owned
by Citadel of which Mr. Rogers serves as a director. Mr. Rogers disclaims
ownership of the Citadel shares.
(7) Includes 187,500 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days. Excludes 20,000,000 shares owned
by Citadel of which Mr. Economou serves as a director. Mr. Economou
disclaims ownership of the Citadel shares.
(8) Includes 16,667 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days.
(9) Includes 16,667 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days. Excludes 20,000,000 shares owned
by Citadel of which Mr. Pierce serves as a director. Mr. Pierce disclaims
ownership of the Citadel shares.
(10) Includes 166,667 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days. Excludes 20,000,000 shares owned
by Citadel of which Mr. Kiam serves as a director. Mr. Kiam disclaims
ownership of the Citadel shares.
(11) Includes 2,000,000 shares owned by Icarus Investments I, Ltd., of which Mr.
Ruff is the president of the general partner, 600,000 shares issuable
pursuant to warrants issued to Icarus, 300,000 shares issuable pursuant to
warrants issued to Mr. Ruff and 100,000 shares issuable pursuant to
warrants issued to Ruff Family Limited Partnership, of which Icarus is
general partner. These warrants are currently exercisable. Excludes
20,000,000 shares owned by Citadel of which Mr. Ruff serves as a director.
Mr. Ruff disclaims ownership of the Citadel shares.
(12) Represents 10,334,000 shares, options to purchase 2,820,001 shares that are
currently exercisable or exercisable within 60 days and 20,000,000 shares
owned by Citadel.
In addition, upon consummation of the proposed spin-off distribution, our
directors and officers who were stockholders of Citadel as of the record date of
the spin-off will receive a pro rata portion of the shares of our common stock
in respect of shares of Citadel common stock held by them on the record date for
the distribution.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 120,000,000 shares of common
stock, $.01 par value, and 1,000,000 shares of preferred stock, $.01 par value,
as described below.
COMMON STOCK
As of September 30, 1999, there were 43,625,788 shares of common stock
outstanding that were held of record by approximately 170 stockholders. There
will be shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option and assuming no exercise after ,
1999 of outstanding options, after giving effect to the sale of the shares of
common stock offered in our initial public offering.
Subject to preferences that may be applicable to any preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available at times and in
amounts as the board may determine from time to time. See "Dividend Policy". The
holders of common stock are entitled to one vote per share on all matters to be
voted upon by the stockholders. Upon the liquidation, dissolution or winding up
of How2.com, the holders of our common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The common stock has no
preemptive or conversion rights and is not subject to redemption. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon completion of our initial public
offering will be fully paid and nonassessable.
PREFERRED STOCK
Our Amended and Restated Certificate of Incorporation authorizes 1,000,000
shares of preferred stock. The board of directors has the authority to issue the
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions of each series, such as dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the right to increase or decrease the number of
shares of any series, without further vote or action by the stockholders. The
board of directors may issue preferred stock with voting or conversion rights
that may have the effect of delaying, deferring or preventing a change in
control of How2.com and could adversely affect the market price of the common
stock and the voting and other rights of the holders of common stock. No shares
of preferred stock are outstanding as of the date of this prospectus, and we
currently have no plans to issue any of the preferred stock.
WARRANTS
As of September 30, 1999, there were warrants outstanding to purchase
800,000 shares of common stock with an exercise price of $2.50 that were issued
in connection with the acquisition of Forward, which warrants expire on May 21,
2001. These warrants are subject to an earnout provision. In addition, we issued
warrants in connection with the sale of our common stock to purchase 1,000,000
shares at a weighted average exercise price of $1.08 per share to affiliates of
a Citadel director who is a significant stockholder of our company. These
warrants expire between January and April 2001.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND DELAWARE LAW
Charter
Our Amended and Restated Certificate of Incorporation includes a number of
provisions that may have the effect of deterring or impeding hostile takeovers
or changes of control or management. These provisions include:
- our board of directors is classified into three classes of directors as
nearly equal in size as possible with staggered three year terms;
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- the authority of our board of directors to issue up to 1,000,000 shares
of preferred stock and to determine the price and the rights preferences
and privileges of these shares, without stockholder approval;
- stockholders must give advance notice prior to nominating directors or
making any stockholder proposals at annual meetings;
- directors can only be removed between annual meetings due to cause as
determined by the vote of 80% of our outstanding shares and only
incumbent directors can fill vacancies on the board of directors; and
- only the incumbent directors can increase or decrease the size of the
board of directors.
See "Risk Factors -- We have implemented anti-takeover provisions that could
make it more difficult for a third party to acquire us".
Delaware Takeover Statute
Upon the closing of our initial public offering, we will be subject to
Section 203 of the Delaware General Corporation Law, which, subject to various
exceptions, prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that the stockholder became an interested stockholder. This
restriction applies unless:
- the transaction is approved by the board of directors prior to the date
the stockholder became an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by (1) persons who are
directors and also officers and (2) employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- on or subsequent to the date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder, subject to various exceptions;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person who owns 15% or more of the outstanding voting stock of the corporation,
and any entity or person affiliated with or controlling or controlled by the
entity or person.
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REGISTRATION RIGHTS
After our initial public offering, the holders of approximately 15,924,468
shares of outstanding common stock will be entitled to rights with respect to
the registration of these shares under the Securities Act, except to the extent
such shares eligible for resale under Rule 144. The holders of registration
rights are those investors that purchased shares of our common stock, as well as
former shareholders of Forward and BPG. Under the terms of the agreements
between us and the holders of these registrable securities, if we propose to
register any of our securities under the Securities Act, either for our own
account or for the account of other security holders exercising registration
rights, the holders are entitled to notice of the registration and are entitled
to include these shares in the registration. Further, we have agreed with these
holders to file a registration statement after our initial public offering.
These rights are subject to conditions and limitations, including the right of
the underwriters of an offering to limit the number of shares included in that
registration under certain circumstances. In addition, the underwriters of our
initial public offering have requested, and the holders of these shares have
agreed, to enter into lock-up agreements pursuant to which these stockholders
would agree not to sell their shares for 180 days following our initial public
offering. Registration of these shares under the Securities Act, and their
subsequent sale pursuant to such registration, would result in these shares
becoming freely tradable without restriction under the Securities Act
immediately upon the effectiveness of the registration, except for shares
purchased by affiliates.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is American
Securities Transfer Corporation, Lakewood, Colorado.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to our initial public offering, there has been no market for our
common stock. Therefore, future sales of substantial amounts of our common stock
in the public market could adversely affect market prices prevailing from time
to time. Furthermore, because only a limited number of shares will be available
for sale shortly after our initial public offering due to existing contractual
and legal restrictions on resale as described below, sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and our ability to raise
equity capital in the future.
Upon completion of our initial public offering, we will have
shares of common stock outstanding. The shares sold in our initial public
offering will be freely transferable without restriction or registration under
the Securities Act, except for any shares purchased by one of our existing
"affiliates," as that term is defined in Rule 144 under the Securities Act. The
remaining 43,625,788 shares of outstanding common stock are "restricted shares",
as defined in Rule 144. Restricted shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under the
Securities Act. As a result of the contractual restrictions described below and
the provisions of Rule 144, none of the restricted shares will be eligible for
immediate sale on the date of this prospectus.
Holders of 15,924,468 of the restricted shares have registration rights
relating to those shares. We intend to file a registration statement under the
Securities Act covering the resale of those restricted shares approximately 180
days after our initial public offering, except to the extent such shares are
then eligible for resale under Rule 144.
LOCK-UP AGREEMENTS
How2.com, our directors and executive officers and Citadel and some of our
other stockholders and option holders have each agreed not to offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of common
stock or any securities
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convertible into or exercisable or exchangeable for common stock, for a period
of 180 days after the date of this prospectus, without the prior written consent
of The Robinson-Humphrey Company, LLC, subject to limited exceptions. The
Robinson-Humphrey Company, LLC, however, may in its sole discretion, at any time
without notice, release all or any portion of the shares subject to lock-up
agreements.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
our initial public offering, a person who owns shares that were purchased from
us at least one year previously, is entitled to sell within any three-month
period a number of shares that does not exceed the greater of
- one percent of our then-outstanding shares of common stock, which will
equal approximately shares immediately after our initial public
offering, or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice of the sale on Form 144.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us. Any
person whose shares are aggregated who is not deemed to have been one of our
affiliates at any time during the three months preceding a sale, and who owns
shares within the definition of "restricted securities" under Rule 144 that were
purchased from us at least two years previously, will be entitled to sell the
shares under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements.
STOCK OPTIONS AND WARRANTS
As of September 30, 1999, options and warrants to purchase a total of
18,044,750 shares of our common stock were outstanding, of which 3,799,445 were
currently exercisable. Holders of options and warrants to purchase approximately
14,790,000 shares of our common stock are subject to 180 day lock-up agreements.
An additional 6,000,000 shares of common stock will be available for future
grants under the 1999 Stock Incentive Plan and an additional 200,000 shares of
common stock will be available for future grants under the 1999 Non-Employee
Directors' Stock Option Plan.
We intend to file a Form S-8 registration statement under the Securities
Act covering all shares of common stock subject to outstanding options or
issuable pursuant to our 1999 Stock Incentive Plan and 1999 Non-Employee
Directors' Stock Option Plan approximately 30 days after the closing of our
initial public offering. Subject to Rule 144 volume limitations applicable to
affiliates, shares registered under the Form S-8 registration statement will be
available for sale in the open market, beginning 90 days after the date of this
prospectus, except to the extent that the shares are subject to vesting
restrictions with us or the contractual restrictions described above.
We cannot predict the effect, if any, that market sales of shares of common
stock, or the availability of shares for sale, will have on the market price of
the common stock. Nevertheless, sales of a large number of shares of common
stock in the public market could adversely affect the market price of the common
stock and could impair our future ability to raise capital through an offering
of our equity securities.
65
<PAGE> 69
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
among How2.com and the underwriters named below, for whom The Robinson-Humphrey
Company, LLC is acting as the representative, How2.com has agreed to sell, and
the underwriters have severally agreed to purchase, the number of shares set
forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ---- ----------------
<S> <C>
The Robinson-Humphrey Company, LLC..........................
Total.............................................
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in our initial public offering are
subject to approval of certain legal matters by counsel and to certain other
conditions. The underwriters are obligated to purchase all the shares, other
than those covered by the over-allotment option described below, if they
purchase any of the shares.
The underwriters propose to offer the shares directly to the public at the
public offering price set forth on the cover page of this prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share in sales to certain other dealers. After the
offering, the public offering price and other selling terms may be changed.
How2.com has granted to the underwriters a 30-day option to purchase up to
an additional shares of common stock at the public offering price less
the underwriting discount. The underwriters may exercise such option solely for
the purpose of covering over-allotments, if any, in connection with our initial
public offering. If the underwriters exercise their over-allotment option, each
underwriter will be obligated, subject to certain conditions, to purchase a
number of additional shares of common stock approximately proportionate to such
underwriter's initial purchase commitment.
How2.com, its executive officers, directors and stockholders, including
Citadel, have agreed that, for a period of 180 days from the date of this
prospectus, they will not, without the prior written consent of The
Robinson-Humphrey Company, LLC, offer, sell, contract to sell, or otherwise
dispose of, any shares of common stock of How2.com or any securities convertible
into, or exercisable or exchangeable for, common stock of How2.com. The
Robinson-Humphrey Company, LLC, in its sole discretion, may release any of the
securities subject to these lock-up agreements at any time without notice.
We intend to apply to list the shares of our common stock on The Nasdaq
Stock Market's National Market under the symbol "HWTO".
66
<PAGE> 70
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by How2.com in connection with our initial public
offering. These amounts are shown assuming both no exercise and full exercise of
the underwriter's option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
PAID BY HOW2.COM
-------------------
NO FULL
EXERCISE EXERCISE
-------- --------
<S> <C> <C>
Per share...................................................
Total.............................................
