<PAGE>
As filed with the Securities and Exchange Commission on February 7, 2000
Registration No. 333-93315
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------------
UPROAR INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 7375 13-3919458
- ------------------------------- ---------------------------- ------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
---------------------
240 West 35th Street
9th Floor
New York, New York 10001
(212) 714-9500
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
---------------------
Kenneth D. Cron
Chairman and Chief Executive Officer
Uproar Inc.
240 West 35th Street
9th Floor
New York, New York 10001
(212) 714-9500
- ------------------------------------------------------------------------------
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
<TABLE>
<CAPTION>
<S> <C> <C>
Alexander D. Lynch, Esq. Robert D. Marafioti, Esq. Marc S. Rosenberg, Esq.
Babak Yaghmaie, Esq. Executive Vice President, Cravath, Swaine & Moore
Brobeck, Phleger & Harrison LLP General Counsel and Secretary Worldwide Plaza
1633 Broadway, 47th Floor Uproar Inc. 825 Eighth Avenue
New York, New York 10019 240 West 35th Street New York, New York 10019-7475
(212) 581-1600 9th Floor (212) 474-1000
New York, New York 10001
(212) 714-9500
</TABLE>
---------------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
---------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================
Proposed
Proposed maximum
maximum aggregate Amount of
Title of each class of Amount to be offering price offering registration
securities to be registered registered(1) per share(2) price(2) fee(3)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value $0.01 per share 5,750,000 shares $ 20.51 $117,932,500 $31,134
================================================================================================================
</TABLE>
(1) Includes 750,000 shares which the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(a) under the Securities Act of 1933, as amended. This price is
based on the last reported sale price of the common stock on the European
Association of Securities Dealers' Automated Quotation System, or EASDAQ,
on February 2, 2000.
(3) $26,400 previously paid.
---------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is not an offer to buy these securities in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED FEBRUARY 7, 2000
P R O S P E C T U S
[LOGO]
5,000,000 Shares
Uproar Inc.
Common Stock
---------------------
We are selling 5,000,000 shares of our common stock. The underwriters
named in this prospectus may purchase up to 750,000 additional shares of our
common stock to cover over-allotments.
This is an initial public offering of our common stock in the United
States. Our common stock is admitted for trading with the European Association
of Securities Dealers' Automated Quotation system, or EASDAQ, under the symbol
"UPRO". On February 2, 2000, the last reported sale price of the common stock
on EASDAQ was [GRAPHIC OMITTED] 21.00, or $20.51, per share, as adjusted for a
2-for-1 stock split to be effected February 18, 2000. We have applied to have
the common stock included for quotation on the Nasdaq National Market under the
symbol "UPRO".
---------------------
Investing in the common stock involves certain risks. See "Risk Factors"
beginning on page 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
---------------------
Per Share Total
Initial public offering price ................. $ $
Underwriting discounts ........................ $ $
Proceeds, before expenses, to Uproar .......... $ $
The underwriters are offering the shares subject to various conditions.
The underwriters expect to deliver the shares to purchasers on or about
, 2000.
---------------------
Salomon Smith Barney
Bear, Stearns & Co. Inc.
Banc of America Securities LLC
Wit SoundView
, 2000.
<PAGE>
[A fold-out; the front inside cover shows colored circles of varying sizes; the
uproar.com logo in the largest circle with the following text: "The
entertainment capital of the Web!"; the following language running across the
top of the page: "A World of Games, Game Shows, and Entertainment!"; and the
following language flowing across the bottom of the page: "LET THERE BE FUN!".
The fold-out inside cover contains page shots from the uproar.com Web site
across the page, with the following accompanying text from left to right:
"GAMES"; "PRIZEPOINT INCENTIVE CURRENCY"; "A GLOBAL NETWORK"; "UPROAR STORE";
and "ONLINE GAME SHOWS"; Across the bottom of the page, the following text
appears in block print; "below the respective shots: "Whether it's multi-player
games like the well-known, branded Family Feud, Bingo Blitz or Puzzle-A-Go-Go,
or single-player crossword puzzles and arcade games, Uproar's entertainment
engages users."; "PrizePoints are an incentive currency used to enter drawings,
win prizes and cash"; "Play in 14 languages. More than 36,000 affiliate Web
sites."; and "Play, win or . . . Buy at the Uproar Store. Differentiated
products that complement our entertainment content and appeal to our
audience."; Within colored circles of varying sizes on the fold-out are the
following logos: "Uproar.com"; "BINGO Blitz"; "mental state"; "GAMESCENE";
"PICTURE THIS"; "amused.com"; "PRIZEPOINT ENTERTAINMENT"; "PUZZLE-A-GO-GO";
"100%"; and "TRIVIA free for all"; The following text runs across the top of
the page: "The Games and Game Shows at Uproar.com Provide a Daily Dose of
Fun!"; On the right side of the page, a large and a small screen shot of
"Family Feud" and one of "Sports Trivia Blitz."]
2
<PAGE>
You should rely only on the information contained in this prospectus.
Uproar has not authorized anyone to provide you with different information.
Uproar is not making an offer of these securities in any state where the offer
is not permitted. You should not assume that the information provided by this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Prospectus Summary ................................................................... 4
Risk Factors ......................................................................... 8
Forward-Looking Statements; Market Data .............................................. 20
Price Range of Common Stock .......................................................... 21
Use of Proceeds ...................................................................... 22
Dividend Policy ...................................................................... 22
Capitalization ....................................................................... 23
Dilution ............................................................................. 24
Selected Consolidated Financial Data ................................................. 25
Management's Discussion and Analysis of Financial Condition and Results of Operations 26
Business ............................................................................. 33
Management ........................................................................... 49
Certain Transactions ................................................................. 56
Principal Stockholders ............................................................... 57
Description of Capital Stock ......................................................... 58
Shares Eligible for Future Sale ...................................................... 62
United States Tax Consequences to Non-United States Holders .......................... 64
Underwriting ......................................................................... 67
Legal Matters ........................................................................ 69
Experts .............................................................................. 69
Change In Independent Accountants .................................................... 69
Where You Can Find Additional Information ............................................ 69
Index to Consolidated Financial Statements ........................................... F-1
</TABLE>
-------------------------
Until , 2000 (25 days after the date of this prospectus), all dealers
that buy, sell or trade the common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
-------------------------
3
<PAGE>
PROSPECTUS SUMMARY
Because this is only a summary, it does not contain all of the information
that may be important to you. You should read the entire prospectus, including
the "Risk Factors" section and the consolidated financial statements and the
notes thereto, before deciding to invest in our common stock.
Our Company
We are a leading online entertainment destination. Through our network of
Web sites, we provide online game shows and interactive single- and
multi-player games that appeal to a broad audience. Our registered users have
grown from 96,000 in January 1998 to 5.2 million in December 1999. Our unique
user audience has similarly grown from 1.3 million in October 1998 to 3.6
million in December 1999. Moreover, Media Metrix, a leading Internet audience
measurement service, estimates that the number of page views generated by our
network of Web sites grew from 43.6 million in December 1998 to 106.1 million
in December 1999. Our sites are very sticky, which means that our users
consistently spend significantly more time per visit on our sites than the
industry average. According to Media Metrix, in December 1999, our users in the
United States spent an average of 17.1 minutes per usage day on our sites and
we were ranked as the fifth stickiest network of Web sites on the Internet. In
addition, we were ranked by Media Metrix among the top five stickiest networks
in each month during 1999.
We derive substantially all of our revenues from the sale of
advertisements on our network of Web sites. We believe that our large user base
and the stickiness of our sites provide advertisers with an attractive platform
to reach their target audiences. As a result, the number of advertisers and
sponsors on our network has grown from 99 as of December 1998 to 256 as of
December 31, 1999. Similarly, the number of advertising impressions served over
our Web sites increased from 70.7 million in December 1998 to 327 million in
December 1999. Because we attract a large, diversified user base and can
segment it based upon information we collect, such as geography, age and
gender, we believe we will be able to target advertisements to particular
demographic profiles specified by our advertisers.
We believe that our technology platform is integral to maintaining the
entertaining and engaging nature of our content. We have made significant
investments in developing and implementing a technology platform to support our
interactive multi-user game shows and games. We believe that our Web sites are
among a few in the world that enable large numbers of users to simultaneously
play interactive multi-player game shows and games. Moreover, we have designed
our technology platform to easily accommodate our growing user base and to take
advantage of emerging technology trends such as alternative access devices,
interactive television platforms and broadband distribution services.
Our Market Opportunity
As a result of the growing popularity of the Internet, an increasing
number of users are looking beyond traditional media, such as radio and
television, to the Internet as a source of entertainment. Game shows are among
the most popular and long-lived programs on television in both the United
States and worldwide. They were among the first entertainment formats to be
successfully adapted to television from radio. Moreover, new game shows are
frequently developed and introduced in order to capitalize on the popularity of
the format and to draw larger audiences to television.
Games and game shows are particularly well suited for online entertainment
content, especially with the development of higher bandwidth distribution
channels, and can be easily adapted to the Internet. We believe that online
games and game shows are a compelling entertainment medium for a mass user
audience because they:
o provide users with an opportunity to win prizes;
o allow users to access entertaining content according to their own
schedule from any location; and
o enable users to participate interactively in the games and game shows and
to compete against other users.
4
<PAGE>
Despite the opportunity presented by the widespread adoption of the
Internet as a medium for delivering entertainment content to a growing user
base, only a limited number of Web sites are currently dedicated to providing a
broad array of fun and challenging interactive entertainment. We believe that
we can grow our revenues by leveraging our large audience and our engaging
content through targeting our advertising placement to specific demographics
within our audience in order to attract more advertisers to our network.
Our Strategy
Our objective is to be the leading online entertainment destination. We
believe we can achieve this objective through the following strategies:
o enhancing our content;
o aggressively expanding our audience;
o further monetizing our audience and building additional revenue streams;
o capitalizing on the popularity of our PrizePoint rewards program;
o continuing to expand internationally; and
o pursuing strategic acquisitions and alliances.
Recent Developments
On February 2, 2000, we sold 1,265,372 shares of our common stock to a
strategic investor, Trans Cosmos USA, Inc., for approximately $25.0 million. We
intend to establish a 50-50 joint venture with Trans Cosmos USA to produce a
local language version of our flagship entertainment site, uproar.com, in
Japan. Trans Cosmos USA is a subsidiary of Trans Cosmos, Inc., which is
headquartered in Tokyo, Japan.
5
<PAGE>
The Offering
Common stock offered..... 5,000,000 shares
Common stock outstanding after
this offering........... 30,237,320 shares
Use of proceeds.......... We intend to use the proceeds of this offering to
fund our marketing activities, expand our sales
force, enhance our products and services, expand our
business internationally, enter into distribution
and affiliate arrangements with other Web sites,
potentially make strategic investments and
acquisitions, and for general corporate purposes.
Proposed Nasdaq National Market
Symbol.................. "UPRO"
EASDAQ Symbol............ "UPRO"
This information is based on our shares of common stock outstanding as of
December 31, 1999 and gives effect to 1,265,372 additional shares of common
stock issued to a strategic investor at approximately $19.76 per share on
February 2, 2000. This information:
o excludes 5,904,408 shares subject to options outstanding as of December
31, 1999 with a weighted average exercise price of $8.52;
o assumes no exercise of the underwriters' over-allotment option; and
o has been restated to reflect a 2-for-1 split of our common stock, to be
effected February 18, 2000.
-------------
As used in this prospectus, UPROAR and the UPROAR logo are service marks,
the registration of which has been applied for and is pending in the United
States and in other markets in which we register our marks. The UPROAR service
mark is registered in Germany and the United Kingdom. We have also applied for
the registration of numerous other trademarks in the United States and those
applications are pending. Those marks include BINGO BLITZ, BLOWOUT BINGO,
GAMESCENE, LET THERE BE FUN, MENTAL STATE, PRIZEPOINT, PRIZEPOINTS and TRIVIA
BLITZ. All other trademarks and service marks used in this prospectus are the
property of their respective owners.
-------------
Uproar Inc. was incorporated in Delaware on December 16, 1999 and is the
successor to Uproar Ltd., a Bermuda limited liability company that was formed
on July 7, 1997, and redomesticated into Delaware on January 26, 2000. Our
principal executive offices are located at 240 West 35th Street, 9th Floor, New
York, New York 10001. Our telephone number at that location is (212) 714-9500.
Information contained on our Web sites does not constitute part of this
prospectus. References in this prospectus to "Uproar," "we," "our," and "us"
refer to Uproar Inc., its predecessor Uproar Ltd., and its subsidiaries.
6
<PAGE>
Summary Consolidated Financial and Operating Data
The following table sets forth summary consolidated financial and
operating data for our business. You should read this information together with
the consolidated financial statements and the notes to those statements
appearing elsewhere in this prospectus. The pro forma data give effect to the
sale of 1,265,372 shares of common stock at approximately $19.76 per share on
February 2, 2000 and the application of the net proceeds from that sale.
<TABLE>
<CAPTION>
Period ended
December 31,
1995
--------------
<S> <C>
Statement of Operations Data:
Revenues ................................... $ 43,365
Cost of revenues ........................... --
----------
Gross profit ............................... 43,365
Operating expenses:
Sales and marketing ....................... --
Product and technology development ........ 33,190
General and administrative ................ 70,182
Amortization of intangible assets ......... --
----------
Loss from operations ....................... (60,007)
Foreign exchange gain (loss) ............... (2,233)
Other income (expense), net ................ 4,326
Provision for income taxes ................. --
----------
Net loss ................................... $ (57,914)
==========
Basic and diluted net loss per share ....... $ (0.05)
==========
Weighted average number of common
shares outstanding ........................ 1,138,356
==========
Pro forma basic and diluted net loss per
share ..................................... ( .02)
Pro forma weighted average number of
shares outstanding ........................ 2,403,728
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1996 1997 1998 1999
--------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ................................... $ 59,698 $ 348,709 $ 1,632,969 $ 10,391,527
Cost of revenues ........................... (40,781) (216,586) (760,376) (2,533,294)
----------- ------------- ------------- -------------
Gross profit ............................... 18,917 132,123 872,593 7,858,233
Operating expenses:
Sales and marketing ....................... 166,806 1,087,058 3,770,866 28,065,956
Product and technology development ........ 389,346 772,744 849,486 3,701,393
General and administrative ................ 187,362 2,092,394 2,327,720 8,919,011
Amortization of intangible assets ......... -- -- 9,303 6,086,198
----------- ------------- ------------- -------------
Loss from operations ....................... (724,597) (3,820,073) (6,084,782) (38,914,325)
Foreign exchange gain (loss) ............... 49,946 (85,439) 57,401 (119,996)
Other income (expense), net ................ (27,829) 82,349 205,751 337,680
Provision for income taxes ................. (4,909) (5,582) (9,020) (28,000)
----------- ------------- ------------- -------------
Net loss ................................... $ (707,389) $ (3,828,745) $ (5,830,650) $ (38,724,641)
=========== ============= ============= =============
Basic and diluted net loss per share ....... $ (0.17) $ (0.42) $ (0.40) $ (1.77)
=========== ============= ============= =============
Weighted average number of common
shares outstanding ........................ 4,258,084 9,034,928 14,697,112 21,909,456
=========== ============= ============= =============
Pro forma basic and diluted net loss per
share ..................................... ( 0.13) ( 0.37) (0.37) (1.67)
Pro forma weighted average number of
shares outstanding ........................ 5,523,456 10,300,300 15,962,484 23,174,828
</TABLE>
The following table is a summary of our balance sheet at December 31,
1999. The pro forma data give effect to the sale of 1,265,372 shares of common
stock at approximately $19.76 per share on February 2, 2000 and the application
of the net proceeds from that sale. The pro forma as adjusted data reflect the
sale of 5,000,000 shares of common stock offered hereby at an assumed initial
public offering price in the United States of $20.51 per share after deducting
the estimated underwriting discount and estimated offering expenses payable by
us.
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
---------- ----------- ------------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ................................ $15,136 40,131 $134,515
Working capital .......................................... 18,555 43,550 137,934
Total assets ............................................. 42,816 67,811 162,195
Total indebtedness, including current maturities ......... 154 154 154
Total stockholders' equity ............................... 37,204 62,199 156,583
</TABLE>
7
<PAGE>
RISK FACTORS
You should consider carefully the risks described below before making an
investment decision.
Financial Risks
We have a history of losses since our inception, we expect future losses and
may not be profitable in the future.
Since our inception in February 1995, we have not been profitable. If our
revenues do not increase substantially, we may never become profitable. We have
not generated enough revenues to exceed the substantial amounts we have spent
to create, launch and enhance our Web sites, to promote awareness of our Web
sites and to develop our business generally. At December 31, 1999, our
accumulated deficit was approximately $49.1 million. Even if we do achieve
profitability, we may not sustain profitability on a quarterly or annual basis
in the future.
It is our intention to invest the proceeds of this offering and cash
generated from operations to build our business and increase our market share.
Despite these investments, our market share may grow more slowly than we
anticipate or may even decrease in the future. In addition, our expenses may
increase faster than we expect. As a result, we expect to continue to generate
substantial losses for the foreseeable future. Moreover, the rate at which we
incur these losses may increase from current levels.
Because we have only recently introduced many of our products and services, you
have limited information upon which you can evaluate our business.
Uproar was founded in February 1995 and we launched our flagship
entertainment site, uproar.com, in September 1997. We launched the other sites
that comprise our network throughout 1998 and 1999. Accordingly, you can only
evaluate our business based on our limited operating history. Our operating
results for any particular quarter may not be indicative of future operating
results. You should not rely on quarter-to-quarter comparisons of our results
of operations as an indication of our future performance. As a young company in
the new and rapidly evolving online entertainment market, we face risks and
uncertainties relating to our ability to successfully implement our business
plan. These risks include our ability to:
o expand our content and services;
o attract a larger audience to our Web sites;
o maintain our current, and develop new, strategic relationships; and
o continue to develop and upgrade our technology.
If we are unsuccessful in addressing these risks and uncertainties, we
will not be able to successfully implement our business plan and our stock
price will decline.
We may fail to meet market expectations because of fluctuations in our
quarterly operating results, which would cause our stock price to decline.
Although we intend to steadily increase our spending and investment to support
our planned growth, our revenues, and some of our costs, will be much less
predictable. This is likely to result in significant fluctuations in our
quarterly results. Because of our limited operating history and the emerging
nature of our industry, we anticipate that securities analysts and investors
will have difficulty in accurately forecasting our results. It is possible that
our operating results in some quarters will be below market expectations. In
this event, the price of our common stock is likely to decline.
The following are among the factors that could cause significant fluctuations
in our operating results:
o the number of users on, and the frequency of their use of, our Web sites;
o our ability to attract and retain advertisers;
8
<PAGE>
o the expiration or termination of our strategic relationships, including
our relationships with Pearson Television and Cable & Wireless;
o the expiration or termination of partnerships with Web sites and Internet
service providers, or ISPs, which can result from mergers or other
strategic combinations as Internet businesses continue to consolidate;
o our ability to offer on a timely and affordable basis merchandise that
appeals to our users' preferences;
o system outages, delays in obtaining new equipment or problems with
planned upgrades;
o our ability to successfully expand our online entertainment offerings
beyond the games and game show sector;
o the introduction of new or enhanced services by us or our competitors;
o changes in our advertising rates or advertising rates in general, both
on and off the Internet; and
o changes in general economic and market conditions, including seasonal
trends, that have an impact on the demand for Internet advertising.
We may not be able to adjust our operating expenses in order to offset any
unexpected revenue shortfalls.
Our operating expenses are based on our expectations of our future
revenues. These expenses are relatively fixed, at least in the short term. We
intend to expend significant amounts in the short term, particularly to expand
our advertising sales department and to build brand awareness. We may be unable
to adjust spending quickly enough to offset any unexpected revenue shortfall.
If we fail to substantially increase our revenues, then our financial condition
and results of operations would be materially adversely affected.
If we do not continue to develop and enhance our brand, we will not be able to
maintain or increase our customer base or our revenues.
Enhancing the Uproar brand is critical to our ability to expand our user
base and our revenues. We believe that the importance of brand recognition will
increase as the number of entertainment Web sites grows. In order to attract
and retain users and advertisers, we intend to increase our expenditures for
creating and maintaining brand loyalty. We use a combination of television,
print and Web-based advertising to promote our brand. If we fail to advertise
and market our brand effectively, we will lose users and our revenues will
decline.
Our success in promoting and enhancing the Uproar brand will also depend
on our success in providing high quality content, features and functions that
are attractive and entertaining to users of online game shows and multi-player
games. If visitors to our Web sites or advertisers do not perceive our services
to be of high quality, the value of the Uproar brand could be diminished, we
will lose users and our revenues will decline.
We have derived a portion of our revenues from reciprocal advertising
agreements, or barter, which do not generate cash revenue.
We derive a portion of our revenues from reciprocal advertising
arrangements, or barter, under which we exchange advertising space on our Web
sites, or provide game content or other services for third-party Web sites,
predominantly for advertising space on other Web sites rather than for cash
payments. In the year ended December 31, 1999, we derived approximately
$1,418,000, or 14% of our revenues, from these arrangements. In the year ended
December 31, 1998, we derived approximately $365,000, or 22%, of our revenues,
from these arrangements. We expect that barter will continue to account for
some of our revenues in the foreseeable future. The Securities and Exchange
Commission, together with the Financial Accounting Standards Board, or FASB,
have recently begun to examine revenues recognized by Internet companies from
barter transactions. This review may result in limitations on revenues which
may be derived from these transactions. If such rules are implemented, our
financial results may suffer.
9
<PAGE>
Our advertising pricing model, which is based heavily on the number of
advertisements delivered to our users, may not be successful.
Different pricing models are used to sell advertising on the Internet. The
models we adopt may prove to not be the most profitable. Currently, advertising
based on impressions, or the number of times an advertisement is displayed on
our Web sites, comprises substantially all of our revenues. To the extent that
we do not meet the minimum guaranteed impressions that we are required to
deliver to users under many of our advertising contracts, we defer recognition
of the corresponding revenues until we achieve the guaranteed impression
levels. To the extent that minimum guaranteed impression levels are not
achieved, we may be required to provide additional impressions after the
contract term, which would reduce our advertising inventory in subsequent
periods.
In addition, since advertising impressions may be delivered to a user's
Web browser without regard to user activity, advertisers may decide that a
pricing model based on user activity is preferable. We cannot predict which
pricing model, if any, will emerge as the industry standard. As a result, we
cannot accurately project our future advertising rates and revenues. If we are
unable to adapt to new forms of Internet advertising or we do not adopt the
most profitable form, our advertising revenues could be adversely affected.
We may not be able to track the delivery of advertisements on our network in a
way that meets the needs of our advertisers.
It is important to our advertisers that we accurately measure the delivery
of advertisements on our network and the demographics of our user base.
Presently, no measurement standards have been widely accepted to measure the
effectiveness of Internet-based advertising. Companies may choose to not
advertise on our Web sites or may pay less for advertising if they do not
perceive our ability to track and measure the delivery of advertisements to be
reliable. We depend on third parties to provide us with many of these
measurement services. If they are unable to provide these services in the
future, we would need to perform them ourselves or obtain them from another
provider. We could incur significant costs or experience interruptions in our
business during the time we are replacing these services. In addition, if
successful, legal initiatives related to privacy concerns could also prevent or
limit our ability to track advertisements.
Our business may suffer if we have difficulty retaining users on our Web sites.
Our business and financial results are also dependent on our ability to
retain users on our Web sites. In any particular month, many of the visitors to
our sites are not registered users and many of our registered users do not
visit our sites. We believe that intense competition has caused, and will
continue to cause, some of our registered users to seek online entertainment on
other sites and spend less time on our sites. It is relatively easy for our
users to go to competing sites and we cannot be certain that any steps we take
will maintain or improve our retention of users. In addition, some new users
may decide to visit our Web sites out of curiosity regarding the Internet and
may later discontinue using Internet entertainment services. If we are unable
to retain our user base, the demand for advertising on our Web sites may
decrease and our revenues may decline.
We must increase our advertising sales department to support our growth.
We need to increase substantially our advertising sales department in the
near future to support our planned growth. On December 31, 1999, our
advertising sales department had 23 members. In October 1999, we hired an
executive vice president to manage our enhanced sales and marketing efforts and
it can take a relatively long time for a sales and marketing manager to begin
to achieve desired results. Our ability to increase our sales department and
improve its results involves a number of risks and uncertainties, including:
o strong competition in hiring and retaining advertising sales personnel;
o our ability to efficiently integrate, train and motivate additional
advertising sales and support personnel;
o our ability to manage an advertising sales organization with offices
throughout the United States and in Europe; and
10
<PAGE>
o the length of time it takes new advertising sales personnel to become
productive.
If we do not successfully increase our advertising sales department, our
ability to support our planned growth could be impeded.
We face risks associated with international operations.
We currently operate in the United States, Hungary, Germany and the United
Kingdom. We intend to establish a joint venture to expand into Japan, and plan
to continue to expand into additional international markets. We anticipate
spending significant financial and managerial resources to support these
expansions.
Our business internationally is subject to a number of risks. These
include:
o linguistic and cultural differences;
o inconsistent regulations and unexpected changes in regulatory
requirements;
o differing technology standards that would affect the quality of the
presentation of our games to our users;
o potentially adverse tax consequences;
o wage and price controls;
o political instability and social unrest;
o uncertain demand for electronic commerce;
o uncertain protection of our intellectual property rights; and
o imposition of trade barriers.
We have no control over many of these matters and any of them may
adversely affect our ability to conduct our business internationally.
Currency fluctuations and exchange control regulations may adversely affect our
business.
Our reporting currency is the United States dollar. Our customers outside
the United States, however, are generally billed in local currencies. Our
accounts receivable from these customers and overhead assets will decline in
value if the local currencies depreciate relative to the United States dollar.
To date, we have not tried to reduce our exposure to exchange rate fluctuations
by using hedging transactions. Although we may enter into hedging transactions
in the future, we may not be able to do so effectively. In addition, any
currency exchange losses that we suffer may be magnified if we become subject
to exchange control regulations restricting our ability to convert local
currencies into United States dollars.
We have limited experience in offering electronic commerce services to our
users and we may not be able to successfully compete or effectively manage the
growth of our electronic commerce business.
We have limited experience in providing electronic commerce services to
our users. We only recently introduced our online store, shopping.uproar.com,
and hired our electronic commerce manager. Some of our competitors may already
be in a better position to provide these services to their users because of
their greater technological, financial and marketing resources. Also, these
competitors may have the support of, or relationships with, important
electronic commerce participants, which could adversely affect the extent of
support that those electronic commerce market participants would provide to us
in the future.
We carry inventory on the majority of products that we sell on our Web
sites. As a result, it will be important to our success in electronic commerce
that we accurately predict the changing trends in consumer preferences for the
goods sold on our sites and do not overstock unpopular products. If demand for
one or
11
<PAGE>
more of the products falls short of our expectations, excess inventory and
outdated merchandise could accumulate, potentially resulting in reduced
merchandise capacity and inventory write-downs due to damage, theft, reduced
selling prices and obsolescense. As a consequence, we may be required to take
inventory markdowns, which could reduce our gross margins.
We sell numerous third-party products on our Web sites. With respect to
those products, we compete with numerous electronic commerce merchants and the
Web sites of companies that manufacture the products we offer. In selling
products over the Internet, we also compete with stores and companies that do
not distribute their products through the Internet. Many of our Internet and
non-Internet competitors are larger than we are, enjoy greater economies of
scale than are available to us, have substantially greater resources than we
have and may be able to offer more products or more attractive prices than we
can.
Risks Associated with Our Advertisers and Strategic Partners
We depend on a small group of advertising customers.
In the year ended December 31, 1999, MyPoints accounted for 14.2% of our
revenues. No other customer accounted for more than 10.0% of our revenues. Our
top five customers, in the aggregate, accounted for 39.6% of our revenues
during that period. Yahoo! accounted for 20.7% of our 1998 revenues in
connection with development services performed in that year. In 1998, our top
advertiser, Microsoft Inc. and associated companies, accounted for
approximately 11.8% of our total revenues and our top five customers, including
Yahoo! and Microsoft, accounted for approximately 44.1% of revenues. If we lose
one or more of our top customers and do not attract additional customers, we
may not generate sufficient revenues to offset this loss of revenues and our
net income will decrease.
Our relationship with Pearson Television may not be successful.
In January 1999, we entered into an agreement with Pearson Television
under which we were granted exclusive rights to provide Internet games in the
English language based on the television games Family Feud, Match Game, 100%
and Password. Our rights under this agreement will expire in September 2001
unless Pearson elects to extend them. In addition, Pearson may terminate this
agreement if Mr. Simon, our Chief Financial Officer, ceases to be employed by
us in a senior management capacity. If Pearson terminates or does not renew the
agreement, it will have the rights to distribute Internet games either directly
or through one of our competitors. Pearson retains the trademark rights for
these shows. The termination of this relationship would have a material adverse
effect on our business, results of operations and financial condition. Even if
Pearson were willing to renew the contract, it may not be willing to do so on
terms that are favorable to us. As a result, we might not be able to recover
the significant investment of resources and our management's time we made in
developing these Internet games.
As part of our agreement with Pearson, we have guaranteed minimum royalty
payments of $200,000 per broadcast year, for two broadcast years, to Pearson
pertaining to these Internet games. In the event that one or more of these
games is not financially successful for us, we are still obligated to make
minimum royalty payments to Pearson.
Risks of Our Business Model
Competition in the online entertainment industry is intense and a failure to
adequately respond to competitive pressure could result in lower revenues.
There are many companies that provide Web sites and online destinations
targeted to audiences seeking various forms of entertainment content. All of
these companies compete with us for visitor traffic, advertising dollars and
electronic commerce sales. This competition is intense and is expected to
increase significantly in the future as the number of entertainment-oriented
Web sites continues to grow. Our success will be largely dependent upon the
perceived value of our content relative to other available entertainment
alternatives, both online and elsewhere.
12
<PAGE>
Increased competition could result in:
o price reductions and lower profit margins;
o lower advertising rates;
o loss of visitors or visitors spending less time on our sites;
o reduced page views or advertising impressions; and
o loss of market share.
Many of our existing and potential competitors, in comparison to us, have:
o longer operating histories;
o greater name recognition in some markets;
o larger customer bases; and
o significantly greater financial, technical and marketing resources.
These competitors may also be able to:
o undertake more extensive marketing campaigns for their brands and
services;
o adopt more aggressive advertising pricing policies;
o use superior technology platforms to deliver their products and
services; and
o make more attractive offers to potential employees, distribution
partners, product manufacturers, inventory suppliers, advertisers and
third-party content providers.
Our competitors may develop content that is better than ours or that
achieves greater market acceptance. Sony Station, for example, currently has
the exclusive right to the online versions of the television game shows
Jeopardy and Wheel of Fortune and the board game Trivial Pursuit. In addition,
new competitors may emerge and acquire significant market share.
We also compete with traditional forms of media, like newspapers,
magazines, radio and television for advertisers and advertising revenue. If
advertisers perceive the Internet or our Web sites to be a limited or an
ineffective advertising medium, they may be reluctant to devote a portion of
their advertising budgets to our Web sites.
Our plans to expand our entertainment business beyond our core game show sites
may not be successful.
Almost all of our experience to date is with online games and game shows.
Because we have only limited experience with businesses beyond our core gaming
sites, we cannot predict whether we will be able to successfully expand into
other online entertainment businesses. Expanding our business will require us
to expend significant amounts of capital to be able to contend with competitors
that have more experience than we do in these businesses and may also have
greater resources to devote to these businesses. Also, our management may have
to divert a disproportionate amount of its attention away from our day-to-day
core business and devote a substantial amount of time expanding into new areas.
If we are unable to effectively expand our business or manage any such
expansion, our financial results will suffer and our stock price will decline.
Risks Related to the Internet Industry
Our revenues depend on the continuing growth of the Internet.
Our future success is dependent on the increased use of the Internet. We
cannot assure you that the market for Internet services will continue to grow
or become sustainable.
13
<PAGE>
The Internet may not continue as a viable commercial marketplace because of
many factors, including:
o the inadequate development of the necessary infrastructure;
o a lack of development of complementary products such as high speed modems
and high speed communication lines; and
o delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and volume of traffic. We cannot
assure you that the Internet infrastructure will be able to support the demands
placed on it by this continued growth. In addition to the Internet's uncertain
ability to expand to accommodate increasing traffic, critical issues concerning
the use of the Internet, including security, reliability, cost, ease of
deployment and administration and quality of service, remain unresolved. A
number of states, for example, have recently permitted telephone companies to
charge increased rates for consumers connecting to the Internet. Concerns
regarding these issues may affect the growth of the use of Internet. If the
Internet fails to continue as a viable marketplace, or develops more slowly
than expected, our growth will slow or stop and our business and financial
results will suffer.
We will only be able to execute our business plan if Internet advertising
increases.
Consumer usage of the Internet is relatively new and the success of the
Internet as an advertising medium will depend on its widespread adoption. The
adoption of Internet advertising, particularly by those entities that have
historically relied on traditional media for advertising, requires the
acceptance of a new way of conducting business, exchanging information and
advertising products and services. Advertisers that have traditionally relied
on other advertising media may be reluctant to advertise on the Internet. These
businesses may find Internet advertising to be less effective than traditional
advertising media for promoting their products and services. Many potential
advertising and electronic commerce partners have little or no experience using
the Internet for advertising purposes. Consequently, they may allocate only
limited portions of their advertising budgets to Internet advertising. We
expect that revenues from Internet advertising will make up a significant
amount of our revenues for the foreseeable future. If the Internet advertising
market develops more slowly than we expect, or if we are unsuccessful in
increasing our advertising revenues, our revenues will not grow as we expect
and our business will suffer.
If we are not able to adapt as Internet technologies and customer demands
continue to evolve, we may become less competitive and our business will
suffer.
We must adapt to rapidly evolving Internet technologies by continually
enhancing our existing services and introducing new services to address our
customers' changing demands. We expect to incur substantial costs in modifying
our services and infrastructure and in recruiting and hiring experienced
technology personnel to adapt to changing technology affecting providers of
Internet services. If we cannot hire the necessary personnel or adapt to these
changes in a timely manner or at all, we will not be able to meet our users'
demands for increasingly sophisticated entertainment and we will become less
competitive. As a result, our revenues would decline and our business will
suffer.
Changes in government regulation could adversely affect our business.
Changes in the legal and regulatory environment that pertains to the
Internet could result in a decrease in our revenues and an increase in our
costs. New laws and regulations may be adopted. Existing laws may be applied to
the Internet and new forms of electronic commerce. New and existing laws may
cover issues like:
o sales and other taxes;
o pricing controls;
o characteristics and quality of products and services;
o consumer protection;
o cross-border commerce;
14
<PAGE>
o libel and defamation; and
o copyright, trademark and patent infringement.
Customer uncertainty and new regulations could increase our costs and
prevent us from delivering our products and services over the Internet. It
could also slow the growth of the Internet significantly. This could delay
growth in demand for our products and limit the growth of our revenues.
Our games and game shows are subject to gaming regulations that are subject to
differing interpretations and legislative and regulatory changes that could
adversely affect our ability to grow our business.
We operate online games of skill and chance that are regulated in many
jurisdictions and, in some instances, we reward prizes to the participants. The
selection of prize winners is sometimes based on chance, although none of our
games requires any form of monetary payment. The laws and regulations that
govern our games, however, are subject to differing interpretations in each
jurisdiction and are subject to legislative and regulatory change in any of the
jurisdictions in which we offer our games. If such changes were to happen, we
may find it necessary to eliminate, modify or cancel components of our products
that could result in additional development costs and the possible loss of
revenue.
User concerns and government regulations regarding privacy may result in a
reduction in our user traffic.
Web sites sometimes place identifying data, or cookies, on a user's hard
drive without the user's knowledge or consent. Our company and many other
Internet companies use cookies for a variety of different reasons, including
the collection of data derived from the user's Internet activity. Any reduction
or limitation in the use of cookies could limit the effectiveness of our sales
and marketing efforts. Most currently available Web browsers allow users to
remove cookies at any time or to prevent cookies from being stored on their
hard drive. In addition, some privacy advocates and governmental bodies have
suggested limiting or eliminating the use of cookies. For example, the European
Union recently adopted a privacy directive that may limit the collection and
use of information regarding Internet users. These efforts may limit our
ability to target advertising or collect and use information regarding the use
of our Web sites, which would reduce our revenues. Fears relating to a lack of
privacy could also result in a reduction in the number of our users.
If Congress adopts legislation that bans online offshore casino gambling, we
will lose revenues derived from some of our advertisers and, if we do not take
appropriate measures to comply with the law, may be subject to legal penalties.
In the year ended December 31, 1999, 12.1% of our revenue was from
advertising that promoted offshore casino sites. The Congress of the United
States is considering legislation that would render unlawful offshore casino
gambling offered online in the United States. If this legislation is enacted in
a form similar to the bill pending in Congress, we would need to terminate or
modify our current agreements with offshore casino site advertisers, which
would result in a corresponding loss of revenue.
In addition, such legislation could impose penalties on United
States-based companies that are deemed to aid in the operation of offshore
online casinos or encourage the use of those sites by United States residents.
Accordingly, it is possible that we could be liable for criminal or civil
penalties if we did not take proper measures to terminate or modify our
agreements with online casino sites.
We may be liable for the content we make available on the Internet.
We make content available on our Web sites and on the Web sites of our
advertisers and distribution partners. The availability of this content could
result in claims against us based on a variety of theories, including
defamation, obscenity, negligence, copyright or trademark infringement. We
could also be exposed to liability for third-party content accessed through the
links from our sites to other Web sites. We may incur
15
<PAGE>
costs to defend ourselves against even baseless claims and our financial
condition could be materially adversely affected if we are found liable for
information that we make available. Implementing measures to reduce our
exposure to this liability may require us to spend substantial resources and
limit the attractiveness of our service to users.
Other Risks Impacting Our Business
We may not effectively manage our growth.
In order to execute our business plan, we must grow significantly. This
growth will place a significant strain on our personnel, management systems and
resources. We expect that the number of our employees, including
management-level employees, will continue to increase for the foreseeable
future. Also, we have recently hired some of our key employees, including our
Chief Executive Officer, Chief Operating Officer, Executive Vice President of
Product Marketing, Executive Vice President of Sales and Marketing and
Executive Vice President of Merchandising. These individuals do not have
significant experience working with us or together as our management team.
We must continue to improve our operational and financial systems and
managerial controls and procedures. We will need to continue to expand, train
and manage our workforce. We anticipate expanding our team of financial
management personnel and are currently attempting to recruit a Chief Financial
Officer. We must also maintain close coordination among our technical,
accounting, finance, marketing, sales and editorial organizations. If we do not
effectively manage this growth, we will not be successful in executing our
business plan.
The loss of our key personnel would impede our future success, and we may have
difficulty attracting and retaining highly-skilled employees.
Our future success depends, in part, on the continued service of our key
management personnel, particularly Kenneth D. Cron, our Chairman of the board
of directors and Chief Executive Officer, and Christopher R. Hassett, our
President and Chief Operating Officer. Our future success also depends on our
ability to attract, retain and motivate highly-skilled employees. Competition
for employees in our industry is intense. We may be unable to attract,
assimilate or retain other highly qualified employees in the future. We have
from time to time in the past experienced, and we expect to continue to
experience in the future, difficulty in hiring and retaining highly-skilled
employees with appropriate qualifications. The employment agreements that we
have with our key management personnel provide for at-will employment and any
of our management personnel can terminate their employment with us at any time.
The loss of the services of these individuals or other key employees, and the
failure to attract and retain other highly qualified employees, would have a
material adverse effect on our ability to continue to develop and effectively
manage our business. We do not maintain key person life insurance policies on
any of our key management personnel.
The technical performance of our Web sites is critical to our business and to
our reputation.
The computer systems that support our Web sites are largely designed and
maintained by us at significant expense. We may not be able to successfully
design and maintain our systems in the future. We also license communications
infrastructure software that we utilize in Uproar 2000 from Tibco Software,
Inc. The license agreement with Tibco does not contain a defined termination
date. If the Tibco license is terminated, we would likely suffer a disruption
in our business and a replacement system could be difficult to identify and
obtain. Any system failure, including network, software or hardware failure,
that causes an interruption in our service or a decrease in responsiveness of
our Web sites, could result in reduced user traffic and reduced revenue. We
have in the past experienced slower response times and interruptions in service
because of equipment or software down time related to the high volume of
traffic on our Web sites and our need to deliver frequently updated information
to our users. We cannot assure you that we will be able to expand our systems
to adequately accommodate our growing user base. We could also be affected by
computer viruses, electronic break-ins from unauthorized users, or other
similar disruptions or attempts to penetrate our online security systems. Any
secure provider system disruption or failure, security breach or other damage
that interrupts or delays our operations could harm our reputation and cause us
to lose users, advertisers and sponsors and adversely affect our business and
operations.
16
<PAGE>
We currently maintain production servers in New York City and London and
plan to include a facility in California in the future. Our domestic data
centers are operated at facilities provided by Level 3 Communications and
Digital Telemedia. Our London data center is operated by PSI Net. Our
operations depend on these facilities' ability to protect their and our systems
against damage from fire, power loss, water, telecommunications failures,
vandalism and other malicious acts, and similar unexpected adverse events. Any
disruption in the Internet access provided by our servers could have a material
adverse effect on our ability to deliver high-quality content to, and produce
fast response times for, our users.
Our users depend on Internet service providers, online service providers
and other Web site operators for access to our Web sites. These providers have
had interruptions in their services for hours and, in some cases, days, due to
system failures unrelated to our systems. Any future interruptions would be
beyond our control to prevent and could harm our reputation and adversely
affect our business.
We may be unable to protect our intellectual property rights and we may be
liable for infringing the intellectual property rights of others.
We do not currently maintain patents on our technology and others may be
able to develop similar technologies in the future. We regard our copyrights,
service marks, trademarks, trade secrets and other intellectual property as
critical to our success. We rely on trademark and copyright law, trade secret
protection and confidentiality and license agreements with our employees,
customers, partners and others to protect our intellectual property rights.
Unauthorized use of our intellectual property by third parties may adversely
affect our business and our reputation. It may be possible for third parties to
obtain and use our intellectual property without authorization. Furthermore,
the validity, enforceability and scope of protection of intellectual property
in Internet-related industries is uncertain and still evolving. Our multi-user
games run on proprietary software systems developed by us at significant
expense. Nonetheless, we do not maintain patents on our technology and others
may be able to develop similar technologies in the future.
We cannot be certain that our products do not or will not infringe valid
patents, copyrights, trademarks or other intellectual property rights held by
third parties. We may be subject to legal proceedings and claims from time to
time relating to the intellectual property of others in the ordinary course of
our business. Disputes concerning the ownership of rights to use intellectual
property could be costly and time consuming to litigate, may distract
management from other tasks of operating our business, and may result in our
loss of significant rights and the loss of our ability to effectively operate
our business.
Any joint ventures, acquisitions and alliances we make could be disruptive to
our business and be dilutive to our investors.
As part of our business strategy, we pursue alliances or joint ventures
with, and may attempt to acquire, complementary businesses, technologies,
services or products, some of which may be significant. We recently agreed to
establish a joint venture to produce a local language version of our flagship
entertainment site, uproar.com, in Japan. These relationships may require
significant management attention and, in some cases, additional working
capital. If we form a joint venture with or acquire a company, we could have
difficulty in assimilating its operations and assimilating and retaining its
key personnel. These difficulties could disrupt our business and disrupt our
management and employees.
It may also be necessary for us to raise additional funds to finance
future transactions. Any equity or debt financings, if available at all, may
adversely impact our operations and, in the case of equity financings, may
result in dilution to existing stockholders.
We cannot predict our future capital needs and we may not be able to secure
additional financing.
We will likely need to raise additional funds in the future. Any required
additional financing may not be available on terms favorable to us, or at all.
If adequate funds are not available on acceptable terms, we may be unable to:
17
<PAGE>
o fund our expansion;
o successfully promote our brand;
o develop or enhance our services;
o respond to competitive pressures; or
o take advantage of acquisition opportunities.
If additional funds are raised by our issuing additional equity
securities, stockholders may experience dilution of their ownership interest
and, if approved by our stockholders, the newly issued securities could have
rights superior to those of the shares of common stock sold in this offering.
If additional funds are raised by our issuing debt, we may be subject to
limitations on our operations.
Our stock price has experienced, and is likely to continue to experience,
extreme price and volume fluctuations.
Following this offering, the price at which our common stock will trade is
likely to be highly volatile. The stock market has from time to time
experienced significant price and volume fluctuations that have affected the
market prices for the securities of technology companies, particularly Internet
companies. We cannot predict the extent to which investor interest will lead to
the development of an active trading market in the United States or how liquid
that market might become. As a result, investors in our common stock may
experience a significant decrease in the value of their common stock regardless
of our operating performance or prospects.
If our stock price is volatile, we may become subject to securities litigation
which is expensive and could result in a diversion of resources.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been brought
against that company. Many companies in the Internet industry have been subject
to this type of litigation in the past. We may also become involved in this
type of litigation. Litigation is often expensive and diverts management's
attention and resources.
We may use the proceeds of this offering ineffectively or in ways with which
you may not agree.
Our management will have significant flexibility in applying the net
proceeds of this offering as well as over the timing of our expenditures. You
may disagree with the way our management decides to spend these proceeds. If we
do not apply the funds we receive effectively, our accumulated deficit will
increase and we may lose significant business opportunities.
Shares eligible for public sale after this offering could adversely affect our
stock price.
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of common stock in the market after this
offering, or the perception that these sales could occur. These sales also
might make it difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate.
Our charter documents and Delaware law may inhibit a takeover that stockholders
may consider favorable.
Provisions in our charter and bylaws may have the effect of delaying or
preventing a change of control or changes in our management that stockholders
consider favorable or beneficial. If a change of control or change in
management is delayed or prevented, the market price of our common stock could
decline.
18
<PAGE>
You will suffer immediate and substantial dilution.
The initial public offering price per share in the United States will
significantly exceed our pro forma net tangible book value per share as of
December 31, 1999 of $2.04. Accordingly, investors purchasing shares in this
offering will suffer immediate and substantial dilution of their investment.
We do not plan to pay dividends in the foreseeable future, and, as a result,
stockholders will need to sell shares to realize a return on their investment.
We have not declared or paid any cash dividends on our capital stock since
inception. We intend to retain any future earnings to finance the operation and
expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future. Consequently, you will need to sell your shares of
common stock in order to realize a return on your investment and you may not be
able to sell your shares at or above the price you paid for them.
19
<PAGE>
FORWARD LOOKING STATEMENTS; MARKET DATA
Many statements made in this prospectus under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere are
forward-looking statements that are not based on historical facts. These
forward-looking statements are usually accompanied by words such as "believes,"
"anticipates," "plans," "expects" and similar expressions. Because these
forward-looking statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements, including those
discussed under "Risk Factors."
This prospectus contains information concerning Uproar and the Internet
market generally. Some of this information is forward-looking in nature and is
based on a variety of assumptions regarding the ways in which this market will
develop. These assumptions have been derived from information currently
available to us and to the third party market observers quoted herein,
including Media Metrix, International Data Corporation, or IDC, Nielsen Media
Research, and Forrester Research. They include the following general underlying
expectations:
o no catastrophic failure of the Internet will occur;
o the number of people online and the total number of hours spent online
will increase significantly over the next five years;
o government regulations will not prohibit or materially and adversely
affect our business;
o the total value of online advertising and electronic commerce will
increase significantly over the next five years; and
o Internet security and privacy concerns will be adequately addressed.
If any one or more of the foregoing assumptions is incorrect, actual
market results may differ from those predicted. While we do not know what
impact these differences may have on our business, our future business, results
of operations and financial condition, and the market price of our shares of
common stock may be materially adversely impacted.
----------------
Some of the Internet usage data presented in this prospectus is derived
from statistics published by Media Metrix, an independent provider of Web
measurement services. Media Metrix draws its data from a sample of over 50,000
Web users that have installed a tracking meter on the computers they use to
access the Web, including those in their places of residence and places of
work. The meter records computer activity by individual, by date, time and
duration and page-by-page viewing of the Web. If the computer has been inactive
for more than 30 minutes the meter requires users to indicate again who is at
the computer. Media Metrix defines "unique visitors per month" as the actual
number of unduplicated users who visit a given Web site or group of sites at
least once in a given month, and "average minutes per usage day" as the average
number of minutes spent on the site or category during the day, per visiting
person.
20
<PAGE>
PRICE RANGE OF COMMON STOCK
Global instrument certificates, or GICs, representing interests in our
common stock, were approved for trading on the Sonstiger Handel of the Vienna
Stock Exchange between September 19, 1997 and November 30, 1999. From September
19, 1997 until December 31, 1998, the GICs were quoted in Austrian Schillings,
or ATS, and from January 1, 1999 until November 30, 1999, the date on which we
withdrew from the trading facility for the GICs provided by the Vienna Stock
Exchange, the GICs were quoted in euros. The following table sets forth, for
the periods indicated, the high and low sale prices as originally reported by
the Vienna Stock Exchange and as converted into United States dollars, for the
GICs. All prices have been adjusted to reflect a 2-for-1 split of our common
stock declared on February 4, 2000 and to be effected February 18, 2000.
Conversions into United States dollars are calculated using the noon buying
rate, per United States $1.00, for cable transfers in foreign currencies as
certified by the Federal Reserve Bank of New York on the date each relevant
price was quoted.
<TABLE>
<CAPTION>
Highest Reported Price
----------------------------------------------
As converted Conversion
As reported to U.S. dollars Rate
------------- ----------------- ------------
<S> <C> <C> <C>
1997
Fourth Quarter (from September 19) ATS 21.50 $ 1.72 12.5
1998
First Quarter ATS 19.75 $ 1.54 12.8
Second Quarter 27.50 2.22 12.4
Third Quarter 35.75 2.86 12.5
Fourth Quarter 110.00 9.32 11.8
1999
[GRAPHIC OMITTED]
First Quarter 12.94 $ 14.60 0.886
Second Quarter 15.50 16.51 0.939
Third Quarter 13.30 13.57 0.980
Fourth Quarter (until November 30, 1999) 16.50 16.63 0.992
</TABLE>
<TABLE>
<CAPTION>
Lowest Reported Price
---------------------------------------------
As converted Conversion
As reported to U.S. dollars Rate
------------- ----------------- -----------
<S> <C> <C> <C>
1997
Fourth Quarter (from September 19) ATS 18.75 $ 1.52 12.3
1998
First Quarter ATS 19.23 $ 1.50 12.8
Second Quarter 21.75 1.67 13.0
Third Quarter 26.25 2.05 12.8
Fourth Quarter 32.13 2.80 11.5
1999
[GRAPHIC OMITTED]
First Quarter 8.70 $ 10.05 0.866
Second Quarter 13.00 13.58 0.957
Third Quarter 8.60 9.10 0.945
Fourth Quarter (until November 30, 1999) 10.00 10.71 0.934
</TABLE>
<PAGE>
Our common stock was approved for trading on the European Association of
Securities Dealers' Automated Quotation system, or EASDAQ, on July 8, 1999. The
following price table sets forth, for the periods indicated, the high and low
sale prices, as originally reported by EASDAQ and as converted into United
States dollars, for our common stock. All prices have been adjusted to reflect
a 2-for-1 split of our common stock to be effected February 18, 2000.
Conversions into United States dollars are calculated using the noon buying
rate, per United States $1.00, for cable transfers in foreign currencies as
certified by the Federal Reserve Bank of New York on the date each relevant
price was quoted. On February 2, 2000, the last reported price of our common
stock on EASDAQ was [GRAPHIC OMITTED] 21.00, or $20.51. The noon buying rate for
February 2, 2000 was [GRAPHIC OMITTED] 1.023 per United States $1.00.
<TABLE>
<CAPTION>
Highest Reported Price Lowest Reported Price
---------------------------------------------- ---------------------------------------------
As converted Conversion As converted Conversion
As reported to U.S. dollars Rate As reported to U.S. dollars Rate
------------- ----------------- ------------ ------------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1999
[GRAPHIC OMITTED]
[GRAPHIC OMITTED]
Third Quarter (from July 8) 13.60 $ 13.88 0.980 9.25 $ 9.63 0.961
Fourth Quarter 25.78 25.99 0.992 10.00 10.71 0.934
</TABLE>
The liquidity and trading patterns of securities quoted on the Vienna
Stock Exchange and EASDAQ may be substantially different from those of
securities quoted on the Nasdaq National Market. EASDAQ is a relatively new
quotation system and we are one of only a small number of issuers that quotes
its shares on EASDAQ. Historical trading prices, therefore, may not be
indicative of the prices at which our common stock will trade in the future.
21
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the sale of the common shares
offered by us are estimated to be $94.4 million, assuming an initial public
offering price in the United States of $20.51 per share, the last reported sale
price of our common stock on EASDAQ on February 2, 2000, and after deducting the
estimated underwriting discount and offering expenses. If the underwriters'
over-allotment option is exercised in full, we estimate that the net proceeds
will be $108.8 million.
We intend to use the proceeds of this offering:
o to fund our marketing activities;
o to expand our advertising sales force;
o to enhance our products and services;
o to expand our business internationally;
o to enter into distribution and affiliate arrangements with other Web
sites; and
o for general corporate purposes.
In addition, as part of our strategy, we seek to enter into alliances or
joint ventures with, and may acquire, complementary businesses, technologies,
services or products, some of which may be significant. We may use some of the
net proceeds for these alliances, joint ventures or acquisitions. We currently
do not have commitments or agreements with respect to any such transactions.
We have not determined the amount of net proceeds to be used for each of
the specific purposes indicated. Accordingly, our management will have
significant flexibility in applying the net proceeds of the offering.
Until this money is used, we intend to invest the net proceeds in
short-term, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
intend to retain any future earnings to finance the operation and expansion of
our business and do not anticipate paying any cash dividends in the foreseeable
future.
22
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
o on an actual basis;
o on a pro forma basis after giving effect to the sale of 1,265,372
additional shares of our common stock at $19.76 per share on February 2,
2000 and the application of the net proceeds of that sale; and
o on a pro forma as adjusted basis to reflect our sale of 5,000,000 shares
of common stock at an assumed initial public price in the United States of
$ 20.51 per share, after deducting underwriting discounts and the
estimated offering expenses payable by us, and the application of the net
proceeds of that sale.
You should read this information together with our consolidated financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
As of December 31, 1999
-----------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------------ ----------- ------------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents ....................... $ 15,136 $ 40,131 $ 134,515
========= ========= =========
Capital lease obligations ....................... $ 154 $ 154 $ 154
Stockholders' equity:
Shares of preferred stock, $.01 par value;
48,000,000 shares authorized, none issued and
outstanding, actual and as adjusted .......... -- -- --
Shares of common stock, $.05 par value;
112,000,000 shares authorized; 23,971,948
shares issued and outstanding (actual);
25,237,320 shares issued and outstanding (pro
forma); 30,237,320 shares issued and outstand-
ing (pro forma as adjusted) .................. 1,199 1,262 1,512
Additional paid-in capital .................... 85,193 110,125 204,259
Accumulated other comprehensive loss .......... (38) (38) (38)
Accumulated deficit ........................... (49,150) (49,150) (49,150)
--------- --------- ---------
Total stockholders' equity .................... 37,204 62,199 156,583
--------- --------- ---------
Total capitalization .......................... $ 37,358 62,353 $ 156,737
========= ========= =========
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of December 31, 1999. It does
not include:
o 5,904,408 shares subject to options outstanding as of December 31, 1999
at a weighted average exercise price of $8.52 per share; and
o 750,000 shares subject to the underwriters' over-allotment option.
23
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was $51.5
million, or $2.04 per share of our common stock. Pro forma net tangible book
value per share is determined by dividing the amount of our total tangible
assets less total liabilities by the pro forma number of shares of common stock
outstanding at that date assuming the sale of 1,265,372 additional shares of
our common stock at approximately $19.76 per share after deducting related
expenses. Assuming our sale of the 5,000,000 shares offered in this offering at
an assumed initial public offering price in the United States of $20.51 per
share and after deducting underwriting discounts and estimated offering
expenses, and the application of the estimated net proceeds, our pro forma net
tangible book value as of December 31, 1999 would have been $145.9 million, or
$4.83 per share of common stock. This represents an immediate increase in pro
forma net tangible book value of $2.79 per share to existing stockholders and
an immediate dilution of $15.68 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price in the United States per share ....... $ 20.51
Pro Forma net tangible book value per share as of December 31, 1999 ..... $ 2.04
Increase attributable to new investors .................................. 2.79
------
Pro Forma net tangible book value per share after the offering ............. 4.83
--------
Dilution per share to new investors ........................................ $ 15.68
--------
</TABLE>
These tables summarize on a pro forma basis, as of December 31, 1999, the
total number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by existing
stockholders and by new investors:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------------ -------------------------- Average Price Per
Number Percent Amount Percent Share
------------ --------- -------------- --------- ------------------
<S> <C> <C> <C> <C> <C>
Existing stockholders ......... 25,237,320 83.5% $ 89,431,638 46.6% $ 3.54
New investors ................. 5,000,000 16.5 102,550,000 53.4 20.51
---------- ----- ------------ ----- ------
Total ...................... 30,237,320 100.0% $191,981,638 100.0% $ 6.35
========== ===== ============ ===== ======
</TABLE>
Total consideration includes non-cash proceeds of $24.7 million.
These tables and calculations do not include:
o the exercise of 5,904,408 stock options outstanding as of December 31,
1999 at a weighted average exercise price of $8.52; and
o 750,000 shares subject to the underwriters' overallotment option.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to these
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in this prospectus. The selected consolidated
statement of operations data for the years ended December 31, 1997, 1998 and
1999, and the consolidated balance sheet data as of December 31, 1998 and 1999,
are derived from our consolidated financial statements, which have been audited
by KPMG LLP, independent accountants, and are included in this prospectus. The
selected consolidated statement of operations data for the period ended
December 31, 1995 and for the year ended December 31, 1996 and the consolidated
balance sheet data as of December 31, 1995, 1996 and 1997 are derived from our
consolidated audited financial statements not included in this prospectus.
<TABLE>
<CAPTION>
Period ended
December 31,
1995
--------------
<S> <C>
Statement of Operations Data:
Revenues ................................ $ 43,365
Cost of revenues ........................ --
----------
Gross profit ............................ 43,365
Operating expenses:
Sales and marketing .................... --
Product and technology development ..... 33,190
General and administrative ............. 70,182
Amortization of intangible assets ...... --
----------
Loss from operations .................... (60,007)
Foreign exchange gain (loss) ............ (2,233)
Other income (expense), net ............. 4,326
Provision for income taxes . ............ --
----------
Net loss ................................ $ (57,914)
==========
Basic and diluted net loss
per share .............................. $ (0.05)
==========
Weighted average number of common
shares outstanding ..................... 1,138,356
==========
Pro forma basic and diluted net loss per
share .................................. ( .02)
Pro forma weighted average number of
shares outstanding ..................... 2,403,728
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1996 1997 1998 1999
--------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ................................ $ 59,698 $ 348,709 $ 1,632,969 $ 10,391,527
Cost of revenues ........................ (40,781) (216,586) (760,376) (2,533,294)
----------- ------------- ------------- -------------
Gross profit ............................ 18,917 132,123 872,593 7,858,233
Operating expenses:
Sales and marketing .................... 166,806 1,087,058 3,770,866 28,065,956
Product and technology development ..... 389,346 772,744 849,486 3,701,393
General and administrative ............. 187,362 2,092,394 2,327,720 8,919,011
Amortization of intangible assets ...... -- -- 9,303 6,086,198
----------- ------------- ------------- -------------
Loss from operations .................... (724,597) (3,820,073) (6,084,782) (38,914,325)
Foreign exchange gain (loss) ............ 49,946 (85,439) 57,401 (119,996)
Other income (expense), net ............. (27,829) 82,349 205,751 337,680
Provision for income taxes . ............ (4,909) (5,582) (9,020) (28,000)
----------- ------------- ------------- -------------
Net loss ................................ $ (707,389) $ (3,828,745) $ (5,830,650) $ (38,724,641)
=========== ============= ============= =============
Basic and diluted net loss
per share .............................. $ (0.17) $ (0.42) $ (0.40) $ (1.77)
=========== ============= ============= =============
Weighted average number of common
shares outstanding ..................... 4,258,084 9,034,928 14,697,112 21,909,456
=========== ============= ============= =============
Pro forma basic and diluted net loss per
share .................................. ( 0.13) ( 0.37) ( 0.37) (1.67)
Pro forma weighted average number of
shares outstanding ..................... 5,523,456 10,300,300 15,962,484 23,174,828
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
------ -------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ................................ $ 48 $ 268 $ 2,342 $ 7,036 $15,136
Working capital .......................................... 82 (261) 2,405 6,444 18,555
Total assets ............................................. 122 422 3,071 9,111 42,816
Total indebtedness, including current maturities ......... -- 512 -- 41 154
Total stockholders' equity ............................... 95 (163) 2,782 7,727 37,204
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the notes to those statements and other
financial information appearing elsewhere in this prospectus.
Overview
We are a leading online entertainment destination. Through our network of
Web sites, we provide online game shows and interactive single- and
multi-player games that appeal to a broad audience. Our business was originally
formed in February 1995 as E-Pub Services Limited, a corporation organized
under the laws of Ireland. From February 1995 through July 1997, we focused on
developing our technology, raising capital and recruiting personnel and did not
generate significant revenues. In July 1997, we formed Uproar Ltd., a
corporation organized under the laws of Bermuda, which became the parent of
E-Pub Services Limited. In September 1997, we launched our Web sites uproar.com
and uproar.co.uk. Uproar Inc. was incorporated in Delaware on December 16,
1999. On January 26, 2000, Uproar Ltd. redomesticated from Bermuda to Delaware
and was merged with Uproar Inc. on January 27, 2000.
We have only a limited operating history for you to use as a basis for
evaluating our business. You must consider the risks and difficulties
frequently encountered by early stage companies like ours in new and rapidly
evolving markets, including the Internet advertising market.
We are subject to industry trends that affect Internet providers
generally, including seasonality and user inactivity. User traffic on Web sites
has typically declined during the summer and year-end vacation and holiday
periods. We believe that advertising sales in traditional media, such as
television and radio, generally are lower in the first and third quarters of
each year.
We have incurred net losses and negative cash flows from operations since
our inception. At December 31, 1999, we had an accumulated deficit of 49.1
million. These losses have been funded primarily through the issuance of shares
of our equity securities. On July 8, 1999, we raised approximately $30.3
million through the issuance of 2,832,000 shares of our common stock which
presently trade on EASDAQ. In January 1999, we raised an aggregate of
approximately $9.6 million through two private issuances of 1,043,360 shares of
our common stock. On February 2, 2000, we raised approximately $25 million
through the sale of 1,265,372 shares of our common stock to a strategic
investor.
We intend to continue to invest heavily in marketing and brand
development, content enhancement and technology and infrastructure development.
As a result, we believe that we will continue to incur net losses and negative
cash flows from operations for the foreseeable future. Moreover, the rate at
which these losses will be incurred may increase from current levels.
Advertising Revenues
Since July 1997, substantially all of our revenues have been derived from
the sale of online advertising. In December 1999, we also began to derive
revenues from our online affinity merchandising program.
Our advertising revenues are predominantly derived from:
o advertising arrangements under which we receive revenues based on the
number of times an advertisement is displayed on our services, commonly
referred to as cost per thousand impressions, or CPMs.
We also derive revenues from:
o sponsorship arrangements under which advertisers sponsor a game show,
game or portion of one of our Web sites in exchange for which we receive a
fixed payment;
o strategic partner arrangements under which our strategic partners offer
co-branded versions of our games on their Web sites and display
advertising in connection with the use of the games, in return for which
we receive revenues from the related advertising; and
26
<PAGE>
o advertising arrangements under which we receive revenues based on the
number of times users click on an advertisement displayed on our services,
commonly referred to as cost per click, or CPCs.
Our revenues from advertising are therefore affected by:
o the number of unique users visiting our Web sites during a given period;
o the amount of time that users actually spend on our Web sites, commonly
referred to as the "stickiness" of our sites;
o the number of advertisements delivered to a user while on our Web sites;
o our ability to target user audiences for our advertisers; and
o the success of our strategic partnerships.
We intermittently rotate advertisements on the pages of our Web sites where our
users tend to spend long amounts of time. As a result, we believe a more
accurate measurement of our potential to generate advertising revenue is the
number of unique users that visit our sites and the amount of time they spend
on our sites, rather than the number of registered users or page views.
We price our advertisements based on a variety of factors, including:
o whether payment is dependent upon guaranteed minimum impression or click
levels;
o whether the advertising is targeted to specific audiences; and
o the available inventory of impressions or clicks associated with a
specific game or game show that will display the specific advertisement.
Since we are able to vary the size of advertising banners we display on a
single page, we are able to charge more for "super-sized" banners than for more
traditional banners.
We recognize advertising revenues which are priced on a cost per thousand
impression, or CPM, basis as the advertisement is displayed, provided that no
significant obligations remain and collection of the resulting receivable is
probable. To the extent minimum guaranteed impression levels are not met, we
defer recognition of the corresponding revenues until guaranteed levels are
achieved. We recognize advertising revenues derived on a cost per click, or
CPC, basis as users click or otherwise respond to the advertisements. To the
extent minimum guaranteed click levels are not met, we defer recognition of the
corresponding revenues until guaranteed levels are achieved. In the case of
contracts requiring actual sales of advertised items, we may experience delays
in recognizing revenues pending receipt of data from that advertiser.
We recognize sponsorship advertising revenue ratably in the period in
which the sponsor's advertisement is displayed and costs associated with
customizing the advertisements received from sponsors are expensed as incurred.
We recognize revenues from our strategic partner arrangements ratably in the
period in which our games are displayed on a third party's Web site. In those
situations where we are responsible for selling the advertising, billing and
collections, we record the advertising revenues, and payments to our strategic
partners are recorded as cost of revenues. We are obligated to pay our
strategic partners their fee regardless of whether we ultimately collect the
advertising revenue. In those situations where our strategic partners are
responsible for selling the advertising, billing and collections, we recognize
revenue only to the extent of our share of net revenues.
If a payment is received prior to the time that we recognize revenue, we
record that payment as deferred revenues.
Barter
We also engage in barter transactions in an effort to enhance our
marketing efforts and improve our reach to potential new users. Under these
arrangements, we deliver game content, including prizes, to a third party, or
display on our Web sites advertisements promoting the third party's goods and
services in exchange for its agreement to run advertisements promoting our Web
sites. Revenues and costs from barter arrangements are recorded at the
estimated fair value of the advertisements or services we provide, unless the
fair value of the
27
<PAGE>
goods or services we receive can be determined more objectively. We recognize
barter revenue at the time we deliver the third party's advertisement or
product to our users. We recognize barter costs when our advertisements are
displayed by the third-party to its users. Barter costs are recorded either as
sales and marketing expenses or as costs of revenue. The breakdown of costs is
dependent upon the nature of the goods or services received by the third party.
Although our revenues and related costs will be equal at the conclusion of the
barter transaction, the amounts may not be equal in any particular quarter.
Barter revenues were approximately 22% and 14% of revenues for the years ended
December 31, 1998 and 1999, respectively. We anticipate that barter revenues
will account for a decreasing percentage of our revenues in the future.
Online Affinity Merchandising Revenues
We expect to generate electronic commerce revenues from our recently
introduced online affinity merchandising program. These revenues are derived
from the sale of products directly by us to our users and, to a lesser extent,
from the associated shipping and handling fees. Revenues and cost of goods from
the sales of products are recognized at the time of shipment from our warehouse
or directly from the supplier. Although revenues from our online affiliate
merchandising program have been insignificant to date, we anticipate that these
revenues will contribute a greater percentage of our revenues in the future.
Acquisition of PrizePoint
In June 1999, we acquired PrizePoint Entertainment Corporation for a total
of 2,444,320 shares of common stock and the assumption of 62,040 options
exercisable into an additional 124,080 shares of our common stock. The
acquisition was accounted for as a pooling-of-interests.
Pearson Agreement
In January 1999, we entered into an agreement with Pearson Television
under which Pearson acquired 2,000,000 shares of our common stock in exchange
for intangible assets, advertising services to be provided over a thirty-month
period commencing April 1, 1999, and cash of $124,599. We recorded the $16.7
million difference between the value of the shares issued and the fair value of
the advertising services and cash received as an intangible asset on our
balance sheet to be amortized over the 33-month life of the agreement. The $8.0
million advertising contribution was recorded as a pre-paid advertising asset
that is being amortized over the period the ads are being shown, from April
1999 through September 2001.
Under our agreement with Pearson, we have the obligation to pay Pearson a
royalty for the rights and license to use the licensed game show formats, equal
to a percentage of gross advertising and other revenue generated from the use
of the licensed games. Additional royalties are due to Pearson for a percentage
of net revenues generated by the licensed game shows, subject to a mimimum of
$200,000 per broadcast year. The initial payment made in July 1999, which
relates to the broadcast year from September 1999 to September 2000, was
recorded as a prepayment and $50,000 was expensed in cost of revenues in the
fourth quarter of 1999.
The intangible assets recorded as a result of the transaction with Pearson
represent the benefits of the association with Pearson during the length of the
agreement, or thirty-three months, resulting from the use of Pearson's
intellectual property and our association with them. The market value of the
common stock issuable to Pearson was determined based upon the share price
quoted on the Vienna Stock Exchange at the date the agreement was signed. The
intangible assets were valued as the difference between the value of the shares
issued and the fair value of the advertising services received. The fair value
of the advertising services received was based on rate card information
provided by Pearson and our estimate of the value of the advertising and
promotional services. During the year ended December 31, 1999, amortization of
intangible assets totaled $6.1 million and amortization of prepaid advertising
services amounting to $1.3 million was recorded as advertising expense.
Should Pearson meet discernible television distribution targets between
September 1999 and August 2000 for its game shows in the United States, we will
issue 400,000 additional shares of our common stock and, if Pearson meets
further targets between September 2000 and August 2001, we will issue an
additional 400,000
28
<PAGE>
shares of our common stock. We have not included the financial impact of the
issuance of any of the additional shares in our statement of operations for the
year ended December 31, 1999 because we do not, at this time, believe that the
achievement of these targets by Pearson is probable since the relevant game
shows are not being syndicated by Pearson.
Cable & Wireless Agreement
In December 1999, we entered into an agreement with Cable & Wireless, the
largest cable television franchise owner in the United Kingdom. The agreement
provides for Cable & Wireless to display up to 14 Uproar game shows on an
Interactive service offered via its digital cable television, which Cable &
Wireless launched in October 1999.
We pay Cable & Wireless a fee, for which Cable & Wireless guarantees
placement within the service, which is accounted for in cost of revenues. The
agreement provides that Cable and Wireless is entitled to additional fees equal
to a percentage of net advertising and sponsorship revenue generated through
the sale of advertising associated with our games placed in Cable & Wireless's
digital interactive service. Such amounts are accounted for in cost of
revenues. Sales, marketing and product and technology development costs are
borne by us and recognized in the period incurred. To the extent that this
arrangement generates revenues, our net revenue would increase accordingly. As
of January 31, 2000, we have not recorded any revenue from this agreement.
Telefonica Agreement
In September 1999, we entered into an agreement with Telefonica
Interactiva de Contenidos, a Spanish corporation, to establish and develop our
products and the Uproar media property in the Spanish and Portuguese languages.
Revenues generated in connection with the Telefonica deal consist of fees
for exclusivity of distribution and for development and support obligations we
have assumed. We performed our obligations under the contract for the fourth
quarter of 1999 and, accordingly, recognized $125,000 of revenue in the fourth
quarter of 1999. Telefonica is also required to pay a royalty based on net
advertising and sponsorship revenue it generates through the sale of
advertising on Web sites, including our games, during the term of the
agreement. Advertising revenue will be recognized for this advertising and
sponsorship revenue during the period in which the advertising is delivered. No
such revenue has been recorded through December 31, 1999. Sales and marketing
costs are borne by Telefonica. Product and technology development costs
associated with the agreement are our responsibility and are recorded in the
period the costs are incurred.
Recent Strategic Investor
On February 2, 2000, we completed the sale of 1,265,372 shares of our
common stock to Trans Cosmos USA, Inc. for approximately $25 million. We intend
to establish a 50/50 joint venture with Trans Cosmos to produce a local
language version of our flagship site, uproar.com, in Japan. Under the proposed
terms of the agreement, we would contribute our intellectual property to the
joint venture along with $500,000 in cash, and Trans Cosmos would contribute
$4.5 million in cash. In addition, we would receive an annual license fee from
the joint venture.
Results of Operations
Year Ended December 31, 1999 and 1998
Revenues
Revenues for the year ended December 31, 1999 increased to $10.4 million
from $1.6 million for the year ended December 31, 1998. The increase in
revenues was primarily due to our ability to generate significantly higher
advertising and sponsorship revenues, primarily as a result of:
o expanding our sales department;
29
<PAGE>
o increasing the number of impressions available on our sites by adding
game shows;
o increasing our number of unique users, which has enabled us to deliver an
increased level of advertising impressions; and
o increasing our branding and marketing efforts.
During the year ended December 31, 1999, we derived revenues of
approximately $1.4 million or 14% of revenues, from barter transactions. During
the year ended December 31, 1998, we derived $365,000, or 22% of revenues, from
barter transactions.
In the year ended December 31, 1999, only one advertiser, MyPoints, which
accounted for 14.2% of our revenues, accounted for more than 10.0% of our
revenues.
Cost of Revenues. Cost of revenues include:
o Internet connection costs;
o prizes;
o depreciation of equipment and software used to host our sites;
o royalties relating to our co-branded properties with our strategic
partners; and
o costs of goods sold in our affinity merchandising program.
Cost of revenues relating to our strategic partner arrangements are
recorded as an expense in the period in which the related revenues are
recorded. Minimum distribution payments, where applicable, are recorded ratably
over the period of the relevant agreement.
Cost of revenues for the year ended December 31, 1999 increased to $2.5
million from $760,000 for the year ended December 31, 1998. The increase in
cost of revenues was primarily attributable to $846,000 related to expenses
associated with prizes, $824,000 related to Internet connection costs,
depreciation costs of equipment and software of $600,000 and $250,000 of
royalties. Our gross profit increased to $7.9 million for the year ended
December 31, 1999 from $873,000 for the year ended December 31, 1998.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of:
o advertising costs, including the costs of online and print
advertisements;
o salaries and commissions for sales and marketing personnel;
o public relations costs;
o referral fees in connection with acquisition of new users through our
affiliate program; and
o other marketing-related expenses.