</TABLE>
In connection with the offering, The Robinson-Humphrey Company, LLC, on
behalf of the underwriters, may over-allot, or engage in syndicate covering
transactions, stabilizing transactions and penalty bids. Over-allotment involves
syndicate sales of common stock in excess of the number of shares to be
purchased by the underwriters in the offering, which creates a syndicate short
position. Syndicate covering transactions involve purchases of common stock in
the open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of common stock made for the purpose of preventing or retarding a
decline in the market price of the common stock while the offering is in
progress. Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when The Robinson-Humphrey Company, LLC, in covering
syndicate short positions or making stabilizing purchases, repurchases shares
originally sold by that syndicate member. These activities may cause the price
of the common stock to be higher than the price that otherwise would exist in
the open market in the absence of such transactions. These transactions may be
effected on The Nasdaq Stock Market's National Market or in the over-the-counter
market or otherwise and, if commenced, may be discontinued at any time.
How2.com has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
The underwriters have reserved for sale, at the public offering price, up
to shares of common stock for persons designated by How2.com who have
expressed an interest in purchasing such shares of common stock in our initial
public offering. The number of shares available for sale to the general public
in our initial public offering will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the other
shares offered hereby. The underwriters are aware of the "Free-Riding and
Withholding" Conduct Rules of the National Association of Securities Dealers in
connection with the sale of certain issuer-directed securities and will comply
with those rules.
Prior to our initial public offering, there has been no public market for
our shares of common stock. Consequently, our initial public offering price will
be determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in determining our initial
public offering price will be:
- the future prospects of How2.com and its industry in general;
- sales, earnings and certain other financial operating information of
How2.com in recent periods; and
- the price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of companies
engaged in activities similar to those of How2.com.
The estimated initial public offering price range set forth on the cover
page of this prospectus is subject to change as a result of market conditions
and other factors.
67
<PAGE> 71
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Hughes & Luce, L.L.P., Dallas, Texas. Certain legal matters will be passed
upon for the underwriters by Kilpatrick Stockton LLP, Atlanta, Georgia.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at June 30, 1999, and for the period from January 7, 1999 (inception)
to June 30, 1999, and the combined financial statements of Forward at May 20,
1999, and for the period from January 1, 1999 to May 20, 1999, as set forth in
their reports. We have included the combined financial statements of Forward,
the Predecessor, as of and for the period ending May 20, 1999, and our financial
statements in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's reports, given on their authority as experts in
accounting and auditing.
The consolidated financial statements of the Predecessor, Forward, as of
December 31, 1997 and 1998 and for each of the years in the two-year period
ended December 31, 1998 have been included in this registration statement in
reliance upon the report of Grant Thornton LLP, independent auditors, given and
upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a registration statement on Form S-1
(including exhibits and schedules thereto) under the Securities Act with respect
to the common stock to be sold in our initial public offering. This prospectus,
which constitutes a part of the registration statement, does not contain all of
the information set forth in the registration statement or the exhibits and
schedules which are part of the registration statement. For further information
with respect to How2.com and our common stock, reference is made to the
registration statement and the exhibits and schedules thereto.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information in our files in the Commission's
public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C., 20549 and at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of
these documents upon payment of a duplicating fee, by writing to the Commission.
You may call the Commission (1-800-SEC-0330) for further information on the
operation of its public reference rooms. Our filings with the Commission,
including the registration statement, will also be available to you on the
Commission's website (http://www.sec.gov).
68
<PAGE> 72
HOW2.COM, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young, LLP, Independent Auditors -- The
Company................................................... F-2
Report of Ernst & Young, LLP, Independent Auditors -- The
Predecessor............................................... F-3
Report of Grant Thornton, LLP, Independent Auditors -- The
Predecessor............................................... F-4
Balance Sheets as of December 31, 1997 and 1998, May 20,
1999 and June 30, 1999.................................... F-5
Statements of Operations for the years ended December 31,
1997 and 1998, the period from January 1, 1999 to May 20,
1999, and the period from January 7, 1999 to June 30,
1999...................................................... F-6
Statements of Stockholders' Equity for the years ended
December 31, 1997 and 1998, the period from January 1,
1999 to May 20, 1999, and the period from January 7, 1999
to June 30, 1999.......................................... F-7
Statements of Cash Flows for the years ended December 31,
1997 and 1998, the period from January 1, 1999 to May 20,
1999, and the period from January 7, 1999 to June 30,
1999...................................................... F-9
Notes to Financial Statements............................... F-10
</TABLE>
F-1
<PAGE> 73
REPORT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS -- THE COMPANY
The Board of Directors
How2.com, Inc.
We have audited the accompanying consolidated balance sheet of How2.com,
Inc. and subsidiaries (the Company) as of June 30, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the period from inception (January 7, 1999) to June 30, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
How2.com, Inc. and subsidiaries as of June 30, 1999, and the results of their
operations and their cash flows for the period from inception (January 7, 1999)
to June 30, 1999 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
October 8, 1999
F-2
<PAGE> 74
REPORT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS -- THE PREDECESSOR
The Board of Directors
How2.com, Inc.
We have audited the accompanying combined balance sheet of Forward
Communications, Inc., Forward Freight, Inc. and FCI Services, Inc. (collectively
"Forward Companies") as of May 20, 1999, and the related combined statements of
operations, stockholders' equity and cash flows for the period from January 1,
1999 to May 20, 1999. These combined financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Forward
Companies as of May 20, 1999, and the results of their operations and their cash
flows for the period from January 1, 1999 to May 20, 1999 in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
October 8, 1999
F-3
<PAGE> 75
REPORT OF GRANT THORNTON, LLP, INDEPENDENT AUDITORS -- THE PREDECESSOR
The Board of Directors
Forward Communications, Inc.
Forward Freight, Inc.
FCI Services, Inc.
We have audited the accompanying combined balance sheets of Forward
Communications, Inc., Forward Freight, Inc. and FCI Services, Inc. (collectively
"Forward Companies") as of December 31, 1998 and 1997, and the related combined
statements of operations, changes in stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 referred to above present fairly,
in all material respects, the combined financial position of Forward Companies
as of December 31, 1998 and 1997, and the combined results of their operations
and their combined cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Dallas, Texas
May 7, 1999
F-4
<PAGE> 76
HOW2.COM, INC. AND SUBSIDIARIES
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PREDECESSOR HOW2.COM
---------------------------------------- -----------
DECEMBER 31, DECEMBER 31, MAY 20, JUNE 30,
1997 1998 1999 1999
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....................... $ 395,468 $ 329,280 $ 1,854 $ 5,532,629
Marketable securities, available for sale....... 107,049 419,014 249,981 252,049
Accounts receivable............................. 519,967 3,887,191 3,477,886 4,307,354
Subscription receivable......................... -- -- -- 160,000
Receivables from stockholders................... 155,664 66,314 -- --
Notes receivable from officers and affiliates... -- 14,314 78,266 819,652
Prepaid expense and other current assets........ 36,931 44,052 157,315 207,736
---------- ---------- ---------- -----------
Total current assets..................... 1,215,079 4,760,165 3,965,302 11,279,420
Property and equipment, net....................... 301,264 685,563 559,966 1,193,705
Intangible assets, net............................ -- -- -- 3,480,962
Goodwill, net..................................... -- -- -- 11,051,000
Deferred income tax asset......................... -- -- 41,464 --
Other assets...................................... -- -- 861 85,249
---------- ---------- ---------- -----------
Total assets............................. $1,516,343 $5,445,728 $4,567,593 $27,090,336
========== ========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 149,527 $ 120,511 $ 173,918 $ 743,235
Promotion payable............................... 330,963 4,380,963 5,710,488 5,995,161
Accrued liabilities............................. 4,271 60,704 86,541 404,365
Payable to Citadel.............................. -- -- -- 140,786
Deferred income................................. -- -- -- 11,799
Deferred income tax liability................... 48,300 11,700 38,478 --
Current portion of long-term debt and capital
lease obligations............................. 34,810 36,455 34,687 47,570
Other current liabilities....................... 15,000 -- 1,277 82,981
---------- ---------- ---------- -----------
Total current liabilities................ 582,871 4,610,333 6,045,389 7,425,897
Deferred income tax liability..................... -- -- -- 1,386,056
Long-term debt and capital lease obligations...... 24,377 198,840 151,657 155,390
Commitments and contingencies.....................
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000
shares authorized; no shares issued or
outstanding................................... -- -- -- --
Common stock -- How2.com -- $0.01 par value;
120,000,000 shares authorized; 40,056,988
shares issued and outstanding................. -- -- -- 400,570
Common stock -- Predecessor..................... 2,000 3,000 3,000 --
Additional paid-in capital...................... -- -- -- 26,712,615
Accumulated other comprehensive income (loss)... 5,496 (4,015) 5,138 946
Retained earnings (deficit)..................... 901,599 637,570 (1,637,591) (2,159,024)
Notes receivable from officers and affiliates... -- -- -- (124,250)
Deferred compensation........................... -- -- -- (6,707,864)
---------- ---------- ---------- -----------
Total stockholders' equity............... 909,095 636,555 (1,629,453) 18,122,993
---------- ---------- ---------- -----------
Total liabilities and stockholders'
equity................................. $1,516,343 $5,445,728 $4,567,593 $27,090,336
========== ========== ========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 77
HOW2.COM, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR HOW2.COM
--------------------------------------------- ---------------
YEAR ENDED YEAR ENDED JANUARY 7, 1999
DECEMBER 31, DECEMBER 31, JANUARY 1, 1999 (INCEPTION) TO
1997 1998 TO MAY 20, 1999 JUNE 30, 1999
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Net revenues............................ $2,171,978 $3,227,914 $ 2,234,473 $ 567,354
Revenues from acquired contracts........ -- -- -- 305,199
---------- ---------- ----------- -----------
Total revenues........................ 2,171,978 3,227,914 2,234,473 872,553
Cost of revenue......................... 935,501 645,020 353,151 121,938
Cost of revenue from acquired
contracts............................. -- -- -- 217,913
---------- ---------- ----------- -----------
Gross profit....................... 1,236,477 2,582,894 1,881,322 532,702
Operating expenses:
Selling, general and administrative... 1,148,223 2,733,635 4,096,429 1,787,007
Stock-based compensation.............. -- -- -- 417,666
Depreciation and amortization......... 99,139 104,589 24,166 533,531
---------- ---------- ----------- -----------
Total operating expense............ 1,247,362 2,838,224 4,120,595 2,738,204
---------- ---------- ----------- -----------
Loss from operations............. (10,885) (255,330) (2,239,273) (2,205,502)
Other income (expense):
Interest income....................... 23,596 33,714 27,234 49,639
Interest expense...................... (6,998) (5,258) (12,433) (3,161)
Miscellaneous income (expense)........ 16,258 9,670 (91,384) --
---------- ---------- ----------- -----------
Total other income (expense)..... 32,856 38,126 (76,583) 46,478
---------- ---------- ----------- -----------
Income (loss) before income taxes....... 21,971 (217,204) (2,315,856) (2,159,024)
Tax (benefit) provision............... 62,618 (25,518) (40,695) --
---------- ---------- ----------- -----------
Net loss...................... $ (40,647) $ (191,686) $(2,275,161) $(2,159,024)
========== ========== =========== ===========
Basic and diluted net loss per share.... $ (0.07)
===========
Weighted average shares of common stock
outstanding used in computing basic
and diluted net loss per share........ 32,842,533
===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 78
HOW2.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK RETAINED OTHER TOTAL
---------------- EARNINGS COMPREHENSIVE STOCKHOLDERS'
PREDECESSOR: SHARES AMOUNT (DEFICIT) INCOME (LOSS) EQUITY (DEFICIT)
- ------------ ------- ------ ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997.............. 110,000 $2,000 $ 1,072,182 $ -- $ 1,074,182
Comprehensive income (loss):
Net loss............................ -- -- (40,647) -- (40,647)
Unrealized gain on marketable
securities available for sale.... -- -- -- 5,496 5,496
-----------
Total comprehensive income (loss)... (35,151)
Distributions to stockholders....... -- -- (129,936) -- (129,936)
------- ------ ----------- ------- -----------
Balance, December 31, 1997............ 110,000 2,000 901,599 5,496 909,095
Comprehensive income (loss):
Net loss............................ -- -- (191,686) -- (191,686)
Unrealized loss on marketable
securities available for sale.... -- -- -- (9,511) (9,511)
-----------
Total comprehensive income (loss)... (201,197)
Issuance of 100,000 shares of FCI
Services, Inc. common stock...... 100,000 1,000 -- -- 1,000
Distributions to stockholders....... -- -- (72,343) -- (72,343)
------- ------ ----------- ------- -----------
Balance, December 31, 1998............ 210,000 3,000 637,570 (4,015) 636,555
Comprehensive income (loss):
Net loss............................ -- -- (2,275,161) -- (2,275,161)
Unrealized gain on marketable
securities available for sale.... -- -- -- 9,153 9,153
Total comprehensive income (loss)... (2,266,008)
------- ------ ----------- ------- -----------
Balance, May 20, 1999................. 210,000 $3,000 $(1,637,591) $ 5,138 $(1,629,453)
======= ====== =========== ======= ===========
</TABLE>
F-7
<PAGE> 79
HOW2.COM, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED NOTES
OTHER RECEIVABLE-
COMMON STOCK ADDITIONAL COMPREHENSIVE RETAINED OFFICERS
--------------------- PAID-IN INCOME EARNINGS AND DEFERRED
HOW2.COM: SHARES AMOUNT CAPITAL (LOSS) (DEFICIT) AFFILIATES COMPENSATION
- --------- ---------- -------- ----------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock upon inception
of the Company
(January 7, 1999).... 20,000,000 $200,000 $ (150,000) $ -- $ -- $ (50,000) $ --
Issuance of common
stock upon exercise
of stock options..... 6,300,000 63,000 162,000 -- -- (74,250) --
Issuance of common
stock through private
equity offerings, net
of issuance costs of
$240,000............. 10,255,668 102,557 15,609,485 -- -- -- --
Issuance of common
stock for
acquisitions......... 3,400,000 34,000 3,966,000 -- -- -- --
Issuance of common
stock and stock
options for
compensation......... 101,320 1,013 7,125,130 -- -- -- (7,060,200)
Amortization of
deferred
compensation......... -- -- -- -- -- -- 352,336
Unrealized gain on
marketable securities
available for sale... -- -- -- 946 -- -- --
Net loss since
inception............ -- -- -- -- (2,159,024) -- --
---------- -------- ----------- ----------- ----------- --------- -----------
40,056,988 $400,570 $26,712,615 $ 946 $(2,159,024) $(124,250) $(6,707,864)
========== ======== =========== =========== =========== ========= ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
HOW2.COM: EQUITY
- --------- -------------
<S> <C>
Issuance of common
stock upon inception
of the Company
(January 7, 1999).... $ --
Issuance of common
stock upon exercise
of stock options..... 150,750
Issuance of common
stock through private
equity offerings, net
of issuance costs of
$240,000............. 15,712,042
Issuance of common
stock for
acquisitions......... 4,000,000
Issuance of common
stock and stock
options for
compensation......... 65,943
Amortization of
deferred
compensation......... 352,336
Unrealized gain on
marketable securities
available for sale... 946
Net loss since
inception............ (2,159,024)
------------
$ 18,122,993
============
</TABLE>
See accompanying notes.
F-8
<PAGE> 80
HOW2.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR HOW2.COM
----------------------------------------- -------------
PERIOD
PERIOD FROM FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1999 JANUARY 7,
----------------------- TO MAY 20, 1999 TO
1997 1998 1999 JUNE 30, 1999
--------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................... $ (40,647) $ (191,686) $(2,275,161) $(2,159,024)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation......................................... 99,139 104,589 24,166 71,487
Amortization......................................... -- -- -- 462,044
Loss on sale of property and equipment............... 3,962 2,203 218,460 --
Loss on sale of marketable securities................ -- -- 43,629 --
Stock-based compensation expense..................... -- -- -- 417,666
Reduction in receivables from stockholders through
compensation....................................... -- 76,841 -- --
Deferred income tax expense (benefit)................ 48,300 (36,600) (14,686) --
Changes in operating assets and liabilities:
Accounts receivable................................ (298,336) (3,367,224) 409,305 (829,468)
Accounts payable and accrued liabilities........... (46,592) 27,417 79,244 887,141
Promotion payable.................................. 330,963 4,050,000 1,329,525 284,673
Payable to Citadel................................. -- -- -- 140,786
Deferred income.................................... -- -- -- 11,799
Other.............................................. (4,786) (40,435) (113,623) (53,359)
--------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities.................................. 92,003 625,105 (299,141) (766,255)
INVESTING ACTIVITIES:
Acquisition of Forward, net of cash received........... -- -- -- (8,050,692)
Cash acquired in 2-Lane transaction.................... -- -- -- 77,284
Purchase of property and equipment..................... (112,354) (506,632) (145,560) (705,222)
Proceeds from sale of equipment........................ 18,847 15,541 29,307 --
Purchase of marketable securities...................... (104,622) (332,001) -- (1,122)
Maturities of marketable securities.................... 102,728 10,525 134,557 --
--------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities.................................. (95,401) (812,567) 18,304 (8,679,752)
FINANCING ACTIVITIES:
Payments on (issuance of) note receivable.............. 17,000 19,000 (63,952) (590,635)
Payments received (made) on receivables from
stockholders......................................... 13,619 (59,834) 66,314 --
Payments on long-term debt and capital lease
obligations.......................................... (82,182) (74,418) (48,951) --
Proceeds from long-term debt........................... 60,400 235,526 -- 16,616
Net proceeds from issuance of common stock............. -- 1,000 -- 15,552,655
Distributions to stockholders.......................... (129,936) -- -- --
--------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities.................................. (121,099) 121,274 (46,589) 14,978,636
--------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents... (124,497) (66,188) (327,426) 5,532,629
Cash and cash equivalents at beginning of period....... 519,965 395,468 329,280 --
--------- ----------- ----------- -----------
Cash and cash equivalents at end of period............. $ 395,468 $ 329,280 $ 1,854 $ 5,532,629
========= =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid.......................................... $ 6,998 $ 5,258 $ 12,433 $ 3,161
========= =========== =========== ===========
Taxes paid............................................. 13,042 14,000 -- --
========= =========== =========== ===========
Noncash investing and financing activities:
Receivable transferred to a stockholder as a
distribution......................................... $ -- $ 72,343 $ -- $ --
========= =========== =========== ===========
</TABLE>
See accompanying notes.
F-9
<PAGE> 81
HOW2.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
How2.com, Inc. was incorporated in the State of Delaware in January 1999.
On January 7, 1999, the company issued 20,000,000 shares of common stock to
Citadel Technology, Inc., a publicly held company ("Citadel"). All references to
the "Company" or "How2" refer to How2.com, Inc. and include its subsidiaries.
The Company was formed on January 7, 1999 for the purpose of developing a
digital marketplace where manufacturers, retailers, content providers and
consumers come together to satisfy interdependent market needs. At June 30,
1999, the Company was in the process of developing internet channels that will
offer our retailers and manufacturers (e-partners(TM)) the opportunity to
selectively associate their company with products, tutorials, editorials or
current events to a highly targeted audience in a non-threatening environment.
In addition, the Company offers our e-seekers(TM) entertaining relevant tutorial
information, e-commerce opportunities and services including online rebate
processing.
On May 20, 1999, the Company purchased the stock of the Forward Companies
("Forward"), a leading product rebate and promotional fulfillment operation that
offered solutions for designing, implementing and fulfilling merchandise and
consumer rebate programs. Consideration paid in connection with the acquisition
totaled $10,500,000 and $52,000 in acquisition costs, consisting of $8,000,000
cash and 1,000,000 common shares valued at $2,500,000. In addition, the Company
issued 1,200,000 shares of common stock and 800,000 contingently issuable
warrants to purchase common stock subject to earnout provisions. This
acquisition has been treated as a business combination accounted for by the
purchase method of accounting. The accompanying financial statements of the
Company include the accounts of Forward subsequent to May 20, 1999, the date of
the acquisition. For purposes of identification and description, Forward is
referred to as the "Predecessor" for the period prior to the date of
acquisition. The financial statements of Forward consist of the combination of
Forward Communications, Inc., FCI Services, Inc. and Forward Freight, Inc.
On March 17, 1999, the Company completed the acquisition of the stock of
2-Lane Media, Inc. ("2-Lane"), a company which was involved in web site and
e-commerce design services. Consideration paid for the acquisition was 1,200,000
of How2.com common shares valued at $1,500,000 and approximately $9,200 in
transaction costs, substantially all of which was paid for purchased expertise.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Presentation
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles. All significant intercompany accounts
and transactions have been eliminated in consolidation. Further, certain prior
year amounts have been reclassified to conform to the current year presentation.
As discussed above, included in the financial statements are operations
relating to Forward, which is deemed to be the Predecessor. Financial data of
the Company with respect to all periods subsequent to May 20, 1999 reflect the
Forward acquisition under the purchase method of accounting. Therefore,
financial data with respect to Forward prior to the acquisition on May 20, 1999,
generally will not be comparable to that of the Company.
Revenue Recognition
The Company's rebate customers are primarily comprised of manufacturers in
the high-tech industry and are located throughout the United States. The Company
recognizes revenue from these customers principally from rebate programs, which
consist of the processing fee earned per rebate, the graphics, printing and
shipping fees earned for the production and distribution of tear pads, and an
estimate of the amount of rebate checks that will never be cashed (referred to
as "slippage"). The estimate of the amount
F-10
<PAGE> 82
HOW2.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of the rebate checks that will never be cashed was $161,000, $1,774,000,
$1,330,100 and $269,000 for the years ended December 31, 1997 and 1998, the
period from January 1, 1999 to May 20, 1999 and the period from May 21, 1999 to
June 30, 1999, respectively. The amount of uncashed checks in any given period
could differ from management's estimate and could have a material impact on the
Company's financial position and results of operations. (See Note 11)
Excluded from revenue is the face amount of the rebates collected from the
Company's clients, and excluded from cost of revenue is the face amount of the
rebate paid to the customer. These amounts totaled $806,000, $10,872,000,
$13,301,000 and $2,693,000 for the years ended December 31, 1997 and 1998, the
period from January 1, 1999 to May 20, 1999 and the period from inception to
June 30, 1999, respectively.
Cost of Revenues
Cost of revenues primarily represent expenses related to printing,
fulfillment and shipping services associated with rebates and promotional
fulfillment.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
Marketable Securities
Marketable debt and equity securities are classified as available for sale
and are carried at fair market value. Unrealized gains and losses are recorded
as a component of stockholders' equity until realized. Realized gains and losses
on the sale of investments are based upon the specific identification method and
are included in the statement of operations.
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.
Property and Equipment
Property and equipment, including items financed through capital leases,
are stated at cost and depreciated using the straight-line method over the
estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION YEARS
- -------------------- -------------
<S> <C>
Furniture and equipment............................... 3-5
Information systems software.......................... 5
Information systems hardware.......................... 5
Automobiles........................................... 5
Leasehold improvements................................ Life of lease
</TABLE>
Intangible Assets
In connection with the Forward acquisition, the Company recorded customer
relationships valued at $1,500,000. Goodwill, which represents the excess of the
purchase price over the net assets acquired, was
F-11
<PAGE> 83
HOW2.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
recorded for approximately $11,236,550. The Company recorded purchased expertise
of approximately $2,257,200 in connection with the acquisition of stock in the
2-Lane Media transaction. The intangibles are amortized using the straight-line
method over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION YEARS
- -------------------- -----
<S> <C>
Goodwill.................................................... 7
Customer relations.......................................... 3
Purchased expertise......................................... 3
</TABLE>
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company reviews long-lived assets, identifiable intangibles
and goodwill pertaining to those assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing the review for recoverability, the Company
estimates the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected cash flows is less than the
carrying amount of the asset, an impairment indicator is present. The impairment
would be measured by the amount by which the asset exceeds the future discounted
cash flow.
Income Taxes
Deferred income tax expenses are provided based upon estimated future tax
effects of differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes
calculated based upon provisions of enacted laws.