Sales and marketing expenses for the year ended December 31, 1999
increased to $28.1 million from $3.8 million for the year ended December 31,
1998. The increases in sales and marketing expenses were primarily attributable
to $22.7 million in advertising, public relations and other promotional
expenditures, and $2.7 million in salaries and commissions for sales and
marketing personnel. We believe that sales and marketing expenses will continue
to increase in absolute dollars for the foreseeable future as we:
o continue our branding strategy;
o continue to expand our direct sales force;
o hire additional marketing personnel; and
o increase expenditures for marketing and promotion.
30
<PAGE>
Product and Technology Development. Product and technology development
expenses include:
o personnel costs for computer software and Web site programmers,
designers, editors and project managers;
o fees paid to writers and graphic artists; and
o the administrative costs relating to our product development facilities.
Product development expenses for the year ended December 31, 1999
increased to $3.7 million from $850,000 for the year ended December 31, 1998.
The increase in product development expenses was primarily attributable to
increased staffing levels required to develop proprietary software components
used to create our service. We have, to date, expensed all product development
costs as incurred. We believe that increased investments in new and enhanced
features and technology are critical to attaining our strategic objectives and
remaining competitive. Accordingly, we intend to continue recruiting and hiring
experienced product development personnel and to make additional investments in
product development. We anticipate that product expenditures will continue to
increase in absolute dollars in future periods.
General and Administrative. General and administrative expenses consist
primarily of:
o salaries and benefits;
o fees for professional services;
o insurance and recruiting fees; and
o costs for general corporate functions, including finance, accounting and
facilities.
General and administration expenses for the year ended December 31, 1999
increased to $8.9 million from $2.3 million for the year ended December 31,
1998. The increase was primarily attributable to $2.1 million in professional
fees, $2.6 million in salaries and benefits associated with hiring of
additional personnel and $812,000 in travel-related costs.
Year Ended December 31, 1998 and 1997
Revenues
Revenues increased to $1.6 million for the year ended December 31, 1998
from $349,000 for the year ended December 31, 1997. The increase in revenues
was due primarily to our ability to generate higher advertising and sponsorship
revenues. In the year ended December 31, 1998, two of our customers, Yahoo! and
Microsoft, each accounted for greater than 10.0% of our revenues. Yahoo! and
Microsoft accounted for 20.7% and 11.8% of our revenues, respectively, for the
year ended December 31, 1998.
Cost of Revenues
Cost of revenues increased to $760,000 for the year ended December 31,
1998 from $217,000 for the year ended December 31, 1997. The increase in cost
of revenues was primarily attributable to $243,000 related to Internet
connection costs, and $225,000 associated with prizes and depreciation costs of
equipment and software of $127,000.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased to $3.8
million for the year ended December 31, 1998 from $1.1 million for the year
ended December 31, 1997. The increase in sales and marketing expenses were
primarily attributable to $1.6 million in advertising, public relations and
other promotional expenditures, $1.5 million in salaries for sales and
marketing personnel, and $365,000 in barter expenses.
Product Development. Product development expenses increased to $849,000
for the year ended December 31, 1998 from $773,000 for the year ended December
31, 1997. The increase in product development expenses was primarily
attributable to increased staffing levels.
31
<PAGE>
General and Administrative. General and administrative expenses increased
to $2.3 million for the year ended December 31, 1998 from $2.1 million for the
year ended December 31, 1997. The increase in general and administrative
expenses was attributable to $710,000 in salaries and benefits associated with
hiring additional personnel, $560,000 in professional fees and $260,000 for
operating lease rental costs.
Liquidity and Capital Resources
To date, we have primarily financed our operations through the sale of our
equity securities. As of December 31, 1999, we had approximately $15.1 million
in cash and cash equivalents, an increase from $7.0 as of December 31, 1998.
Net cash used in operating activities was $2.7 million, $5.1 million and $29.1
million for the years ended December 31, 1997, 1998 and 1999, respectively. Net
cash used in operating activities resulted primarily from our net operating
losses, offset by:
o depreciation and amortization; and
o increases in accounts payable and accrued expenses.
Net cash used in investing activities was $274,000, $973,000 and $5.5
million for the years ended December 31, 1997, 1998 and 1999, respectively, as
we purchased equipment to enhance and develop our technical infrastructure.
Net cash provided by financing activities was $5.1 million, $10.8 million
and $42.8 million for the years ended December 31, 1997, 1998 and 1999,
respectively. Net cash provided by financing activities consisted primarily of
proceeds from the sale of shares of our common stock. On July 8, 1999, we
raised approximately $30.3 million through the issuance of 2,832,000 shares or
our common stock which presently trade on EASDAQ. In January 1999, we raised an
aggregate of approximately $9.6 million through two private issuances of
1,043,360 shares of our common stock. On February 2, 2000, we raised
approximately $25 million through the sale of 1,265,372 shares of our common
stock to a strategic investor.
Our principal commitments consist of obligations under capital and
operating leases. We expect our capital expenditures will increase
significantly in the future as we make technological improvements to our system
and technical infrastructure.
We have experienced a substantial increase in our capital expenditures and
operating lease arrangements since our inception consistent with the growth in
our operations and staffing. We anticipate that this will continue for the
foreseeable future. Additionally, we will continue to evaluate possible
investments in businesses, products and technologies, and plan to expand our
sales and marketing programs and conduct more aggressive brand promotions.
We believe that the net proceeds from this offering, together with our
current cash and cash equivalents, will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next
twelve months. If cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or debt
securities or to obtain a credit facility. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders. If we issue debt securities, our fixed obligations will increase
and we may become subject to covenants that would restrict our operations. We
cannot assure you that financing will be available in amounts or on terms
acceptable to us, if at all.
32
<PAGE>
BUSINESS
Overview
We are a leading online entertainment destination. Through our network of
Web sites, we provide online game shows and interactive single- and
multi-player games that appeal to a broad audience. Our registered users have
grown from 96,000 in January 1998 to 5.2 million in December 1999. Our unique
user audience has similarly grown from 1.3 million in October 1998 to 3.6
million in December 1999. Moreover, Media Metrix, a leading Internet audience
measurement service, estimates that the number of page views generated by our
network of Web sites grew from 43.6 million in December 1998 to 106.1 million
in December 1999. Our sites are very sticky, which means that our users
consistently spend significantly more time per visit on our sites than the
industry average. According to Media Metrix, in December 1999, our users in the
United States spent an average of 17.1 minutes per usage day on our sites and
we were ranked as the fifth stickiest network of Web sites on the Internet. In
addition, we were ranked by Media Metrix among the top five stickiest networks
in each month during 1999.
We derive substantially all of our revenues from the sale of
advertisements on our network of Web sites. Online advertisers typically pay on
the basis of the number of advertising impressions shown. The number of
impressions is a function of the number of users on our Web sites, the amount
of time that they stay on our Web sites, the frequency with which we change our
advertising displays and the number of Web sites on our network. We believe
that our large user base and the stickiness of our sites provide advertisers
with a highly attractive platform to reach their target audience. As a result,
the number of advertisers and sponsors on our network has grown from 99 as of
December 1998 to 256 as of December 31, 1999. Similarly, the number of
advertising impressions served over our Web sites increased from 70.7 million
in December 1998 to 327 million in December 1999. Because we attract a large,
diversified user base and can segment it based upon information we collect,
such as geography, age and gender, we believe we will be able to target
advertisements to particular demographic profiles specified by our advertisers.
We believe that our technology platform is integral to maintaining the
entertaining and engaging nature of our content. We have made significant
investments in developing and implementing a technology platform to support our
interactive multi-user game shows and games. We believe that our Web sites are
among a few in the world that enable large numbers of users to simultaneously
play interactive multi-player game shows and games. Moreover, we have designed
our technology platform to easily accommodate our growing user base and to take
advantage of emerging technology trends such as alternative access devices,
interactive television platforms and broadband distribution services.
Industry Background
The Internet
The Internet has emerged as a mass communications and commerce medium that
millions of people worldwide use to share information, communicate and conduct
business electronically. International Data Corporation, or IDC, a market
research firm, estimates that the number of Internet users worldwide will grow
from 142 million in 1998 to 502 million by the end of 2003. The relatively
lower costs of publishing content on the Internet and the availability of
powerful new tools for the development and distribution of content have led to
its rapid growth.
Internet Advertising
The Internet has also become an attractive medium for advertisers.
According to Forrester Research, a market research firm, Internet advertising
spending worldwide will increase from $1.5 billion in 1998 to $15.3 billion by
2003.
The unique interactive nature of the Internet allows advertisers to:
o reach broad global audiences from anywhere in the world;
o gather demographic information and target their messages to specific
groups of consumers;
o change their advertisements frequently in response to market factors,
current events and consumer feedback; and
o more accurately track the effectiveness of their advertising messages.
33
<PAGE>
Electronic Commerce
The growing adoption of the Internet also represents a significant
opportunity to sell goods and services over the Internet. This is commonly
referred to as electronic commerce. According to International Data
Corporation, or IDC, spending on the Internet is expected to increase from
$50.4 billion in 1998 to approximately $1.3 trillion in 2003. As electronic
commerce grows, companies are expected to increasingly use the Internet to
reach their customers.
The Uproar Opportunity
As a result of the growing popularity of the Internet, an increasing
number of users are looking beyond traditional media, such as radio and
television, to the Internet as a source of entertainment.
Game shows are among the most popular and long-lived programs on
television in both the United States and worldwide. They were among the first
entertainment formats to be successfully adapted to television from radio.
Moreover, new game shows are frequently developed and introduced in order to
capitalize on the popularity of the format and to draw larger audiences to
television. According to Nielsen Media Research, television game shows
consistently are among the most popular syndicated television programs. Nielsen
estimates that the top five game shows drew an average audience of
approximately 9.1 million people per show in the United States in the fourth
quarter of the 1999 television season.
Games and game shows are particularly well suited for online entertainment
content, especially with the development of higher bandwidth distribution
channels, and can be easily adapted to the Internet. We believe that online
games and game shows are a compelling entertainment medium for a mass user
audience because they:
o provide users with an opportunity to win prizes;
o allow users to access entertaining content according to their own
schedule from any location; and
o enable users to participate interactively in the games and game shows and
to compete against other users.
Despite the opportunity presented by the widespread adoption of the
Internet as a medium for delivering entertainment content to a growing user
base, only a limited number of Web sites are currently dedicated to providing a
broad array of fun and challenging interactive entertainment. We believe that
we can grow our revenues by leveraging our large audience and our engaging
content through targeting our advertising placement to specific demographics
within our audience in order to attract more advertisers to our network and
derive higher costs per thousand impressions, or CPMs.
The Uproar Network
We are a leading online entertainment destination. Through our network of
Web sites, we provide online game shows and interactive single- and
multi-player games that appeal to a broad audience. As a result, our registered
users have grown to 5.2 million in December 1999. Our unique user audience has
similarly grown to 3.6 million in December 1999. Moreover, Media Metrix
estimates that the number of page views generated by our network of Web sites
grew from 43.6 million in December 1998 to 106.1 million in December 1999. Due
to the engaging nature of our game shows and interactive games, our sites are
very sticky, which means that our users consistently spend significantly more
time per visit on our sites than the industry average. According to Media
Metrix, in December 1999 we were ranked fifth among networks in stickiness, as
measured by average minutes per user per usage day spent on our network. We
have been ranked among the top five stickiest sites by Media Metrix in each
month in 1999. Our network consists of the following Web sites:
o uproar.com o uproar.co.uk o gamescene.com
o prizepoint.com o uproar.de o amused.com
o shopping.uproar.com o euro.uproar.com o mentalstate.com
34
<PAGE>
We believe that our success in attracting users and advertisers to date
has been due to a number of factors, including:
Our Engaging Online Game Shows and Interactive Games
We are committed to providing our user audience with a variety of engaging
game shows and interactive games. We are focused on creating formats that we
believe will have lasting appeal to a broad-based audience and on adapting to
the Internet formats which have proven appeal in other media. We currently
provide our audience with eight multi-user games, 36 single-user arcade games
and two daily puzzles. We recently launched our online version of the game
shows Family Feud and 100%. Pursuant to our agreement with Pearson Television,
a leading provider of syndicated television game shows, we have exclusive
rights to create online versions of leading Pearson properties, including
Family Feud, Match Game, Password and 100%. These game shows have proven to be
extremely popular and appeal to a broad audience on television. Our users
frequently spend more time on our sites than on a typical Web site. We believe
the length of time spent by users on our site, or our site's stickiness, is a
validation of the engaging nature of our game and game show formats and is
highly appealing to our advertising customers.
Our Large Audience of Registered Users with Targetable Demographics
As a result of the mass appeal of our games and game shows, our database
of registered users has grown to approximately 5.2 million people as of
December 31, 1999. We believe that our broad user base is comprised of a cross
section of the general population visiting the Web. We design our games and
game shows to attract specific demographic profiles desired by online
advertisers. For example, our CNN/SI Trivia Blitz game attracts an audience
that is more than 90% male, whereas Picture This attracts a predominately
female audience. We expend a substantial amount of time and resources to better
understand the demographics of our audience. For example, to receive prizes,
contestants must register and provide us with detailed demographic information.
We are able to use this registration information to select which advertising
will be shown to each individual player during a game. We believe these are
important factors in attracting advertisers to our Web sites and improving our
cost per thousand impressions, or CPMs.
Our Cost-Effective Customer Acquisition Strategy and Broad Distribution Channel
We have developed a cost-effective channel for the distribution of our
game shows and games. Our distribution channel consists of:
o promotional agreements with prominent, high-traffic Web sites;
o affiliate arrangements with other Web sites; and
o our relationships with Pearson and Cable & Wireless.
We have entered into promotional agreements with several high-traffic Web
sites in order to expand and diversify our user base. Currently, we have
alliances with CNN and Internet Movie Database. These parties promote our games
and game shows on their respective Web sites for fees as prescribed in the
agreements. In these alliances we have created unique, Uproar-branded or
co-branded games to appear on the third party's Web site.
We also distribute our single player game content to a variety of Web
sites through our affiliate program in order to reach as wide an audience as
possible. Under this program, Uproar-branded games are delivered to third-party
affiliates and made available on their Web sites free of charge. We typically
pay a small referral fee to affiliate sites for each registered user we obtain
through their sites. This arrangement provides us with a cost-efficient means
of increasing our registered user base by expanding our reach across the
Internet. Our affiliate network has grown from approximately 15,200 members as
of December 31, 1998 to approximately 36,100 members as of December 31, 1999.
As part of our strategic relationship with Pearson, our site uproar.com is
actively promoted to Pearson's television audience through promotional spots
and in-show exposure. We have also entered into a relationship with Cable &
Wireless under which we will provide content for its developing digital
television cable network in the United Kingdom.
35
<PAGE>
In addition to promotional and affiliate relationships, we use extensive
television, radio, print and outdoor advertising to reach new users. In October
1999, we began a branding campaign which consisted of television advertising.
We incurred significant expenses in connection with our branding campaign and
intend to incur significant costs in the future to maintain and expand our user
base and brand recognition. However, we believe that our affiliate distribution
network will continue to serve as a cost-efficient method of acquiring new
users, contributing to lower overall new user acquisition costs.
Our Technology Platform
We believe that our technology platform is integral in providing our
audience with a rich and engaging entertainment experience. As a result, we
have made and expect to continue to make significant investments in developing
and implementing a technology platform to support our interactive multi-user
game shows and games. We believe that our Web sites are among the few in the
world that enable very large numbers of users to simultaneously play
interactive multi-player games and game shows. We believe that our technology
platform is critical to maintaining the entertaining and engaging nature of our
content. Moreover, we have designed our technology platform to accommodate our
growing base of users and to take advantage of emerging technology trends such
as alternative access devices, interactive television platforms and broadband
distribution services.
Our Strategy
Our objective is to be the leading online entertainment destination. We
believe we can achieve this objective through the following strategies:
Enhancing Our Content
We will seek to enhance our network by adding other entertainment formats
in addition to games and game shows that have proven their appeal to a broad
audience in traditional media. We believe that providing our users with a
richer and more compelling entertainment experience is critical to our future
success as more people turn to the Internet as a medium for entertainment. In
addition, we intend to continue to enhance our content by improving our
existing, and creating new, games and game shows. For example, in 1999 we
introduced online versions of two popular television game shows, Family Feud
and 100%. We intend to launch online versions of two other popular game shows,
Match Game and Password, in 2000. We believe that by enhancing our game and
game show content, we will:
o further differentiate our brand from competing sites;
o provide users with a more comprehensive and satisfying entertainment
experience; and
o attract a broader audience to our Web sites; and
o compel our users to visit our sites more often and remain there longer.
In January 2000, we launched Uproar 2000. This enhanced version of our
current site uproar.com, has a new interface that we believe our users will
find more attractive and easier to use. Uproar 2000 incorporates our reward
currency, PrizePoints, into all games and game shows.
Aggressively Expanding Our User Audience
We intend to continue to aggressively expand our user base by promoting
our brand name. We believe that establishing a readily recognizable brand name
is critical to attracting a larger user base and deriving additional
advertising revenues. We intend to continue to build our brand through:
o extensive Internet, television, print and outdoor advertising;
o additional promotional and syndication opportunities;
o public relations programs; and
o new strategic alliances.
36
<PAGE>
We also intend to continue to pursue additional affiliate opportunities to
further expand our user base more cost-effectively. We have developed a number
of our games for distribution through our affiliate program. We intend to seek
similar opportunities continually in order to enlarge the community of Internet
users that visit our Web site for entertainment and to increase our revenue
opportunities.
Further Monetizing Our Audience and Building Additional Revenue Streams
Our large and growing user base provides us with a platform from which we
can derive additional revenues. We intend to capitalize on our ability to
target our advertising placement to specific demographics within our large
audience of users in order to attract more advertisers to our network and to
derive higher costs per thousand impressions, or CPMs, and, consequently,
higher revenues. In addition, we intend to significantly expand our sales and
marketing efforts by hiring additional sales and marketing personnel to reach a
larger base of advertisers and sponsors.
We also intend to expand our revenue base beyond advertising to include
affinity merchandising. We recently introduced an online store,
shopping.uproar.com, that is linked to our new site, Uproar 2000. We sell
products that are both appealing to our existing audience and that are
differentiated from items commonly found on other online stores. We currently
sell approximately 460 products. We believe our audience will be predisposed to
purchase products that complement the entertainment content that we publish.
For example, we sell a hand-held Tiger Electronics version of Family Feud, one
of our online game shows. We believe that differentiated products will tend to
have higher gross profit margins over more readily available products.
Therefore, we attempt to select those products that have the most attractive
combination of appeal to our audience and gross profit margin opportunities.
Capitalizing on the Popularity of Our PrizePoint Rewards Program
Our PrizePoint program rewards our users with points earned by playing
online games. Our users can enter their points into a drawing for prizes. The
more points a player enters into a drawing, the greater his or her chances to
win a prize. We believe that the PrizePoint program significantly enhances the
entertainment value of our games and game shows by enabling our users to
compete to win points. Moreover, in order to be eligible to receive prizes
awarded under the program, our users must complete an online registration form
that allows us to better measure the demographics of our user audience and to
provide our advertisers with targeted advertising opportunities. We intend to
capitalize on the popularity of our PrizePoint reward program by integrating
the products and services of our affiliate merchandising partners into our
PrizePoint reward system.
Continuing to Expand Internationally
We believe that our games and game shows will be popular in international
markets. In December 1998, we launched our local Web site in Germany in
cooperation with Bertelsmann, a leading German media company, which features
game shows and puzzles in German. We also own and operate a Web site designed
for the United Kingdom market. In February 1998, we launched our
euro.uproar.com, which provides game content in 14 languages. Combined, these
sites provide local language content in a number of European countries,
including Austria, Belgium, Denmark, Holland, Finland, France, Germany, Italy,
Luxembourg, Norway, Portugal, Spain, Switzerland and Sweden.
We recently entered into an exclusive distribution and co-branding
agreement with Telefonica Interactiva, a leading provider of Internet access
and local content and services in the Spanish- and Portuguese-speaking world.
Under the agreement, our co-branded site will be the exclusive game content
provider of the Telefonica site, including the Terra Network sites. The
agreement is for a period of three years and provides for the payment of
certain minimum fees to us. We believe that our relationship with Telefonica
provides us with a unique opportunity to expand into the Spanish- and
Portuguese-speaking markets, including Spain, Brazil, Mexico, Chile and Peru.
We believe that introducing localized versions of our games and game shows
will provide us with many of the same opportunities for revenue as those in the
United States. We intend to continue to create localized games and game shows
in international markets.
37
<PAGE>
Pursuing Strategic Acquisitions and Alliances
We plan to continue to expand our user base, revenues and competitive
position through strategic acquisitions and alliances. In 1999, we acquired
PrizePoint, which offers single-player games of skill and chance in which
players compete to win points that can be entered into drawings for prizes. In
1999, we also entered into a strategic alliance with Pearson Television to
enhance the breadth of our content, and a strategic alliance with Telefonica
Interactiva to expand our reach into the Spanish- and Portuguese-speaking
markets.
We believe that these acquisitions and alliances have significantly
enhanced our presence in our markets and have enabled us to reach a broader
base of users and advertisers. We intend to aggressively seek other
opportunities to acquire or form alliances with other companies that will
complement our network.
Alliances and Strategic Relationships
We have entered into a number of contracts that forge alliances and
strategic relationships designed to enhance and expand our brand name, promote
our Web sites, provide us with high quality, brand-identified new content and
create new revenue opportunities. These agreements are summarized below.
Pearson Television, Inc. We entered an agreement with Pearson Television
in January 1999 that provides us with exclusive rights to create and produce
English language online versions of Pearson's game shows Family Feud, Match
Game, Password and 100%. These rights expire in September 2001, at which time
Pearson has an option to renew the contract for an additional three years. In
addition, Pearson may terminate the agreement if Mr. Simon, our Chief Financial
Officer, is not employed by us in a senior management capacity. For the term of
the agreement, Pearson will provide advertising and promotion for uproar.com on
the United States syndicated versions of these games, consisting of:
o inclusion of a 10-second commercial at the end of each of the television
game shows;
o mention of uproar.com at the close of each television program;
o inclusion of uproar.com in the closing credits of each of the television
programs; and
o inclusion of uproar.com in all written sales materials, press
advertising, press kits and media guides.
In 1999, we introduced online versions of two of Pearson's popular
television game shows, Family Feud and 100%. We intend to launch online
versions of two other popular television game shows, Match Game and Password,
in 2000.
We issued Pearson 2,000,000 shares in January 1999 in exchange for the
rights to its online games, $8.0 million in advertising services and $124,599
in cash. The value of the shares we issued to Pearson was $24.8 million. We
recorded the $16.7 million difference between the market value of the shares
issued and the fair value of the advertising services and cash received as an
intangible asset on our balance sheet which will be amortized over the 33-month
life of the agreement. As part of our agreement with Pearson, we have
guaranteed minimum royalty payments of $200,000 per broadcast year for two
broadcast years to Pearson. In the event that one or more of these games is not
financially successful for us, we still are obligated to make these minimum
royalty payments to Pearson.
Telefonica Interactiva. In November 1999, we entered into an exclusive
distribution and co-branding agreement with Telefonica Interactiva, a leading
provider of Internet access and local-language content and services in the
Spanish- and Portuguese-speaking world. Under the agreement, a co-branded
Spanish and Portuguese site will become the exclusive game content provider on
the Telefonica Web site including the Terra Network sites. In addition,
Telefonica plans to incorporate our PrizePoint rewards program into our
co-branded site, as well as its offline activities. We believe that our
agreement with Telefonica will significantly enhance our international presence
by expanding our reach into the Spanish- and Portuguese-speaking markets served
by Telefonica, including Spain, Brazil, Mexico, Chile and Peru.
To date, revenues generated in connection with the Telefonica deal consist
of fees paid to us by Telefonica for our obligation to work exclusively with
Telefonica in the Spanish- and Portuguese- language markets, and for
Telefonica's right to use our name in connection with the launch of its portal
services. These fees will total $2.9 million over 3 years to be paid quarterly,
including an aggregate of $500,000 in the first
38
<PAGE>
year, $800,000 in the second year and $1,600,000 in the final year. Telefonica
is also required to pay a portion of the net advertising and sponsorship
revenue generated by our products distributed within their service during the
term of the agreement. Advertising revenue will be recognized for Uproar's
share of advertising and sponsorship revenue during the period in which the
advertising is delivered.
Cable & Wireless Communications. Pursuant to our agreement with Cable &
Wireless Communications, we developed custom multi-player games for the Cable &
Wireless interactive digital television network that was launched in the United
Kingdom in October 1999. The agreement was signed in December 1998 and is in
effect for a period of three years. We expect to create a number of new games
during the term of this agreement. We share the net revenues generated by the
games with Cable & Wireless.
We pay an annual subscription fee to Cable & Wireless for this service. In
addition, we will pay Cable & Wireless a percentage of the net advertising
revenue our products generate on its service, depending on the amount of
revenue generated.
CNN. In September 1998, we entered an agreement with CNN to produce
co-branded trivia games that are distributed on cnn.com. We update the games
daily with questions based on current news and events. CNN promotes the games
with links from its home page, and receives a small referral fee from Uproar
for each new registered user the games generate. The agreement is currently on
a month-to-month basis.
Recent Strategic Investor. In February 2000, we completed the sale of
1,265,372 shares of our common stock to Trans Cosmos USA, Inc. for
approximately $25 million. We intend to establish a 50/50 joint venture with
Trans Cosmos to produce a local language version of our flagship site,
uproar.com, in Japan. Under the proposed terms of the agreement, we would
contribute our intellectual property to the joint venture along with $500,000
in cash, and Trans Cosmos would contribute $4.5 million in cash. In addition,
we would receive an annual license fee from the joint venture.
Game and Game Show Programming
We launched uproar.com, our flagship entertainment site for the United
States market in September 1997. Since then, we have been focused on expanding
the offerings available on our site with programming designed to appeal to
broad audiences and encourage them to remain on the site for longer periods of
time than users typically spend on other Internet sites. We believe that our
site provides an attractive platform for our advertisers to reach their desired
target demographics. In December 1999, Media Metrix reported that Uproar was
the fifth stickiest network, reaching over 3.6 million unique visitors in that
month. According to Media Metrix, in December 1999, the median age of these
visitors was 33, of whom 45.2% were male and 54.8% were female.
In December 1999, we began introducing a preview of our new version of
uproar.com, called Uproar 2000. By introducing our PrizePoint incentive
currency, we believe we will improve our ability to attract, retain and
monetize a growing Internet audience. The following is a description of some of
the available programming on our network of Web sites.
Multi Player Games
Family Feud is a game produced by us under license from Pearson Television
and is designed to replicate many of the elements of the popular television
game show bearing the same name. We launched Family Feud in December 1999. The
game integrates graphics and sounds that are reminiscent of the television
show. Players are given the opportunity to match their responses to questions
against those provided by survey respondents. Players compete to be listed on a
leader board and are ultimately rewarded for accurate responses with
PrizePoints.
Bingo Blitz is our version of the classic bingo game. Bingo Blitz allows
participants to compete against thousands of other players for prizes. Each
player is provided with three bingo cards to mark. The first player to submit a
card with the correct pattern covered wins a prize. Prizes range in value from
$2.00 to $25.00. We believe that the game's animated graphics and the user's
ability to earn prizes further enhance its entertainment value.
39
<PAGE>
Blow Out Bingo is a variation of bingo in which the prize offered is
progressively increased after each game that does not have a winner. As the
prize grows, it tends to attract additional players. Once we award a winner,
the prize is returned to its starting amount and the process starts again.
Premier Bingo is another variation of bingo in which different prizes are
offered depending on the ball in the sequence in which a winner achieves bingo.
The earlier in the game a player achieves bingo, the more valuable the prize.
There are five variations of Premier Bingo with prizes falling in specific
categories: finance, home and family, computers, travel and consumer
electronics. We believe that each form of Premier Bingo attracts a different
user demographic. We therefore target advertising based on the type of Premier
Bingo a user is playing.
Puzzle A-Go-Go is a version of the popular game, "hangman," which has been
enhanced for multi-player competition. This game show format was launched in
December 1997. Players compete in groups of three in real time to guess letters
in a hidden phrase. The first player to identify the phrase wins the game.
Winners are eligible for prizes that are typically given away each hour.
Picture This is a game combining popular culture trivia and images of
celebrities. Participants compete against one another in groups of five within
a virtual living room. As players answer questions, portions of a celebrity's
image are gradually revealed. The first player to correctly identify the name
of the celebrity wins. Picture This was originally launched in December 1997 as
a co-branded and co-promoted product with People Magazine. Currently, we
exclusively own and operate the game show for an unlimited duration.
Single Player Games
We publish a wide selection of single-user games ranging from crossword
puzzles to arcade games. These games are designed to provide an alternative to
our multi-user games and enhance the overall scope of entertainment that we
provide to our users. As of December 31, 1999, there were 36 different
single-user and arcade games and two daily puzzles available on our Web sites.
We create, develop, and own most of these games, while we license others from
third parties. We created the arcade games such as Fill-It, Battle Rocks, and
Laser Wheel that are available on prizepoint.com. We license 12 games from the
Clevermedia Network that we publish on our site gamescene.com.
Humor
Amused.com is a site featuring humor, entertainment and links to
third-party Web sites. Subtitled the Center for the Easily Amused, CNN has
referred to it as the "ultimate guide to wasting time." Amused.com features
chat rooms, trivia, and online anecdotes, some of which are contributed by the
visitors to the site. This site is designed to attract a younger audience than
our other sites, and we believe it offers advertisers an opportunity to target
teens and college students.
Affiliate Programming
We launched Trivia Blitz in August 1997 as a game to be distributed by
third-party Web sites. Approximately 36,100 sites have joined our affiliate
network. Trivia Blitz promotes the Uproar brand and attracts new players to our
sites. We publish a variety of Trivia Blitz games with editorial content in
subjects including general trivia, sports, popular music, and current news and
events. We also publish Trivia Blitz games in Spanish, German, Danish, and
Italian to serve some of our international markets. Players that do well in the
Trivia Blitz games are encouraged to register with us in order to qualify for
prize drawings. If a player registers, we pay the affiliate partner a small
referral fee, which serves as a revenue source for the partner. We believe our
affiliate program offers third-party Web sites an attractive combination of
engaging content and a revenue opportunity, while providing us with registered
users at low cost.
PrizePoints
Players earn points called "PrizePoints" on our Uproar 2000 and
prizepoint.com sites. Players can accumulate PrizePoints over time and use them
to enter drawings to win prizes and cash. The larger the number of PrizePoints
that a player enters into a particular drawing, the greater the player's
chances of winning the drawing. We consider PrizePoints an incentive currency
in a manner that is similar to airline frequent flyer points. Uproar players
have an incentive to earn, collect and accumulate PrizePoints. We believe
40
<PAGE>
that our users will consistently return to our sites to try to accumulate
additional PrizePoints. In addition, we can alter the rate at which PrizePoints
are awarded to encourage behavior on our sites that improves the commercial
performance of the site.
We initially awarded PrizePoints only on our site, prizepoint.com. In
December 1999, we expanded our PrizePoint program to include Uproar 2000. We
intend to further expand this program and award PrizePoints on all of our
properties, including our international Web sites. In addition, we intend to
award PrizePoints in our affiliate network games.
International Programming
Uproar.co.uk is our Web site for the United Kingdom market. Launched in
September 1997, the Web site offers sites that are essentially the same as our
United States site, but the content is selected with consideration for United
Kingdom cultural and language differences. As in the United States, players
compete in a variety of game shows for fun and cash prizes.
Uproar.de, our German language site, was launched in December 1998 in
cooperation with Bertelsmann. This relationship allowed us to expand rapidly
into the German market. Today, we independently own and operate uproar.de.
Uproar.de features the multi-player game shows Mission Brain Attack and Berti's
Buro, plus three versions of the Trivia Blitz application. The games are
designed to match the cultural and language requirements of the German-language
audience.
Euro.uproar.com offers Bingo Blitz in 11 languages and offers our audience
the opportunity to play against a worldwide player base.
Affinity Merchandising and Electronic Commerce
We recently introduced an online store, shopping.uproar.com, that is
linked to our Uproar 2000 site. We strive to sell products that are both
appealing to our existing audience and are differentiated from items commonly
found on other online stores. We currently sell approximately 460 products
selected by our internal team of merchants. We believe our audience will have a
preference for products that complement our entertainment content. For example,
we sell a hand-held Tiger Electronics version of Family Feud, one of our online
game shows. We believe that differentiated products will tend to have higher
gross margins in the future over more readily available products. Therefore, we
attempt to select those products that have the most attractive combination of
appeal to our audience and higher gross margin opportunities.
We have a contract with Digital River to build and operate the online
store. We select the products sold on our store and have approval over the look
and feel of shopping.uproar.com. Digital River's systems, however, are used to
implement searching, shopping cart functions and customer electronic mail
notifications on the site. In addition, Digital River's systems are used to
communicate to a third-party credit card processing service and to our
warehousing facility. Digital River also runs a customer service center on our
behalf that operates 24 hours, seven days a week. The customer service center
is accessible via electronic mail and a toll-free telephone line. Under our
agreement, we pay Digital River a fee per transaction processed.
We take title and warehouse the majority of the items that we sell on
shopping.uproar.com. We have a contract with DSS to supply us with warehousing
facilities. DSS handles all aspects of operating the warehouse, including
accepting shipments from our suppliers, downloading orders electronically from
Digital River and packing products for shipment to our customers.
Advertising Sales
As of December 31, 1999, we had a sales organization of 21 professionals
in the United States and two professionals in the United Kingdom.
Sales Organization
Our sales organization is dedicated to maintaining close relationships
with top advertisers and leading advertising agencies. It is structured on a
regional basis and is focused solely on selling advertising on our Web sites.
Our sales organization consults regularly with advertisers and agencies on
design and placement of
41
<PAGE>
their Web-based advertising, provides customers with advertising measurement
analysis and focuses on providing a high level of customer service
satisfaction.
Advertising Programs and Products
Currently, we enter into agreements with our advertisers and advertising
agencies under which they pay for a guaranteed number of impressions for a
fixed fee. These agreements range from one month to one year. Advertising on
our Web sites currently consists primarily of banner-style advertisements,
buttons and sponsorships from which viewers can connect directly to the
advertiser's own Web site. Our standard cost per thousand impressions, or CPMs,
for banner advertisements varies depending on the location of the
advertisements on the site and the extent to which the advertisements are
targeted to a particular audience.
We also offer our advertising customers other direct marketing and
advertising solutions in order to build brand awareness, generate leads and
drive traffic to an advertiser's site. These include newsletter sponsorships,
opt-in electronic mail programs under which users must affirmatively check a
box to indicate interest, and fixed-fee game sponsorships.
Advertisers
We had 256 advertisers and sponsors on our Web sites during the year ended
December 31, 1999. The following is a selected list of our current advertising
customers, which are representative of our customer base:
About.com Disney Gillette MSN
Ask Jeeves eHow Golden Palace MyPoints
CoolSavings.com FreeShop.com Mail.com
These advertisers, in the aggregate, accounted for approximately 40.5% of
total revenues in the year ended December 31, 1999.
Marketing and Brand Awareness
We use multiple advertising media like television, print and Web-based
advertising in order to:
o build our brand;
o increase traffic; and
o raise our profile among potential advertisers.
Our television advertisements have appeared on broadcast television in
several large markets in the United States, including New York, San Francisco,
Chicago and Los Angeles. In addition to advertising on television, we advertise
in print, use outdoor advertising and have a significant presence in targeted
online media. We also have an extensive public relations campaign. Our
strategic and content partners also typically provide us with advertising
support.
Technology and Infrastructure
We maintain a 27-member technical staff in New York. This technical staff
is responsible for developing our Web sites and game programming and for
managing the distribution of our content through our domestic Web sites. We
also maintain a 33-member technical staff in Budapest, Hungary. The Budapest
technical team is responsible for providing international support for our
content, as well as developing country-specific content and managing the
technical infrastructure for our international Web sites.
Our technical staff strives to create a comfortable and compelling user
experience for as large an audience of visitors as possible. This involves
developing reliable, secure, and scalable Web sites using industry-standard
technologies. Our game content and certain elements of our server systems use
the Java programming language. We also make extensive use of Microsoft Web
server technology, as well as the Windows NT Server operating system.
42
<PAGE>
Some of our most popular interactive games involve simultaneous,
multi-player activity. In order to create a seamless user experience in this
type of environment, we have developed a highly scalable, distributed server
system capable of delivering real time interactivity between a large number of
simultaneous users in a multi-player environment.
Our business is based on the delivery of banner advertising within pages
viewed by users of our Web sites and our advertising customers require timely
and accurate reporting of actual advertising delivered on our sites. We have
contracted with AdForce, Inc. to serve our advertising and provide the
corresponding reporting.
We distribute our programming from data centers in New York and London. We
are currently expanding our data center operations to include a facility in
California. Our domestic data centers are operated at facilities provided by
Level 3 Communications and Digital Telemedia. Our data center in London is
operated at facilities provided by PSI Net.
Competition
Many companies provide Web sites targeted to audiences seeking various
forms of entertainment content. We compete with all of these companies for
visitor traffic, advertising dollars and electronic commerce. This competition
is intense and is expected to increase significantly in the future as the
number of entertainment-orientated Web sites continues to grow. Our success, to
date, has been largely dependent upon the perceived value of our content
relative to other available entertainment alternatives, both online and
elsewhere. In addition, we are one of the few online entertainment properties
capable of delivering real time interactivity between a large number of
simultaneous users.
Our primary direct competitors for online game shows and similar
entertainment include:
o Gamesville/Lycos;
o Mplayer.com;
o Sony Station;
o Pogo; and
o Zone.com.
Some of our competitors maintain game show style formats similar to those
offered by us. Sony Station, for example, currently has the exclusive right to
the online versions of the television game shows Jeopardy and Wheel of Fortune
and the board game Trivial Pursuit. Other competitors primarily offer "extreme"
games similar to many arcade and video games. We do not actively participate in
that segment of the market. Many competitors offer a wide variety of online
single-player games.
We also compete indirectly with many providers of content and services
over the Internet, including search engines and entertainment content sites.
Some of our competitors and potential new competitors have:
o longer operating histories;
o greater name recognition in some markets; and
o significantly greater financial and marketing resources.
These competitors may also be able to:
o undertake more extensive marketing campaigns for their brands and
services;
o adopt more aggressive advertising pricing policies;
o use superior technology platforms to deliver their products and
services; and
o make more attractive offers to potential employees, distribution
partners, product manufacturers, inventory suppliers, advertisers and
third-party content providers.
43
<PAGE>
Our competitors may develop content that is better than ours or that achieves
greater market acceptance. It is also possible that new competitors may emerge
and acquire significant market share. This could also harm our business.
We also compete with traditional forms of media, like newspapers,
magazines, radio and television for advertisers and advertising revenue. If
advertisers perceive the Internet or our Web site to be a limited or an
ineffective advertising medium, they may be reluctant to devote a portion of
their advertising budget to our Web sites.
The online entertainment market does not have substantial barriers to
entry. Increased competition could result in:
o lower advertising rates;
o price reductions and lower profit margins;
o loss of visitors;
o reduced ad impressions; and
o loss of market share.
Any one of these could materially adversely affect our business, results of
operations and financial condition.
Our ability to compete successfully depends on many factors. These factors
include:
o the quality of the content provided by us and our competitors;
o how easy our services are to use compared to those of our competitors;
o the success of our sales and marketing efforts; and
o the performance of our technology.
Government Regulation and Legal Environment
General. There are an increasing number of laws and regulations pertaining
to the Internet. In addition, a number of legislative and regulatory proposals
are under consideration by federal, state, local and foreign governments and
agencies. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, online content regulation, user privacy, taxation and quality of
products and services. Moreover, the applicability to the Internet of existing
laws governing issues such as intellectual property ownership and infringement,
copyright, trademark, trade secret, obscenity, libel, employment and personal
privacy is uncertain and developing. Any new legislation or regulation, or the
application or interpretation of existing laws, may decrease the growth in the
use of the Internet, which could in turn decrease the demand for our services,
increase our cost of doing business or otherwise have a material adverse effect
on our business, results of operations and financial condition.
Liability for Information Retrieved from Our Web sites and from the
Internet. Content may be accessed on any of our Web sites or on the Web sites
of our affiliates, and this content may be downloaded by users and subsequently
transmitted to others over the Internet. This could result in claims against us
based on a variety of theories, including defamation, obscenity, negligence,
copyright or trademark infringement or other theories based on the nature,
publication and distribution of this content. These types of claims have been
brought, sometimes successfully, against providers of Internet services in the
past. We could also be exposed to liability with respect to third-party content
that may be posted by users in chat rooms offered on our Web sites. It is also
possible that if any information provided on our Web sites contains errors or
false or misleading information, third parties could make claims against us for
losses incurred in reliance on such information. Our sites contain numerous
links to other Web sites. As a result, we may be subject to claims alleging
that, by directly or indirectly providing links to other Web sites, we are
liable for copyright or trademark infringement or the wrongful actions of third
parties through their respective Web sites.
44
<PAGE>
The Communications Decency Act of 1996, or CDA, was enacted in the United
States to prohibit the transmission over the Internet of indecent, obscene or
offensive content. Although selected parts of the CDA have been deemed
unconstitutional, provisions protecting providers of Internet services from
claims related to third-party content remain effective. Under the CDA, a
provider of Internet services will generally not be treated as a publisher or
speaker of any information available on its service but provided by a
third-party content provider unless the provider of Internet services exerts
editorial control over the content or embraces the content as its own. Our
activities may not permit us, in every instance, to take advantage of this safe
harbor provision. Although we attempt to reduce our exposure to this potential
liability through, among other things, provisions in our affiliate agreements,
user policies and disclaimers, the enforceability and effectiveness of such
measures are uncertain.
Our general liability insurance may not cover all potential claims to
which we are exposed and may not be adequate to indemnify us for all liability
that may be imposed. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage could have a material adverse
effect on our business, results of operations and financial condition. Even to
the extent that these claims do not result in liability to Uproar, we could
incur significant costs in investigating and defending against these claims.
Potential liability for information disseminated through our Web sites could
lead us to implement measures to reduce its exposure to such liability, which
may require the expenditure of substantial resources and limit the
attractiveness of our service to users.
Online Content Regulations. Several United States federal and state
statutes prohibit the transmission of indecent, obscene or offensive content
over the Internet to particular groups of persons. The enforcement of these
statutes and initiatives, and any future enforcement activities, statutes and
initiatives, may result in limitations on the type of content and
advertisements available on our Web sites. Legislation regulating online
content could dampen the growth in use of the Internet generally and decrease
the acceptance of the Internet as an advertising and electronic commerce
medium.
Legislation Prohibiting Online Gambling. Congress is currently considering
legislation that seeks to ban Internet gambling activities. One pending bill
has already been approved by the Senate and would prohibit a gambling-related
business from using the Internet to facilitate wagering. If enacted into law in
its current form, the bill would likely subject those who display advertising
for unlawful Internet gambling sites to criminal penalties. We do not engage in
gambling activities ourselves but we do accept advertising from online gambling
sites. For the year ended December 31, 1999, 12.1% of our revenues were derived
from gambling sites. If these sites are outlawed or substantially curtailed,
our business could suffer. The pending legislation may impose liability on
United States companies that are deemed to assist in the operation of offshore
illegal gambling sites. If Congress ultimately passes this legislation in a
form that prohibits us from accepting advertising from gambling sites, we would
take all reasonable measures to comply with the legislation and our advertising
revenues would decline.
Regulation of Sponsors of Contests and Sweepstakes. Contests and games of
chance are subject to the gambling, lottery and disclosure laws of various
jurisdictions in which we offer our contests and games. Although we have been
advised by counsel that our contests and games are in compliance with the laws
of all jurisdictions in which we offer them, the laws or the way they are
interpreted and enforced may change from market to market. A game sponsor, for
example, cannot require the consumer to make a payment, buy its product or
provide a substantial benefit, collectively called "consideration," as a
condition of entering its game of chance, or in some instances, its contest of
skill. If consideration were interpreted differently in a particular
jurisdiction, we may find it necessary to eliminate, modify or cancel
components of our products that could result in additional development costs
and/or the possible loss of revenue.
Privacy Concerns. The United States Federal Trade Commission, or FTC, is
considering adopting regulations regarding the collection and use of personal
identifying information obtained from individuals when accessing Web sites,
with particular emphasis on access by minors. These regulations may include
requirements that companies establish procedures to, among other things:
o give adequate notice to consumers regarding information collection and
disclosure practices;
o provide consumers with the ability to have personal identifying
information deleted from a company's database;
45
<PAGE>
o provide consumers with access to their personal information and with the
ability to rectify inaccurate information;
o clearly identify affiliations or a lack thereof with third parties that
may collect information or sponsor activities on a company's Web site; and
o obtain express parental consent prior to collecting and using personal
identifying information obtained from children under 13 years of age.
These regulations may also include enforcement and redress provisions.
Moreover, our business model is in part based upon our ability to obtain
registration information about our users and to use this information for
targeted advertising. If new regulations are adopted that limit or eliminate
our ability to use this information, our business, results of operations and
financial condition could be materially adversely affected. Even in the absence
of these regulations, the FTC has begun investigations into the privacy
practices of companies that collect information on the Internet. The FTC's
regulatory and enforcement efforts alone may adversely affect the ability to
collect demographic and personal information from users, which similarly could
have an adverse effect on our ability to provide highly targeted opportunities
for advertisers.
It is also possible that "cookies," or information keyed to a specific
server, file pathway or directory location that is stored on a user's hard
drive, possibly without the user's knowledge, which are used to track
demographic information and to target advertising, may become subject to laws
limiting or prohibiting their use. A number of Internet commentators, advocates
and governmental bodies in the United States and other countries have urged the
passage of laws limiting or abolishing the use of cookies. Limitations on or
elimination of our use of cookies could limit the effectiveness of our
targeting of advertisements, which could have a material adverse effect on our
business, results of operations and financial condition.
The European Union, or EU, has adopted a directive that imposes
restrictions on the collection and use of personal data. Under the directive,
EU citizens are guaranteed rights to access their data, rights to know where
the data originated, rights to have inaccurate data rectified, rights to
recourse in the event of unlawful processing and rights to withhold permission
to use their data for direct marketing. The directive could, among other
things, affect companies that collect information over the Internet from
individuals in EU member countries, and may impose restrictions that are more
stringent than current Internet privacy standard in the United States. In
particular, companies with offices located in EU countries will not be allowed
to send personal information to countries that do not maintain adequate
standards of privacy. The directive does not, however, define what standards of
privacy are adequate. As a result, the directive may adversely affect our
activities because we engage in data collection from users in EU member
countries.
Data Protection. Legislative proposals have been made by the United States
government that would afford broader protection to owners of databases of
information such as stock quotes and sports scores. This protection already
exists in the EU. If enacted, this legislation could result in an increase in
the price of services that provide data to Web sites and could create potential
liability for unauthorized use of this data. Either of these possibilities
could have a material adverse effect on our business, results of operations and
financial condition.
Internet Taxation. A number of legislative proposals have been made at the
United States federal, state and local level, and by certain European
governments, that would impose additional taxes on the sale of goods and
services over the Internet and certain states have taken measures to tax
Internet-related activities. Although the United States Congress recently
placed a three-year moratorium on state and local taxes on Internet access or
on discriminatory taxes on electronic commerce, existing state or local laws
were expressly excepted from this moratorium. Further, once this moratorium is
lifted, some type of federal and/or state taxes may be imposed upon Internet
commerce. This legislation, or other attempts at regulating commerce over the
Internet, may substantially impede the growth of commerce on the Internet and,
as a result, materially adversely affect our opportunity to derive financial
benefit from those activities.
Domain Names. Domain names are Internet "addresses." The current system
for registering, allocating and managing domain names has been the subject of
litigation, including trademark litigation, and of proposed regulatory reform.
We have registered several domain names. We may seek to register additional
domain
46
<PAGE>
names, although there is no assurance we will successfully obtain the
registrations and third parties may bring claims for infringement against us
for the use of any of our domain names or other trademarks. Our domain names
may lose their value, or we may not have to obtain entirely new domain names in
addition to or in lieu of its current domain names if reform efforts result in
a restructuring in the current system.
Jurisdictions. Due to the global nature of the Internet, it is possible
that, although our transmissions over the Internet originate primarily in the
United States and the United Kingdom, the governments of other states and
countries might attempt to regulate our transmissions or prosecute us for
violations of their laws. These laws may be modified, or new laws enacted, in
the future. Any of these developments could have a material adverse effect on
our business, results of operations and financial condition. In addition, as
our service is available over the Internet in multiple states and countries,
these jurisdictions may claim that we are required to qualify to do business as
a foreign corporation in each of these states or countries. We are qualified to
do business only in Delaware, New York, California, the United Kingdom and
Hungary, and our failure to qualify as a foreign corporation in a jurisdiction
where we are required to do so could subject us to taxes and penalties and
could result in our inability to enforce contracts in those jurisdictions. Any
new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services could have a material adverse effect on our business, results of
operations and financial condition.
Intellectual Property and Proprietary Rights
We do not currently maintain patents on our technology and others may be
able to develop similar technologies in the future. We regard our copyrights,
service marks, trademarks, trade secrets and other intellectual property as
critical to our success. We rely on trademark and copyright law, trade secret
protection and confidentiality and/or license agreements with our employees,
customers, partners and others to protect our intellectual property rights.
Despite our precautions, it may be possible for third parties to obtain and use
our intellectual property without authorization. Furthermore, the validity,
enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving.
We are pursuing the registration of our trademarks in the United States,
Germany, Italy, Norway, Sweden and the United Kingdom. We may not be able to
secure adequate protection for our trademarks in the United States and other
countries. To date, we do not believe that any oppositions have been filed.
We also currently hold trademark registrations in the United States,
United Kingdom, Germany, Sweden, Norway, Finland, Denmark and Iceland.
Effective trademark protection may not be available in all the countries in
which we conduct business. Policing unauthorized use of our marks is also
difficult and expensive. In addition, it is possible that our competitors will
adopt product or service names similar to ours, thereby impeding our ability to
build brand identity and possibly leading to customer confusion.
We currently license an advertising serving system from AdForce. This
system delivers and tracks advertising impressions and click-throughs in all of
our Web sites. If the AdForce system is no longer available or our license is
terminated, we would be likely to suffer a disruption in our business, which
could materially adversely affect our results of operations. In addition, a
replacement system could be costly to license and install.
We also license communications infrastructure software that we utilize in
Uproar 2000 from Tibco Software, Inc. Tibco granted this license to us without
charge until February 2000, at which time we will begin to pay Tibco a
licensing fee. The license agreement with Tibco does not contain a defined
termination date. If the Tibco license is terminated, we would likely suffer a
disruption in our business, which could materially adversely affect our results
of operations. In addition, a replacement system could be difficult to identify
and obtain.
Our inability to effectively protect our trademarks and service marks
would have a material adverse effect on our business, results of operations and
financial conditions. We also intend to continue to license technology from
third parties. The market in which we operate is continually and rapidly
evolving, and we
47
<PAGE>
may need to license additional technologies to remain competitive. In addition,
we may fail to successfully integrate any licensed technology into our
services. Our inability to obtain any of these licenses could delay product and
service development until alternative technologies can be identified, licensed
and integrated.
Employees
As of December 31, 1999, we had 157 full-time employees, of whom 21 worked
in sales, 19 in marketing, 89 in production and technology; 9 in merchandising;
and 19 in finance and administration. Of these employees, 107 are primarily
resident in the United States and 50 in Europe. From time to time, we employ
independent contractors to support our research and development, marketing,
sales and editorial departments. None of our personnel are represented under
collective bargaining agreements. We consider our relations with our employees
to be good.
Facilities
Our executive offices are located in approximately 29,000 square feet of
office space in New York, under a lease that expires in August 2005. We also
lease approximately 8,900 square feet of office space in San Francisco under a
lease that expires in November 2004 and approximately 6,300 square feet of
office space in Budapest under a lease that expires in October 2001, unless we
choose to extend it to October 2003. In addition, we lease small sales offices
in London, Chicago and Los Angeles.
Legal Proceedings
Uproar Inc., a New York corporation and one of our wholly-owned
subsidiaries, was named in an action entitled "Burgos v. Ellwell Associates,
LLC and E-Pub Inc." relating to an alleged personal injury. E-Pub Inc. is the
former name of the New York Corporation, Uproar Inc. This case is currently in
the discovery stage and a trial date has not yet been set. There is a motion
pending with respect to our potential liability to our co-defendant, Ellwell
Associates.
48
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth our directors, executive officers and other
key employees, their ages and the positions held by them:
<TABLE>
<CAPTION>
Name Age Position
- --------------------------------- ----- ---------------------------------------------------------------
<S> <C> <C>
Kenneth D. Cron ................. 43 Chairman of the Board of Directors and Chief Executive Officer
Christopher R. Hassett .......... 37 President, Chief Operating Officer and Director
Michael K. Simon ................ 35 Chief Financial Officer and Director
Francis G. Blot ................. 37 Executive Vice President, Product Marketing
Shannon King .................... 43 Executive Vice President, Merchandising
Robert D. Marafioti ............. 52 Executive Vice President, General Counsel and Secretary
Jeffrey L. Strief ............... 44 Executive Vice President, Marketing and Sales
Thompson B. Barnhardt ........... 36 Director
Esther Dyson .................... 48 Director
Catherine V. Mackay ............. 32 Director
</TABLE>
Kenneth D. Cron joined us as our Chief Executive Officer and as a director
in September 1999. In December 1999, Mr. Cron was appointed the Chairman of our
board of directors. From September 1978 to June 1999, Mr. Cron worked at CMP
Media where, as the President of Publishing, he had responsibility for the
company's United States businesses, including its print publications, trade
show conferences and online services. He was also a director of CMP Media. Mr.
Cron earned a B.A. from the University of Colorado.
Christopher R. Hassett joined us as our President, Chief Operating
Officer, and as a director in July 1999, subsequent to our acquisition of
PrizePoint Entertainment. Mr. Hassett was PrizePoint's co-founder and Chief
Executive Officer from March 1998 to June 1999. Prior to that, Mr. Hassett
founded Pointcast, serving as its Chairman and Chief Executive Officer from
November 1992 to October 1997. In 1996, Mr. Hassett was recognized as Business
Week's entrepreneur of the year and as C Net's person of the year. Mr. Hassett
earned a B.S. in electrical engineering from the University of Lowell.
Michael K. Simon is our founder. He was the Chairman of our board of
directors from July 1999 to December 1999 and served as our Chief Executive
Officer from February 1995 to September 1999. Since November 1999, Mr. Simon
has served as our Chief Financial Officer. Prior to founding Uproar, Mr. Simon
was the Managing Director of Ablaksoft Kft., a Hungarian software company, from
April 1993 to February 1995. He earned an M.B.A. from Washington University in
St. Louis and a B.S. in Electrical Engineering from the University of Notre
Dame.
Francis G. Blot joined us as our Executive Vice President, Product
Marketing, in July 1999, subsequent to our acquisition of PrizePoint
Entertainment. Mr. Blot co-founded PrizePoint in March 1998 and served as its
Vice President of Marketing from March 1998 to June 1999. From June 1994 to
March 1998, Mr. Blot was Vice President of Business Development at Pointcast,
where he was responsible for, among other things, its electronic commerce
business. Prior to that, Mr. Blot worked in business and product development
positions for Prodigy for nearly seven years. Mr. Blot earned a B.S. in
electrical engineering from SUNY Utica.
Shannon King joined us as our Executive Vice President of Merchandising in
August 1999. From April 1984 to August 1999, Ms. King served as Executive Vice
President of Merchandising for The Sharper Image, where she was responsible for
all merchandising for that company's 85-store retail chain, catalog and
wholesale business. Ms. King earned a Master's in international business from
the American Graduate School of International Management and a B.A. in
international business and politics from the University of Colorado.
Robert D. Marafioti joined us in October 1999 as Executive Vice President,
General Counsel and Secretary. From October 1988 through June 1999, he worked
for CMP Media, where he served as Executive Vice President, General Counsel and
Secretary. Mr. Marafioti received a B.A. from Yale University and a J.D. from
Columbia School of Law.
49
<PAGE>
Jeffrey L. Strief joined us as our Executive Vice President of Marketing
and Sales in October 1999. From May 1985 to June 1999, Mr. Strief worked for
CMP Media, where he served as Executive Vice President of the Business
Technology Group with responsibility for InformationWeek and other technology
publications and Internet services. Mr. Strief earned a B.A. in marketing from
California State University Fullerton.
Thompson B. Barnhardt joined our board of directors in February 1995.
Since November 1999, he has been President of BiznesPolska.pl, an Internet
publishing company. From June 1994 to October 1999, Mr. Barnhardt was President
of New World Publishing, Inc., a publisher of several English-language business
journals in Central Europe. Mr. Barnhardt earned an M.B.A. from the University
of Virginia Darden Graduate School of Business Administration and a B.A. in
economics from the University of Virginia.
Esther Dyson joined our board of directors in April 1997. Ms. Dyson has
been the Chairman of EDventure Holdings, publisher of the newsletter Release
1.0, since 1983. She is the author of Release 2.0, an acclaimed book about
cyberspace. Ms. Dyson is a director of four software companies: Graphisoft,
Languageware.net, Scala Business Solutions and Thinking Tools. She is also a
director of Medscape, a healthcare Web site, PRT Group, a systems integrator,
and WPP Group, a multimedia company. Ms. Dyson holds a B.A. from Harvard
College.
Catherine V. Mackay joined our board of directors in September 1999 as the
result of our agreement with Pearson Television. She has worked for Pearson
Television Enterprises since March 1995 in various capacities. Ms. Mackay is
currently President of Pearson Television Enterprises, the division of Pearson
Television that operates all of its Internet, interactive television,
merchandising and music publishing activities. Prior to joining Pearson
Television Enterprises, Ms. Mackay worked for Cie Generale des Eaux, from
January 1994 to August 1995. Ms. Mackay earned an M.B.A. from INSEAD and a B.A.
from Oxford University.
Composition of the Board of Directors
Our board of directors currently consists of six members, three of whom
are independent. The directors are elected by our stockholders at the annual
meeting of our stockholders. Each of our directors holds office until the next
annual meeting of stockholders and until the director's successor is elected
and qualified, or until the director's earlier death, resignation or removal.
We will appoint two independent directors to each of our audit and compensation
committees within 60 days after the completion of this offering.
Board Committees
The audit committee of the board of directors reviews, acts on and reports
to the board of directors with respect to various auditing and accounting
matters, including the recommendation of our auditors, the scope of the annual
audits, fees to be paid to the auditors, the performance of our independent
auditors and our accounting practices.
The compensation committee of the board of directors recommends, reviews
and oversees the salaries, benefits, and stock option plans for our employees,
consultants, directors and other individuals compensated by us. The
compensation committee will also administer our compensation plans.
Director Compensation
In the past, we have compensated our directors with stock options from
time to time. As of December 31, 1999, our directors held options to purchase
96,000 shares for compensation for services.
Under the automatic option grant program of our Stock Incentive Plan, each
individual who first joins the board of directors after the closing of this
offering as a nonemployee member of the board will also receive an option grant
for 30,000 shares of our common stock at the time of his or her commencement of
service on the board. In addition, as of February 4, 2000, and at each
subsequent annual meeting of stockholders beginning with the 2001 annual
meeting, each individual who has served as a nonemployee board member for at
least 6 months and is to continue to serve as a nonemployee member of the board
of directors will be granted an option to purchase 5,000 shares of our common
stock.
50
<PAGE>
No executive officer of Uproar serves on the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of Uproar's board of directors or compensation committee.
Executive Compensation
The following table sets forth all compensation awarded to, earned by or
paid to our Chief Executive Officer and our other highly-compensated executive
officers whose annual salary and bonus exceeded $100,000 in 1999 for services
rendered in all capacities during 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
Other Annual Securities
Name and Principal Position Salary Bonus Compensation Underlying Options
- ------------------------------------------- ---------- --------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
Kenneth D. Cron(1) ........................ 1998 $ -- $ -- $ -- --
Chairman and Chief Executive Officer 1999 -- -- -- 1,600,000
Christopher R. Hassett(2) ................. 1998 -- -- -- --
President and Chief Operating Officer 1999 183,336 -- -- 686,698
Michael K. Simon(3) ....................... 1998 122,495 -- -- 82,000
Chief Financial Officer 1999 150,000 -- 2,950 182,000
David A. Becker(4) ........................ 1998 114,537 5,250 -- 400,000
1999 150,000 35,820 -- 400,000
</TABLE>
- ------------
(1) Kenneth D. Cron joined us as our Chief Executive Officer in September 1999
and became Chairman of our board of directors in December 1999. Mr. Cron
is not entitled to receive an annual salary or bonus from us.
(2) Christopher R. Hassett joined us as our Chief Operating Officer and as a
director in July 1999. He currently also serves as our President. Mr.
Hassett is not entitled to receive an annual salary or bonus from us.
(3) Mr. Simon served as our Chief Executive Officer until September 1999 and as
our Chairman until December 1999.
(4) Mr. Becker was our President and Chief Operating Officer until August 1999.
Option Grants in Last Fiscal Year
The following table sets forth grants of stock options for the year ended
December 31, 1999 to our Chief Executive Officer and to each of our most highly
compensated executive officers, whose salary and bonus exceeded $100,000 in
1999. The potential realizable value is calculated based on the term of the
option at its time of grant. It is calculated assuming that the fair market
value of common stock on the date of grant appreciates at the indicated annual
rate compounded annually for the entire term of the option and that the option
is exercised and sold on the last day of its term for the appreciated stock
price. These numbers are calculated based on the requirements of the Securities
and Exchange Commission and do not reflect our estimate of future stock price
growth. The percentage of total options granted to employees in the last fiscal
year is based on options to purchase an aggregate of 5.3 million shares of
common stock granted under our option plans. We have never granted any stock
appreciation rights.
<TABLE>
<CAPTION>
Percent of
Number of Total Potential Realizable Value
Securities Options Exercise at Assumed Annual Rates
Underlying Granted to Price Per of Stock Price Appreciation
Options Employees Share Expiration for Option Term
Name Granted In 1999 ($) Date 5% 10%
- -------------------------------- ------------ ------------ ----------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth D. Cron ................ 1,600,000 30.0% $ 9.43 9/9/09 $9,483,731 $24,033,636
Christopher R. Hassett ......... 686,978 12.9 9.43 9/9/09 4,071,947 10,319,112
Michael K. Simon ............... 100,000 1.9 9.43 9/9/09 592,733 1,502,102
David A. Becker ................ -- -- -- -- -- --
</TABLE>
51
<PAGE>
Aggregated Option Exercises in the Year Ended December 31, 1999 and Year-End
Option Values
The following table sets forth information concerning the value realized
upon exercise of stock options and the number and value of unexercised options
held as of December 31, 1999 by our Chief Executive Officer and our most highly
compensated executive officers whose salary and bonus exceeded $100,000 in
1999. The values set forth below were calculated based on the fair market value
of the shares underlying the options on the date of exercise, less the
applicable exercise price per share, multiplied by the number of shares
underlying the options.
<TABLE>
<CAPTION>
Number of Value of
Securities Underlying Unexercised
Unexercised Options at In-the-Money Options
December 31, 1999 at December 31, 1999
Shares Acquired Value ------------------------------ -----------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------- ----------------- ---------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth D. Cron ................ -- $ -- 800,000 800,000 $10,439,106 $10,439,100
Christopher R. Hassett ......... -- -- 343,489 343,489 4,482,743 4,482,148
Michael K. Simon ............... -- -- 109,759 72,241 1,863,392 1,403,135
David A. Becker ................ -- -- 400,000 -- 8,105,553 --
</TABLE>
Employment Agreements
In the United States, we typically enter into employment agreements only
with senior executive officers. We have entered into employment agreements with
Mr. Cron, our Chairman of the Board and Chief Executive Officer; Mr. Hassett,
our President and Chief Operating Officer; Mr. Simon, our Chief Financial
Officer; Mr. Marafioti, our Executive Vice President and General Counsel; and
Mr. Strief, our Executive Vice President of Marketing and Sales.
We entered into employment agreements with each of Messrs. Cron and
Hassett in September 1999 and with each of Messrs. Marafioti and Strief in
October 1999. Each employment agreement provides for compensation solely in the
form of options to acquire our common stock.
Pursuant to the agreement with Mr. Cron, we have granted him options to
acquire 1,600,000 shares of our common stock, of which options to acquire
800,000 shares have vested and are currently exercisable, and options to
acquire the remaining 800,000 shares will have vested and become exercisable by
September 6, 2001. Pursuant to the agreement with Mr. Hassett, we have granted
him options to acquire 686,978 shares of our common stock, of which options to
acquire 343,489 shares have vested and are currently exercisable, and options
to acquire the remaining 343,489 shares will have vested and become exercisable
by September 6, 2001. In the event of the termination of employment of Mr. Cron
or Mr. Hassett for any reason other than termination by us for cause, or in the
event of a change of control of Uproar, all stock options that have not been
exercised will immediately vest.
Pursuant to the agreement with Mr. Marafioti, we have granted him options
to acquire 500,000 shares of our common stock, of which options to acquire
62,498 shares have vested and are currently exercisable, and options to acquire
the remaining 437,502 shares will have vested and become exercisable by
September 25, 2001. Pursuant to the agreement with Mr. Strief, we have granted
him options to acquire 700,000 shares of our common stock, of which options to
acquire 87,498 shares have vested and are currently exercisable, and options to
acquire the remaining 612,502 shares will have vested and become exercisable by
September 25, 2001. In the event of the termination of employment of Mr.
Marafioti or Mr. Strief by reason of his resignation for good reason or his
termination by us without cause, or in the event of a change of control of
Uproar, all stock options that have not been exercised by them will immediately
vest.
Messrs. Cron, Hassett, Marafioti and Strief are also entitled to
participate in all health and other benefit plans provided by us to our
executive employees. The employment of each continues on an at-will basis. The
employment agreement of each of the executives prohibits him from competing
with us for a period of one year from the date of termination if we terminate
his employment for cause or if he resigns without good reason. We have agreed
to indemnify each of the four executives for all liabilities relating to their
status as officers or directors to the extent permitted by the laws of the
State of Delaware.
52
<PAGE>
We entered into an employment agreement with Mr. Simon in December 1999.
His employment agreement provides for compensation in the form of an annual
salary and bonus. In addition, beginning on March 31, 2000, at the end of each
calendar quarter during the term of the agreement, we will grant Mr. Simon
options to acquire 15,000 shares of our common stock, which will vest and be
exercisable upon termination of the agreement. Mr. Simon is also entitled to
participate in all health and other benefit plans provided by us to our
executive employees.
Mr. Simon's employment under the agreement will end on the earliest of (1)
December 2001, (2) the date on which our agreement with Pearson is modified so
that the termination of Mr. Simon's employment with us no longer triggers
Pearson's right to terminate our agreement with Pearson, or (3) the termination
of the Pearson Agreement. In the event Mr. Simon's employment is terminated by
us without cause, or he chooses to terminate his employment with us for good
reason, all stock options previously granted to him will accelerate and vest in
full.
In Europe, consistent with standard market practices, we typically enter
into employment agreements with all of our employees.
Stock Option Plans
Stock Incentive Plan
The Stock Incentive Plan is intended to serve as the successor equity
incentive program to our 1999 Share Option/Share Issuance Plan. The Stock
Incentive Plan became effective upon its adoption by the board of directors. We
anticipate that it will be ratified by the stockholders within a reasonable
time after board approval.
To date, 5,400,000 shares of our common stock have been authorized for
issuance under the Stock Incentive Plan. The Stock Incentive Plan share reserve
will be automatically increased on the first trading day of July each calendar
year, beginning in July 2000, by a number of shares equal to 1% of the total
number of shares of common stock outstanding on the last trading day of the
immediately preceding June, but no annual increase will exceed 400,000 shares.
However, in no event may any one participant in the Stock Incentive Plan
receive option grants or direct stock issuances for more than 2,000,000 shares
in the aggregate per calendar year.
Outstanding options under the predecessor plan have been incorporated into
the Stock Incentive Plan and no further option grants will thereafter be made
under that predecessor plan. The incorporated options will continue to be
governed by their existing terms, unless our compensation committee extends one
or more features of the Stock Incentive Plan to those options. However, except
as otherwise noted below, the outstanding options under that predecessor plan
contain substantially the same terms and conditions summarized below for the
discretionary option grant program under the Stock Incentive Plan.
The Stock Incentive Plan has three separate programs:
o the discretionary option grant program under which eligible individuals
in Uproar's employ or service (including officers, non-employee board
members and consultants) may be granted options to purchase shares of
Uproar's common stock;
o the stock issuance program under which such individuals may be issued
shares of common stock directly, through the purchase of such shares or as
a bonus tied to the performance of services; and
o the automatic option grant program under which option grants will
automatically be made at periodic intervals to eligible non-employee board
members.
The discretionary option grant and stock issuance programs will be
administered by our compensation committee. This committee will determine:
o which eligible individuals are to receive option grants or stock
issuances,
o the time or times when such option grants or stock issuances are to be
made,
o the number of shares subject to each such grant or issuance,
53
<PAGE>
o the exercise or purchase price for each such grant or issuance,
o the status of any granted option as either an incentive stock option or a
non-statutory stock option under the federal tax laws,
o the vesting schedule to be in effect for the option grant or stock
issuance and
o the maximum term for which any granted option is to remain outstanding.
Neither the compensation committee nor the board will exercise any
administrative discretion with respect to the automatic option grant program
for the nonemployee board members.
The exercise price for the options may be paid in cash or in shares of our
common stock valued at fair market value on the exercise date. Options may also
be exercised through a same-day sale program without any cash outlay by the
optionee.
In the event that we are acquired, whether by merger or asset sale or
board-approved sale by the stockholders of more than 50% of our voting stock,
each outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation or otherwise continued will
automatically accelerate in full, and all unvested options under the
discretionary option grant and all unvested shares under the stock issuance
programs will immediately vest, except to the extent our repurchase rights with
respect to those shares are to be assigned to the successor corporation or
otherwise continued in effect. The compensation committee may grant options and
issue shares under those programs which will accelerate
o in an acquisition even if the options and repurchase rights are assumed,
o in connection with a hostile change in control effected through a
successful tender offer for more than 50% of our outstanding voting stock
or by proxy contest for the election of board members, or
o upon a termination of the individual's service following an acquisition
or hostile change in control.
Stock appreciation rights may be issued under the discretionary option
grant program which will provide the holders with the election to surrender
their outstanding options for an appreciation distribution from Uproar equal to
the fair market value of the vested shares subject to the surrendered option
less the aggregate exercise price payable for such shares. Such appreciation
distribution may be made in cash or in shares of our common stock. Currently no
stock appreciation rights are outstanding under the predecessor plan.
The compensation committee has the authority to cancel outstanding options
under the discretionary option grant program, including options incorporated
from the predecessor plan, in return for the grant of new options for the same
or different number of option shares with an exercise price per share based
upon the fair market value of the common stock on the new grant date.
Under the automatic option grant program of the Stock Incentive Plan, each
individual who first joins the board of directors after the closing of this
offering as a nonemployee member of the board will receive an option grant for
30,000 shares of our common stock at the time of his or her commencement of
service on the board. In addition, as of January 1, 2000, and thereafter, at
each annual meeting of stockholders beginning with the 2001 annual meeting,
each individual who has served as a nonemployee board member for at least 6
months and is to continue to serve as such will be granted an option to
purchase 5,000 shares of our common stock. Each automatic grant will have an
exercise price equal to the fair market value per share of our common stock on
the grant date and will have a maximum term of 10 years, subject to earlier
termination following the optionee's cessation of board service. Each option
will vest in a series of 4 equal quarterly installments upon the optionee's
completion of each quarter of service over the 1-year period measured from the
grant date. However, each outstanding option will immediately vest upon an
acquisition or change in control or the death or disability of the optionee
while serving as a board member.
Limited stock appreciation rights will automatically be included as part
of each grant made under the automatic option grant program and may be granted
to one or more officers as part of their option grants under the discretionary
option grant program. Options with such a limited stock appreciation right may
be surrendered to us upon the successful completion of a hostile tender offer
for more than 50% of our
54
<PAGE>
outstanding voting stock. In return for the surrendered option, the optionee
will be entitled to a cash distribution from us in an amount per surrendered
option share equal to the highest price per share of common stock paid in
connection with the tender offer less the exercise price payable for such
share.
The board may amend or modify the Stock Incentive Plan at any time,
subject to required stockholder approval. The Stock Incentive Plan will
terminate no later than ten years from the effective date of the Plan.
55
<PAGE>
CERTAIN TRANSACTIONS
In January 1999, we entered into a strategic relationship with Pearson
Television that provides us with rights to create and produce English-language
versions of television game show formats owned by Pearson. In connection with
this arrangement, we issued 2,000,000 shares to Pearson. We also agreed to
issue to Pearson an additional 400,000 shares between September 1999 and August
2000 and 400,000 shares between September 2000 and August 2001 if Pearson meets
television distribution targets for its game shows in the United States as
stated in our January 1999 agreement with Pearson. In addition, we agreed to
appoint a Pearson representative, Ms. Mackay, to our board of directors. Ms.
Mackay's term will expire at the annual stockholders' meeting in 2001.
Under the merger agreement with PrizePoint, we issued approximately
2,440,000 shares of our common stock to PrizePoint stockholders, including Mr.
Hassett, our President and Chief Operating Officer, and his family members. In
addition, we appointed Mr. Hassett to our board of directors. Mr. Hassett's
term will expire at the annual stockholders' meeting in 2001.
In 1996, Michael Simon was granted an option to purchase 484,000 shares at
a price of $0.46 per share and an option to purchase 200,000 shares of our
common stock at $0.77 per share. The exercise price of these options was above
the fair market value of the shares at the time of grant, and the expiration
date of the options was December 31, 1997. In December 1997, our board of
directors extended the expiration date of these options to June 30, 1998, and
increased the exercise price to $0.53 per share and $0.88 per share,
respectively. In 1998, Mr. Simon exercised these options.