Forward was comprised of three businesses: Forward Communications, Inc.,
FCI Services, Inc. and Forward Freight, Inc. In 1997 and 1998, both Forward
Communications, Inc. and FCI Services, Inc. were taxed under S Corporation
status of the Internal Revenue Code (the "Code") as amended. The Code and
certain applicable state statutes provide that the income and expenses of an S
Corporation are not taxable separately to the corporation but rather accrue
directly to the shareholders. Effective January 1999, Forward Freight, Inc. also
filed for S Corporation status. A provision for income taxes on a pro forma
basis, as if Forward were liable for federal and state income taxes as a taxable
corporate entity, is not significant because the benefit of the operating losses
would be fully reserved in a valuation allowance.
Stock-Based Compensation
The Company has elected to account for stock-based compensation to
employees using the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related Interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market value of the Company's stock
at the date of the grant over the amount an employee must pay to acquire the
stock. See Note 12 regarding the pro forma net loss and earnings per share
information as required by the alternative fair value accounting provided for
under Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123).
Net Loss Per Share
Basic income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the period. Basic income (loss) per share excludes any dilutive effects
of options as well as the effect of contingently issuable warrants and
contingently returnable common shares issued in connection with the Forward
acquisition. Diluted income
F-12
<PAGE> 84
HOW2.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(loss) per common share includes the dilutive effect of options calculated using
the treasury stock method, and, under certain conditions, includes the effect of
contingently issuable common stock and warrants. Options to purchase 15,908,500
shares of common stock have been excluded from the computation of diluted income
(loss) per share as the effect would be anti-dilutive. The effect of 1,200,000
contingently returnable common shares and 800,000 contingently issuable warrants
have been excluded from both basic and diluted income (loss) per share
computations as the attainment of the specified financial goals required for
issuance have not been met.
Comprehensive Income
In July 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income". SFAS 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources.
Software Developed and Obtained for Internal Use
The Company expenses or capitalizes the cost of computer software developed
or obtained for internal use in accordance with Statement of Position ("SOP")
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." During the period from inception to June 30, 1999, the
Company capitalized approximately $86,250 of costs incurred to develop its web
site infrastructure.
Start-Up Costs
SOP 98-5 provides guidance on the financial reporting of start-up costs and
organization costs. The Company expenses start-up activities and organization
costs incurred in accordance with issued Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities."
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities and measure those instruments at
fair value. It also provides guidance for accounting changes in the fair value
of the derivative (i.e., gains and losses). SFAS 133 is effective for all fiscal
years beginning after June 15, 2000. The Company does not expect the adoption of
SFAS 133 will have a material effect on its financial statements.
3. ACQUISITION
In May 1999, How2.com completed the acquisition of Forward, a leading
product rebate and promotional fulfillment operation that offers solutions for
designing, implementing and fulfilling merchandise and consumer rebate programs.
The terms of the transaction included a cash payment of $8,000,000 and 1,000,000
shares of How2.com common stock. In connection with the acquisition, How2.com
agreed to issue additional shares to the shareholders of Forward in the event
our common stock does not trade above $2.50 per share at any time during the 30
days following our initial public offering. How2.com also granted to the former
shareholders of Forward warrants to purchase an additional 800,000 shares at
$2.50 per share, and an additional 1,200,000 shares of common stock in the event
certain earnout provisions are met for the nine month period ended December 31,
1999. If the earnout provisions are met, the distribution of the shares and
warrants to the former Forward shareholders would increase the amount of
goodwill by the then current fair value of the contingent securities which would
increase our amortization expense over the remaining life of goodwill. The total
purchase price of $10,552,000, including acquisition costs, was allocated to
tangible assets acquired of approximately $4,568,000, liabilities
F-13
<PAGE> 85
HOW2.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
assumed of $6,198,000, customer relationships of $1,500,000 and goodwill of
$10,682,000. Goodwill was additionally increased by $554,550, relating to
deferred tax liabilities resulting from the non-deductibility of customer
relationships, resulting in total goodwill of $11,236,550. The allocation of the
purchase price is preliminary and subject to adjustment as the valuation of
customer relationships and the evaluation of certain liabilities has not been
finalized.
The acquisition of Forward has been accounted for under the "purchase"
method of accounting, with How2.com as the acquirer in accordance with generally
accepted accounting principles. The results of operations for the six months
ended June 30, 1999, include Forward's financial results after May 20, 1999.
The following unaudited financial information represents the Company's
results of operations on a pro forma basis as if the acquisition had occurred on
January 1, 1998:
<TABLE>
<CAPTION>
PRO FORMA
------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
Total revenues........................................ $ 3,227,914 $ 3,107,026
=========== ===========
Net loss.............................................. $(2,108,907) $(5,211,882)
=========== ===========
Basic and diluted net loss per share.................. $ (0.06) $ (0.16)
=========== ===========
Weighted average shares of common stock outstanding
used in computing basic and diluted net loss per
share............................................... 32,842,533 32,842,533
=========== ===========
</TABLE>
These pro forma amounts represent the historical operating results of the
Company and Forward, combined with appropriate adjustments which give effect to
incremental goodwill amortization and amortization related to the value assigned
to the customer relationships acquired in connection with the acquisition. Pro
forma adjustments for amortization expense relating to goodwill and acquired
customer relationships totaled $2,105,221 and $809,271 in the period ending
December 31, 1998 and June 30, 1999, respectively. In addition, adjustments to
income tax benefit of $188,000 and $72,269 in the periods ending December 31,
1998 and June 30, 1999, respectively, are included in the pro forma amounts
relating to the amortization of the customer relationship intangible. No tax
adjustments are included relating to the amortization of goodwill as such assets
are not deductible for tax purposes. The pro forma data is not intended to be
indicative of actual results had the acquisition occurred on January 1, 1998 nor
do they indicate results which may be achieved in the future.
4. ASSET PURCHASES
In March 1999, How2.com completed the acquisition of 2-Lane, a company that
offered web site and e-commerce design services for a diverse client roster. The
Company will no longer offer web site and e-commerce design services to outside
customers but, rather, will utilize the talent acquired in the acquisition to
develop and maintain its own web site. In connection with the completion of
acquired contracts, the Company recognized revenue of approximately $305,200 for
the period from January 7, 1999 to June 30, 1999. The purchase price for the
stock acquired from 2-Lane consisted of 1,200,000 shares of How2.com common
stock valued at $1,500,000 and approximately $9,200 in transaction costs. The
1,200,000 shares are convertible at the option of the holders into shares of
Citadel common stock in the event the How2.com shares do not become publicly
traded by March 2000. The total consideration was preliminarily allocated to
tangible assets acquired of approximately $241,700, liabilities assumed of
approximately $155,200 and purchased expertise valued at approximately
$1,422,700. The intangible asset acquired was additionally increased by
$834,500, relating to deferred tax liabilities resulting from the non-
deductibility of the purchased expertise, resulting in total purchased expertise
of $2,257,200. The allocation
F-14
<PAGE> 86
HOW2.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of the purchase price is preliminary and subject to adjustment as a valuation of
the purchased expertise has not been finalized.
In August 1999, How2.com completed the acquisition of certain assets used
in multimedia production and content conversion (to convert traditional media
formats into web-enabled content) from Broadcast Production Group, Inc. ("BPG").
In addition, How2.com retained certain members of the BPG management team as
employees. The purchase price consisted of $500,000 in cash and 200,000 shares
of common stock valued at $2,000,000. In connection with the acquisition,
How2.com agreed to issue additional shares to the shareholders of BPG (based on
the average closing price over the 30 days following our initial public offering
date) in the event the common stock does not trade at or above $10 in the thirty
days following the initial public offering by How2.com such that the total value
of the consideration would equal $2,000,000.
5. MARKETABLE SECURITIES -- AVAILABLE FOR SALE
Investments in marketable securities -- available for sale consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------------------- ---------------------------------
MARKET UNREALIZED MARKET UNREALIZED
COST VALUE GAIN COST VALUE GAIN (LOSS)
-------- -------- ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mutual funds................. $ 50,272 $ 55,331 $5,059 $314,038 $328,108 $ 14,070
Municipal bonds.............. 51,281 51,718 437 51,281 51,718 437
Common stock................. -- -- -- 57,710 39,188 (18,522)
-------- -------- ------ -------- -------- --------
$101,533 $107,049 $5,496 $423,029 $419,014 $ (4,015)
======== ======== ====== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MAY 20, 1999 JUNE 30, 1999
-------------------------------- --------------------------------
MARKET UNREALIZED MARKET UNREALIZED
COST VALUE GAIN COST VALUE GAIN
-------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mutual funds.................. $244,843 $249,981 $5,138 $251,103 $252,049 $946
======== ======== ====== ======== ======== ====
</TABLE>
During the period from January 1, 1999 to May 20, 1999, gross proceeds from
the sale of marketable securities was $134,557 with realized gains of $14,052
and realized losses of $57,681. The cost of the marketable securities sold was
determined through specific identification.
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1997 1998 MAY 20, 1999 JUNE 30, 1999
--------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Furniture and equipment............. $ 176,858 $ 358,671 $ 429,780 $ 310,420
Information systems hardware........ 153,204 302,637 321,872 320,723
Information systems software........ 33,041 35,844 38,958 562,942
Automobiles......................... 136,305 217,766 -- --
Leasehold improvements.............. 21,273 82,066 84,408 71,107
--------- --------- --------- ----------
Total..................... 520,681 996,984 875,018 1,265,192
Less -- Accumulated depreciation.... (219,417) (311,421) (315,052) (71,487)
--------- --------- --------- ----------
Net property and equipment.......... $ 301,264 $ 685,563 $ 559,966 $1,193,705
========= ========= ========= ==========
</TABLE>
F-15
<PAGE> 87
HOW2.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Outstanding long-term debt and capital lease obligations consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998 MAY 20, 1999 JUNE 30, 1999
------- -------- ------------ -------------
<S> <C> <C> <C> <C>
Note payable to a finance company with
interest at 9.35%.................... $ -- $ 35,295 $ -- $ --
Note payable to a bank with interest at
8%, due in monthly principal and
interest installments at $4,028
through maturity in December 2003,
collateralized by equipment.......... -- 200,000 186,344 180,753
Note payable to a bank with interest
ranging from 9% to 10.25%............ 59,187 -- -- --
------- -------- -------- --------
Total long-term debt................. 59,187 235,295 186,344 180,753
Capital lease obligations............ -- -- -- 22,207
------- -------- -------- --------
Total long-term debt and capital lease
obligations.......................... 59,187 235,295 186,344 202,960
Less current maturities................ 34,810 36,455 34,687 47,570
------- -------- -------- --------
Total long-term debt and capital
lease obligations............... $24,377 $198,840 $151,657 $155,390
======= ======== ======== ========
</TABLE>
Aggregate maturities of long-term debt and capital lease obligations are as
follows:
<TABLE>
<CAPTION>
JUNE 30
- -------
<S> <C>
2000...................................................... $ 47,570
2001...................................................... 44,566
2002...................................................... 40,956
2003...................................................... 44,354
2004...................................................... 25,514
</TABLE>
F-16
<PAGE> 88
HOW2.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The provision (benefit) for income taxes as of June 30, 1999 is recorded
based on the estimated effective tax rate for the year. Changes in the estimated
tax rates will be recorded in the interim period in which they occur. The
provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED JANUARY 1, 1999- JANUARY 7, 1999-
DECEMBER 31, 1997 DECEMBER 31, 1998 MAY 20, 1999 JUNE 30, 1999
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Current income tax:
Federal...................... $13,978 $ -- $(14,000) $ --
State........................ 340 11,082 (11,082) --
------- -------- -------- -------
Total current income
tax expense
(benefit).......... 14,318 11,082 (25,082) --
Deferred income tax:
Federal...................... 47,641 (32,145) (11,202) --
State........................ 659 (4,455) (4,411) --
------- -------- -------- -------
Total deferred income
tax expense
(benefit).......... 48,300 (36,600) (15,613) --
------- -------- -------- -------
Total expense
(benefit).......... $62,618 $(25,518) $(40,695) $ --
======= ======== ======== =======
</TABLE>
The differences between the provision (benefit) for income taxes and the
amount computed by applying the statutory federal tax rate for C corporations to
income before income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED JANUARY 1, 1999- JANUARY 7, 1999-
DECEMBER 31, 1997 DECEMBER 31, 1998 MAY 20, 1999 JUNE 30, 1999
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Provision computed at federal
statutory rate............... $ 7,470 $(73,849) $(787,391) $(734,068)
State income taxes, net of
federal tax effect........... 659 4,374 (101,408) --
Effect of S Corporation
election..................... 80,658 35,236 787,391 --
Non-deductible goodwill........ -- -- -- 40,270
Operating loss not benefited... -- -- 96,283 693,798
Other.......................... (26,169) 8,721 (35,570) --
-------- -------- --------- ---------
Total expense
(benefit).......... $ 62,618 $(25,518) $ (40,695) $ --
======== ======== ========= =========
</TABLE>
F-17
<PAGE> 89
HOW2.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax liabilities recognized on the
accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998 MAY 20, 1999 JUNE 30, 1999
----------------- ----------------- ------------ -------------
<S> <C> <C> <C> <C>
Deferred tax liabilities:
Slippage......................... $(59,522) $(59,522) $(61,637) $ (99,261)
Intangibles...................... -- -- -- (1,286,912)
Other, net....................... -- -- -- (108,991)
-------- -------- -------- -----------
Total deferred tax
liabilities............ (59,522) (59,522) (61,637) (1,495,164)
-------- -------- -------- -----------
Deferred tax assets:
Net operating loss
carryforwards................. -- 45,104 74,720 957,203
Deferred compensation............ -- -- -- 124,614
Other, net....................... 11,222 2,718 1,797 33,512
-------- -------- -------- -----------
Total deferred tax
assets................. 11,222 47,822 76,517 1,115,329
Valuation allowance for deferred
tax assets....................... -- -- (11,894) (1,006,221)
-------- -------- -------- -----------
Deferred tax assets, net of
valuation allowance.............. 11,222 47,822 64,623 109,108
-------- -------- -------- -----------
Deferred income tax liabilities,
net of deferred income tax
assets........................... $(48,300) $(11,700) $ 2,986 $(1,386,056)
======== ======== ======== ===========
</TABLE>
9. RELATED PARTY TRANSACTIONS
At June 30, 1999, the Company has full recourse notes receivable of
$225,000 relating to the purchase of common stock by certain of the Company's
officers and directors. The notes granted to these parties bear interest at a
rate of five percent annually and are secured by the pledge of the common stock
issued to these individuals. Subsequent to June 30, 1999, all but $74,250 has
been collected from the officers and directors.