In 1997, we created an option program under which employees and directors
were granted options to purchase in the aggregate up to 100,000 shares at an
exercise price of $2.21 per share. That price was above the fair market value
of the shares at the time this program was created. We granted the following
directors and executive officers options under this program:
Name Options Purchase Price
- ------------------------- --------- ----------------
Michael K. Simon 82,000 $2.21 per share
Thompson B. Barnhardt 32,000 $2.21 per share
Esther Dyson 32,000 $2.21 per share
In 1999, we acquired PrizePoint Entertainment. The following table sets
out the number of PrizePoint shares that the following officers and directors
of PrizePoint purchased, the number of our shares into which they were
converted, and the equivalent per share price:
<PAGE>
<TABLE>
<CAPTION>
Name PrizePoint Shares Uproar Shares Price Per Uproar Share
- ------------------------------- ------------------- --------------- -----------------------
<S> <C> <C> <C>
Christopher R. Hassett 716,667 753,058 $ 0.84
Francis G. Blot 218,500 229,560 $ 0.01
</TABLE>
The Uproar shares listed for Mr. Hassett include 184,400 shares owned by his
spouse; the Uproar shares listed for Mr. Blot include 69,000 shares owned by
his spouse.
In 1999, we established our 1999 Share Option/Share Issuance Plan. The
exercise price of all options granted under that Plan in 1999 was equal to the
fair market value of the shares on the date of grant. The following directors
and officers have been granted options under this program:
Name Options Purchase Price
- -------------------------- ----------- -----------------
Kenneth D. Cron 1,600,000 $9.43 per share
Christopher R. Hassett 686,978 $9.43 per share
Michael K. Simon 100,000 $9.43 per share
Francis G. Blot 223,360 $9.43 per share
Shannon King 200,000 $9.43 per share
Robert D. Marafioti 500,000 $10.82 per share
Jeffrey L. Strief 700,000 $10.82 per share
The options listed for Mr. Blot include 35,000 options granted to his spouse.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of January 31, 2000 and as adjusted to reflect
the sale of the shares of common stock in this offering, for
o each person who we know to beneficially own 5% or more of our common
stock;
o each executive officer named in the Summary Compensation Table;
o each of our directors; and
o all of our directors and executive officers as a group.
Unless otherwise indicated, the address of each beneficial owner listed
below is c/o Uproar Inc., 240 West 35th Street, 9th Floor, New York, New York
10001.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Except as indicated by footnote, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them. The number of shares of common stock outstanding
used in calculating the percentage for each listed person includes the shares
of common stock underlying options held by such person that are exercisable
within 60 days of January 31, 2000, but excludes shares of common stock
underlying options held by any other person. Percentage of beneficial ownership
is based on 23,972,468 shares of common stock outstanding as of January 31,
2000, and 30,237,840 shares of common stock to be outstanding after the
completion of this offering, including 1,265,372 shares sold to a strategic
investor on February 2, 2000. All share numbers have been adjusted to reflect a
2-for-1 stock split of our common stock to be effected February 18, 2000.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Offering Owned After Offering
------------------------ -----------------------
Name of Beneficial Owner Number Percent Number Percent
- ----------------------------------------------- ------------ --------- ------------ --------
<S> <C> <C> <C> <C>
Kenneth D. Cron (1) ........................... 843,320 3.4% 843,320 2.7%
Christopher R. Hassett (2) .................... 1,096,547 4.5 1,096,547 3.6
Michael K. Simon (3) .......................... 1,395,101 5.8 1,395,101 4.6
David A. Becker (4) ........................... 400,000 1.6 400,000 1.3
Thompson B. Barnhardt (5) ..................... 32,000 * 32,000 *
Esther Dyson (6) .............................. 158,240 * 158,240 *
Catherine V. Mackay (7) ....................... 2,000,000 8.3 2,000,000 6.6
Pearson Television, Inc. (8) .................. 2,000,000 8.3 2,000,000 6.6
All directors and executive officers as a group
(10 persons) ................................. 8,534,764 32.7 8,534,764 26.4
</TABLE>
<PAGE>
- ------------
* Indicates less than one percent of the common stock.
(1) Includes 800,000 shares issuable upon the exercise of currently exercisable
stock options.
(2) Includes (a) 343,489 shares issuable upon the exercise of currently
exercisable stock options and 184,000 shares owned by Mr. Hassett's
spouse.
(3) Includes 49,981 shares issuable upon the exercise of currently exercisable
stock options.
(4) Includes 400,000 shares issuable upon the exercise of currently exercisable
options. Mr. Becker's address is 87 Remsen Street, #3, Brooklyn, NY 11201.
(5) Includes 32,000 shares issuable upon the exercise of currently exercisable
stock options. Mr. Barnhardt's address is c/o Biznes Polska.pl Sp zoo.,
Ul. Gornoslaska 7B, Warsaw 00-443.
(6) Includes 32,000 shares issuable upon the exercise of currently exercisable
stock options. Ms. Dyson's address is 104 Fifth Avenue, 20th Floor, New
York, NY 10011.
(7) All shares indicated as owned by Ms. Mackay are included because of Ms.
Mackay's affiliation with Pearson Television, Inc. Ms. Mackay disclaims
beneficial ownership of all shares owned by Pearson Television, Inc. Ms.
Mackay's address is c/o Pearson Television, Inc., 1330 Avenue of the
Americas, New York, NY 10019.
(8) The address of Pearson Television, Inc. is 1330 Avenue of the Americas, New
York, NY 10019.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our common stock and relevant provisions of
our certificate of incorporation as will be in effect upon the closing of this
offering and the bylaws as will be in effect upon the closing of this offering
are summaries and are qualified by reference to our certificate of
incorporation and the bylaws, copies of which have been filed with the
Securities and Exchange Commission as exhibits to our Registration Statement of
which this prospectus forms a part. The description of the common stock
reflects changes to our capital structure that will occur upon the closing of
the offering in accordance with the terms of our certificate of incorporation.
Our authorized capital stock currently consists of 112,000,000 shares of
common stock, par value $.01 per share, and 48,000,000 shares of preferred
stock, par value $.01 per share.
Common Stock
As of January 31, 2000, there were 23,972,468 shares of common stock
outstanding and held of record by stockholders. After giving effect to the
issuance of the shares of common stock in this offering, there will be
30,237,840 shares of common stock outstanding upon the closing of this offering
assuming that the underwriters do not exercise their over-allotment option and
including 1,265,372 shares of our common stock sold to Trans Cosmos USA in
February 2000.
Holders of common stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
those dividends, if any, as may be declared by the board of directors out of
legally available funds, subject to any preferential dividend rights of any
outstanding preferred stock. Upon our liquidation, dissolution or winding up,
the holders of common stock are entitled to receive ratably our net assets
available after the payment of all debts and other liabilities and subject to
the prior rights of any outstanding preferred stock. Holders of the common
stock have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are, and the shares offered by us in the
offering will be, when issued in consideration for payment, fully paid and
nonassessable. The rights, preferences and privileges of holders of common
stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock which we may designate and
issue in the future.
Preferred Stock
Upon the closing of the offering, the board of directors will be
authorized, without further stockholder approval, to issue from time to time up
to an aggregate of 48,000,000 shares of preferred stock in one or more series
and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each series,
including the dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, including sinking fund provisions, redemption
price or prices, liquidation preferences and the number of shares constituting
any series or designations of such series. We have no present plans to issue
any shares of preferred stock.
Global Instrument Certificate Units
Some of our stockholders continue to hold interests in our shares in the
form of undivided interests, or GIC Units, in global instrument certificates,
or GICs, issued by Oesterreichische Kontrollbank Aktiengesellschaft, or OeKB,
with each GIC Unit representing one share. OeKB holds the shares and all rights
thereunder in trust for the GIC holders. OeKB, as legal owner of the shares,
votes at stockholder meetings only in accordance with the instructions of GIC
Unit holders, provided these have been received by OeKB in compliance with the
terms and conditions of the GIC arrangements.
GIC Units will be converted to the underlying shares on written
application by the GIC Unit holders to the OeKB. The OeKB charges a fee to the
GIC Unit holders for conversion according to the provisions applied by the OeKB
from time to time. The OeKB will not automatically convert the GICs in respect
of shares that it currently holds on behalf of GIC Unit holders to our shares
of common stock.
58
<PAGE>
We withdrew from the trading facility for the GICs provided by the Vienna
Stock Exchange on November 30, 1999. As a result, the GIC Units are no longer
tradable on the Vienna Stock Exchange.
Registration Rights
In our agreement with Pearson Television in January 1999, we granted
Pearson rights to register the shares of common stock that it acquired under
that agreement. Twice during the three-year period beginning in January 2001,
Pearson is entitled to require us to register all or any portion of its shares.
This type of registration right is known as a "demand" registration right. In
addition, during the five-year period commencing in January 2001, Pearson is
entitled to require us to register all or any portion of its shares when we
register shares of our common stock for our own account or for the account of
other stockholders. This type of registration right is known as a "piggyback"
registration right.
These registration rights are subject to certain conditions and
limitations, including:
o the right of the underwriters in any underwritten offering to limit the
number of shares of common stock held by Pearson to be included in any
demand or piggyback registration; and
o our right to refuse to effect a registration pursuant to Pearson's demand
registration rights during the twelve-month period following the effective
date of a registration statement in connection with which Pearson
exercised any piggyback registration rights, or at any time when another
registration statement of ours, other than a Form S-4 or S-8, is
reasonably foreseen by our board of directors to be filed within 30 days
of a registration demand, has been filed and not yet become effective, or
has been effective for less than six months prior to a registration
demand.
We are generally required to bear all of the expenses of registering
Pearson's shares of common stock, other than underwriting discounts and
commissions. Subject to the lock-up provisions contained in the Pearson
agreement, registration of any of the shares of common stock held by Pearson
would result in those shares becoming freely tradable without restriction under
the Securities Act of 1933, as amended, immediately after the effectiveness of
the registration We have agreed to indemnify Pearson in connection with the
registration of its shares of common stock under the terms of our agreement
with Pearson.
In connection with our sale of 1,265,372 shares of our common stock to a
strategic investor, Trans Cosmos USA, Inc., in February 2000, we granted that
strategic investor piggyback registration rights, subject to conditions and
limitations including the right of the underwriters in any written offering to
limit the number of shares of common stock held by Trans Cosmos to be included
in such piggyback registration. We also granted Trans Cosmos the right to
require us to file a registration statement on Form S-3 under the Securities
Act with respect to the shares of common stock it acquired from us. However, we
are not obligated to file this registration statement if:
o Form S-3 is not available;
o Trans Cosmos proposes to sell its common stock for an aggregate price of
less than $2.0 million;
o our Chief Executive Officer provides Trans Cosmos with a certificate
stating that, in the judgment of the Board of Directors, the registration
would be seriously detrimental to us and our stockholders, which would
allow us, once in any 12 month period, to defer the registration for up to
90 days;
o the registration would require us to qualify to do business in any
particular jurisdiction or to provide a second consent of service of
process; or
o we have filed two effective Form S-3 registrations for the strategic
investor.
We are generally required to bear all of the expenses of registering Trans
Cosmos common stock, other than underwriting discounts and commissions and
legal fees of the strategic investor. Registration of any of the shares of
common stock held by Trans Cosmos would result in those shares becoming freely
tradable without restriction under the Securities Act immediately after
effectiveness of the registration. We have agreed to indemnify Trans Cosmos in
connection with the registration of its shares of common stock under the terms
of the registration rights agreement.
59
<PAGE>
Anti-Takeover Effects of Certain Provisions of Delaware Law and Uproar's
Certificate of Incorporation and Bylaws
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law (as amended from time to time, the "DGCL"). Subject to certain
exceptions, Section 203 prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the interested stockholder attained
such status with the approval of the board of directors or unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of the corporation's voting stock. This
statute could prohibit or delay the accomplishment of mergers or other takeover
or change in control attempts with respect to Uproar and, accordingly, may
discourage attempts to acquire Uproar.
In addition, provisions of the certificate of incorporation and bylaws,
which provisions will be in effect upon the closing of the offering and are
summarized in the following paragraphs, may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that
a stockholder might consider in its best interest, including those attempts
that might result in a premium over the market price for the shares held by
stockholders.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation provides that, except to the extent
prohibited by the Delaware General Corporation Law, or DGCL, our directors
shall not be personally liable to Uproar or our stockholders for monetary
damages for any breach of fiduciary duty as directors of Uproar. Under the
DGCL, the directors have a fiduciary duty to Uproar which is not eliminated by
this provision of the certificate and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available. In addition, each director will continue to be subject to liability
under the DGCL for breach of the director's duty of loyalty to Uproar, for acts
or omissions which are found by a court of competent jurisdiction to be not in
good faith or which involves intentional misconduct, or 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
prohibited by DGCL. This provision also does not affect the directors'
responsibilities under any other laws, such as the Federal securities laws or
state or Federal environmental laws.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director:
(1) for any breach of the director's duty of loyalty to the corporation or
its stockholders;
(2) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(3) arising under Section 174 of the DGCL; or
(4) for any transaction from which the director derived an improper
personal benefit.
The DGCL provides further that the indemnification permitted thereunder shall
not be deemed exclusive of any other rights to which the directors and officers
may be entitled under the corporation's bylaws, any agreement, a vote of
stockholders or otherwise. The Certificate eliminates the personal liability of
directors to the fullest extent permitted by Section 102(b)(7) of the DGCL and
provides that Uproar shall fully indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that such person is or was a director or
officer of Uproar, or is or was serving at the request of Uproar as a director
or officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding.
60
<PAGE>
Our bylaws permit us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions, regardless of whether the DGCL would permit indemnification. We have
obtained liability insurance for our officers and directors.
At present, we are not the subject of pending litigation or proceeding
involving any director, officer, employee or agent as to which indemnification
will be required or permitted under the certificate. We are not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock will be American
Stock Transfer & Trust Company, New York, New York.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market, or
the perception that such sales could occur, could adversely affect prevailing
market prices of our common stock. Upon completion of this offering, we will
have outstanding an aggregate of 30,237,320 shares of our common stock,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options. Of these shares, all shares sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act, unless such shares are purchased by "affiliates" as that term
is defined in Rule 144 under the Securities Act. The remaining 25,237,320 of
shares of our common stock held by existing stockholders are "restricted
securities" as that term is defined in Rule 144 under the Securities Act of
1933, as amended, or are subject to transfer restrictions under Regulation S.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 or 701 under the
Securities Act, which rules are summarized below. Subject to lock-up agreements
described below and the provisions of Rules 144 and 701, these 25,237,320
shares will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of Shares Date
- ------------------ -----------------------------------------------------------------
<S> <C>
15,126,607 After the date of this prospectus
7,733,760 After 90 days from the date of this prospectus subject, in some
cases, to volume limitations
2,763,320 As of July 8, 2000
4,427,298 After 180 days from the date of this prospectus subject, in some
cases, to volume limitations
</TABLE>
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned our common
stock for at least one year would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
o 1% of the number of common shares then outstanding, which will equal
approximately 302,373 shares immediately after this offering; or
o the average weekly trading volume of the common shares on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
Rule 144(k)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner other than an affiliate, is entitled to sell such shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory share plan or other written agreement is
eligible to resell such shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with restrictions,
including the holding period, contained in Rule 144.
Lock-Up Agreements
All of our officers, directors and some of our stockholders have signed
lock-up agreements under which they agreed not to transfer or dispose of,
directly or indirectly, any shares or any securities convertible into or
exercisable or exchangeable for common stock, for a period of 180 days after
the date of this prospectus. Transfers or dispositions can be made sooner:
o with the prior written consent of Salomon Smith Barney;
62
<PAGE>
o in the case of certain transfers to affiliates;
o as a bona fide gift; or
o to any trust.
In connection with our agreement with Pearson, Pearson has agreed not to
transfer or dispose of, directly or indirectly, more than 1,000,000 of the
shares of our common stock issued to it under the agreement until at least
January 14, 2001. On and after that date, Pearson will be able to sell the
remaining entire number of shares that were issued to it under the agreement.
Registration Rights
Beginning in January 2001, Pearson, or its transferees, will be entitled
to request that we register up to 2,000,000 shares of our common stock. After
this offering, Trans Cosmos, or its transferees, will be entitled to request
that we register up to 1,265,372 shares of our common stock under the
Securities Act of 1933, as amended, as described in more detail in "Description
of Capital Stock -- Registration Rights."
Stock Plans
At December 31, 1999, options to purchase 5,904,408 shares were issued and
outstanding under our stock option plans and otherwise. All of these shares
will be eligible for sale in the public market from time to time, subject to
vesting provisions and Rule 144 volume limitations applicable to our
affiliates.
63
<PAGE>
UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of the material United States
federal income and estate tax consequences of the ownership and disposition of
the common stock applicable to Non-United States Holders of this common stock.
For the purpose of this discussion, a Non-United States Holder is any holder
that for United States federal income tax purposes is not a United States
person. The following discussion is based on current provisions of the Internal
Revenue Code of 1986, as amended, and administrative and judicial
interpretations thereof, all as in effect on the date hereof, and all of which
are subject to change, possibly with retroactive effect. We have not and will
not seek a ruling from the Internal Revenue Service with respect to the United
States federal income and estate tax consequences described below and, as a
result, there can be no assurance that the Internal Revenue Service will not
disagree with or challenge any of the conclusions set forth in this discussion.
For purposes of this discussion, the term United States person means:
o a citizen or resident of the United States;
o a corporation or other entity taxable as a corporation created or
organized in the United States or under the laws of the United States or
any political subdivision thereof;
o an estate whose income is included in gross income for United States
federal income tax purposes regardless of its source; or
o a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who
have the authority to control all substantial decisions of the trust.
This discussion does not consider:
o United States state and local or non-United States tax consequences;
o specific facts and circumstances that may be relevant to a particular
Non-United States Holder's tax position, including, if the Non-United
States Holder is a partnership, that the United States tax consequences of
holding and disposing of our common stock may be affected by
determinations made at the partner level;
o the tax consequences for the shareholders or beneficiaries of a
Non-United States Holder;
o special tax rules that may apply to certain Non-United States Holders,
including, without limitation, banks, insurance companies, dealers in
securities and traders in securities who elect to apply a mark-to-market
method of accounting; or
o special tax rules that may apply to a Non-United States Holder that holds
our common stock as part of a "straddle", "hedge", or "conversion
transaction".
Dividends
If we pay a dividend, any dividend paid to a Non-United States Holder of
common stock generally will be subject to United States withholding tax either
at a rate of 30% of the gross amount of the dividend or such lower rate as may
be specified by an applicable tax treaty. Dividends received by a Non-United
States Holder that are effectively connected with a United States trade or
business conducted by the Non-United States Holder or, if an income tax treaty
applies, are attributable to a permanent establishment, or in the case of an
individual, a "fixed base" in the United States, as provided in that treaty
("U.S. trade or business income"), are generally not subject to such
withholding tax if the Non-United States Holders files the appropriate U.S.
Internal Revenue Service Form with the payor. However, such U.S. trade or
business income, net of deductions and credits, is taxed at the same graduated
rates applicable to United States persons. Any U.S. trade or business income
received by a Non-United States Holder that is a corporation may also, under
circumstances, be subject to an additional "branch profits tax" at a 30% rate
or such lower rate as specified by an applicable income tax treaty.
64
<PAGE>
Dividends paid on or prior to December 31, 2000 to an address in a foreign
country are presumed, absent actual knowledge to the contrary, to be paid to a
resident of such country for purposes of the withholding discussed above and
for the purposes of determining the applicability of a tax treaty rate. For
dividends paid after December 31, 2000:
o a Non-United States Holder of common stock who claims the benefit of an
applicable income tax treaty rate generally will be required to satisfy
applicable certification and other requirements;
o in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of the
partnership and the partnership will be required to provide information,
including a United States taxpayer identification number; and
o look-through rules will apply for tiered partnerships.
A Non-United States Holder of common stock that is eligible for a reduced
rate of withholding tax pursuant to a tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund
with the IRS.
Gain on Disposition of Common Stock
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
his common stock unless:
o the gain is U.S. trade or business income (which gain, in the case of a
corporate Non-United States Holder, must also be taken into account for
branch profits tax purposes);
o the Non-United States Holder is an individual who holds his or her common
stock as a capital asset (generally, an asset held for investment
purposes) and who is present in the United States for a period or periods
aggregating 183 days or more during the calendar year in which the sale or
disposition occurs and certain other conditions are met;
o the Non-United States Holder is subject to tax pursuant to the provisions
of the United States tax law applicable to certain United States
expatriates; or
o Uproar is or has been a "United States real property holding corporation"
for United States federal income tax purposes at any time within the
shorter of the five-year period preceding the disposition or the holder's
holding period for its common stock.
Generally, a corporation is a "United States real property holding
corporation" if the fair market value of its "United States real property
interests" equals or exceeds 50% of the sum of the fair market value of its
worldwide real property interests plus its other assets used or held for use in
a trade or business. We believe that Uproar has not been and is not currently,
and we do not anticipate it becoming, a "United States real property holding
corporation" for United States federal income tax purposes. The tax relating to
stock in a "United States real property holding corporation" will not apply to
a Non-United States Holder whose holdings, direct and indirect, at all times
during the applicable period, constituted 5% or less of the common stock,
provided that the common stock was regularly traded on an established
securities market.
Backup Withholding and Information Reporting
Generally, we must report annually to the Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the
amount, if any, of tax withheld. A similar report is sent to the holder.
Pursuant to tax treaties or other agreements, the Internal Revenue Service may
make its reports available to tax authorities in the recipient's country of
resident.
Dividends paid to a Non-United States Holder at an address within the
United States may be subject to backup withholding at a rate of 31% if the
Non-United States Holder fails to establish that it is entitled to an exemption
or to provide a correct taxpayer identification number and other information to
the payer. Backup withholding will generally not apply to dividends paid to
Non-United States Holders at an address outside the United States on or prior
to December 31, 2000 unless the payer has knowledge that the payee is a United
65
<PAGE>
States person. Under recently finalized Treasury Regulations regarding
withholding and information reporting, payment of dividends to Non-United
States Holders at an address outside the United States after December 31, 2000
may be subject to backup withholding at a rate of 31% unless such Non-United
States Holder satisfies various certification requirements.
Under current Treasury Regulations, the payment of the proceeds of the
disposition of common stock to or through the United States office of a broker
or through a non-United States branch of a United States broker is subject to
information reporting and backup withholding at a rate of 31% unless the holder
certifies its non-United States status under penalties or perjury or otherwise
establishes an exemption. Generally, the payment of the proceeds of the
disposition by a Non-United States Holder of common stock outside the United
States to or through a non-United States office of a non-United States broker
will not be subject to backup withholding but will be subject to information
reporting requirements if the broker is:
o a United States person;
o a "controlled foreign corporation" for United States federal income tax
purposes; or
o a foreign person 50% or more of whose gross income for certain periods is
from the conduct of a United States trade or business
unless the broker has documentary evidence in its files of the holders'
Non-United States status and other conditions are met, or the holder otherwise
establishes an exemption. Neither backup withholding nor information reporting
generally will apply to a payment of the proceeds of a disposition of common
stock by or through a foreign office of a foreign broker not subject to the
preceding sentence.
In general, the recently promulgated final Treasury Regulations, described
above, do not significantly alter the substantive withholding and information
reporting requirements but would alter the procedures for claiming benefits of
an income tax treaty and change the certifications procedures relating to the
receipt by intermediaries of payments on behalf of the beneficial owner of
shares of common stock. Non-United States Holders should consult their tax
advisors regarding the effect, if any, of those final Treasury Regulations on
an investment in the common stock. Those final Treasury Regulations are
generally effective for payments made after December 31, 2000.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
Estate Tax
An individual Non-United States Holder who owns common stock at the time
of his death or had made a particular lifetime transfer of an interest in
common stock will be required to include the value of that common stock in such
holder's gross estate for United States federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.
The foregoing discussion is a summary of the principal federal income and
estate tax consequences of the ownership, sale or other disposition of common
stock by Non-United States Holders. Accordingly, investors are urged to consult
their own tax advisors with respect to the income tax consequences of the
ownership and disposition of common stock, including the application and effect
of the laws of any state, local, foreign or other taxing jurisdiction.
66
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and we have agreed to sell to such underwriter, the number of shares
set forth opposite the name of such underwriter.
Number of
Underwriter Shares
- ------------------------------------------ ----------
Salomon Smith Barney Inc. ................
Bear, Stearns & Co. Inc. .................
Banc of America Securities LLC ...........
SoundView Technology Group, Inc. .........
----------
Total ...................................
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of 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, for whom Salomon Smith Barney Inc., Bear, Stearns & Co.
Inc., Banc of America Securities LLC and SoundView Technology Group, Inc. are
acting as representatives, propose to offer some of the shares directly to the
public at the initial public offering price set forth on the cover page of this
prospectus and some of the shares to certain dealers at the initial public
offering 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 on sales to certain other dealers. If all of the shares
are not sold at the initial offering price, the representatives may change the
public offering price and the other selling terms. The representatives have
advised us that the underwriters do not intend to confirm any sales to any
accounts over which they exercise discretionary authority.
We have granted to the underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to additional shares of
common stock at the initial 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 this offering. To the
extent such option is exercised, each underwriter will be obligated, subject to
conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
At our request, the underwriters will reserve up to shares of our
common stock to be sold, at the initial public offering price, to our
directors, officers and employees, as well as to some of our customers and
suppliers and individuals associated or affiliated with our directors,
customers and suppliers. This directed share program will be administered by
Salomon Smith Barney Inc. The number of shares of common stock available for
sale to the general public will be reduced to the extent these individuals
purchase reserved shares. Any reserved shares which are not so purchased will
be offered by the underwriters to the general public on the same basis as the
other shares offered by this prospectus. We have agreed to indemnify the
underwriters against liabilities and expenses, including liabilities under the
Securities Act of 1933, in connection with sales of the directed shares.
Uproar, its officers and directors, and some of our stockholders have
agreed that, for a period of 180 days from the date of this prospectus, they
will not, without the prior written consent of Salomon Smith Barney Inc.,
dispose of or hedge any shares of our common stock or any securities
convertible into or exchangeable for our common stock. Salomon Smith Barney
Inc., in its sole discretion, may release any of the securities subject to
these lock-up agreements at any time without notice.
Prior to this offering there has been no public market for our common
stock in the United States. The common stock is currently admitted for trading
on EASDAQ under the symbol "UPRO". The initial price to public of the common
stock in the United States will be determined by negotiation among the
underwriters and Uproar. In addition to prevailing market conditions, among the
factors that may be considered in
67
<PAGE>
determining the price to public of the common stock are Uproar's historical
financial performance, estimates of Uproar's business potential and its
prospects, the price of Uproar's shares on EASDAQ, an assessment of the
Uproar's management and the consideration of the above factors in relation to
the market valuations of companies in similar businesses.
Uproar has applied to have the common stock included for quotation on the
Nasdaq National Market under the symbol "UPRO".
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by Uproar in connection with this offering. These
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of common stock.
Paid by Uproar
------------------------------
No Exercise Full Exercise
------------- --------------
Per share ......... $ $
Total ............. $ $
In connection with the offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of common stock in the open
market. These transactions may include over-allotment, syndicate covering
transactions and stabilizing transactions. 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 the common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of 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.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.
Any of 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
National Market or in the over-the-counter market, or otherwise and, if
commenced, may be discontinued at any time.
A prospectus in electronic format is being made available on a Web site
maintained by Wit SoundView's affiliate, Wit Capital Corporation. In addition,
all dealers purchasing shares from Wit SoundView in this offering have agreed
to make a prospectus in electronic format available on Web sites maintained by
each of these dealers. Other information contained on any of these Web sites
and any information contained on any other Web site maintained by Wit Capital
is not part of the prospectus or the registration statement, has not been
approved or endorsed by Uproar or any underwriter and should not be relied upon
by investors.
We estimate that our total expenses for this offering will be $1.5
million.
We have agreed to indemnify the underwriters against liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
68
<PAGE>
LEGAL MATTERS
The validity of the common shares offered hereby will be passed upon for
Uproar by Brobeck, Phleger & Harrison LLP, New York, New York. Various legal
matters in connection with the offering will be passed upon for the
underwriters by Cravath, Swaine & Moore, New York, New York.
EXPERTS
The consolidated financial statements of Uproar Inc. and subsidiaries as
of December 31, 1999 and the year then ended have been included herein and in
the registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Uproar Inc. and subsidiaries as
of December 31, 1998 and each of the years in the two-year period ended
December 31, 1998, have been included herein and in the registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority as experts in
accounting and auditing.
The audited financial statements of PrizePoint as of December 31, 1998 and
for the period from PrizePoint's inception, March 4, 1998, to December 31,
1998, incorporated into the financial statements included in this prospectus,
were audited by Arthur Andersen LLP, independent public accountants, and are
included herein in reliance upon the authority of the firm as experts in giving
the reports.
CHANGE IN INDEPENDENT ACCOUNTANTS
On August 28, 1998, we changed our auditors to KPMG Hungaria Kft. from
Coopers & Lybrand in Dublin, Ireland.
The decision to change independent accountants from Coopers & Lybrand,
Dublin, to KPMG Hungaria Kft., was recommended by our audit committee and
approved by our board of directors.
We believe, and have been advised by the successor to Coopers & Lybrand,
Dublin, PricewaterhouseCoopers LLP, Dublin, that it concurs in such belief
that, for the period from February 1995 (inception) through the date of the
change in accountants, Coopers & Lybrand, Dublin, did not have any disagreement
with us on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of Coopers & Lybrand, Dublin, would have caused it
to make reference to the subject matter of the disagreement in connection with
its report on our financial statements.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange 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 this 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 about us and the shares of common stock to be sold in the
offering, please refer 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 Securities and
Exchange Commission's public reference room at 450 Fifth Street, N.W.,
Washington, D.C., 20549. You can request copies of these documents, upon
payment of a duplicating fee, by writing to the Securities and Exchange
Commission. Please call the Securities and Exchange Commission at
1-800-SEC-1330 for further information about the public reference rooms.
Uproar's Securities and Exchange Commission filings, including the registration
statement, are also available to you on the Securities and Exchange
Commission's Internet site (http://www.sec.gov).
As a result of the offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934, as amended, and
will file periodic reports, proxy statements and other information with the
Securities and Exchange Commission.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors and to make available
to our stockholders quarterly reports containing unaudited interim consolidated
financial data for the first three quarters of each fiscal year.
69
<PAGE>
Companies approved for trading on EASDAQ are required to publish relevant
financial and other information regularly and to keep the public informed of
all events likely to affect the market price of their securities.
Price-sensitive information is available to investors in Europe through the
EASDAQ-Reuters Regulatory Company Reporting System and other international
information providers. Investors who do not have direct access to such
information should ask their financial advisors for the terms on which such
information will be provided to them by these financial advisors. We will
ensure that a summary of our quarterly and annual financial statements will be
provided to stockholders in Europe across the EASDAQ Company Reporting System,
or ECR System. A hard copy of the annual report will be provided to
stockholders promptly after it becomes available. Complete quarterly statements
will either be sent by us to our stockholders or will be available upon request
from the us at our executive offices. Copies of all documents filed by us with
EASDAQ are also available for inspection at the offices of EASDAQ, 56 Rue de
Colonies, Bte.15, B-1000 Brussels, Belgium.
70
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
December 31, 1997, 1998 and 1999
Table of Contents
<TABLE>
<S> <C>
Independent Auditors' Reports ......................................... F-2
Consolidated Balance Sheets ........................................... F-4
Consolidated Statements of Operations ................................. F-5
Consolidated Statements of Stockholders' Equity and Comprehensive Loss F-6
Consolidated Statements of Cash Flows ................................. F-7
Notes to Consolidated Financial Statements ............................ F-8
</TABLE>
F-1
<PAGE>
[Firm Letterhead]
Independent Auditors' Report
The Board of Directors and Stockholders
Uproar Inc.:
We have audited the accompanying consolidated balance sheet of Uproar Inc.
and subsidiaries (formerly Uproar Ltd.) as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity and
comprehensive loss, and cash flows for the year then ended. 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 financial position of Uproar Inc.
and subsidiaries, (formerly Uproar Ltd.) as of December 31, 1999, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
(Signed) KPMG LLP
February 4, 2000
F-2
<PAGE>
[Firm Letterhead]
Independent Auditors' Report
The Board of Directors and Stockholders
Uproar Inc.:
We have audited the accompanying consolidated balance sheet of Uproar Inc.
and subsidiaries (formerly Uproar Ltd.) as of December 31, 1998, and the
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for the years ended December 31, 1997 and 1998. 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 audits. We did not audit the financial
statements of PrizePoint Entertainment Corporation, a Delaware corporation, a
company acquired during 1999 in a transaction accounted for as a pooling of
interests, as discussed in note 3. Such financial statements are included in
the financial statements of Uproar Inc. (formerly Uproar Ltd.) and subsidiaries
as of and for the year ended December 31, 1998 and reflect 23% and 0% of total
consolidated assets and revenues respectively. Those financial statements were
audited by other auditors whose unqualified report has been furnished to us and
our opinion, insofar as it relates to amounts included for PrizePoint
Entertainment Corporation, is based solely upon the report of the other
auditors.
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, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Uproar Inc. and subsidiaries,
(formerly Uproar Ltd.) as of December 31, 1998, and the results of their
operations and their cash flows for the years ended December 31, 1997 and 1998
in conformity with generally accepted accounting principles.
(Signed) KPMG Hungaria Kft.
August 4, 1999, except for paragraph 1 of note 19
which is as of December 16, 1999
F-3
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
Consolidated Balance Sheets
As of December 31, 1998 and 1999
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ............................. $ 7,035,645 $ 15,135,742
Restricted cash ....................................... -- 604,275
Accounts receivable -- net of allowance for doubtful
accounts of $0 and $271,000, respectively ........... 551,036 3,767,769
Prepaid advertising ................................... 201,327 3,861,996
Other current assets .................................. 24,689 744,612
------------- -------------
Total current assets ............................... 7,812,697 24,114,394
------------- -------------
Property and equipment, net ............................ 1,111,966 5,031,429
Intangible assets, net ................................. 47,357 10,649,387
Other long term assets ................................. 138,685 173,426
Prepaid advertising, long term portion ................. -- 2,847,005
------------- -------------
Total assets ....................................... $ 9,110,705 $ 42,815,641
============= =============
Liabilities and stockholders' equity
Current liabilities:
Current portion of capital lease obligation ........... $ 25,949 $ 102,777
Trade accounts payable ................................ 855,866 1,390,908
Accrued expenses ...................................... 471,906 3,921,570
Other current liabilities ............................. 15,188 144,399
------------- -------------
Total current liabilities .......................... 1,368,909 5,559,654
------------- -------------
Long term portion of capital lease obligation .......... 15,134 51,681
Stockholders' equity:
Preferred stock, $.01 par value, 48,000,000 shares
authorized, none issued ............................. -- --
Common stock, $.05 par value, 112,000,000 shares
authorized; 17,746,280 and 23,971,948 shares issued
and outstanding at December 31, 1998 and 1999
respectively ........................................ 643,860 1,198,597
Additional paid-in capital ............................ 17,470,939 85,193,156
Accumulated deficit ................................... (10,424,698) (49,149,339)
Accumulated other comprehensive income (loss) ......... 36,561 (38,108)
------------- -------------
Total stockholders' equity ......................... 7,726,662 37,204,306
------------- -------------
Total liabilities and stockholders' equity ......... $ 9,110,705 $ 42,815,641
============= =============
</TABLE>
The balance sheet at December 31, 1998 has been restated to reflect the
acquisition of PrizePoint Entertainment Corporation, which was completed on
June 7, 1999 and accounted for as a pooling of interests.
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
Consolidated Statements of Operations
Years Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
--------------- --------------- ----------------
<S> <C> <C> <C>
Revenues ................................... $ 348,709 $ 1,632,969 $ 10,391,527
Cost of revenues ........................... (216,586) (760,376) (2,533,294)
------------ ------------ -------------
Gross profit ............................... 132,123 872,593 7,858,233
------------ ------------ -------------
Sales and marketing ........................ 1,087,058 3,770,866 28,065,956
Product and technology
development ............................... 772,744 849,486 3,701,393
General and administrative ................. 2,092,394 2,327,720 8,919,011
Amortization of intangible assets .......... -- 9,303 6,086,198
------------ ------------ -------------
Total operating expenses ................... 3,952,196 6,957,375 46,772,558
------------ ------------ -------------
Loss from operations ....................... (3,820,073) (6,084,782) (38,914,325)
Other income (expenses):
Foreign exchange gain (loss) .............. (85,439) 57,401 (119,996)
Interest income ........................... 97,717 205,751 535,166
Interest expense .......................... (15,368) -- (7,050)
Other income (expense) .................... -- -- (190,436)
------------ ------------ -------------
Loss before income taxes .................. (3,823,163) (5,821,630) (38,696,641)
Provision for income taxes ................ 5,582 9,020 28,000
------------ ------------ -------------
Net loss .................................. $ (3,828,745) $ (5,830,650) $ (38,724,641)
============ ============ =============
Basic and diluted loss per share . $ (0.42) $ (0.40) $ (1.77)
Weighted average number of
common shares outstanding ............... 9,034,928 14,697,112 21,909,456
============ ============ =============
</TABLE>
The results for all periods have been restated to reflect the acquisition of
PrizePoint Entertainment Corporation which was completed on June 7, 1999 and
accounted for as a pooling of interests.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
Years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Additional
Common Stock
------------------------------ Paid-in
Shares Amount Capital
-------------- -------------- --------------
<S> <C> <C> <C>
Balance at December 31, 1996 ........... 5,400,000 210,162 394,549
Comprehensive loss: ....................