In January 1999, the Company loaned its Chief Executive Officer (CEO) and
its Chief Operating Officer (COO) $100,000 and $50,000, respectively, in
connection with the exercise of stock options. Both officers have repaid the
Company for the full amount of the loan subsequent to June 30, 1999. In July
1999, the Company loaned its CEO $250,000 in connection with the exercise of
stock options in exchange for a full recourse note bearing interest at a rate of
five percent per annum and secured by the shares of Company common stock. The
loan was subsequently repaid in full in October 1999.
During the six months ended June 30, 1999, the Company also loaned its CEO
$600,000. The note bears interest at a rate of five percent annually and matures
on December 15, 1999. The note was subsequently paid in July 1999.
In July 1999, the Company loaned $750,000 to its COO in connection with his
relocation to Dallas. The note bears interest at a rate of five percent annually
and is secured by a pledge of our common stock owned by him.
Included in note receivable from officers and affiliates is $50,000
representing payment due from Citadel for the issuance of 20,000,000 shares of
common stock on January 7, 1999. To assist the Company in its initial
development, Citadel provided payment for certain services on behalf of its
subsidiary. As a result, at June 30, 1999, the Company has recognized a payable
to Citadel of approximately $141,000 representing payment for certain travel and
marketing related expenditures, in addition to salaries and related benefits
allocated based on hours spent supporting How2.com's initial operations. This
amount was subsequently contributed to equity as the amount represented
additional consideration for the stock
F-18
<PAGE> 90
HOW2.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
purchased on January 7, 1999 by Citadel. As a result of proceeds received from
private placements, the Company has since been able to fund its operations
sufficiently and does not anticipate the need to incur additional borrowings
from Citadel. Subsequent to May 31, 1999, Citadel no longer held a majority
interest in the Company.
In the past, Citadel has borrowed cash from How2.com to cover short-term
cash requirements. How2.com made those loans to Citadel, totaling approximately
$451,000 through September 30, 1999, pursuant to a promissory note secured by
300,000 shares of our common stock. The note is due on demand and bears interest
at five percent.
Included in selling, general and administrative expenses are bonuses paid
to executive officers of the Predecessor company in the amount of $425,000,
$1,331,000 and $2,817,000 for the years ended December 31, 1997 and 1998 and the
period from January 1, 1999 to May 20, 1999, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company leases certain office equipment and office space under
operating leases. Total rental expense for the years ended December 31, 1997 and
1998, the period from January 1, 1999 to May 20, 1999 and the period from
January 7, 1999 to June 30, 1999 was approximately $136,000, $216,000, $87,028
and $114,000, respectively. Under the Company's facility lease in Coppell,
Texas, the Company is required to maintain a $200,000 line of credit to be
utilized by the landlord in the event of default.
Future minimum rents due under operating leases with initial or remaining
terms exceeding one year as of June 30, 1999 are as follows:
<TABLE>
<CAPTION>
JUNE 30
- -------
<S> <C>
2000..................................................... $ 971,983
2001..................................................... 974,660
2002..................................................... 894,999
2003..................................................... 609,252
2004 and thereafter...................................... 453,929
----------
Total.......................................... $3,904,823
==========
</TABLE>
The Company is not currently a party to any material legal proceedings, but
may from time to time be subject to legal proceedings and claims in the ordinary
course of business, as well as claims of alleged infringement of trademarks and
other intellectual property of third parties by the Company.
11. RISKS AND UNCERTAINTIES
The escheat laws of each state provide that under circumstances defined in
the state's statutes, holders of unclaimed or abandoned property, possibly
including the rebate checks that consumers do not cash, also called "slippage",
must surrender that property to the state. As a result, any state into which we
send rebate checks could assert that it is entitled to unclaimed rebate checks
that we have issued to consumers in that state. If one or more states into which
we send a significant number of rebate checks sought to collect these rebate
checks under their escheat laws, our business could be materially adversely
affected.
Our ultimate success depends upon, among other factors, our ability to
continue to develop and upgrade our technology, infrastructure, develop and
expand our product and service offering, establish and sustain relationships
with manufacturers, retailers, service providers, and content providers and
raise additional capital to meet our working capital and capital expenditure
needs. The Company believes that the net proceeds from the sale of common stock
of the Company discussed in Note 14, together with
F-19
<PAGE> 91
HOW2.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
existing sources of liquidity, will be sufficient to fund its sales and
marketing expenses, capital expenditures, working capital and other cash
requirements for at least the next 12 months. If this offering is not
consummated, the Company believes that operating and capital outlays can be
supported for at least the next 12 months with our current cash balances,
proceeds from the private equity financings closed since June 30, 1999 and the
sale and leaseback of property and equipment. It would be necessary for the
Company to reduce sales and marketing expenses from the level anticipated if the
offering is not completed. On a long term basis, the Company may need to raise
additional funds in order to take advantage of new business opportunities, to
react to unforeseen difficulties or to otherwise respond to pressures resulting
from our competitors.
12. STOCKHOLDERS' EQUITY
The Company's certificate of incorporation authorizes 1,000,000 shares of
preferred stock. The Board of Directors has the authority to issue the preferred
stock in one or more series and to fix the rights, preferences, privileges and
restrictions of each series, such as dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the right to increase or decrease the number of shares of any
series, without further vote or action by the stockholders. No shares of
preferred stock are outstanding as of June 30, 1999.
The Company is authorized to issue 120,000,000 shares of common stock, of
which 40,056,988 common shares were issued and outstanding at June 30, 1999. On
January 7, 1999, the Company was formed with an initial investment receivable of
$50,000 contributed by Citadel in exchange for 20,000,000 shares of the
Company's common stock. As of June 30, 1999, the Company has issued 10,255,668
shares of common stock with a per share price ranging from $1.25 to $2.50
through private equity offerings. The Company has also issued 6,300,000 shares
of common stock in connection with the exercise of certain stock options having
an exercise price of $0.025 to $0.25. At June 30, 1999, the Company recognized a
subscription receivable in the amount of $160,000 for those issuances of common
stock in which proceeds had not been collected. As of October 15, 1999, all
amounts have been collected.
As of September 30, 1999, the Company has raised an additional $11,982,000
in capital for general corporate purposes through the issuance of 2,368,800
shares of common stock, with prices ranging from $2.50 to $8.00, in private
equity offerings subsequent to June 30, 1999.
Total shares of common stock reserved for the issuance of common stock at
June 30, 1999 is 17,708,500. This includes 15,908,500 shares issuable upon
exercise of outstanding options at a weighted average exercise price of $1.02
and 1,800,000 shares issuable upon exercise of outstanding warrants at an
average exercise price of $1.71. Included in the 1,800,000 outstanding warrants
are 1,000,000 warrants issued in connection with the sale of common stock. These
warrants have exercise prices ranging from $0.25 to $2.50 and expire at various
dates starting in January 2001 and ending in April 2001. In connection with the
Forward acquisition, the Company also issued 800,000 contingently exercisable
warrants, with an exercise price of $2.50, to the former shareholders of
Forward.
In connection with the acquisition of 2-Lane and Forward, the Company
issued 1,200,000 and 2,200,000 shares of common stock at per share prices of
$1.25 and $2.50, respectively. The terms of the Forward transaction included
1,200,000 shares of common stock subject to certain earnout provisions for the
nine months ended December 31, 1999.
F-20
<PAGE> 92
HOW2.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Prior to the acquisition, the Forward Companies had the following capital
structure at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1998
------ ------
<S> <C> <C>
Forward Freight, Inc. $0.01 par value; 1,000,000 shares
authorized; 100,000 issued and outstanding................ $1,000 $1,000
Forward Communications, Inc., $0.10 par value; 10,000,000
shares authorized; 10,000 issued and outstanding.......... 1,000 1,000
FCI Services, Inc., $0.01 par value; 1,000,000 shares
authorized; 100,000 issued and outstanding................ -- 1,000
------ ------
$2,000 $3,000
====== ======
</TABLE>
In July 1999, the Company effected a four-for-one stock split for
shareholders of record on July 7, 1999. All share and per share amounts have
been restated to reflect the effect of the stock split.
Stock Options
Since formation of the Company on January 7, 1999, the Company has granted
approximately 22,208,500 options to purchase shares of common stock. Upon
inception, the Board of Directors adopted and approved the 1999 Stock Option
Plan for stock option grants to employees, consultants and non-employee
directors. Stock options granted under this plan generally expire ten years from
the date of grant. No grants have been made under the 1999 Stock Option Plan as
of June 30, 1999.
A summary of the stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
---------- --------------
<S> <C> <C>
Balance at January 7, 1999.................................. -- $ --
Granted................................................... 22,208,500 0.74
Exercised................................................. (6,300,000) 0.04
----------
Outstanding, June 30, 1999................................ 15,908,500 1.02
==========
</TABLE>
The following table summarizes information about options outstanding and
exercisable at June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------ -----------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF OPTIONS CONTRACTUAL WEIGHTED AVERAGE OPTIONS EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE PRICE
- -------------- ----------- ------------ ---------------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.25 7,820,000 9.55 $0.25 495,000 $0.25
1.25-1.50 5,752,000 9.74 1.46 679,445 1.46
2.50 2,336,500 9.70 2.50 -- 2.50
---------- ---- ----- --------- -----
$0.25-2.50 15,908,500 9.64 $1.02 1,174,445 $0.94
========== ==== ===== ========= =====
</TABLE>
As permitted by SFAS No. 123, the Company has chosen to account for stock
based compensation using the intrinsic value method prescribed in APB No. 25.
Accordingly, no compensation cost has been recognized for those options granted
at the fair market value on the date of grant. Had compensation cost for these
grants under the Company's stock based compensation plan been determined using
the alternative accounting method based on the fair value prescribed by SFAS No.
123, the Company's pro
F-21
<PAGE> 93
HOW2.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
forma net loss for the six months ended June 30, 1999 would have been
approximately $2,903,000 and diluted and basic loss per share would have been
$(0.09) for the same period.
The fair value of each option grant given to employees is estimated on the
date of grant using the Black-Scholes option pricing model. The weighted average
fair value of the options granted under this model when fair value equaled the
exercise price and when the fair value was greater than the exercise price was
$0.44 and $1.98 per option, respectively, for the six months ended June 30, 1999
based on the following assumptions: dividend yield of zero, risk free interest
rate of 6.0%, expected life of three years, and expected volatility of 138.0%.
The Company recorded deferred compensation expense of approximately
$6,425,000 representing the difference between the grant price and the deemed
fair market value of certain of the Company's stock options granted during the
period from January 7, 1999 to June 30, 1999. During this period, the Company
granted options to purchase 4,520,000 shares of common stock with exercise
prices ranging from $0.25 to $1.50 which had a fair market value on the
individual grant dates ranging from $1.25 to $2.50. The deferred compensation is
being amortized over the three year vesting period for the options. For the
period ended June 30, 1999, compensation expense for the options granted below
fair market value totaled approximately $276,000.
The Company has also recognized deferred compensation for consulting
services received in exchange for the issuance of Company stock options. The
deferred compensation totaled $635,200 for options to purchase 520,000 shares of
common stock, using the Black-Scholes option pricing model with the following
assumptions: dividend yield of zero, risk free interest rate of 6.0%, expected
life of three years, and expected volatility of 138.0%. Compensation expense
related to these options grants totaled $76,000.
13. MAJOR CUSTOMERS
Major customer information is presented based on the aggregate amount
invoiced which, for rebates, includes the face amount of the rebates processed
plus the fee earned by the Company for processing the rebate. In the period from
January 7, 1999 to June 30, 1999, two customers accounted for 73% of the
Company's aggregate amount invoiced to customers. In the period from January 1,
1999 to May 20, 1999 (for Predecessor), three customers accounted for 81% of the
Company's aggregate amount invoiced to customers. During the years ended
December 31, 1998 and 1997, three customers and two customers accounted for 81%
and 34% of the Company's aggregate amount invoiced to customers, respectively.
14. SUBSEQUENT EVENTS (UNAUDITED)
In July 1999, the Company entered into an agreement with Staples, Inc. to
be the exclusive provider of rebate services with respect to products sold by
participating vendors through its 800 office supply superstores.
The Board of Directors of the Company has authorized the management of the
Company to file a Form S-1 with the Securities and Exchange Commission for our
initial public offering of its common stock.
F-22
<PAGE> 94
[The inside back cover features four pictures, centered, two rows of two,
entitled: Rebates Headquarters, Rebate Process, Rebate Search, and Rebate
Status. Under each title is a description]
<PAGE> 95
- ------------------------------------------------------
- ------------------------------------------------------
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE
SALE OF COMMON STOCK MEANS THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
CORRECT AFTER THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO
SELL OR A 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 7
Special Note Regarding
Forward-Looking Statements......... 20
Use of Proceeds...................... 21
Dividend Policy...................... 21
Capitalization....................... 22
Dilution............................. 23
Selected Financial and Operating
Data............................... 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 26
Business............................. 33
Management........................... 48
Certain Transactions................. 58
Principal Stockholders............... 60
Description of Capital Stock......... 62
Shares Eligible for Future Sale...... 64
Underwriting......................... 66
Legal Matters........................ 68
Experts.............................. 68
Where You Can Find More
Information........................ 68
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
---------------------
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE SHARES OF OUR COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN OUR INITIAL PUBLIC OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
SHARES
[HOW2.COM LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
THE ROBINSON-HUMPHREY
COMPANY
---------------------
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 96
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of common stock being registered. All amounts are estimates except
the Commission registration fee and the NASD filing fees.
<TABLE>
<S> <C>
Commission registration fee................................. $33,000
NASD fee.................................................... 13,000
Nasdaq National Market initial listing fee.................. *
Printing and engraving...................................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue sky fees and expenses.................................. 10,000
Transfer agent fees......................................... *
Miscellaneous............................................... *
-------
Total............................................. $
=======
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933
(the "Act"). Article VII of the Registrant's Bylaws provides for mandatory
indemnification of its directors and officers and permissible indemnification of
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. The Registrant's Amended and Restated Certificate of
Incorporation provides that, pursuant to Delaware law, its directors shall not
be liable for monetary damages for breach of the directors' fiduciary duty of
care as directors to the Registrant and its stockholders. This provision in the
Amended and Restated Certificate of Incorporation does not eliminate the
directors' fiduciary duty of care, and in appropriate circumstances equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the
Registrant, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
The Registrant has entered into Indemnification Agreements with its officers and
directors, a form of which is attached as Exhibit 10.1 hereto and incorporated
herein by reference. The Indemnification Agreements provide the Registrant's
officers and directors with further indemnification to the maximum extent
permitted by the Delaware General Corporation Law. The Registrant maintains
liability insurance for its directors and officers. Reference is also made to
Section of the Underwriting Agreement contained in Exhibit 1.1 hereto,
indemnifying officers and directors of the Registrant against certain
liabilities.
II-1
<PAGE> 97
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since our formation, we have issued and sold the following securities (as
adjusted for a four-for-one stock split effective July 1999):
1. On January 7, 1999, we issued 20,000,000 shares of Common Stock to
Citadel in an organizational subscription for an aggregate purchase price
of $50,000 and sharing of other Citadel resources, including personnel,
administrative and financial resources.
2. From February 1, 1999 to September 30, 1999, we issued an aggregate
of 12,664,468 shares of Common Stock to accredited investors for an
aggregate purchase price of $28,000,000, or an average price of $2.21 per
share.
3. In March 1999, we issued 1,200,000 shares of Common Stock to the
five former shareholders of 2-Lane Media, Inc. in connection with the
acquisition of 2-Lane Media, Inc.
4. In May 1999, we issued 2,200,000 shares of Common Stock to the two
former shareholders of the Forward Companies in connection with the
acquisition of the Forward Companies. Of these shares, 1,200,000 are
subject to an earnout provision that provides that the shares will be the
property of the shareholder in the event EBITDA from the acquired business
exceeds $3,000,000 for the nine months ending December 31, 1999. In
addition, we issued warrants to purchase an additional 800,000 shares at an
exercise price of $2.50 per share, subject to the condition that EBIDTA
from the acquired business exceeds $4,000,000 for the nine months ending
December 31, 1999. In the event these targets are not met, the shares and
warrants are required to be returned to How2.com, Inc.
5. We have granted options to purchase 23,544,750 shares of common
stock to employees, consultants and other service providers of the Company,
of which 7,300,000 shares have been exercised as of September 30, 1999. In
connection with the 2-Lane Media, Inc. acquisition, we granted options to
purchase 200,000 shares at an exercise price of $0.25 per share to
employees of 2-Lane Media, Inc.
6. In January through April 1999, we granted warrants to purchase
1,000,000 shares of common stock at a weighted average exercise price of
$1.08 per share to Icarus Investments I, L.P. and its affiliates in
connection with their purchase of our common stock and for services as a
consultant.
The sale of the above securities was deemed to be exempt from registration
under the Act in reliance upon Section 4(2) of the Act or Rule 701 promulgated
under Section 3(b) of the Act as transactions by an issuer not involving any
public offering or transactions pursuant to compensation benefit plans and
contracts relating to compensation as provided under Rule 701.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1* -- Form of Underwriting Agreement.
3.1 -- Amended and Restated Certificate of Incorporation of the
Registrant, filed with the Delaware Secretary of State on
October 15, 1999.
3.2* -- Amended and Restated Bylaws of the Registrant.
4.1* -- Specimen Certificate of the Registrant's common stock.
5.1* -- Opinion of Hughes & Luce, L.L.P., counsel to the
Registrant.
10.1* -- Form of Indemnification Agreement entered into between
the Registrant and its directors and executive officers.
10.2* -- 1999 Stock Incentive Plan.
10.3* -- 1999 Non-Employee Directors' Stock Option Plan.
10.4(a)* -- Form of Nonqualified Stock Option Agreement -- Executive.
</TABLE>
II-2
<PAGE> 98
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.4(b)* -- Form 1 of Nonqualified Stock Option
Agreement -- Employee.
10.4(c)* -- Form 2 of Nonqualified Stock Option
Agreement -- Employee.
10.4(d)* -- Form of Nonqualified Stock Option
Agreement -- Non-Employee.
10.5(a)* -- Office Lease, dated September 20, 1996, between The Utah
State Retirement Investment Fund and Citadel Computer
Systems Incorporated, (Dallas, TX)
10.5(b)* -- First Amendment to Office Lease, dated July 24, 1996,
between The Utah State Retirement Investment Fund and
Citadel Computer Systems, Incorporated. (Dallas, TX)
10.5(c)* -- Second Amendment of Lease, dated February 6, 1997,
between The Utah State Retirement Investment Fund and
Citadel Computer Systems Incorporated. (Dallas, TX)
10.5(d)* -- Third Amendment to Office Lease, dated June 30, 1999,
between The Utah State Retirement Fund and Citadel
Technology, Inc. (Dallas, TX)
10.6* -- Lease Agreement, dated September 30, 1998, between
Lincoln CBC II, Ltd. and Forward Freight, Inc. (Coppell,
TX)
10.7* -- First Amendment to Lease Agreement, dated March 30, 1999
between Coppell Business Center II, Ltd. and Forward
Freight, Inc. (Coppell, TX)
10.8* -- Second Amendment to Lease Agreement, dated May 1, 1999
between Coppell Business Center II, Ltd. and Forward
Freight, Inc. (Coppell, TX)
10.9* -- Third Amendment to Lease Agreement, dated June 10, 1999
between Coppell Business Center II, Ltd. and Forward
Freight, Inc. (Coppell, TX)
10.10* -- Standard Office Lease, dated August 2, 1999, between
Arden Realty Limited Partnership and the Registrant.
(Santa Monica, CA)
10.11(a)* -- Lease Agreement, dated November 6, 1995, between
Pruneyard Associates, L.P. and Broadcast Production
Group, including all exhibits thereto. (San Jose, CA)
10.11(b)* -- Lease Termination Agreement, dated November 6, 1995,
between Pruneyard Associates, L.P. and Broadcast
Production Group. (San Jose, CA)
10.11(c)* -- Tenant Estoppel Certificate with Attorney,
Non-Disturbance and Notice of Default, dated March ,
1998, by Broadcast Production Group to Bank of America
National Trust and Savings Association. (San Jose, CA)
10.11(d)* -- Consent to Assignment, dated , between
Cornerstone Holding, LLC, Broadcast Production Group,
Inc., and the Registrant. (San Jose, CA)
10.12* -- Lease Agreement, dated May 20, 1999, between Choice
Medical Supplies and the Registrant. (Bellevue, WA)
10.13* -- Employment Agreement, dated as of January 8, 1999,
between Steven B. Solomon and Registrant.
10.14* -- Employment Agreement, dated as of June 15, 1999, between
Kenneth R. Johnsen and Registrant.
10.15* -- Employment Agreement, dated as of June 15, 1999, between
Mark Mirken and Registrant.
10.16* -- Form of Executive Employment Agreement, between the
Registrant's other executive officers and key personnel
and the Registrant.
10.16(a)* -- Schedule of Employment Agreement terms.
10.17* -- Professional Services Order Form (With Terms &
Conditions), dated , between Registrant and
Netscape, including High-level Statement of Work and all
appendices thereto.
10.18* -- Internet Data Center Services Agreement, dated June 30,
1999, between Exodus Communications, Inc. and the
Registrant.
10.19(a)* -- Master Terms of Service, dated , between Sun
Microsystems, Inc. and the Registrant.