Net loss ..............................
Foreign currency translation ..........
Total comprehensive loss ...............
Sale of common stock ................... 4,000,000 157,526 4,558,161
Stockholder receivable ................. 195,318
Conversion of loan notes ............... 1,774,600 69,138 366,420
Exercise of stock options .............. 289,080 10,206 139,042
Stock compensation expense ............. 1,244,888
---------
Balance at December 31, 1997 ........... 11,463,680 447,032 6,898,378
Comprehensive loss:
Net loss ..............................
Foreign currency translation ..........
Total comprehensive loss ...............
Sale of common stock ................... 4,758,360 144,253 9,522,211
Exercise of stock options .............. 1,524,240 52,575 1,047,246
Stock compensation expense ............. 3,104
---------
Balance at December 31, 1998 ........... 17,746,280 643,860 17,470,939
Comprehensive loss:
Net loss ..............................
Foreign currency translation ..........
Total comprehensive loss ...............
Re-denomination of currency of
common stock .......................... 288,858 (288,858)
Acquisition and retirement of shares (760) (38) (19,342)
Sale of common stock ................... 3,875,360 179,064 39,887,305
Issuance of common stock for
intangible assets and advertising
services from Pearson Television
Limited ............................... 2,000,000 69,300 24,586,575
Exercise of warrants ................... 43,360 2,168 247,832
Stock compensation expense ............. 735,489
Exercise of stock options .............. 307,708 15,385 2,573,216
---------- ------- ----------
Balance at December 31, 1999 ........... 23,971,948 $1,198,597 85,193,156
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Other
Accumulated Comprehensive
Deficit Income (Loss) Total
----------------- --------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1996 ........... (765,303) (1,960) (162,552)
Comprehensive loss: ....................
Net loss .............................. (3,828,745) (3,828,745)
Foreign currency translation .......... 32,663 32,663
----------
Total comprehensive loss ............... (3,796,082)
----------
Sale of common stock ................... 4,715,687
Stockholder receivable ................. 195,318
Conversion of loan notes ............... 435,558
Exercise of stock options .............. 149,248
Stock compensation expense ............. 1,244,888
----------
Balance at December 31, 1997 ........... (4,594,048) 30,703 2,782,065
Comprehensive loss:
Net loss .............................. (5,830,650) (5,830,650)
Foreign currency translation .......... 5,858 5,858
----------
Total comprehensive loss ............... (5,824,792)
----------
Sale of common stock ................... 9,666,464
Exercise of stock options .............. 1,099,821
Stock compensation expense ............. 3,104
----------
Balance at December 31, 1998 ........... (10,424,698) 36,561 7,726,662
Comprehensive loss:
Net loss .............................. (38,724,641) (38,724,641)
Foreign currency translation .......... (74,669) (74,669)
-----------
Total comprehensive loss ............... (38,799,310)
-----------
Re-denomination of currency of
common stock .......................... --
Acquisition and retirement of shares (19,380)
Sale of common stock ................... 40,066,369
Issuance of common stock for
intangible assets and advertising
services from Pearson Television
Limited ............................... 24,655,875
Exercise of warrants ................... 250,000
Stock compensation expense ............. 735,489
Exercise of stock options .............. 2,588,601
-----------
Balance at December 31, 1999 ........... $ (49,149,339) $ (38,108) $ 37,204,306
============= ========== ==============
</TABLE>
The results for all periods have been restated to reflect the acquisition of
PrizePoint Entertainment Corporation which was completed on June 7, 1999 and
accounted for as a pooling of interests.
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd)
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Year ended
December 31,
--------------------------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Cash flows from operating activities
Net loss ............................................. $ (3,828,745) $ (5,830,650) $ (38,724,641)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ........................ 56,556 183,181 6,954,230
Provision for doubtful accounts ...................... -- -- 270,913
Amortization of prepaid advertising services ......... -- -- 1,338,999
Stock compensation expense ........................... 1,244,888 3,104 735,489
Loss on sale of property and equipment ............... -- -- 189,683
Changes in operating assets and liabilities
Accounts receivable ................................ (229,821) (302,366) (3,487,646)
Prepaid advertising and other current assets ....... (66,909) (121,858) (584,596)
Trade accounts payable ............................. 115,204 711,060 667,411
Income tax payable ................................. (2,936) -- --
Accrued expenses and other current liabilities ..... 104,521 342,267 3,578,875
Other long term assets ............................. (59,210) (79,475) (34,741)
------------ ------------- -------------
Net cash used in operating activities ................ (2,666,452) (5,094,737) (29,096,024)
------------ ------------- -------------
Cash flows from investing activities
Purchase of intangibles .............................. (13,955) (42,706) --
Purchase of property and equipment ................... (260,220) (930,470) (4,965,269)
Increase in restricted cash .......................... -- -- (604,275)
Proceeds from sale of equipment ...................... -- -- 27,154
------------ ------------- -------------
Net cash used in investing activities ................ (274,175) (973,176) (5,542,390)
------------ ------------- -------------
Cash flows from financing activities
Proceeds from issuance of common stock ............... 4,911,005 9,666,464 40,046,989
Proceeds from exercise of stock options and
warrants ........................................... 149,248 1,099,821 2,838,601
Principal payments on capital leases ................. -- (10,812) (72,410)
------------ ------------- -------------
Net cash provided by financing activities ............ 5,060,253 10,755,473 42,813,180
------------ ------------- -------------
Effect of exchange rate on cash ...................... (45,307) 5,858 (74,669)
------------ ------------- -------------
Net increase in cash and cash equivalents ............ 2,074,319 4,693,418 8,100,097
Cash and cash equivalents, beginning of year ......... 267,908 2,342,227 7,035,645
------------ ------------- -------------
Cash and cash equivalents, end of year ............... $ 2,342,227 $ 7,035,645 $ 15,135,742
============ ============= =============
Supplemental disclosure of cash flow information
Interest paid ........................................ $ 41,441 $ -- $ 7,050
Income taxes paid .................................... 8,518 10,625 15,842
Issuance of common stock for advertising
services and intangibles ........................... -- -- 24,655,875
Purchase of equipment under capital lease
obligations ........................................ -- 41,083 185,785
Conversion of debt to common stock ................... 435,558 -- --
</TABLE>
The results for all periods have been restated to reflect the acquisition of
PrizePoint Entertainment Corporation which was completed on June 7, 1999 and
accounted for as a pooling of interests.
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
Notes to Consolidated Financial Statements
(1) Nature of business
The Company was originally formed in February 1995 as E-Pub Services
Limited, a corporation organized under the laws of Ireland. In July 1997, due
to tax matters related to the trading of common shares on the third tier of the
Vienna Stock Exchange, we formed Uproar Ltd., a corporation organized under the
laws of Bermuda. All shareholders in E-Pub Services Limited became shareholders
in Uproar Ltd. by exchanging their shares in E-Pub Services Limited for shares
in Uproar Ltd. at a ratio of 1:1. The transaction was accounted for as a
transaction between companies under common control and therefore there was no
adjustment to the historical basis of the assets and liabilities of E-Pub
Services Limited.
Uproar Inc. was incorporated in Delaware on December 16, 1999. Uproar Ltd.
subsequently domesticated from Bermuda to Delaware and, on January 27, 2000
merged with Uproar, Inc. See note 19. Between the date of incorporation and
January 27, 2000, Uproar Inc. had no substantial operations.
The Company provides online game shows and interactive multi-player games
that appeal to a broad audience. The Company seeks to attract a large, quality
audience by offering highly engaging and "sticky" products. Players access the
products free of charge, the Company's revenue primarily being generated
through the sale of advertising. The Company operates in one business segment.
(2) Significant accounting policies and procedures
(a) Principles of consolidation
The consolidated financial statements comprise the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated upon consolidation.
(b) Cash equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the time of acquisition to be cash equivalents. Cash
equivalents at December 31, 1998 and December 31, 1999 consist primarily of
money market funds. Financial instruments that potentially subject the Company
to a concentration of credit risk consist of cash and cash equivalents and
accounts receivable. Cash and cash equivalents are deposited with high credit
quality financial institutions.
Restricted cash consists of cash on deposit supporting letters of credit
in favor of lessors for two office leases.
(c) Fair value of financial instruments
The Company's financial instruments, including cash and cash equivalents,
restricted cash, accounts receivable, accounts payable and accrued expenses are
carried at cost, which approximates their fair value because of the short-term
maturity of these instruments.
(d) Currency translation and transactions
The reporting currency for the Company is the United States Dollar (USD).
The functional currency for the Company's operations is generally the
applicable local currency. Accordingly, the assets and liabilities of the
subsidiaries whose functional currency is other than the USD are included in
the consolidated financial statements by translating the assets and liabilities
into the reporting currency at the exchange rates applicable at the end of the
reporting year. The statements of operations and cash flows of such non-USD
functional currency operations are translated at the average exchange rate for
the reporting year. Translation gains or losses are accumulated as a separate
component of stockholders' equity. Currency transaction gains or losses arising
from transactions of the Company in currencies other than the functional
currency are included in operations for each reporting period.
F-8
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
Notes to Consolidated Financial Statements -- (Continued)
(2) Significant accounting policies and procedures -- (Continued)
(e) Property and equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated on the straight-line method over the estimated useful
lives of the assets as follows:
Years
------
Furniture and fixtures ................... 8
Computer equipment and software .......... 3
(f) Intangible assets
Intangible assets consist principally of intangible assets arising from
the agreement with Pearson Television (note 14(b)) which are being amortized on
a straight-line basis over the period of benefit, the thirty-three month life
of the agreement. Other intangible assets consist of costs incurred for
trademarks and license fees. These assets are amortized over five years, which
is the estimated period of benefit, on a straight-line basis.
(g) Impairment of long-lived assets and long-lived assets to be disposed
of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(h) Stock based compensation
The Company accounts for stock based compensation under the
intrinsic-value based method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issues to Employees," and
discloses the effect of the difference in applying the fair value based method
of accounting on a pro-forma basis, as required by SFAS No. 123 "Accounting for
Stock-Based Compensation."
(i) Revenue recognition
Advertising revenues are derived principally from short-term advertising
contracts in which the Company typically guarantees its advertising customers a
minimum number of impressions to be delivered to users of its Web sites or
clicks, over a specified period of time for a fixed fee. Customers are invoiced
monthly in accordance with delivery of advertising services during the month.
Advertising revenues are recognized as the advertisement is displayed or as
users click or otherwise respond to advertisements, provided that no
significant Company obligations remain. To the extent that minimum guaranteed
impressions are not met or clicks, the Company defers recognition of the
corresponding revenues until the guaranteed impressions or clicks are achieved.
Advertising revenues were approximately 79%, 95% and 98% of total revenues for
the years ended December 31, 1997, 1998, and 1999, respectively.
The Company commenced selling merchandise through its Web site in December
1999 and has recognized related revenues of approximately $15,000 for the year
ended December 31, 1999. Such revenues include shipping and handling fees.
Revenue is recognized at the time of shipment from the warehouse or directly
from the supplier. Customers have a right to return product within 21 days
after shipment. The Company provides an allowance for actual sales returns in
the 21 days subsequent to a period end. Through January 28, 2000, the Company
has not experienced any returns.
The Company provides sponsorship advertising on game shows or on a portion
of its Web sites in consideration for a fixed fee. The Company incurs
insignificant costs to customize the advertisements received
F-9
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
Notes to Consolidated Financial Statements -- (Continued)
(2) Significant accounting policies and procedures -- (Continued)
from the sponsors which are expensed as incurred. Sponsorship agreements do not
segregate the fees for development of customized features and displaying the
sponsors advertisments on the Web sites, therefore, the entire fee is deferred
and recognized ratably in the period in which the sponsor's advertising is
displayed.
The Company enters into arrangements with third parties whereby the
Company's games are displayed on the third parties' Web sites. The revenues
generated from advertising in connection with the use of the Company's games
are recognized ratably in the period in which the advertising is displayed on
the third party Web site. Generally, the Company is responsible for selling the
advertising, billing and collections and is obligated to pay the third parties
their fees for displaying the games on their Web sites regardless of whether
the Company collects the advertising revenue. In these situations the Company
records the advertising revenues and the payments to the third parties are
recorded as cost of revenues. When the third party sells the advertising and
pays the Company a portion of the advertising revenues, the Company only
recognizes revenue for its portion of gross revenues.
Revenues include barter revenues from the exchange by the Company of
services or advertising space on the Company's Web sites for reciprocal
advertising or promotional services including prizes. Revenues from these
barter transactions are recorded at the estimated fair value of the services or
advertisements delivered, unless the fair value of the goods or services
received is more objectively determinable, and are recognized when the
advertisements are run on the Company's Web sites or services are provided. The
related expense is recorded when it is incurred and classified as sales and
marketing expenses or cost of revenues in accordance with the terms of the
barter agreement.
Barter revenues represented 0%, 22% and 14% of total revenues for the
years ended December 31, 1997, 1998, and 1999, respectively.
In 1997, one advertising customer accounted for 14% of total revenues and
another accounted for 11%. In 1998, one advertising customer accounted for 21%
of total revenues while another customer accounted for 12%. In 1999, one
advertising customer accounted for 14% of total revenues.
(j) Cost of revenues
Cost of revenues is primarily comprised of prize expenses, Internet
connection charges, royalties, merchandise costs and a portion of computer
equipment and software depreciation.
(k) Product development and advertising
Product development costs and advertising costs are expensed as incurred.
Advertising costs, which are included in sales and marketing expenses, amounted
to $188,000, $1,847,000 and $22,739,000 in 1997, 1998, and 1999 respectively.
Prepaid Pearson advertising costs (notes 7 and 14(b)) are being amortized
commencing April 1, 1999 over the thirty-month contractual period the
advertising services are provided to the Company.
(l) Merchandise Inventory
Inventories which are stated at the lower of cost or market, are comprised
of goods available for the online sale of merchandise through the Company's Web
site and are included in other current assets. See
note 6.
(m) Business segment reporting
The Company has determined that it does not have any separately reportable
business segments. However related disclosures about products and services,
geographic areas and major customers are included in note 17.
F-10
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
Notes to Consolidated Financial Statements -- (Continued)
(2) Significant accounting policies and procedures -- (Continued)
(n) Income taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(o) Net loss per share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings Per Share". Basic net income per share is computed by dividing the
net income available to common stockholders for the period by the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed by dividing the net income for the period by the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares, composed of incremental common
shares issuable upon the exercise of stock options and warrants, are included
in net income per share to the extent such shares are dilutive. Common stock
equivalents were not included in loss per share for any periods presented since
they were anitdilutive. Potentially dilutive common stock equivalents,
consisting of stock options, as of December 31, 1997, 1998 and 1999 amounted to
2,110,920, 897,200, and 5,904,408 respectively.
(p) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Significant
estimates made by the Company include the useful lives and recoverability of
long-lived assets.
(q) Recent accounting pronouncements
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company adopted these statements effective July 1,
1998 and June 30, 1999, respectively. These statements modified or expanded the
Company's stockholders' equity and segment disclosures and had no impact on the
Company's results of operations, financial position or cash flows.
In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement, which is effective for fiscal years beginning after June 15, 2000,
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through earnings. If the derivative is an effective hedge, changes in its fair
value will be offset against the change in the fair value of the hedged item in
either other comprehensive income or earnings. The ineffective portion of a
derivative classified as a hedge will be immediately recognized in earnings.
The Company is required to adopt the new statement effective July 1, 2000, and
has not yet determined the effect SFAS No. 133 will have on its results of
operations and financial position. This statement is not required to be applied
retroactively to financial statements of prior periods.
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement did not have any
effect on the Company's results of operations, financial position or cash
flows.
F-11
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
Notes to Consolidated Financial Statements -- (Continued)
(2) Significant accounting policies and procedures -- (Continued)
In 1998, the Company adopted SFAS No. 128, "Earnings Per Share." The
Company has reported on the income statement basic and diluted loss per share
for all periods presented.
(3) PrizePoint acquisition
On June 7, 1999, the Company completed an acquisition of PrizePoint
Entertainment Corporation ("PrizePoint"), a provider of online single-player
games. Under the terms of the acquisition agreement the Company exchanged
approximately 2.44 million shares of its common stock in exchange for all of
the outstanding shares of common stock of PrizePoint. Fractional shares were
acquired for $19,380 and then retired. All outstanding PrizePoint preferred
shares were converted in accordance with their original terms into PrizePoint
common stock immediately prior to the acquisition. The acquisition has been
accounted for as a pooling of interests and, accordingly, the Company's
consolidated financial statements have been restated to include the accounts
and operations of PrizePoint for all periods prior to the merger.
Separate revenues and net loss amounts for the year ended December 31,
1998 and three months ended March 31, 1999 are summarized below:
December 31, March 31,
1998 1999
---------------- ---------------
(Unaudited)
Revenues
Uproar ..................... $ 1,632,969 $ 963,418
PrizePoint ................. -- 47,750
------------ ------------
1,632,969 1,011,168
------------ ------------
Net loss
Uproar ..................... (4,602,025) (4,399,357)
PrizePoint ................. (1,228,625) (818,575)
------------ ------------
$ (5,830,650) $ (5,217,932)
============ ============
PrizePoint was formed in March 1998 and recognized revenues beginning in
the first quarter of 1999. Adjustments to eliminate the sale of advertising
between Uproar Inc. and PrizePoint reduced combined net revenue by $12,000 for
the three months ended March 31, 1999.
(4) Property and equipment
December 31,
-------------------------------
1998 1999
------------- ---------------
Computer equipment .................... $ 963,053 $ 4,680,785
Purchased software .................... 162,768 667,335
Furniture and fixtures ................ 247,184 568,493
Construction in progress .............. -- 162,461
---------- ------------
1,373,005 6,079,074
Less accumulated depreciation ......... (261,039) (1,047,645)
---------- ------------
$1,111,966 $ 5,031,429
========== ============
Depreciation expense for 1997, 1998, and 1999 was $56,556, $173,878 and
$882,385 respectively.
F-12
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
Notes to Consolidated Financial Statements -- (Continued)
(5) Intangible assets, net
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1999
----------- --------------
<S> <C> <C>
Intangible benefits of Pearson Agreement ......... $ -- $ 16,673,875
Patents .......................................... 3,510 3,510
Trademarks ....................................... 6,345 6,283
Licenses ......................................... 45,622 44,823
Other ............................................ 1,183 1,344
-------- ------------
56,660 16,729,835
Less accumulated amortization .................... (9,303) (6,080,448)
-------- ------------
$ 47,357 $ 10,649,387
======== ============
</TABLE>
The intangible benefits of the Pearson agreement include a license to
create and use the English language Internet versions of certain Pearson game
shows and benefits from association with Pearson and their brands during the
thirty-three month term of the agreement.
(6) Other current assets
Other current assets consist of the following:
December 31,
--------------------------
1998 1999
----------- ------------
Prepaid insurance ....................... $ 19,864 $ 178,446
Prepaid license fees .................... -- 150,000
Prepaid data warehouse services ......... -- 22,032
Prepaid rent ............................ -- 85,281
Merchandise inventory ................... -- 172,508
Other ................................... 4,825 136,345
-------- ---------
$ 24,689 $ 744,612
======== =========
(7) Prepaid advertising
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1999
------------ --------------
<S> <C> <C>
Prepaid advertising ............................... $ 201,327 $ 66,000
Prepaid Pearson advertising -- note 14(b) ......... -- 3,795,996
--------- -----------
$ 201,327 $ 3,861,996
========= ===========
Long term portion of prepaid Pearson
advertising -- note 14(b) ........................ $ -- $ 2,847,005
========= ===========
</TABLE>
F-13
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
Notes to Consolidated Financial Statements -- (Continued)
(8) Other long term assets
Other long term assets consist of the following:
December 31,
---------------------------
1998 1999
------------ ------------
Security deposits ......... $ 125,035 $ 168,657
Other ..................... 13,650 4,769
--------- ---------
$ 138,685 $ 173,426
========= =========
(9) Accrued expenses
Accrued expenses consist of the following:
December 31,
----------------------------
1998 1999
----------- --------------
Advertising ..................... $ 33,825 $ 2,786,020
Severance ....................... -- 94,225
Prizes and awards ............... 59,638 174,008
Commission and salaries ......... 95,675 78,943
Deferred revenue ................ 30,000 154,906
Bonus ........................... 91,757 16,500
Legal and other fees ............ 123,102 256,141
Other accruals .................. 37,909 360,828
--------- -----------
$ 471,906 $ 3,921,570
========= ===========
Accrued advertising consists of uninvoiced online banner advertising
purchased by and delivered to the Company.
(10) Valuation and qualifying accounts
<TABLE>
<CAPTION>
Balance at Provisions Balance
Beginning for Returns End of
of Period and Doubtful Accounts Write-offs Period
------------ ----------------------- ------------ ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997 ......... -- -- -- --
Year ended December 31, 1998 ......... -- -- -- --
Year ended December 31, 1999 ......... -- 270,913 -- 270,913
</TABLE>
(11) Stockholders' equity
During 1997, 4,000,000 shares of common stock were sold in a private
placement. Net proceeds to the Company were $4,715,687.
In accordance with their original terms, during 1997 loan notes totaling
NLG 832,000 ($435,558) were converted to common stock at a rate of NLG 18.756
for every forty shares, which resulted in the issuance of 1,774,600 shares.
E-Pub Services Limited was the predecessor company to Uproar Limited.
During 1997, 11,174,600 common shares in E-Pub Services Limited, representing
100% of the equity ownership, were exchanged at the ratio of 1:1 for the common
shares in Uproar Limited, a company under common control, at that time a
non-operating shell company.
F-14
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
Notes to Consolidated Financial Statements -- (Continued)
(11) Stockholders' equity -- (Continued)
During 1998, 4,758,360 shares of common stock were sold in a private
placement. Net proceeds to the Company were $9,666,464.
In January 1999, 1,000,000 shares of common stock were sold in a private
placement. Net proceeds to the Company totaled $9,344,654.
In January 1999, 2,000,000 shares of common stock were issued to Pearson
Television Limited in exchange for intangible benefits, advertising services
and cash of $124,599. The fair value of the common stock issued was
$24,780,474. See Note 14(b).
In January 1999, 43,360 shares of common stock were sold in a private
placement for $250,000.
On April 1, 1999 the par value of the Company's common stock was changed
from 1 Irish Punt to $0.05. Subsequently the Company effected a 20 for 1 stock
split. The net effect of these transactions was a $288,858 transfer from
additional paid-in capital to common stock. All prior period stock transactions
have been restated to reflect the impact of the stock split.
In June 1999, 43,360 warrants, which had been issued by PrizePoint during
1998, were exercised at an aggregate exercise price of $250,000.
In July 1999 the Company completed the sale of 2,832,000 shares on the
EASDAQ stock exchange. Net proceeds to the Company totaled $30,347,116.
(12) Stock compensation plan
As of December 31, 1998 the Company had one stock-based compensation plan.
The plan authorizes the granting of options to acquire the Company's common
stock to selected key employees, who also may be officers, and to non-employee
directors. Options granted prior to July 1, 1997 were granted with an exercise
price above the common stock's market value at the date of grant and became
fully exercisable on December 31, 1997. The original expiration date of these
options was also December 31, 1997. On December 31, 1997, the exercise price of
these options was increased by 15% and the expiration date was extended to June
30, 1998. Compensation expense for the excess of the market value over the
exercise price, aggregating $1,244,888 was recorded at that time. Generally 50%
of the options granted under this plan vest and become fully exercisable two
years from the date of grant and the remaining 50% vest and become fully
exercisable three years from the date of grant. During 1998 and 1999 the
Company granted options under this plan with exercise prices less than the fair
value of the common stock which resulted in stock compensation expense of
$1,406,623. This amount is recorded as compensation expense over the vesting
periods, and amounted to $3,104 and $735,489 for the years ended December 31,
1998 and 1999, respectively.
During 1999, the Company established the Uproar Ltd. 1999 Share
Option/Share Issuance Plan (the "1999 Plan"). The 1999 Plan authorizes the
Company to grant options to its employees, non-employee directors and
consultants to purchase up to 5,400,000 shares of the Company's common stock,
as well as to issue shares directly to such persons without any intervening
option grants. The exercise period for options granted under the Plan can be no
more than ten years from the date of grant. The Company commenced granting
options under the 1999 Plan in September, 1999 and the exercise price of each
such option was the market value of a share of the Company's common stock on
the date of grant.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock compensation plans. The compensation cost charged
against income was $1,244,888, $3,104, and $735,489 for the years ended
December 31, 1997, 1998 and 1999 respectively. Had compensation cost been
determined in accordance with the provisions of SFAS No. 123, the Company's net
loss and net loss per share would have been the pro forma amounts indicated
below. The fair values of the options for the pro-forma calculations are
computed using the Black-Scholes method.
F-15
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
Notes to Consolidated Financial Statements -- (Continued)
(12) Stock compensation plan -- (Continued)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1997 1998 1999
---------------- ---------------- -----------------
<S> <C> <C> <C>
Net Loss
As reported ................................ $(3,828,745) $(5,830,650) $(38,724,641)
Proforma ................................... (3,890,803) (6,678,354) 41,454,415
Basic loss per share
As reported ................................ $ (0.42) (0.40) $ (1.77)
Proforma ................................... (0.43) (0.45) (1.89)
Weighted average shares outstanding ......... 9,034,928 14,697,112 21,909,456
Option pricing model assumptions:
Expected dividend yield .................... 0% 0% 0%
Average option life ........................ 2.5 years 2 years 2.5 years
Volatility ................................. 70% 70% 60%
Risk free interest rate .................... 3% 3% 5%
</TABLE>
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Price
--------------- ---------------
<S> <C> <C>
Outstanding, December 31, 1996 .................... 1,800,000 $ .74
Granted ........................................... 600,000 2.43
Exercised ......................................... (289,080) .64
---------
Outstanding, December 31, 1997 .................... 2,110,920 1.23
Granted ........................................... 329,200 2.32
Exercised ......................................... (1,524,240) .77
Cancelled ......................................... (18,680) 2.44
----------
Outstanding, December 31, 1998 .................... 897,200 2.39
Granted ........................................... 5,337,716 9.64
Options assumed in PrizePoint acquisition ......... 124,080 .07
Exercised ......................................... (307,708) 8.41
Cancelled ......................................... (146,880) 4.76
----------
Outstanding, December 31, 1999 .................... 5,904,408 $ 8.52
==========
</TABLE>
<PAGE>
At December 31, 1999 the weighted-average exercise price and average remaining
contractual life of outstanding options was $8.52 and 9.42 years remaining,
respectively. 614,690 shares are available for grants under the 1999 Plan and
2,222,912 shares are exercisable at December 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------ -------------------------------
Weighted-
Average Weighted-
Number Exercise Remaining Number Average
Outstanding Prices Life in Years Exercisable Exercise Price
- ------------- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
34,000 $ .01 7.52 14,228 $ .01
78,986 .10 9.27 35,326 .10
911,720 2.21 8.32 695,706 2.21
3,580,458 9.43 9.71 1,273,488 9.43
1,200,000 10.82 9.87 204,164 10.82
33,702 11.15 9.78 -- --
42,882 16.09 9.81 -- --
22,660 17.27 9.96 -- --
--------- ---------
5,904,408 $ .01-17.27 9.51 2,222,912 $ 7.09
========= =========
</TABLE>
F-16
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
Notes to Consolidated Financial Statements -- (Continued)
(13) Income taxes
The Company's income tax expense is comprised of the following:
Year Ended December 31,
-------------------------------
1997 1998 1999
-------- -------- ---------
Current tax expense
United States ................... $ -- $ -- $ --
Foreign ......................... 5,582 9,020 28,000
------ ------ -------
Total income tax expense ......... $5,582 $9,020 $28,000
------ ------ -------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1997 1998 1999
---------------- ---------------- -----------------
<S> <C> <C> <C>
Sources of loss before income tax
United States ................... $ (1,060,562) $ (4,455,439) $ (23,081,307)
Foreign ......................... (2,762,601) (1,366,191) (15,615,334)
------------ ------------ -------------
Loss before income taxes ......... $ (3,823,163) $ (5,821,630) $ (38,696,641)
============ ============ =============
</TABLE>
The components of the net deferred tax asset as of December 31, 1998 and
1999 consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1999
--------------- ----------------
<S> <C> <C>
Deferred tax assets:
United States Federal net operating loss carryforwards ......... 2,146,000 9,723,000
Accounts receivable allowances ................................. -- 108,000
Accrued liabilities ............................................ 61,000 313,000
United Kingdom net operating loss carryforwards ................ 137,000 323,000
--------- ---------
2,344,000 10,467,000
Less valuation allowance ....................................... (2,344,000) (10,467,000)
---------- -----------
Deferred tax assets, net .......................................... $ -- $ --
============ =============
</TABLE>
<PAGE>
The net operating loss carryforwards are comprised of the losses incurred
in the UK and US subsidiaries. The Bermudan company enjoys tax-free status and
the only other subsidiary which is in Hungary, has been profitable.
Realization of deferred tax assets is dependent upon future earnings, if
any. The Company has recorded a full valuation allowance against its deferred
tax assets since management believes that it is not more likely than not that
these assets will be realized. No income tax benefit has been recorded for all
periods presented because of the valuation allowance.
At December 31, 1999, the US subsidiary has a federal net operating loss
carryforward for income tax purposes of approximately $28,597,000. There can be
no assurance that the Company will realize the benefit of the net operating
loss carryforwards. The federal net operating loss carryforwards are available
to offset future taxable income and expire in various amounts through 2019.
Due to the "change in ownership" provisions in Section 382 of the Internal
Revenue Code, the availability of the Company's US net operating loss
carryforwards will be subject to an annual limitation against taxable income in
future periods, which could substantially limit the eventual utilization of
these carryforwards.
(14) Significant agreements
(a) Cable and Wireless
On December 23, 1998, the Company entered into an agreement with Cable &
Wireless Communications ("CWC"), the largest cable television franchise owner
in the UK. The agreement provides for CWC to display
F-17
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
Notes to Consolidated Financial Statements -- (Continued)
(14) Significant agreements -- (Continued)
up to 14 Uproar game shows on an interactive service offered via its digital
cable television which was launched by CWC on October 15, 1999. The agreement
provides for the Company to have an anchor position within the games and
entertainment channel on the CWC service and to participate in promotional
opportunities on the service. The Company pays CWC an annual maintenance fee
which is included in cost of revenues for which CWC guarantees placement within
the service. The agreement provides that CWC is entitled to additional fees
equal to a percentage of net advertising and sponsorship revenue generated by
the Company and arising directly from games displayed upon the interactive
service. The agreement is for an initial three-year period from launch of the
Uproar games on the CWC interactive service, and then automatically continuing
with a provision for a six-month notice of cancellation. Two months of the
annual fee has been paid and recognized as an expense as of December 31, 1999.
(b) Pearson Television
On January 13, 1999, the Company entered into an agreement with Pearson
Television Limited ("Pearson"), whereby Pearson acquired 2,000,000 common
shares of the Company in exchange for intangible assets, advertising services
to be provided over a thirty-month period commencing April 1, 1999 and cash of
$124,599.
The market value of the common shares acquired by Pearson was $24,780,474
of which $24,655,875, net of the $124,599 cash payment was attributable to
intangible assets and prepaid advertising services. In accounting for the
transaction the Company capitalized intangible assets of $16,673,875 and
prepaid advertising services of $7,982,000, their estimated fair value. For the
year ended December 31, 1999, amortization of intangible assets was $6,063,227
and amortization of prepaid advertising services amounting to $1,338,999 was
recorded as advertising expense.
Should Pearson meet certain television distribution targets for its game
shows in the United States, they will be granted 400,000 additional common
shares between September 1999 and August 2000 and a further 400,000 shares
between September 2000 and August 2001. See note 15.
Included in the intangible assets, Uproar acquired a license to create and
use the English language Internet versions of certain Pearson game shows during
the thirty-three month term of the agreement. The Company pays Pearson a
royalty for the rights and license to use the game show formats on its Web
sites, equal to a percentage of gross advertising and other revenue generated
from the use of the licensed Internet games. Additional royalties are due to
Pearson for a percentage of net advertising and other revenues generated by the
licensed game shows, as defined in the agreement, subject to a minimum
guaranteed amount of $400,000 for the term of the agreement. The minimum
guaranteed amount of $400,000 is due in two equal installments on July 15, 1999
and July 15, 2000 and represents the minimum due for each of the two television
broadcast years measured from September 1999 to September 2001. The initial
payment was recorded as a prepayment with $50,000 expensed in the year ended
December 31, 1999.
(c) Telefonica
On September 29, 1999, the Company entered an agreement with Telefonica
Interactiva De Contenidos ("Telefonica"), a Spanish corporation, to establish
and develop Uproar products and the Uproar media property in the Spanish and
Portuguese languages. The agreement requires Uproar to license distribution
rights to Telefonica, and provide services and support to Telefonica for the
operations of the Web sites in exchange for which Telefonica has agreed to pay
Uproar exclusivity fees. Such fees are recognized as revenue ratably over the
related contractual period. Telefonica will display the Uproar Web sites online
for the Spanish and Portuguese language markets from Telefonica's Terra.com Web
sites. Telefonica sells advertising displayed with Uproar games on their Web
sites and remits a percentage of the revenues to the Company, which is
recognized as revenue by the Company when the advertisements are displayed. The
agreement term is for an initial three-year period from the date of the
agreement, after which it can be extended for an additional twelve-month
period.
F-18
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
Notes to Consolidated Financial Statements -- (Continued)
(15) Commitments and contingencies
(a) Pearson Television
Under the terms of the Pearson agreement (see note 14(b), should Pearson
meet certain television distribution targets for its game shows in the United
States, they will be granted 400,000 additional common shares between September
31, 1999 and August 2000 and a further 400,000 shares between September 2000
and August 2001. Since, as of December 31, 1999 it is not considered probable
that the distribution target under the Pearson Television agreement will be
met, no accounting has been provided for this transaction in these consolidated
financial statements.
(b) Legal claim
In 1997, E-Pub Inc., a wholly-owned subsidiary, was named in an action
entitled "Burgos v. Ellwell Associates, LLC and E-Pub Inc", relating to an
alleged personal injury. The plaintiff seeks damages of $6 million against
Ellwell Associates, the landlord of the building in which E-Pub Inc's office is
located, and E-Pub Inc.
Through December 31, 1999, certain limited written discovery was exchanged
by the parties. Although the plaintiff has not yet specified the precise extent
and severity of his alleged injuries, the Company has recently received
documentary information suggesting that the plaintiff's injuries no longer
prevent him from gainful employment. Uproar Inc. has asserted a cross claim
against the landlord, seeking to hold the landlord responsible for any injuries
sustained by the plaintiff.
Uproar Inc. has denied liability and will vigorously defend the action in
the future. No provision to date has been made in the consolidated financial
statements as Uproar Inc., based on legal advice, is unable to estimate the
extent of any potential liability with reasonable accuracy at this time.
(c) Other commitment
In connection with two office leases the Company has letters of credit
outstanding for approximately $604,275. The cash balances supporting the
letters of credit are reported as restricted cash.
(16) Leases
The Company has several non-cancelable operating leases, primarily for
office space. These leases generally contain renewal options for periods
ranging from three to five years and require the Company to pay all executory
costs such as maintenance and insurance. Rental expense for operating leases
was $105,645, $159,121, and $652,642 for the years ended December 31, 1997,
1998, and 1999 respectively. The interest rate on the capital leases was
approximately 1%.
Future minimum lease payments under non-cancelable leases (with initial or
remaining lease terms in excess of one year) as of December 31, 1999 are:
F-19
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
Notes to Consolidated Financial Statements -- (Continued)
(16) Leases -- (Continued)
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
----------- -------------
<S> <C> <C>
Year ended December 31,
2000 ....................................... 107,989 822,222
2001 ....................................... 54,228 800,439
2002 ....................................... -- 618,021
2003 ....................................... -- 612,301
2004 ....................................... -- 548,541
Thereafter ................................. -- 90,289
------- -------
Total minimum lease payments ................ $162,212 $3,491,813
==========
Less amounts representing interest ......... (7,754)
--------
Current portion of capital leases ........... 102,777
--------
Long term capital lease obligation .......... $ 51,681
========
</TABLE>
(17) Segment reporting
In presenting segment information the Company has applied the provisions
of SFAS No. 131. The Company has determined that it does not have any
separately reportable business segments.
The Company attributes revenues to different geographic areas on the basis
of the location of the customer. Revenues by geographic area are as follows:
Revenues
-------------------------------------------
Year ended December 31,
-------------------------------------------
1997 1998 1999
----------- ------------- -------------
United States ......... $332,555 $1,545,663 $ 9,966,057
England ............... 8,727 83,120 246,336
Hungary ............... 6,612 -- --
Germany ............... -- -- 54,134
Other ................. 815 4,186 125,000
-------- ---------- -----------
Total ................. $348,709 $1,632,969 $10,391,527
======== ========== ===========
<PAGE>
Included in revenues in the United States for the year ended December 31,
1999 is $15,145 relating to the sale of merchandise through the Company Web
site. There were no such revenues in prior periods.
Investment in long-lived assets by geographic area are as follows:
Property and Equipment and
Intangible Assets
-----------------------------
December 31,
-----------------------------
1998 1999
------------- --------------
United States ......... $ 962,880 $15,394,683
England ............... 35,399 89,496
Ireland ............... 20,532 --
Hungary ............... 108,040 184,618
Germany ............... -- 12,019
Bermuda ............... 32,472 --
---------- -----------
Total ................. $1,159,323 $15,680,816
========== ===========
F-20
<PAGE>
Uproar Inc. and Subsidiaries
(Formerly Uproar Ltd.)
Notes to Consolidated Financial Statements -- (Continued)
(18) Pension and other post-retirement plans
Effective January 1, 1998, the Company established a 401(k) salary
deferral plan (the "401(k) Plan") on behalf of its U.S. employees. The 401(k)
Plan is a qualified defined contribution plan and allows employees to defer up
to 15% of their compensation, subject to certain limitations. Under the 401(k)
Plan, the Company has the discretion to match contributions made by the
employee. The Company made no matching contributions in 1998 or 1999.
(19) Subsequent events
On December 16, 1999, Uproar Inc., was incorporated in the state of
Delaware. On January 26, 2000 Uproar Ltd. was redomesticated from Bermuda to
the state of Delaware and became a Delaware corporation. On January 27, 2000,
Uproar Inc. was merged into Uproar Ltd. whereby each ordinary share of the
Bermuda Company became one share of common stock of the Delaware corporation,
which was accounted for as a transaction between companies under common
control. Simultaneous with the merger, Uproar Inc. increased its number of
authorized common stock to 112,000,000, with par value $.01 per share.
On February 2, 2000, the Company sold 1,265,372 shares of common stock for
net proceeds of approximately $25 million to Trans Cosmos USA Inc. (TCUI). The
Common Stock Purchase agreement provides that the Company and TCUI intend to
form a Japanese joint venture to produce a Japanese-localized version of
Uproar's Web site, uproar.com. The joint venture would be owned equally and
Uproar and TCUI will contribute to the joint venture $500,000 and $4,500,000,
repectively. Uproar would receive an annual royalty fee from the joint venture
for licensing its intellectual property.
On February 4, 2000 the Company declared a 2-for-1 common stock split for
shareholders of record on February 18, 2000, effected in the form of a stock
dividend. All prior period stock transactions and amounts have been restated to
reflect the impact of the stock split.
F-21
<PAGE>
[The Uproar.com logo running across the top of the page; colored circles of
varying sizes: within the circles are the following logos: "CABLE & WIRELESS";
"PEARSON TELEVISION"; "sky"; "excite"; "TOWER RECORDS.com"; and "terra"; and
the following text: "Partners in . . . Branding, Content, Syndication and
Distribution appears under the Uproar logo.]
<PAGE>
================================================================================
5,000,000 Shares
Uproar Inc.
Common Stock
[LOGO]
--------
P R O S P E C T U S
, 2000
--------
Salomon Smith Barney
Bear, Stearns & Co. Inc.
Banc of America Securities LLC
Wit SoundView
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the estimated costs and expenses, other
than the underwriting discount, payable by the registrant in connection with
the sale of the common stock being registered.
Amount to
be Paid
-------------
SEC registration fee ................................... $ 31,134
NASD filing fee ........................................ 10,500
Nasdaq National Market listing fee ..................... 63,725
Legal fees and expenses ................................ 500,000
Accounting fees and expenses ........................... 300,000
Printing and related expenses .......................... 170,000
Blue sky fees and expenses ............................. 5,000
Transfer agent and registrar fees and expenses ......... 15,000
Miscellaneous .......................................... 404,641
----------
Total ............................................. $1,500,000
==========
Item 14. Indemnification of Directors and Officers
The registrant's Certificate of Incorporation in effect as of the date
hereof, and the registrant's Certificate of Incorporation to be in effect upon
the closing of this offering (collectively, the "Certificate") provides that,
except to the extent prohibited by the Delaware General Corporation Law, as
amended, or DGCL, the registrant's directors shall not be personally liable to
the registrant or its stockholders for monetary damages for any breach of
fiduciary duty as directors of the registrant. Under the DGCL, the directors
have a fiduciary duty to the registrant which is not eliminated by this
provision of the Certificate and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available. In addition, each director will continue to be subject to liability
under the DGCL for breach of the director's duty of loyalty to the registrant,
for acts or omissions which are found by a court of competent jurisdiction to
be 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 prohibited by DGCL. This provision also does not affect
the directors' responsibilities under any other laws, such as the Federal
securities laws or state or Federal environmental laws. The registrant has
obtained liability insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director:
o for any breach of the director's duty of loyalty to the corporation or
its stockholders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o arising under Section 174 of the DGCL; or
o for any transaction from which the director derived an improper personal
benefit.
The DGCL provides further that the indemnification permitted thereunder shall
not be deemed exclusive of any other rights to which the directors and officers
may be entitled under the corporation's bylaws, any agreement, a vote of
stockholders or otherwise. The Certificate eliminates the personal liability of
directors to the fullest extent permitted by Section 102(b)(7) of the DGCL and
provides that the registrant shall fully indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that such person is or was a director
or officer of the registrant, or is or was serving at the request of the
II-1
<PAGE>
registrant as a director or officer of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding.
Item 15. Recent Sales of Unregistered Securities
The Registrant has sold and issued the following securities since February
7, 1995 (inception):
1. From February 7, 1995 to December 31, 1999, the Registrant issued and
sold 20,384,028 shares of common stock at prices ranging from $0.04 to
$11.72 per share.
2. In 1997, the Registrant issued 1,774,600 shares of common stock upon
the conversion of convertible notes.
3. In 1997, the Registrant issued 289,080 shares of common stock upon the
exercise of options at a weighted average exercise price of $0.64.
4. In 1998, the Registrant issued 1,524,240 shares of common stock upon
the exercise of options at a weighted average exercise price of $0.77.
5. Since December 31, 1998, the Registrant issued 307,708 shares of common
stock upon the exercise of options at a weighted average exercise price of
$8.41 per share.
6. In February 2000, the Registrant completed the sale of 1,265,372 shares
of its common stock at approximately $19.76 per share to an accredited
investor for the aggregate purchase price of approximately $25,000,000.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act. The recipients of securities in each of these transactions
represented their intention to acquire the securities for investment only and
not with view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and instruments
issued in such transactions. All recipients had adequate access, through their
relationship with the Registrant, to information about the Registrant.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
Number Description
- ---------- --------------------------------------------------------------------------------------------------------------
<S> <C>
1.1* Form of underwriting agreement.
3.1 Certificate of incorporation for Uproar Inc.
3.2 Bylaws for Uproar Inc.
3.3+ Certificate of incorporation for Uproar Ltd.
3.4+ Memorandum of association for Uproar Ltd.
3.5+ Bye-laws of Uproar Ltd.
3.6 Certificate of Domestication of Uproar Ltd.
3.7 Certificate of Ownership and Merger of Uproar Inc. with and into Uproar (DE), Inc.
4.1* Specimen common stock certificate.
4.2 See Exhibits 3.1 and 3.2 for provisions of the certificate of incorporation and bylaws defining the rights of
holders of common stock.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
5.2* Opinion of M.L.H. Quin & Co., Bermuda counsel to Registrant.
10.1* 1999 Stock Option Plan.
10.2+ Employment agreement, dated September 6, 1999, by and between Kenneth D. Cron and the Registrant.
10.3+ Lease agreement, as amended, dated April 19, 1999, by and between Nassau Bay Associates, L.P., and the
Registrant.
10.4+ Lease agreement, dated November 9, 1999, by and between Golden Van Associates, LLC, and the
Registrant.
10.5+ Lease agreement, dated September 7, 1998, by and between ANU Kft. and the Registrant.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.6 Agreement and plan of reorganization, dated April 29, 1999, by and between PrizePoint Entertainment
Corporation and the Registrant.
10.7*+ Internet game development agreement, dated January 12, 1999, by and between Pearson Television, Inc.
and the Registrant.
10.8*+ License and services agreement, dated September 29, 1999, by and between Telefonica Interactiva de
Contenidos and the Registrant.
10.9 Employment agreement, dated as of September 6, 1999, by and between Christopher R. Hassett and the
Registrant.
10.10* Stock Incentive Plan.
10.11+ Employment agreement, dated December 20, 1999, by and between Michael K. Simon and the Registrant.
10.12 Employment agreement, dated as of October 25, 1999, by and between Robert D. Marafioti and the
Registrant.
10.13 Employment agreement, dated as of October 25, 1999, by and between Jeffrey L. Strief and the
Registrant.
10.14 Common Stock Purchase Agreement dated February 2, 2000, by and between the Registrant and Trans
Cosmos USA, Inc.
10.15 Registration Rights Agreement dated February 2, 2000, by and between the Registrant and Trans Cosmos
USA, Inc.
16.1 Letter from PricewaterhouseCoopers LLP:
21.1+ List of Subsidiaries.
23.1* Consent of Brobeck, Phleger & Harrison LLP.
23.2 Consent of KPMG LLP.
23.3 Report of Arthur Andersen LLP.
23.4 Consent of Arthur Andersen LLP.
23.5 Consent of KPMG Hungaria Kft.
24.1 Powers of attorney (see Signature Page).
27.1 Financial Data Schedule.
</TABLE>
- ------------
* To be filed by amendment.
+ Confidential treatment request to be filed with the Securities and Exchange
Commission.
+ Previously filed.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act of 1933, shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Amendment No. 1 to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on this 7th day of
February 2000.
UPROAR INC.
By: /s/ Kenneth D. Cron
------------------------------------
Kenneth D. Cron
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the registration statement has been signed by the
following persons in the capacities indicated on February 7, 2000:
<TABLE>
<CAPTION>
Signature Title(s)
- --------------------------------------- ------------------------------------------------
<S> <C>
/s/ Kenneth D. Cron Chairman of the Board of Directors and Chief
- ------------------------------------- Executive Officer (principal executive officer)
Kenneth D. Cron
* President, Chief Operating Officer and Director
- -------------------------------------
Christopher R. Hassett
* Chief Financial Officer and Director (principal
- ------------------------------------- accounting and financial officer)
Michael K. Simon
* Director
- -------------------------------------
Thompson B. Barnhardt
* Director
- -------------------------------------
Catherine V. Mackay
</TABLE>
<PAGE>
POWER OF ATTORNEY
*By: /s/ Kenneth D. Cron
- -------------------------------------
Kenneth D. Cron
Attorney-in-fact
I, the undersigned director of Uproar Inc. (the "Company"), hereby
severally constitute and appoint Kenneth D. Cron, Chairman of the Board of
Directors and Chief Executive Officer, and Christopher R. Hassett, Director,
President and Chief Operating Officer, and each of them individually, with full
powers of substitution and resubstitution, my true and lawful attorneys, with
full powers to them and each of them to sign for me, in my name and in the
capacities indicated below, the Amendment No. 1 to the registration statement on
Form S-1 filed with the Securities and Exchange Commission, and any and all
subsequent amendments to said registration statement (including post-effective
amendments), and any registration statement filed pursuant to Rule 462(b) under
the Securities Act of 1933, as amended, in connection with the registration
under the Securities Act of 1933, as amended, of equity securities of the
Company, and to file or cause to be filed the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as each
of them might or could do in person, and hereby ratifying and confirming all
that said attorneys, and each of them, or their substitute or substitutes, shall
do or cause to be done by virtue of this Power of Attorney.
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 indicated on February 7, 2000:
Signature Title(s)
----------- --------
/s/ Esther Dyson Director
- -------------------------------------- ---------
Esther Dyson
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Description
- ------------ -----------------------------------------------------------------------------------------------
<S> <C>
1.1* Form of underwriting agreement.
3.1 Certificate of incorporation for Uproar Inc.
3.2 Bylaws for Uproar Inc.
3.3+ Certificate of incorporation for Uproar Ltd.
3.4+ Memorandum of association for Uproar Ltd.
3.5+ Bye-laws of Uproar Ltd.
3.6 Certificate of Domestication of Uproar Ltd.
3.7 Certificate of Ownership and Merger of Upoar Inc. with and into Uproar (DE) Inc.
4.1* Specimen common stock certificate.
4.2 See Exhibits 3.1 and 3.2 for provisions of the certificate of
incorporation and bylaws defining the rights of holders of common stock.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
5.2* Opinion of M.L.H. Quin & Co., Bermuda counsel to Registrant.
10.1* 1999 Stock Option Plan.
10.2+ Employment agreement, dated September 6, 1999, by and between
Kenneth D. Cron and the Registrant.
10.3+ Lease agreement, as amended, dated April 19, 1999, by and between Nassau
Bay Associates, L.P., and the Registrant.
10.4+ Lease agreement, dated November 9, 1999, by and between Golden Van Associates,
LLC, and the Registrant.
10.5+ Lease agreement, dated September 7, 1998, by and between ANU Kft. and the Registrant.
10.6 Agreement and plan of reorganization, dated April 29, 1999, by and between
PrizePoint Entertainment Corporation and the Registrant.
10.7*+ Internet game development agreement, dated January 12, 1999, by and between Pearson
Television, Inc. and the Registrant.
10.8*+ License and services agreement, dated September 29, 1999, by and between Telefonica
Interactiva de Contenidos and the Registrant.
10.9 Employment agreement dated as of September 6, 1999, by and between Christopher R. Hassett and
the Registrant.
10.10* Stock Incentive Plan.
10.11+ Employment agreement, dated December 20, 1999, by and between Michael K. Simon and the
Registrant.
10.12 Employment agreement, dated as of October 25, 1999, by and between Robert D. Marafioti and the
Registrant.
10.13 Employment agreement, dated as of October 25, 1999, by and between Jeffrey L. Strief and the
Registrant.
10.14 Common Stock Purchase Agreement dated February 2, 2000, by and between the Registrant and
Trans Cosmos USA, Inc.
10.15 Registration Rights Agreement dated February 2, 2000, by and between the Registrant and Trans
Cosmos USA, Inc.
16.1 Letter from PricewaterhouseCoopers LLP.
21.1+ List of Subsidiaries.
23.1* Consent of Brobeck, Phleger & Harrison LLP.
23.2 Consent of KPMG LLP.
23.3 Report of Arthur Andersen LLP.
23.4 Consent of Arthur Andersen LLP.
23.5 Consent of KPMG Hungaria Kft.
24.1 Powers of attorney (see Signature Page).
27.1 Financial Data Schedule.
</TABLE>
- ------------
* To be filed by amendment.
+ Confidential treatment request to be filed with Securities and Exchange
Commission.
+ Previously filed.
<PAGE>
CERTIFICATE OF INCORPORATION
OF
UPROAR (DE), INC.
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified, and
referred to as the "General Corporation Law of the State of Delaware"), hereby
certifies that:
First: The name of the corporation (hereinafter called the
"Corporation") is Uproar (DE), Inc.
Second: The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
Third: The purpose of the Corporation is to conduct any lawful
business, to promote any lawful purpose, and to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
Fourth:
A. Classes of Stock. The total number of shares of stock which the
Corporation shall have authority to issue is one hundred and sixty million
(160,000,000), consisting of forty-eight million (48,000,000) shares of
Preferred Stock, par value $.01 per share (the "Preferred Stock"), and one
hundred and twelve million (112,000,000) shares of Common Stock, par value $.01
per share (the "Common Stock").
B. Preferred Stock. The Preferred Stock may be issued from time to time
in one or more series. The Board of Directors is hereby authorized to provide
for the issuance of shares of Preferred Stock in one or more series and, by
filing a certificate pursuant to the applicable law of the State of Delaware
(the "Preferred Stock Designation"), to establish from time to time the number
of shares to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations and restrictions thereof. The authority of the Board
of Directors with respect to each series shall include, but not be limited to,
determination of the following:
(a) The designation of the series, which may be by
distinguishing number, letter or title.
<PAGE>
(b) The number of shares of the series, which number the
Board of Directors may thereafter (except where otherwise provided in the
Preferred Stock Designation) increase or decrease (but not below the number of
shares thereof then outstanding).
(c) The amounts payable on, and the preferences, if any, of
shares of the series in respect of dividends, and whether such dividends, if
any, shall be cumulative or noncumulative.
(d) Dates at which dividends, if any, shall be payable.
(e) The redemption rights and price or prices, if any, for
shares of the series.
(f) The terms and amount of any sinking funds provided for
the purchase or redemption of shares of the series.
(g) The amounts payable on, and the preferences, if any, of
shares of the series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation.
(h) Whether the shares of the series shall be convertible
into or exchangeable for shares of any other class or series, or any other
security, of the Corporation or any other corporation, and, if so, the
specification of such other class or series or such other security, the
conversion or exchange price or prices or rate or rates, any adjustments
thereof, the date or dates at which such shares shall be convertible or
exchangeable and all other terms and conditions upon which such conversion or
change may be made.
(i) Restrictions on the issuance of shares of the same series
or of any other class or series.
(j) The voting rights, if any, of the holders of shares of
the series.
C. Common Stock; Voting. The Common Stock shall be subject to the
express terms of the Preferred Stock and any series thereof. Except as may
otherwise be provided in this Certificate of Incorporation, in a Preferred Stock
Designation or by applicable law, the holders of shares of Common Stock shall be
entitled to one vote for each such share upon all questions presented to the
stockholders, the Common Stock shall have the exclusive right to vote for the
election of directors and for all other purposes, and holders of Preferred Stock
shall not be entitled to vote at or receive notice of any meeting of
stockholders.
The number of shares of authorized Common Stock may be increased or
decreased (but not below the number then outstanding) by the affirmative vote of
the holders of a majority in voting power of the outstanding shares of capital
stock of the Corporation entitled to vote thereon, voting together as a single
class notwithstanding the provisions of Section 242(b)(2) of the General
Corporation Law of the State of Delaware.
The Corporation shall be entitled to treat the person in whose name any
share of its stock is registered as the owner thereof for all purposes and shall
not be bound to recognize any equitable or other claim to, or interest in, such
share on the part of any other person whether or not the Corporation shall have
notice thereof, except as expressly provided by applicable law.
<PAGE>
Fifth: The name and the mailing address of the incorporator are as
follows:
NAME MAILING ADDRESS
---- ---------------
John J. Sivolella, Esq. Brobeck, Phleger & Harrison LLP
1633 Broadway, 47th Floor
New York, NY 10019
Sixth: The Corporation is to have perpetual existence.
Seventh: The number of directors of the Corporation shall be such
number, not less than five (5) nor more than fifteen (15) (exclusive of
directors, if any, to be elected by holders of preferred stock of the
Corporation, voting separately as a class), as shall be set forth from time to
time in the Bylaws, provided that no action shall be taken to decrease or
increase the number of directors unless at least a majority of the outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of directors (considered for this purpose as one class) cast at a
meeting of the stockholders called for that purpose approve such decrease or
increase. Vacancies in the Board of Directors of the Corporation, however
caused, and newly created directorships shall be filled by a vote of a majority
of the directors then in office, whether or not a quorum, and any director so
chosen shall hold office for a term expiring at the annual meeting of
stockholders at which the term of the class to which the director has been
chosen expires and when the director's successor is elected and qualified.
Eighth: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
ss. 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
ss. 279 of Title 8 of the Delaware Code order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this Corporation, as the case
may be, and also on this Corporation.
Ninth: Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation. The stockholders of the
Corporation may not take any action by written consent in lieu of a meeting.
<PAGE>
Tenth: A director of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the General Corporation Law of the
State of Delaware, as the same may be amended and supplemented. Any amendment,
modification or repeal of the foregoing sentence shall not adversely affect any
right or protection of a director of the Corporation hereunder in respect of any
act or omission occurring prior to the time of such amendment, modification or
repeal. If the General Corporation Law of the State of Delaware is amended after
approval by the stockholders of this Article TENTH to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as so
amended.
Eleventh:
A. Right to Indemnification. The Corporation shall indemnify
and hold harmless, to the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended, any person (a "Covered Person")
who was or is made is threatened to be made a party or is otherwise involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding"), by reason of the fact that he, or a person for
whom he is the legal representative, is or was a director or officer of the
Corporation or, while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or nonprofit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses (including
attorneys' fees) reasonably incurred by such Covered Person. Notwithstanding the
preceding sentence, except as otherwise provided in this ARTICLE ELEVENTH, the
Corporation shall be required to indemnify a Covered Person in connection with a
proceeding (or part thereof) commenced by such Covered Person only if the
commencement of such proceeding (or part thereof) by the Covered person was
authorized by the Board of Directors of the Corporation.
B. Prepayment of Expenses. The Corporation shall pay the
expenses (including attorneys' fees) incurred by a Covered Person in defending
any proceeding in advance of its final disposition, provided, however, that, to
the extent required by law, such payment of expenses in advance of the final
disposition of the proceeding may be made only upon receipt of an undertaking by
the Covered Person to repay all amounts advanced if it should be ultimately
determined that the Covered Person is not entitled to be indemnified under this
ARTICLE ELEVENTH or otherwise.
C. Claims. If a claim for indemnification or advancement of
expenses under this ARTICLE ELEVENTH is not paid in full within thirty days
after a written claim therefor by the Covered Person has been received by the
Corporation, the Covered Person may file suit to recover the unpaid amount of
such claim and, if successful in whole or in part, shall be entitled to be paid
the expense of prosecuting such claim. In any such action the corporation shall
have the burden of proving that the Covered Person is not entitled to the
requested indemnification or advancement of expenses under applicable law.
<PAGE>
D. Nonexclusivity of Rights. The rights conferred on any
Covered Person by this ARTICLE ELEVENTH shall not be exclusive of any other
rights which such Covered Person may have or hereafter acquire under any
statute, provision of the certificate of incorporation, these Bylaws, agreement,
vote of stockholders or disinterested directors or otherwise.
E. Other Sources. The Corporation's obligation, if any, to
indemnify or to advance expenses to any Covered Person who was or is serving at
its request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, enterprise or nonprofit entity shall be
reduced by any amount such Covered Person may collect as indemnification or
advancement of expenses from such other corporation, partnership, joint venture,
trust, enterprise or non-profit enterprise.
F. Amendment or Repeal. Any repeal or modification of the
foregoing provisions of this ARTICLE ELEVENTH shall not adversely affect any
right or protection hereunder of any Covered Person in respect of any act or
omission occurring prior to the time of such repeal or modification.
G. Other Indemnification and Prepayment of Expenses. This
ARTICLE ELEVENTH shall not limit the right to the Corporation to the extent and
in the manner permitted by law, to indemnify and to advance expenses to persons
other than Covered Persons when and as authorized by appropriate corporate
action.
Twelfth: In furtherance of and not in limitation of powers conferred by
statute, the Board of Directors of the Corporation is expressly authorized to
adopt, repeal, alter, amend and rescind the Bylaws of the Corporation by vote of
66.67% of the Board of Directors.
Thirteenth: The Corporation reserves the right to amend, alter, change
or repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute and this Amended and Restated
Certificate of Incorporation, and all rights conferred upon stockholders herein
are granted subject to this reservation. Notwithstanding the foregoing, the
provisions set forth in ARTICLES SEVENTH, EIGHTH, TENTH, ELEVENTH, TWELFTH and
this ARTICLE THIRTEENTH may not be repealed, altered, amended or rescinded in
any respect unless the same is approved by the affirmative vote of the holders
of not less than 66.67% of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors (considered
for this purpose as a single class) cast at a meeting of the stockholders called
for that purpose (provided that notice of such proposed repeal, alteration,
amendment or rescission is included in the notice of such meeting).
<PAGE>
Fourteenth: The effective time of the Certificate of Incorporation of
the Corporation shall be January 26, 2000, and the time when the existence of
the Corporation shall be deemed to have commenced, shall be July 7, 1997, as
stated on the accompanying Certificate of Domestication filed with this
Certificate of Incorporation in accordance with Section 388 of the General
Corporation Law of the State of Delaware.
Signed on January 26, 2000.
/s/ John J. Sivolella, Esq.
-------------------------------
Incorporator
<PAGE>
BYLAWS
OF
UPROAR INC.
ARTICLE I
OFFICES
Section 1.1. Registered Office and Agent. The registered office of the
Corporation in the State of Delaware shall be at 1209 Orange Street, Wilmington,
Delaware 19805. The registered agent at such address shall be The Corporation
Trust Company .
Section 1.2. Other Offices. The Corporation may also have offices at
such other places as the Board of Directors may from time to time appoint or the
business of the Corporation may require.
ARTICLE II
STOCKHOLDERS' MEETINGS
Section 2.1. Place of Meetings. All meetings of the stockholders for
the election of directors shall be held at such place, either within or without
the State of Delaware, as shall be designated from time to time by the Board of
Directors.
Section 2.2. Annual Meetings. An annual meeting of stockholders shall
be held for the election of directors and the transaction of any other proper
business on such date and at such time as shall be designated by the Board of
Directors. If the annual meeting for election of directors is not held on the
date designated therefor, the directors shall cause the meeting to be held as
soon thereafter as convenient.
Section 2.3. Election of Directors. Elections of the directors of the
Corporation shall be by written ballot.
Section 2.4. Special Meetings. Special meetings of the stockholders may
be called at any time by the Chairman of the Board, the Chief Executive Officer,
or the Board of Directors pursuant to a resolution adopted by the affirmative
vote of a majority of the whole Board of Directors. Upon the written request of
any person or persons who have duly called a special meeting, the Secretary
shall fix the date of the meeting, to be held not more than sixty days after
receipt of the request, and shall give due notice thereof. Business transacted
at any special meeting shall be confined to the purposes stated in the notice of
such meeting.
Section 2.5. Quorum. One-third of the shares entitled to vote, present
in person or represented by proxy, shall constitute a quorum at a meeting of
stockholders, except as may be otherwise required by law. When a quorum is once
present, it shall not be broken by the subsequent withdrawal of any stockholder.
<PAGE>
Section 2.6. Adjournments. The chairman of any meeting of stockholders,
or a majority of the shares present in person or represented by proxy and
entitled to vote at such meeting, may adjourn the meeting from time to time,
whether or not a quorum is present. Notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting at which the
adjournment is taken; provided that, if the adjournment is for more than 30
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting. At such adjourned meeting at which a
quorum shall be present in person or represented by proxy, any business may be
transacted which might have been transacted at the meeting as originally
noticed.
Section 2.7. Voting. Unless otherwise provided in the certificate of
incorporation of the Corporation (the "Certificate of Incorporation"), and
subject to the provisions of applicable law and of these Bylaws relating to the
determination of stockholders entitled to vote at any meeting of stockholders,
each stockholder shall be entitled to one vote for each share of capital stock
held by such stockholder. Except as otherwise provided by law, in all matters
other than the election of directors, the affirmative vote of the majority of
the shares present in person or represented by proxy at the meeting and entitled
to vote on the subject matter shall be the act of the stockholders. Directors
shall be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors.
Section 2.8. Proxies. Each stockholder entitled to vote at a meeting of
stockholders, or (if not then prohibited by the Certificate of Incorporation) to
consent or dissent to corporate action in writing without a meeting, may
authorize another person or persons to act for such stockholder by proxy, but no
such proxy shall be voted or acted upon after three years from its date, unless
the proxy provides for a longer period. A duly executed proxy shall be
irrevocable if it states that it is irrevocable and if, and only as long as, it
is coupled with an interest sufficient in law to support an irrevocable power. A
proxy may be made irrevocable regardless of whether the interest with which it
is coupled is an interest in the stock itself or an interest in the Corporation
generally. All proxies shall be filed with the Secretary of the meeting before
being voted upon.
Section 2.9. Notice of Meetings. Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting shall
be given which shall state the place, date and hour of the meeting, and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called. Unless otherwise provided by law, written notice of any meeting shall be
given not less than ten nor more than sixty days before the date of the meeting
to each stockholder entitled to vote at such meeting.
Section 2.10. Consent in Lieu of Meetings. Unless otherwise provided in
the Certificate of Incorporation, any action required to be taken at any annual
or special meeting of stockholders, or any action which may be taken at any
annual or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted and shall be delivered to the Corporation by delivery in
accordance with law to its registered office in the State of Delaware, its
principal place of business or the Secretary of the Corporation. Prompt notice
of the taking of the corporate action without a meeting by less than unanimous
written consent shall be given to those stockholders who have not consented in
writing.
<PAGE>
Section 2.11. List of Stockholders. The officer who has charge of the
stock ledger of the Corporation shall prepare and make, at least ten days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. The list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.
Section 2.12. Order of Business. At each meeting of the stockholders,
the Chairman of the Board or, in his absence, such person as shall be selected
by the Board shall act as the chairman of the meeting. The order of business at
each such meeting shall be as determined by the chairman of the meeting. The
chairman of the meeting shall have the right and authority to prescribe such
rules, regulations and procedures and to do all such acts and things as are
necessary or desirable for the proper conduct of the meeting, including, without
limitation, the establishment of procedures for the maintenance of order and
safety, limitations on the time allotted to questions or comments on the affairs
of the Corporation, restrictions on entry to such meeting after the time
prescribed for the commencement thereof, and the opening and closing of the
voting polls.
Section 2.13. Proposal of Stockholder Business and Nominations:
A. Annual Meetings of Stockholders.
(1) Nominations of persons for election to the Board of Directors of
the Corporation and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders only (a) pursuant
to the Corporation's notice of meeting (or any supplement thereto), (b) by or at
the direction of the Board of Directors or (c) by any stockholder of the
Corporation who was a stockholder of record of the Corporation at the time the
notice provided for in this Section 11 is delivered to the Secretary of the
Corporation, who is entitled to vote at the meeting and who complies with the
notice procedures set forth in this Section 11.
<PAGE>
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of paragraph A.(1) of
this Section 11, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation and any such proposed business other
than the nominations of persons for election to the Board of Directors must
constitute a proper matter for stockholder action. To be timely, a stockholder's
notice shall be delivered to the Secretary at the principal executive offices of
the Corporation not later than the close of business on the ninetieth day nor
earlier than the close of business on the one hundred twentieth day prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is more than thirty days
before or more than seventy days after such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the close of
business on the one hundred twentieth day prior to such annual meeting and not
later than the close of business on the later of the ninetieth day prior to such
annual meeting or the tenth day following the day on which public announcement
of the date of such meeting is first made by the Corporation. In no event shall
the public announcement of an adjournment of an annual meeting commence a new
time period for the giving of a stockholder's notice as described above. Such
stockholder's notice shall set forth: (a) as to each person whom the stockholder
proposes to nominate for election or re-election as a director, all 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
(the "Exchange Act") and Rule 14a-11 thereunder (and such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the text of the proposal or business (including the
text of any resolutions proposed for consideration and, in the event that such
business includes a proposal to amend the Bylaws of the Corporation, the
language of the proposed amendment), the reasons for conducting such business at
the meeting and any material interest in such business of such stockholder and
the beneficial owner, if any, on whose behalf the proposal is made; and (c) as
to the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner, (ii) the class and number of shares of capital stock of the Corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner, (iii) 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 propose such business or
nomination, and (iv) a representation whether the stockholder or the beneficial
owner, if any, intends or is part of a group which intends (a) to deliver a
proxy statement and/or form of proxy to holders of at least the percentage of
the Corporation's outstanding capital stock required to approve or adopt the
proposal or elect the nominee and/or (b) otherwise to solicit proxies from
stockholders in support of such proposal or nomination. The Corporation may
require any proposed nominee to furnish such other information as it may
reasonably require to determine the eligibility of such proposed nominee to
serve as a director of the Corporation.
(3) Notwithstanding anything in the second sentence of paragraph (A)(2)
of this Section 11 to the contrary, in the event that the number of directors to
be elected to the Board of Directors of the Corporation at an annual meeting is
increased and there is no public announcement by the Corporation naming the
nominees for the additional directorships at least one hundred days prior to the
first anniversary of the preceding year's annual meeting, a stockholder's notice
required by this Section 11 shall also be considered timely, but only with
respect to nominees for the additional directorships, if it shall be delivered
to the Secretary at the principal executive offices of the Corporation not later
than the close of business on the tenth day following the day on which such
public announcement is first made by the Corporation.
<PAGE>
B. Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected pursuant to the
Corporation's notice meeting (1) by or at the direction of the Board of
Directors or (2) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time the notice provided for
in this Section 11 is delivered to the Secretary of the Corporation, who is
entitled to vote at the meeting and upon such election and who complies with the
notice procedures set forth in this Section 11. In the event the Corporation
calls a special meeting of stockholders for the purpose of electing one or more
directors to the Board of Directors, any such stockholder entitled to vote in
such election of directors may nominate a person or persons (as the case may be)
for election to such position(s) as specified in the Corporation's notice of
meeting, if the stockholder's notice required by paragraph (A)(2) of this
Section 11 shall be delivered to the Secretary at the principal executive
offices of the Corporation not earlier than the close of business on the one
hundred twentieth day prior to such special meeting and not later than the close
of business on the later of the ninetieth day prior to such special meeting or
the tenth day following the day on which public announcement is first made of
the date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment or postponement of a special meeting commence a
new time period (or extend any time period) for the giving of a stockholder's
notice as described above.
C. General.
(1) Only such persons who are nominated in accordance with the
procedures set forth in this Section 11 shall be eligible to be elected at an
annual or special meeting of stockholders of the Corporation to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 11. Except as otherwise provided by law, the chairman
of the meeting shall have the power and duty (a) to determine whether a
nomination or any business proposed to be brought before the meeting was made or
proposed, as the case may be, in accordance with the procedures set forth in
this Section 11 (including whether the stockholder or beneficial owner, if any,
on whose behalf the nomination or proposal is made solicited (or is part of a
group which solicited) or did not so solicit, as the case may be, proxies in
support of such stockholder's nominee or proposal in compliance with such
stockholder's representation as required by clause A.(2)(c)(iv) of this Section
11) and (b) if any proposed nomination or business was not made or proposed in
compliance with this Section 11, to declare that such nomination shall be
disregarded or that such proposed business shall not be transacted.
(2) For purposes of this Section 11, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
<PAGE>
(3) Notwithstanding the foregoing provisions of this Section 11, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Section 11. Nothing in this Section 11 shall be deemed to affect
any rights (a) of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(b) of the holders of any series of preferred stock to elect directors pursuant
to any applicable provisions of the certificate of incorporation.
ARTICLE III
DIRECTORS
Section 3.1. Powers and Number. The business and affairs of the
Corporation shall be managed by or under the direction of its Board of
Directors, which may exercise all such powers of the Corporation and do all such
lawful acts and things as are not by applicable law or by the Certificate of
Incorporation or by these Bylaws directed or required to be exercised or done by
the stockholders. Unless fixed by the Certificate of Incorporation, the number
of directors which shall constitute the whole Board shall be fixed by resolution
of the Board of Directors or by the stockholders at the annual meeting of the
stockholders, except as provided in Section 2 of this Article. The directors
need not be residents of the State of Delaware or stockholders in the
Corporation.
Section 3.2. Election and Term. Directors shall be elected by the
stockholders at the annual meeting of stockholders of the Corporation. Each
director shall hold office until the next annual meeting of stockholders and
until such director's successor is elected and qualified, or until such
director's earlier death, resignation or removal.
Section 3.3. Vacancies. Vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be filled
by a majority of the directors then in office, though less than a quorum, or by
a sole remaining director. Any director so chosen shall hold office until the
next annual meeting of stockholders and until such director's successor is
elected and qualified, or until such director's earlier death, resignation or
removal. If there are no directors in office, then an election of directors may
be held in the manner provided by applicable law. If, at the time of filling any
vacancy or any newly created directorship, the directors then in office shall
constitute less than a majority of the whole Board (as constituted immediately
prior to any such increase), the Court of Chancery may, upon application of any
stockholder or stockholders holding at least ten percent (10%) of the total
number of the shares at the time outstanding having the right to vote for such
directors, summarily order an election to be held to fill any such vacancies or
newly created directorships, or to replace the directors chosen by the directors
then in office.
<PAGE>
Section 3.4. Location of Meetings. The Board of Directors may hold its
meetings, both regular and special, either within or without the State of
Delaware.
Section 3.5. Regular Meetings. Regular meetings of the Board of
Directors may be held at such time and place as shall be determined by the Board
of Directors from time to time. No notice shall be required for regular meetings
the time and place of which have been fixed.
Section 3.6. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board, the Chief Executive
Officer or a majority of the directors then in office. Written, oral or any
other mode of notice of the time and place shall be given for special meetings
of the Board of Directors in sufficient time for the convenient assembly of the
directors thereat.
Section 3.7. Quorum. At all meetings of the Board of Directors,
one-third of the total number of directors shall constitute a quorum for the
transaction of business and the vote of the majority of the directors present at
a meeting at which a quorum is present shall be the act of the Board of
Directors, unless the Certificate of Incorporation or these Bylaws shall require
a vote of a greater number. If a quorum shall not be present at any meeting of
the Board of Directors, the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present.
Section 3.8. Action without a Meeting. Any action required or permitted
to be taken at any meeting of the Board of Directors, or of any committee
thereof, may be taken without a meeting if all of the members of the Board of
Directors or committee, as the case may be, consent thereto in writing, and the
writing or writings are filed with the minutes of proceedings of the Board of
Directors or committee.