</TABLE>
II-3
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.19(b)* -- SunSpectrum Support Program Module, dated ,
between Sun Microsystems, Inc. and Registrant
10.20* -- Statement of Work/Agreement -- Agreement for Rebate
Management, dated July 16, 1999, between Staples, Inc.
and the Registrant, including all exhibits thereto.
10.21* -- Stock Purchase Agreement, dated March 11, 1999, among the
Registrant, 2-Lane Media, Inc. and the shareholders of
2-Lane Media, Inc., including all exhibits thereto, but
excluding all schedules thereto.
10.22* -- Stock Purchase Agreement, dated May 20, 1999, among the
Registrant, FCI Services, Inc., Forward Communications,
Inc., and the shareholders of Forward Communications,
Inc. and FCI Services Inc., including all exhibits
thereto, but excluding all schedules thereto.
10.23* -- Agreement and Plan of Reorganization, dated May 20, 1999,
among the Registrant, F3 Acquisition Corporation, Forward
Freight, Inc., and the shareholders of Forward Freight
Inc., including all exhibits thereto, but excluding all
schedules thereto.
10.24* -- Agreement and Plan of Reorganization, dated August 9,
1999, among the Registrant, Broadcast Production Group,
Inc. ('BPG'), and the shareholders of BPG, including all
exhibits thereto, but excluding all schedules thereto.
10.25(a)* -- Promissory note, dated January 8, 1999, made by Steven B.
Solomon payable to the Registrant.
10.25(b)* -- Promissory note, dated June 15, 1999, made by Steven B.
Solomon payable to the Registrant.
10.25(c)* -- Promissory note, dated July 7, 1999, made by Steven B.
Solomon payable to the Registrant.
10.26(a)* -- Promissory note, dated January 8, 1999, made by Kenneth
R. Johnsen payable to the Registrant.
10.26(b)* -- Promissory note, dated August 2, 1999, made by Kenneth R.
Johnsen payable to the Registrant.
10.27* -- Form of Stock Purchase Agreement between the Registrant
and its investors.
10.28* -- Promissory note, dated September 30, 1999, made by
Citadel Technology, Inc. payable to the Registrant.
22.1 -- Subsidiaries
23.1 -- Consent of Ernst & Young LLP, Independent Accountants.
23.2 -- Consent of Grant Thornton LLP, Independent Accountants.
23.3* -- Consent of Hughes & Luce, L.L.P., counsel to the
Registrant. Reference is made to Exhibit 5.1.
24.1* -- Power of Attorney (see page II-6).
27.1* -- Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedule
Financial Statement Schedules are not listed because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE> 100
Insofar as indemnification by the Registrant for liabilities arising under
the Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Amended and
Restated Certificate of Incorporation or the Amended and Restated Bylaws of the
Registrant, Indemnification Agreements entered into between the Registrant and
its officers and directors, the Underwriting Agreement, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-5
<PAGE> 101
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on this 19th day of October, 1999.
HOW2.COM, INC.
By: /s/ STEVEN B. SOLOMON
----------------------------------
Steven B. Solomon
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Steven B. Solomon and Juli C.
Spottiswood, and each of them, his or her true and lawful attorneys-in-fact and
agents with full power of substitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
sign any registration statement for the same offering covered by this
Registration Statement that is to be effective on filing pursuant to Rule 462(b)
promulgated under the Securities Act of 1933, and all post-effective amendments
thereto, and to file the same, with all exhibits thereto and all documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his or her or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEVEN B. SOLOMON Chief Executive Officer and October 19, 1999
- ----------------------------------------------------- Chairman of the Board
Steven B. Solomon (Principal Executive
Officer)
/s/ JULI C. SPOTTISWOOD Chief Financial Officer and October 19, 1999
- ----------------------------------------------------- Secretary (Principal
Juli C. Spottiswood Financial and Accounting
Officer)
/s/ KENNETH R. JOHNSEN Chief Operating Officer, October 19, 1999
- ----------------------------------------------------- President, and Director
Kenneth R. Johnsen
Director , 1999
- -----------------------------------------------------
Lawrence Lacerte
/s/ DAVID S. LUNDEEN Director October 19, 1999
- -----------------------------------------------------
David S. Lundeen
</TABLE>
II-6
<PAGE> 102
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
\
/s/ MARK ROGERS Director October 19, 1999
- -----------------------------------------------------
Mark Rogers
/s/ CHRIS A. ECONOMOU Director October 18, 1999
- -----------------------------------------------------
Chris A. Economou
/s/ JOHN W. THOMPSON Director October 19, 1999
- -----------------------------------------------------
John W. Thompson
/s/ DR. MICHAEL HAMMER Director October 19, 1999
- -----------------------------------------------------
Dr. Michael Hammer
/s/ ROBERT PICKERING Director October 19, 1999
- -----------------------------------------------------
Robert Pickering
Director , 1999
- -----------------------------------------------------
Victor K. Kiam II
/s/ EDWARD L. PIERCE Director October 19, 1999
- -----------------------------------------------------
Edward L. Pierce
</TABLE>
II-7
<PAGE> 103
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1* -- Form of Underwriting Agreement.
3.1 -- Amended and Restated Certificate of Incorporation of the
Registrant, filed with the Delaware Secretary of State on
October 15, 1999.
3.2* -- Amended and Restated Bylaws of the Registrant.
4.1* -- Specimen Certificate of the Registrant's common stock.
5.1* -- Opinion of Hughes & Luce, L.L.P., counsel to the
Registrant.
10.1* -- Form of Indemnification Agreement entered into between
the Registrant and its directors and executive officers.
10.2* -- 1999 Stock Incentive Plan.
10.3* -- 1999 Non-Employee Directors' Stock Option Plan.
10.4(a)* -- Form of Nonqualified Stock Option Agreement -- Executive.
10.4(b)* -- Form 1 of Nonqualified Stock Option
Agreement -- Employee.
10.4(c)* -- Form 2 of Nonqualified Stock Option
Agreement -- Employee.
10.4(d)* -- Form of Nonqualified Stock Option
Agreement -- Non-Employee.
10.5(a)* -- Office Lease, dated September 20, 1996, between The Utah
State Retirement Investment Fund and Citadel Computer
Systems Incorporated. (Dallas, TX)
10.5(b)* -- First Amendment to Office Lease, dated July 24, 1996,
between The Utah State Retirement Investment Fund and
Citadel Computer Systems, Inc. (Dallas, TX)
10.5(c)* -- Second Amendment of Lease, dated February 6, 1997,
between The Utah State Retirement Investment Fund and
Citadel Computer Systems Incorporated. (Dallas, TX)
10.5(d)* -- Third Amendment to Office Lease, dated June 30, 1999,
between The Utah State Retirement Fund and Citadel
Technology, Inc. (Dallas, TX)
10.6* -- Lease Agreement, dated September 30, 1998, between
Lincoln CBC II, Ltd. and Forward Freight, Inc. (Coppell,
TX)
10.7* -- First Amendment to Lease Agreement, dated March 30, 1999
between Coppell Business Center II, Ltd. and Forward
Freight, Inc. (Coppell, TX)
10.8* -- Second Amendment to Lease Agreement, dated May 1, 1999
between Coppell Business Center II, Ltd. and Forward
Freight, Inc. (Coppell, TX)
10.9* -- Third Amendment to Lease Agreement, dated June 10, 1999
between Coppell Business Center II, Ltd. and Forward
Freight, Inc. (Coppell, TX)
10.10* -- Standard Office Lease, dated August 2, 1999, between
Arden Realty Limited Partnership and the Registrant.
(Santa Monica, CA)
10.11(a)* -- Lease Agreement, dated November 6, 1995, between
Pruneyard Associates, L.P. and Broadcast Production
Group, including all exhibits thereto. (San Jose, CA)
10.11(b)* -- Lease Termination Agreement, dated November 6, 1995,
between Pruneyard Associates, L.P. and Broadcast
Production Group. (San Jose, CA)
10.11(c)* -- Tenant Estoppel Certificate with Attorney,
Non-Disturbance and Notice of Default, dated March ,
1998, by Broadcast Production Group to Bank of America
National Trust and Savings Association. (San Jose, CA)
10.11(d)* -- Consent to Assignment, dated , between
Cornerstone Holding, LLC, Broadcast Production Group,
Inc., and the Registrant. (San Jose, CA)
10.12* -- Lease Agreement, dated May 20, 1999, between Choice
Medical Supplies and the Registrant. (Bellevue, WA)
10.13* -- Employment Agreement, dated as of January 8, 1999,
between Steven B. Solomon and Registrant.
10.14* -- Employment Agreement, dated as of June 15, 1999, between
Kenneth R. Johnsen and Registrant.
10.15* -- Employment Agreement, dated as of June 15, 1999, between
Mark Mirken and Registrant.
</TABLE>
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.16* -- Form of Executive Employment Agreement, between the
Registrant's other executive officers and key personnel
and Registrant.
10.16(a)* -- Schedule of Employment Agreement terms.
10.17* -- Professional Services Order Form (With Terms &
Conditions), dated , between Registrant and
Netscape, including High-level Statement of Work and all
appendices thereto.
10.18* -- Internet Data Center Services Agreement, dated June 30,
1999, between Exodus Communications, Inc. and the
Registrant.
10.19(a)* -- Master Terms of Service, dated , between Sun
Microsystems, Inc. and Registrant.
10.19(b)* -- SunSpectrum Support Program Module, dated ,
between Sun Microsystems, Inc. and the Registrant.
10.20* -- Statement of Work/Agreement -- Agreement for Rebate
Management, dated July 16, 1999, between Staples, Inc.
and the Registrant, including all exhibits thereto.
10.21* -- Stock Purchase Agreement, dated March 11, 1999, among the
Registrant, 2-Lane Media, Inc. and the shareholders of
2-Lane Media, Inc., including all exhibits thereto, but
excluding all schedules thereto.
10.22* -- Stock Purchase Agreement, dated May 20, 1999, among the
Registrant, FCI Services, Inc., Forward Communications,
Inc., and the shareholders of Forward Communications,
Inc. and FCI Services Inc., including all exhibits
thereto, but excluding all schedules thereto.
10.23* -- Agreement and Plan of Reorganization, dated May 20, 1999,
among the Registrant, F3 Acquisition Corporation, Forward
Freight, Inc., and the shareholders of Forward Freight
Inc., including all exhibits thereto, but excluding all
schedules thereto.
10.24* -- Agreement and Plan of Reorganization, dated August 9,
1999, among the Registrant, Broadcast Production Group,
Inc. ('BPG'), and the shareholders of BPG, including all
exhibits thereto, but excluding all schedules thereto.
10.25(a)* -- Promissory note, dated January 8, 1999, made by Steven B.
Solomon payable to the Registrant.
10.25(b)* -- Promissory note, dated June 15, 1999, made by Steven B.
Solomon payable to the Registrant.
10.25(c)* -- Promissory note, dated July 7, 1999, made by Steven B.
Solomon payable to the Registrant.
10.26(a)* -- Promissory note, dated January 8, 1999, made by Kenneth
R. Johnsen payable to the Registrant.
10.26(b)* -- Promissory note, dated August 2, 1999, made by Kenneth R.
Johnsen payable to the Registrant.
10.27* -- Form of Stock Purchase Agreement between the Registrant
and its investors.
10.28* -- Promissory note, dated September 30, 1999, made by
Citadel Technology, Inc. payable to the Registrant.
22.1 -- Subsidiaries
23.1 -- Consent of Ernst & Young LLP, Independent Accountants.
23.2 -- Consent of Grant Thornton LLP, Independent Accountants.
23.3* -- Consent of Hughes & Luce, L.L.P., counsel to the
Registrant. Reference is made to Exhibit 5.1.
24.1* -- Power of Attorney (see page II-6).
27.1* -- Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
HOW2HQ.COM, INC.
How2HQ.com, Inc., (the "Corporation") is a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware. The date on which its original Certificate of Incorporation was filed
with the Secretary of State of Delaware, under the name shoppingwave.com, inc.,
is January 7, 1999. A Certificate of Amendment to the Certificate of
Incorporation was filed with the Secretary of State of Delaware on March 11,
1999; on June 7, 1999; and on July 15, 1999. This Amended and Restated
Certificate of Incorporation, which restates and further amends the Certificate
of Incorporation, was duly adopted by and in accordance with the provisions of
Sections 222, 242 and 245 of the General Corporation Law of the State of
Delaware. The provisions of the original Certificate of Incorporation and any
and all amendments thereto, are hereby further amended and restated so as to
read, in their entirety, as follows.
ARTICLE I
NAME
The name of the corporation is How2.com, Inc.
ARTICLE II
REGISTERED AGENT
The address of the corporation's registered office in Delaware is 1209
Orange Street, City of Wilmington, County of New Castle, Delaware 19801. The
name of the corporation's registered agent at such address is The Corporation
Trust Company.
ARTICLE III
PURPOSE
The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE IV
CAPITAL STOCK
The corporation shall be authorized to issue two classes of stock to be
designated respectively "Common" and "Preferred." The total number of shares of
Common Stock that the corporation shall have authority to issue shall be One
Hundred and Twenty Million (120,000,000), and the par value of each share of
Common Stock shall be one cent ($.01). The
1
<PAGE> 2
total number of shares of Preferred Stock that the corporation shall have
authority to issue shall be One Million (1,000,000), and the par value of each
share of Preferred Stock shall be one cent ($.01).
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors is hereby
authorized, in the resolution or resolutions adopted by the Board of Directors
or any authorized committee thereof providing for the issue of any wholly
unissued series of Preferred Stock, within the limitations and restrictions
stated in the corporation's Certificate of Incorporation, as amended from time
to time, to fix or alter, the dividend rights, dividend rate, conversion rights,
voting rights, rights and terms of redemption (including sinking fund
provisions), the redemption price or prices, and the liquidation preferences of
any wholly unissued series of Preferred Stock, and the number of shares
constituting any such series and the designation thereof, or any of them, and to
increase or decrease the number of shares of any series subsequent to the issue
of shares of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status that they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
ARTICLE V
DIRECTORS
The business and affairs of the corporation shall be managed by or
under the direction of the Board of Directors. The Board of Directors may
exercise all such authority and powers of the corporation and do all such lawful
acts and things as are not by statute or this Certificate of Incorporation
directed or required to be exercised or done by the shareholders.
A. Number of Directors
The number of directors of the corporation shall be fixed from time to
time by action of not less than a majority of the members of the Board of
Directors then in office, though less than a quorum, but in no event shall be
less than five nor more than fifteen.
B. Classes
Commencing with the first annual meeting of stockholders, the directors
shall be divided into three classes, designated Class I, Class II and Class III.
The number of directors in each class shall be the whole number contained in the
quotient arrived at by dividing the authorized number of directors by three, and
if a fraction is also contained in such quotient then if such fraction is
one-third (1/3) the extra director shall be a member of Class I and if the
fraction is two-thirds (2/3) one of the extra directors shall be a member of
Class I and the other shall be a member of Class III. The term of office of
directors elected to each class at the first annual meeting of stockholders
shall expires as follows: Class I shall expire at the 1999 annual meeting of
stockholders, Class II shall expire at the 2000 annual meeting of stockholders,
Class III shall expire at the 2001 annual meeting of stockholders. At each
annual meeting of stockholders
2
<PAGE> 3
following the first annual meeting of stockholders, directors shall be elected
to succeed those directors whose terms expire for a term of office to expire at
the third succeeding annual meeting of stockholders after their election. All
directors shall hold office until the annual meeting of stockholders for the
year in which their term expires and until their successors are duly elected and
qualified, or until their earlier death, resignation, disqualification or
removal.
C. Vacancies
Subject to the rights, if any, of the holders of any series of
Preferred Stock then outstanding, newly created directorships resulting from any
increase in the authorized number of directors or any vacancies in the Board of
Directors resulting from death, resignation, disqualification or removal may be
filled only by a majority vote of the directors then in office, though less than
a quorum, and directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of office of the class to which
they have been elected expires and until such director's successor shall have
been duly elected and qualified.
D. Removal
Subject to the rights, if any, of any series of Preferred Stock then
outstanding, any director, or the entire Board of Directors, may be removed from
office at any time, but only for cause and only by the affirmative vote of the
holders of at least 80% of the shares of capital stock of the corporation
entitled to vote generally in the election of directors, voting together as a
single class.
ARTICLE VI
NOMINATIONS FOR THE BOARD OF DIRECTORS
Nominations of persons for election to the Board of Directors may be
made at an annual meeting of stockholders or special meeting of stockholders
called by the Board of Directors for the purpose of electing directors (i) by or
at the direction of the Board or (ii) by any stockholder of the corporation
entitled to vote for the election of directors at such meeting who complies with
the notice procedures set forth in this Article VI. Such nominations, other than
those made by or at the direction of the Board, shall be made pursuant to timely
notice in writing to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not less than 60 days nor more
than 90 days prior to the scheduled date of the meeting, regardless of any
postponement, deferral or adjournment of that meeting to a later date; provided,
however, that if less than 70 days' notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so delivered or received not later than the close of
business on the 10th day following the earlier of (i) the day on which such
notice of the date of the meeting was mailed or (ii) the day on which such
public disclosure was made.
A stockholder's notice to the Secretary shall set forth (i) as to each
person whom the stockholder proposes to nominate for election or reelection as a
director (a) the name, age, business address and residence address of such
person, (b) the principal occupation or
3
<PAGE> 4
employment of such person, (c) the class and number of shares of the corporation
that are beneficially owned by such person on the date of such stockholder's
notice and (d) any other information relating to such person that is required to
be disclosed in solicitations of proxies for election of directors, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, or any successor statute thereto (the
"Exchange Act") (including, without limitation, such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected); (ii) as to the stockholder giving notice (a) the name and address, as
such information appears on the corporation's books, of such stockholder and any
other stockholders known by such stockholder to be supporting such nominee(s),
(b) the class and number of shares of the corporation which are beneficially
owned by such stockholder and each other stockholder known by such stockholder
to be supporting such nominee(s) on the date of such stockholders notice, (c) a
representation that the stockholder is a holder of record of stock of the
corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; and (iii) a description of all arrangements or understandings between
the stockholder and each nominee and other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the stockholder.
Subject to the rights, if any, of the holders of any series of
Preferred Stock then outstanding, no person shall be eligible for election as a
director of the corporation unless nominated in accordance with the procedures
set forth in this Article VI. The chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by this Article VI and if he should so
determine, he shall so declare to the meeting and the defective nomination shall
be disregarded.
ARTICLE VII
MEETING OF THE STOCKHOLDERS
At an annual meeting of stockholders, only such business shall be
conducted, and only such proposals shall be acted upon, as shall have been
properly brought before the annual meeting of stockholders (a) by or at the
direction of the Board of Directors or (b) by a stockholder of the corporation
who complies with the procedures set forth in this Article VII. For business or
a proposal to be properly brought before an annual meeting of stockholders by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not less than 60 days nor more than 90 days prior to the scheduled
date of the annual meeting, regardless of any postponement, deferral or
adjournment of that meeting to a later date; provided, however, that if less
than 70 days' notice or prior public disclosure of the date of the annual
meeting is given or made to stockholders, notice by the stockholder to be timely
must be so delivered or mailed and received not later than the close of business
on the 10th day following the earlier of (i) the day on which such notice of the
date of the meeting was mailed or (ii) the day on which such public disclosure
was made.
A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before an annual meeting of
stockholders (i) a description, in 500 words or
4
<PAGE> 5
less, of the business desired to be brought before the annual meeting and the
reasons for conducting such business at the annual meeting, (ii) the name and
address, as such information appears on the corporation's books, of the
stockholder proposing such business and any other stockholders known by such
stockholder to be supporting such proposal, (iii) the class and number of shares
of the corporation which are beneficially owned by such stockholder and each
other stockholder known by such stockholder to be supporting such proposal on
the date of such stockholder's notice, (iv) a description, in 500 words or less,
of any interest of the stockholder in such proposal and (v) a representation
that the stockholder is a holder of record of stock of the corporation and
intends to appear in person or by proxy at the meeting to present the proposal
specified in the notice.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that the business was not properly brought before the
meeting in accordance with the procedures prescribed by this Article VII, and if
he should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted. Notwithstanding
the foregoing, nothing in this Article VII shall be interpreted or construed to
require the inclusion of information about any such proposal in any proxy
statement distributed by, at the direction of, or on behalf of, the Board of
Directors.
ARTICLE VIII
INDEMNIFICATION
To the fullest extent permitted by the General Corporation Law or
Delaware, as the same may be amended from time to time, the corporation shall
indemnify any and all of its directors and officers, or former directors and
officers, or any person who may have served at the corporation's request as a
director or officer of another corporation, partnership, joint venture, trust,
or other enterprise.
ARTICLE IX
DIRECTOR LIABILITY
To the fullest extent permitted by the General Corporation Law of
Delaware, as the same may be amended from time to time, a director or former
director of the corporation shall not be personally liable to the corporation or
to its stockholders for monetary damages for breach of fiduciary duty as a
director. No repeal, amendment or modification of this Article, whether direct
or indirect, shall eliminate or reduce its effect with respect to any act or
omission of a director or former director of the corporation prior to such
repeal, amendment, or modification.
5
<PAGE> 6
ARTICLE X
SPECIAL MEETINGS OF STOCKHOLDERS
Subject to the rights of the holders of any series of Preferred Stock,
special meetings of the stockholders, unless otherwise prescribed by statute,
may be called at any time only by the Chairman of the Board of the corporation
or the Board of Directors pursuant to a resolution adopted by a majority of the
entire Board of Directors, which constitutes the total number of directors which
the corporation would have if there were no vacancies on the Board of Directors.
ARTICLE XI
BYLAWS
The Board of Directors is expressly authorized to adopt, amend or
repeal the Bylaws of the corporation. Any Bylaws made by the directors under the
powers conferred hereby may be amended or repealed by the directors or by the
stockholders. Notwithstanding the foregoing and anything contained in this
Certificate of Incorporation to the contrary, the Bylaws shall not be amended or
repealed by the stockholders, and no provision inconsistent therewith shall be
adopted by the stockholders, without the affirmative vote of the holders of at
least 80% of the voting power of all shares of the corporation entitled to vote
generally in the election of directors voting together as a single class.
ARTICLE XII
AMENDMENTS
The corporation reserves the right to amend, add, alter, change repeal
or adopt any provision contained in the Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation. In addition to any
affirmative vote required by applicable law or any other provision of the
Certificate of Incorporation or specified in any agreement, and in addition to
any voting rights granted to or held by the holders or any series of Preferred
Stock, the affirmative vote of the holders of not less than 80% of the voting
power of all securities of the corporation entitled to vote generally in the
election of directors shall be required to amend, add, alter, change, repeal or
adopt any provisions inconsistent with Articles V, VI, VII, VIII, X, XI and XII
of the Certificate of Incorporation.
I, THE UNDERSIGNED, being the Chief Executive Officer of How2HQ.com,
Inc., do hereby execute this Amended and Restated Certificate of Incorporation,
declaring and certifying that the facts herein stated are true on this 14th day
of October, 1999.
/s/ STEVEN B. SOLOMON
------------------------------------------
Steven B. Solomon, Chief Executive Officer
6
<PAGE> 1
EXHIBIT 22.1
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
Subsidiary Jurisdiction of Incorporation
- ------------ -------------------------------
<S> <C>
2-Lane Media, Inc...................................................... California
F3 Acquisition, Inc.................................................... Delaware
Forward Communications, Inc............................................ Texas
FCI Services, Inc...................................................... Texas
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated October 8, 1999, in the Registration Statement
(Form S-1) and related Prospectus of How2.com, Inc. for the registration of its
shares of its common stock.
Dallas, Texas
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated May 7, 1999, in the Registration Statement (Form
S-1) and related Prospectus of How2.com, Inc. for the registration of its shares
of its common stock.
/s/ GRANT THORTON LLP
------------------------------------
Grant Thorton LLP
Dallas, Texas
October 19, 1999