Section 3.9. Telephone Conference. Members of the Board of Directors,
or any committee of the Board of Directors, may participate in a meeting of the
Board of Directors, or such committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
Section 3.10. Committees of Directors. The Board of Directors may
designate one or more committees, each committee to consist of one or more of
the directors of the Corporation. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee.
In the absence or disqualification of a member of a committee, the
member or members present at any meeting and not disqualified from voting,
whether or not such member or members constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to approving or adopting, or recommending to the
stockholders any action or matter expressly required by law to be submitted to
stockholders for approval, or adopting, amending or repealing any of the Bylaws
of the Corporation. Such committee or committees shall have such name or names
as may be determined from time to time by resolution adopted by the Board of
Directors.
<PAGE>
Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
Section 3.11. Compensation of Directors. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, the Board of Directors shall
have the authority to fix the compensation of directors. The directors may be
paid their expenses, if any, of attendance at each meeting of the Board of
Directors and may be paid a fixed fee for attendance at each meeting of the
Board of Directors attended and/or an annual fee for serving as director, or
both. Such fees may be paid in the form of cash, shares of the Corporation's
stock, options to purchase shares of the Corporation's stock, any combination of
the foregoing, or in such other form as the Board of Directors may determine. No
such payment shall preclude any director from serving the Corporation in any
other capacity and receiving compensation therefor. Members of special or
standing committees may be paid like compensation for attending committee
meetings and/or serving on committees.
Section 3.12. Resignation; Removal of Directors. Any director may
resign at any time upon written notice to the Corporation. Such resignation
shall be effective at the time specified in the written notice thereof or, if no
time is specified, at the time of its receipt by the Chairman of the Board or
the Secretary of the Corporation. Any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors, except as otherwise
provided by law.
ARTICLE IV
OFFICERS
Section 4.1. Executive Officers. The executive officers of the
Corporation shall be chosen by the directors and may include a Chairman of the
Board, a Vice Chairman of the Board, a Chief Executive Officer, a President, one
or more Vice Presidents (with one or more classes of seniority, including Senior
Vice Presidents and Executive Vice Presidents), a Secretary, one or more
Assistant Secretaries, a Chief Financial Officer, a Treasurer, one or more
Assistant Treasurers, and such other officers as the Board of Directors may deem
necessary; provided that the executive officers of the Corporation shall in any
event include a Chairman of the Board or a President and a Secretary or a
Treasurer. Any number of offices may be held by the same person.
Section 4.2. Term of Office; Vacancies; Resignation and Removal. Each
officer of the Corporation shall hold office until the meeting of the Board of
Directors following the next annual meeting of stockholders and until such
officer's successor is elected and qualified, or until such officer's earlier,
death, resignation or removal. Any vacancy occurring in any executive office of
the Corporation shall be filled by the Board of Directors or by such other
executive officer of the Corporation as the Board of Directors may authorize.
Any officer may resign at any time upon written notice to the Corporation. Any
officer may be removed, with or without cause, by the Board of Directors.
<PAGE>
Section 4.3. Chairman of the Board. The Chairman of the Board shall be
the chief executive officer of the Corporation; he shall preside at all meetings
of the stockholders and directors; he shall conduct general and active
management of the business of the Corporation; he shall see that all orders and
resolutions of the Board of Directors are carried into effect, subject, however,
to the right of the directors to delegate any specific powers (except such as
may be by statute exclusively conferred on the Chairman of the Board) to any
other officer or officers of the Corporation; he shall have the general power
and duties of supervision and management usually vested in the office of
Chairman of the Board of a corporation; and he shall exercise such additional
authority and perform such additional duties as may be provided in these Bylaws
or as the Board of Directors may from time to time assign to him.
Section 4.4. Secretary. The Secretary shall have the duty to record the
proceedings of all meetings of the stockholders, the Board of Directors and the
committees of the Board of Directors in a book to be kept for that purpose. He
shall give, or cause to be given, notice of all meetings of the stockholders,
the Board of Directors and its committees, and he shall exercise such additional
authority and perform such additional duties as may be assigned to him from time
to time by the Board of Directors or the Chairman of the Board, to whose
supervision he shall be subject. He shall keep in safe custody the corporate
seal of the Corporation and, when authorized, shall affix the same to any
instrument requiring it; when so affixed, it may be attested by the Secretary's
signature. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by such
officer's signature.
Section 4.5. Other Officers. Each of the other officers of the
Corporation shall have such authority and duties as may be provided in these
Bylaws or assigned to such officer from time to time by the Board of Directors
or by the executive officer, if any, to whose supervision such officer may be
subject, and such officer shall have such additional authority and duties as are
incident to his office except to the extent inconsistent with the authority and
duties provided in these Bylaws or assigned to him by the Board of Directors or
such executive officer.
ARTICLE V
CORPORATE RECORDS
Section 5.1. Any stockholder of record, in person or by attorney or
other agent, shall, upon written demand under oath stating the purpose thereof,
have the right during the usual hours for business to inspect for any proper
purpose the Corporation's stock ledger, a list of its stockholders, and its
other corporate books and records including a copy of these Bylaws, and to make
copies or extracts therefrom. A proper purpose shall mean a purpose reasonably
related to such person's interest as a stockholder. In every instance where an
attorney or other agent shall be the person who seeks the right to inspection,
the demand under oath shall be accompanied by a power of attorney or such other
writing which authorizes the attorney or other agent to so act on behalf of the
stockholder. The demand under oath shall be directed to the Corporation at its
registered office in the State of Delaware or at its principal place of
business.
<PAGE>
ARTICLE VI
STOCK CERTIFICATES, DIVIDENDS, ETC.
Section 6.1. Certificates. Every holder of stock in the Corporation
shall be entitled to have a certificate signed by, or in the name of the
Corporation by, the Chairman of the Board or the Vice-Chairman of the Board, or
the President or a Vice-President, and the Treasurer or an Assistant Treasurer,
or the Secretary or an Assistant Secretary of the Corporation, certifying the
number of shares owned by such holder in the Corporation. Any or all of the
signatures on the certificate may be facsimile.
Section 6.2. Transfers. Transfers of shares of the Corporation shall be
made on the books of the Corporation upon surrender of the certificates
therefor, endorsed by the person named in the certificate or by his attorney
lawfully constituted in a writing duly executed and filed with the Corporation
or with the Corporation's transfer agent or registrar. No transfer shall be made
which is inconsistent with law.
Section 6.3. Lost Certificate. The Corporation may issue a new
certificate of stock in place of any certificate theretofore issued by it,
alleged to have been lost, stolen or destroyed, and the Corporation may require
the owner of the lost, stolen or destroyed certificate, or such owner's legal
representative, to give the Corporation a bond sufficient to indemnify it
against any claim that may be made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate.
Section 6.4. Record Dates.
A. In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the board of directors, and which record date
shall not be more than sixty nor less than ten days before the date of such
meeting. If not record date is fixed by the Board of Directors, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
B. In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting (where not
prohibited by the Certificate of Incorporation), the Board of Directors may fix
a record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which dates shall not be more than ten days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors. If no
record date has been fixed by the Board of Directors, the record date for
determining stockholders entitled to express consent to corporate action in
writing without a meeting, (i) when no prior action by the Board of Directors is
required, shall be the first date on which a signed written consent is delivered
to the Corporation in accordance with law, and (ii) when prior action by the
Board of Directors is required, shall be at the close of business on the day on
which the Board of Directors adopts the resolution taking such prior action.
<PAGE>
C. In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than sixty days prior to such action.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.1. Dividends. The Board of Directors may declare and pay
dividends upon the outstanding shares of the capital stock of the Corporation
from time to time and to such extent as they deem advisable, in the manner and
upon the terms and conditions provided by applicable statutes and the
Certificate of Incorporation.
Section 7.2. Reserves. Before payment of any dividend the Board of
Directors may set apart out of any funds of the Corporation available for
dividends as the directors, from time to time in their absolute discretion,
think proper, and the directors may abolish any such reserve in the manner at
any time.
Section 7.3. Seal. The corporate seal shall have inscribed thereon the
name of the Corporation, the year of its organization and the words "Corporate
Seal - Delaware."
Section 7.4. Fiscal Year. The fiscal year of the Corporation shall be
fixed, and may be changed from time to time, by the Board of Directors.
Section 7.5. Notice. Whenever written notice is required to be given to any
person, it may be given to such person, either personally or by sending a copy
thereof through the mail or by facsimile to his address or facsimile number as
it appears on the records of the Corporation, or supplied by him to the
Corporation for the purpose of notice. If the notice is sent by mail, it shall
be deemed given when deposited in the United States mail, postage prepaid. If
notice is sent by facsimile, it shall be deemed given upon successful
transmission of the facsimile.
<PAGE>
Section 7.6. Waiver of Notice. Whenever any written notice is required
to be given by statute, or by the Certificate of Incorporation or these Bylaws,
a written waiver, signed by the person entitled to notice, whether before or
after the time stated therein, shall be deemed equivalent to notice. Attendance
of a person either in person or by proxy at any meeting shall constitute a
waiver of notice of such meeting, except where the person attends a meeting for
the express purpose of objecting at the beginning of the meeting to the
transaction of any business because the meeting was not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of any
meeting, need be specified in any written waiver of notice of such meeting.
ARTICLE VIII
AMENDMENTS
Section 8.1. These Bylaws may be amended or repealed by the vote of a
majority of the shares present in person or represented by proxy at a meeting of
the stockholders called for such purpose and entitled to vote thereon. In
addition, in accordance with the Corporation's Certificate of Incorporation, the
Board of Directors shall have the power to amend or repeal any of these Bylaws
by the affirmative vote of 66.67% of the members of the Board of Directors.
ARTICLE IX
INDEMNIFICATION
Section 9.1. Right to Indemnification. The Corporation shall indemnify
and hold harmless, to the fullest extent permitted by applicable law as in
effect from time to time, any person (a "Covered Person") who was or is a party
or is threatened to be made a party to or is otherwise involved in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "Proceeding"), by reason of the
fact that he, or a person for whom he is the legal representative, is or was a
director or officer of the Corporation or, while a director or officer of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, employee or agent of another Corporation or of a partnership, joint
venture, trust, or other enterprise or a nonprofit entity, including service
with respect to employee benefit plans, against all liability or loss suffered
and expenses (including attorneys' fees) reasonably incurred by such Covered
Person. Notwithstanding the preceding sentence, except as otherwise provided in
Section 3 of this Article IX, the Corporation shall be required to indemnify a
Covered Person only if authorized by the Board of Directors of the Corporation.
Section 9.2. Prepayment of Expenses. The Corporation shall pay the
expenses (including attorneys' fees) incurred by a Covered Person in defending
any Proceeding in advance of its final disposition, provided, however, that, to
the extent required by law, such payment of expenses in advance of such final
disposition shall be made only upon receipt of an undertaking by or on behalf of
the Covered Person to repay all amounts advanced if it should be ultimately
determined that the Covered Person is not entitled to be indemnified under this
Article IX or otherwise.
<PAGE>
Section 9.3. Claims. If a claim for indemnification or advancement of
expenses under this Article IX is not paid in full within thirty days after a
written claim therefor by the Covered Person has been received by the
Corporation, the Covered Person may file suit to recover the unpaid amount of
such claim and, if successful in whole or in part, shall be entitled to be paid
the expense of prosecuting such claim. In any such action, the Corporation shall
have the burden of proving that the Covered Person is not entitled to the
requested indemnification or advancement of expenses under applicable law.
Section 9.4. Nonexclusivity of Rights. The rights conferred on any
Covered Person by this Article IX shall not be exclusive of any other rights
which such Covered Person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, provision of these Bylaws,
agreement, vote of stockholders or disinterested directors or otherwise.
Section 9.5. Other Sources. The Corporation's obligation, if any, to
indemnify or to advance expenses to any Covered Person who was or is serving at
its request as a director, officer, employee or agent of another Corporation,
partnership, joint venture, trust, enterprise or nonprofit entity shall be
reduced by any amount such Covered Person collects as indemnification or
advancement of expenses from such other Corporation, partnership, joint venture,
trust, enterprise or non-profit entity.
Section 9.6. Amendment or Repeal. Any amendment or repeal of the
foregoing provisions of this Article IX shall not adversely affect any right or
protection hereunder of any Covered Person in respect of any act or omission
occurring prior to the time of such amendment or repeal.
Section 9.7. Other indemnification and Prepayment of Expenses. This
Article IX shall not limit the right of the Corporation, to the extent and in
the manner permitted by law, to indemnify and to advance expenses to persons
other than Covered Persons when and as authorized by appropriate corporate
action.
<PAGE>
CERTIFICATE OF DOMESTICATION
OF
UPROAR LIMITED
It is hereby certified that:
1. The corporation (hereinafter called the "corporation") was first
formed, incorporated, or otherwise came into being on July 7, 1997 in the
jurisdiction of the Island of Bermuda.
2. The name of the corporation immediately prior to the filing of this
certificate of domestication pursuant to the provisions of Section 388 of the
General Corporation Law of the State of Delaware is Uproar Limited.
3. The name of the corporation as set forth in its certificate of
incorporation to be filed concomitantly with this certificate of domestication
in accordance with subsection (b) of Section 388 of the General Corporation Law
of the State of Delaware is Uproar (DE), Inc.
4. The jurisdiction that constituted the seat, siege social, or
principal place of business or central administration of the corporation, or
other equivalent thereto under applicable law immediately prior to the filing of
this certificate of domestication pursuant to the provisions of Section 388 of
the General Corporation Law of the State of Delaware is the jurisdiction of the
Island of Bermuda.
5. The undersigned is a corporation officer, director, trustee,
manager, partner, or other person performing functions equivalent to those of an
officer or director, however named or described, and is authorized to sign this
certificate of domestication on behalf of the corporation.
6. The effective time of this certificate of domestication shall be
January 26, 2000.
Signed on January 26, 2000
/s/ Robert D. Marafioti, Esq.
------------------------------------------
Name: Robert D. Marafioti, Esq.
Title: Executive Vice President,
General Counsel and Secretary
<PAGE>
CERTIFICATE OF OWNERSHIP
AND MERGER OF
UPROAR INC.
WITH AND INTO
UPROAR (DE), INC.
- --------------------------------------------------------------------------------
Pursuant to Section 253 of the General
Corporation Law of the State of Delaware
- --------------------------------------------------------------------------------
Uproar (DE), Inc., pursuant to Section 253 of the General
Corporation Law of the State of Delaware (the "DGCL"), hereby certifies as
follows:
FIRST: That the name and state of incorporation of each of the
constituent corporations to the merger are as follows:
Name State of Incorporation
---- ----------------------
Uproar (DE), Inc. Delaware
Uproar Inc. Delaware
SECOND: That Uproar (DE), Inc. owns more than 90% of the
outstanding shares of the common stock of Uproar Inc., which is the only
outstanding class of capital stock of Uproar Inc.;
THIRD: That the Board of Directors of Uproar (DE), Inc. by
unanimous written consent dated January 27, 2000 pursuant to Section 141(f) of
the DGCL, duly adopted resolutions authorizing the merger of Uproar Inc. with
and into Uproar (DE), Inc. pursuant to section 253 of the DGCL (the "Merger"),
with Uproar (DE), Inc. surviving. A true copy of such resolutions is annexed
hereto as Exhibit A. Such resolutions have not been modified or rescinded and
are in full force and effect on the date hereof.
FOURTH: That Article FIRST of the Certificate of Incorporation
of Uproar (DE), Inc. shall be amended to read as follows:
"FIRST: The name of the corporation (hereinafter called the
"Corporation") is Uproar Inc."
FIFTH: That this Certificate of Ownership and Merger shall be
effective upon its filing with the Secretary of State of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, Uproar (DE), Inc. has caused this
Certificate of Ownership and Merger to be executed in its corporate name this
day of January 27, 2000.
UPROAR (DE), INC.
By: /s/ Robert D. Marafioti
-----------------------
Name: Robert D. Marafioti
Title: Executive Vice President,
General Counsel and Secretary
<PAGE>
EXHIBIT A
CONSENT IN LIEU OF MEETING
OF
THE BOARD OF DIRECTORS
OF
UPROAR (DE), INC.
The undersigned, being all of the directors of Uproar (DE), Inc., a
Delaware corporation (the "Corporation"), acting pursuant to section 141(f) of
the General Corporation Law of the State of Delaware, hereby adopt, by this
written consent, the following resolutions and direct that this written consent
be filed with the minutes of the proceedings of the Board of Directors of the
Corporation:
RESOLVED, that Uproar Inc., a Delaware corporation ("Uproar"),
be merged with and into the Corporation, which shall be the surviving
corporation (the "Surviving Corporation"), pursuant to Section 253 of
the General Corporation Law of the State of Delaware (the "DGCL"); and
FURTHER RESOLVED, that by virtue of such merger (the
"Merger"), each issued and outstanding share of common stock, par value
$0.01 per share, of Uproar Inc. that is owned by the Corporation shall
be cancelled and retired and shall cease to exist and no consideration
shall be delivered in exchange therefor, and
FURTHER RESOLVED, that by virtue of the Merger, each issued
and outstanding share of common stock, par value $0.01 per share, of
the Corporation be converted into and become one fully paid and
nonassessable share of common stock, par value $0.01 per share, of the
Surviving Corporation; and
FURTHER RESOLVED, that the Certificate of Incorporation of the
Corporation shall be the Certificate of Incorporation of the Surviving
Corporation as set forth in the form attached hereto and that Article
FIRST of the Certificate of Incorporation shall be amended to read as
follows: "FIRST: The name of the corporation (hereinafter called the
"Corporation") is Uproar Inc."; and
<PAGE>
FURTHER RESOLVED, that the By-Laws of Uproar shall be the
By-Laws of the Surviving Corporation as set forth in the form attached
hereto; and
FURTHER RESOLVED, that the name of the Surviving Corporation
shall be Uproar Inc.; and
FURTHER RESOLVED, that the directors and officers of the
Corporation immediately prior to the Merger shall be the directors and
officers of the Surviving Corporation, each to hold office until their
respective successors are duly elected or appointed and qualified in
the manner provided in the By-Laws of the Surviving Corporation, or as
otherwise provided by law; and
FURTHER RESOLVED, that the Chairman of the Board or any
officer of the Corporation, acting individually, be, and each of them
hereby is, authorized and directed to execute and acknowledge in the
name of and on behalf of the Corporation a Certificate of Ownership and
Merger setting forth, among other things, a copy of these resolutions
and the date of their adoption; and that such officers are hereby
authorized and directed to cause such executed Certificate of Ownership
and Merger to be filed in the Office of the Secretary of State of the
State of Delaware in accordance with Sections 103 and 253 of the DGCL;
and
FURTHER RESOLVED, that the Merger shall become effective and
the corporate existence of Uproar shall cease upon the filing of such
Certificate of Ownership and Merger with the Secretary of State of the
State of Delaware in accordance with Sections 103 and 253 of the DGCL;
and
FURTHER RESOLVED, that the appropriate officers of the
Corporation be, and each of them hereby is, authorized and directed to
take or cause to be taken all such further actions and to execute and
deliver or cause to be delivered all such further instruments and
documents in the name and on behalf of the Corporation, and to incur
all such fees and expenses as in their judgment shall be necessary or
advisable in order to carry out fully the intent and purposes of the
foregoing resolutions; and
FURTHER RESOLVED, that all actions previously taken by an
officer or director of the Corporation in connection with the
transactions contemplated by these resolutions are hereby adopted,
ratified, conformed and approved in all respects.
<PAGE>
IN WITNESS WHEREOF, the undersigned directors of the Corporation have
executed this Consent in Lieu of a Meeting as of the day of January 27, 2000.
/s/ Thompson B. Barnhardt /s/ Christopher R. Hassett
- -------------------------------------- --------------------------
Thompson B. Barnhardt Christopher R. Hassett
/s/ Kenneth D. Cron /s/ Catherine V. Mackay
- -------------------------------------- -----------------------
Kenneth D. Cron Catherine V. Mackay
/s/ Esther Dyson /s/ Michael K. Simon
- -------------------------------------- --------------------
Esther Dyson Michael K. Simon
<PAGE>
Exhibit-10.6
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
UPROAR LTD.,
UPROAR ACQUISITION, INC.
AND
PRIZEPOINT ENTERTAINMENT CORPORATION
APRIL 29, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I THE MERGER .........................................................................................1
1.1 The Merger......................................................................................1
1.2 Closing; Effective Time.........................................................................2
1.3 Effect of the Merger............................................................................2
1.4 Articles of Incorporation; Bylaws...............................................................2
1.5 Directors and Officers..........................................................................2
1.6 Effect on Capital Stock.........................................................................2
1.7 Surrender of Certificates.......................................................................4
1.8 No Further Ownership Rights in Target Capital Stock.............................................6
1.9 Lost, Stolen or Destroyed Certificates..........................................................6
1.10 Resale Restrictions.............................................................................7
1.11 Tax and Accounting Consequences.................................................................7
1.12 Exemption from Registration.....................................................................7
1.13 Taking of Necessary Action; Further Action......................................................7
ARTICLE II REPRESENTATIONS AND WARRANTIES OF TARGET...........................................................7
2.1 Organization, Standing and Power................................................................8
2.2 Capital Structure...............................................................................8
2.3 Authority.......................................................................................9
2.4 Financial Statements...........................................................................10
2.5 Absence of Certain Changes.....................................................................10
2.6 Absence of Undisclosed Liabilities.............................................................11
2.7 Litigation.....................................................................................11
2.8 Restrictions on Business Activities............................................................11
2.9 Governmental Authorization.....................................................................11
2.10 Title to Property..............................................................................12
2.11 Intellectual Property..........................................................................12
2.12 Environmental Matters..........................................................................13
2.13 Taxes..........................................................................................14
2.14 Employee Benefit Plans.........................................................................15
2.15 Certain Agreements Affected by the Merger......................................................17
2.16 Employee Matters...............................................................................18
2.17 Interested Party Transactions..................................................................18
2.18 Insurance......................................................................................18
2.19 Compliance With Laws...........................................................................19
2.20 Minute Books...................................................................................19
2.21 Brokers' and Finders' Fees.....................................................................19
2.22 Shareholder Agreement; Irrevocable Proxies.....................................................19
2.23 Vote Required..................................................................................19
2.24 Board Approval.................................................................................19
2.25 Material Contracts.............................................................................19
2.26 No Breach of Material Contracts................................................................20
2.27 Product Releases...............................................................................20
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
2.28 Year 2000......................................................................................20
2.29 Accounting and Tax Matters.....................................................................21
2.30 Representations Complete.......................................................................21
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND ACQUISITION SUB...................................21
3.1 Organization, Standing and Power...............................................................21
3.2 Capital Structure..............................................................................21
3.3 Authority......................................................................................22
3.4 Financial Statements...........................................................................22
3.5 EASDAQ Filing..................................................................................23
3.6 Absence of Undisclosed Liabilities.............................................................23
3.7 Tax Matters....................................................................................23
3.8 Complete Copies of Materials...................................................................23
3.9 Board Approval.................................................................................23
3.10 Representations Complete.......................................................................23
3.11 Intellectual Property..........................................................................24
3.12 Year 2000......................................................................................25
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME...............................................................25
4.1 Conduct of Business of Target .................................................................25
4.2 Restriction on Conduct of Business of Target...................................................25
4.3 No Solicitation................................................................................28
ARTICLE V ADDITIONAL AGREEMENTS..............................................................................28
5.1 Preparation of Information Statement...........................................................28
5.2 Meeting of Shareholders........................................................................29
5.3 Access to Information..........................................................................29
5.4 Confidentiality................................................................................29
5.5 Public Disclosure..............................................................................29
5.6 Consents; Cooperation..........................................................................30
5.7 Shareholder Representation Agreements..........................................................30
5.8 Shareholder Agreement/Irrevocable Proxies......................................................30
5.9 Legal Requirements.............................................................................31
5.10 Federal Securities and Blue Sky Laws...........................................................31
5.11 Employee Benefit Plans.........................................................................31
5.12 Escrow Agreement...............................................................................32
5.13 Employees......................................................................................32
5.14 Expenses.......................................................................................32
5.15 Treatment as Reorganization....................................................................33
5.16 Further Assurances.............................................................................33
5.17 Preferred Stock................................................................................33
5.18 Pooling Accounting.............................................................................33
5.19 Pooling Letter.................................................................................33
5.20 Easdaq Listing.................................................................................33
5.21 Pooling Memorandum.............................................................................34
5.22 Employee Bonuses...............................................................................34
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE VI CONDITIONS TO THE MERGER..........................................................................34
6.1 Conditions to Obligations of Each Party to Effect the Merger...................................34
6.2 Additional Conditions to Obligations of Target.................................................35
6.3 Additional Conditions to the Obligations of Acquiror and Acquisition Sub.......................36
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER................................................................37
7.1 Termination....................................................................................37
7.2 Effect of Termination..........................................................................38
7.3 Amendment......................................................................................38
7.4 Extension; Waiver..............................................................................39
ARTICLE VIII ESCROW AND INDEMNIFICATION......................................................................39
8.1 Escrow Fund....................................................................................39
8.2 Indemnification................................................................................39
8.3 Damage Threshold...............................................................................40
8.4 Escrow Period..................................................................................41
8.5 Claims upon Escrow Fund........................................................................41
8.6 Objections to Claims...........................................................................42
8.7 Resolution of Conflicts; Arbitration...........................................................42
8.8 Shareholders' Agent............................................................................43
8.9 Actions of the Shareholders' Agent.............................................................44
8.10 Third-Party Claims.............................................................................44
8.11 Exclusive Remedy...............................................................................44
ARTICLE IX GENERAL PROVISIONS................................................................................44
9.1 Non-Survival at Effective Time.................................................................44
9.2 Notices........................................................................................45
9.3 Interpretation.................................................................................46
9.4 Counterparts...................................................................................46
9.5 Entire Agreement; Nonassignability; Parties in Interest........................................46
9.6 Severability...................................................................................46
9.7 Governing Law..................................................................................47
</TABLE>
iii
<PAGE>
SCHEDULES
Target Disclosure Schedule
Schedule 2.2 - Target Securityholders
Schedule 2.3 - Agreements Requiring Consent
Schedule 2.5 - Certain Changes
Schedule 2.6 - Undisclosed Liabilities
Schedule 2.7 - Target Litigation
Schedule 2.10 - Target Real Property
Schedule 2.11 - Target Intellectual Property
Schedule 2.14 - Target Employee Plans
Schedule 2.15 - Agreements Affected by Merger
Schedule 2.17 - Interested Party Transactions
Schedule 2.18 - Target Insurance Policies
Schedule 2.25 - List of Material Contracts
Schedule 2.27 - Product Releases
Schedule 5.11 - Holders of Outstanding Target Options
Schedule 5.13 - Employees
Acquiror Disclosure Schedule
Schedule 3.11 - Acquiror Intellectual Property
EXHIBITS
Exhibit A - Shareholder Agreement
Exhibit B - Confidentiality Agreement
Exhibit C - Shareholder Representation Agreement
Exhibit D - Draft of Preliminary Prospectus for listing on EASDAQ
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is
made and entered into as of April 29, 1999, by and between Uproar Ltd., a
Bermuda corporation ("Acquiror") and its wholly-owned subsidiary, Uproar
Acquisition, Inc., a Delaware corporation ("Acquisition Sub"), and PrizePoint
Entertainment Corporation, a Delaware corporation ("Target").
RECITALS
A. The Boards of Directors of Target, Acquiror and Acquisition
Sub have determined it is in the best interests of their respective companies
and the shareholders of their respective companies that Target and Acquisition
Sub combine into a single company through the statutory merger of Acquisition
Sub with and into Target (the "Merger") and, in furtherance thereof, have
approved the Merger.
B. Pursuant to the Merger, among other things, each
outstanding share of capital stock of Target ("Target Capital Stock") shall be
converted into shares of common stock of Acquiror ("Acquiror Common Stock"), at
the rate set forth herein.
C. Target, Acquiror and Acquisition Sub desire to make certain
representations, warranties, covenants and other agreements in connection with
the Merger.
D. The parties intend, by executing this Agreement, to adopt a
plan of reorganization within the meaning of Section 368 of the Internal Revenue
Code of 1986, as amended (the "Code"), and to cause the Merger to qualify as a
reorganization under the provisions of Sections 368(a) of the Code.
E. The parties intend that for financial accounting purposes
the Merger shall be accounted for as a pooling-of-interests.
F. As an inducement to Acquiror to enter into this Agreement,
certain of the shareholders of Target have, concurrently with the date hereof,
entered into an agreement to vote the shares of Target's Capital Stock owned by
such person to approve the Merger and against any competing proposals.
NOW, THEREFORE, in consideration of the covenants and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section
1.2) and subject to and upon the terms and conditions of this Agreement, the
Certificate of Merger (the "Certificate of Merger") and the applicable
provisions of the Delaware General Corporation Law ("Delaware Law"), Acquisition
<PAGE>
Sub shall be merged with and into Target, the separate corporate existence of
Acquisition Sub shall cease and Target shall continue as the surviving
corporation and a wholly-owned subsidiary of Acquiror. Target as the surviving
corporation after the Merger is hereinafter sometimes referred to as the
"Surviving Corporation."
1.2 Closing; Effective Time. The closing of the transactions
contemplated hereby (the "Closing") shall take place as soon as practicable
after the satisfaction or waiver of each of the conditions set forth in Article
VI hereof or at such other time as the parties hereto agree (the "Closing
Date"). The Closing shall take place at the offices of Brobeck, Phleger &
Harrison LLP, 1633 Broadway, 47th Floor, New York 10019, or at such other
location as the parties hereto agree. In connection with the Closing, the
parties hereto shall cause the Merger to be consummated by filing the
Certificate of Merger, together with the required officers' certificates, with
the Secretary of State of the State of Delaware, in accordance with the relevant
provisions of Delaware Law (the time of such filing being the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of
the Merger shall be as provided in this Agreement, the Certificate of Merger and
the applicable provisions of Delaware Law. Without limiting the generality of
the foregoing, and subject thereto, at the Effective Time, all the property,
rights, privileges, powers and franchises of Target and Acquisition Sub shall
vest in the Surviving Corporation, and all debts, liabilities and duties of
Target and Acquisition Sub shall become the debts, liabilities and duties of the
Surviving Corporation, and the Surviving Corporation shall become a wholly-owned
subsidiary of Acquiror.
1.4 Articles of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of
Incorporation of Acquisition Sub, as in effect immediately prior to the
Effective Time, shall be the Articles of Incorporation of the Surviving
Corporation until thereafter amended as provided by Delaware Law and such
Certificate of Incorporation.
(b) The Bylaws of Acquisition Sub, as in effect
immediately prior to the Effective Time, shall be the Bylaws of the Surviving
Corporation until thereafter amended as provided by Delaware Law and such
Bylaws.
1.5 Directors and Officers. At the Effective Time, the
directors of Acquisition Sub as in effect immediately prior to the Effective
Time, shall be the directors of the Surviving Corporation, until their
respective successors are duly elected or appointed and qualified. The officers
of Target, as in effect immediately prior to the Effective Time, shall be the
officers of the Surviving Corporation, until their respective successors are
duly elected or appointed and qualified.
1.6 Effect on Capital Stock. By virtue of the Merger and
without any further action on the part of Acquiror, Acquisition Sub, Target or
the holders of any of Target's securities:
(a) Conversion of Target Capital Stock. Subject to the
terms and conditions of this Agreement and the Certificate of Merger as of the
2
<PAGE>
Effective Time, by virtue of the Merger and without any further action on the
part of the holder of any shares of Target Capital Stock:
(i) At the Effective Time, each share of Target Common
Stock and each share of Target Preferred Stock issued and outstanding
immediately prior to the Effective Time (other than shares of Target Common
Stock, if any, held by persons who have not voted such shares for approval of
the Merger and with respect to which such persons shall have perfected
dissenters' rights in accordance with Delaware Law ("Dissenting Shares")) shall
be converted into and exchanged for the right to receive .0262718445 shares of
Acquiror Common Stock (the "Exchange Ratio"); provided, that 10% of the Acquiror
Common Stock otherwise deliverable to each such holder shall be held in escrow
as provided in Section 1.7(c). Each share of Target Common Stock or Preferred
Stock issued and outstanding immediately prior to the Effective Time that is
restricted or not fully vested shall upon such conversion and exchange have the
same restrictions or vesting arrangements applicable to such shares prior to the
conversion, in addition to those restrictions imposed pursuant to Section 1.10
hereof.
(ii) At the Effective Time, each Target Option granted
and outstanding immediately prior to the Effective Time shall be assumed by
Acquiror in accordance with Section 5.11.
(b) Cancellation of Target Capital Stock Owned by Acquiror
or Target. At the Effective Time, all shares of Target Capital Stock that are
owned by Target as treasury stock, and each share of Target Capital Stock owned
by Acquiror, Acquisition Sub or any other direct or indirect wholly owned
subsidiary of Acquiror or of Target immediately prior to the Effective Time
shall be canceled and extinguished without any conversion thereof.
(c) Acquisition Sub Stock. At the Effective Time, all
issued and outstanding shares of common stock of Acquisition Sub, by virtue of
the Merger and without any further action on the part of any holder thereof,
shall be converted into, and exchanged for, one share of common stock, par value
$0.05 per share, of the Surviving Corporation.
(d) Target Stock Option Plans. At the Effective Time, the
Target 1998 Stock Option Plan, as amended (the "Target Stock Option Plan") and
all options to purchase Target Common Stock then outstanding under the Target
Stock Option Plan shall be assumed by Acquiror in accordance with Section 5.11.
(e) Adjustments to Exchange Ratio. The Exchange Ratio
shall be adjusted to reflect fully the effect of any stock split, reverse split,
stock dividend (including any dividend or distribution of securities convertible
into Acquiror Common Stock or Target Capital Stock), reorganization,
recapitalization or other like change with respect to Acquiror Common Stock or
Target Capital Stock occurring after the date hereof and prior to the Effective
Time.
(f) Fractional Shares. No fraction of a share of Acquiror
Common Stock will be issued, but in lieu thereof each holder of shares of Target
Capital Stock who would otherwise be entitled to a fraction of a share of
Acquiror Common Stock (after aggregating all fractional shares of Acquiror
Common Stock to be received by such holder) shall receive from Acquiror an
3
<PAGE>
amount of cash (rounded to the nearest whole cent) equal to the product of (i)
such fraction, multiplied by (ii) the Acquiror Stock Price.
(g) Dissenters' Rights. Any Dissenting Shares shall not be
converted into, or be exchangeable for, the right to receive Acquiror Common
Stock but shall instead be converted into the right to receive such
consideration as may be determined to be due with respect to such Dissenting
Shares pursuant to Delaware Law unless and until such holder shall have failed
to perfect or shall have effectively withdrawn or lost his right of appraisal
and payment, as the case may be. Target shall give Acquiror prompt notice of any
Dissenting Shares (and shall also give Acquiror prompt notice of any withdrawals
of such demands for appraisal rights) and Acquiror shall have the right to
direct all negotiations and proceedings with respect to such demands. Neither
Target nor the Surviving Corporation shall, except with the prior written
consent of Acquiror, voluntarily make any payments with respect to, or settle or
offer to settle, any such demand for appraisal rights. If, after the Effective
Time, any Dissenting Shares shall lose their status as Dissenting Shares,
Acquiror shall issue and deliver, upon surrender by such shareholder of
certificate or certificates representing shares of Target Capital Stock, the
number of shares of Acquiror Common Stock to which such shareholder would
otherwise be entitled under this Section 1.6 and the Certificate of Merger less
the number of shares allocable to such shareholder that have been deposited in
the Escrow Fund (as defined below) in respect of such shares of Acquiror Common
Stock pursuant to Section 1.7(c) and Article VIII hereof, without any interest
thereon.
1.7 Surrender of Certificates.
(a) Exchange Agent. Acquiror's transfer agent shall act as
exchange agent (the "Exchange Agent") in the Merger.
(b) Acquiror to Provide Common Stock and Cash. Promptly
after the Effective Time, Acquiror shall make available to the Exchange Agent
for exchange in accordance with this Article I, through such reasonable
procedures as Acquiror may adopt, (i) the shares of Acquiror Common Stock
issuable pursuant to Section 1.6(a) in exchange for shares of Target Capital
Stock outstanding immediately prior to the Effective Time less the number of
shares of Acquiror Common Stock to be deposited into an escrow fund (the "Escrow
Fund") pursuant to the requirements of Article VIII and (ii) cash in an amount
sufficient to permit payment of cash in lieu of fractional shares pursuant to
Section 1.6(f).
(c) Exchange Procedures.
(i) Promptly after the Effective Time, the Surviving
Corporation shall cause to be mailed to each holder of record of a certificate
or certificates (the "Certificates") which immediately prior to the Effective
Time represented outstanding shares of Target Capital Stock, whose shares were
converted into the right to receive shares of Acquiror Common Stock (and cash in
lieu of fractional shares) pursuant to Section 1.6, (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon receipt of the Certificates by the
Exchange Agent and receipt of an executed Shareholder Representation Agreement
4
<PAGE>
by Acquiror, and shall be in such form and have such other provisions as
Acquiror may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates (or book entries in
the case of shares that have not yet vested) representing shares of Acquiror
Common Stock (and cash in lieu of fractional shares). Upon surrender of a
Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by Acquiror, together with such letter of
transmittal, duly completed and validly executed in accordance with the
instructions thereto, and upon receipt by Acquiror of an executed Shareholder
Representation Agreement, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate, with appropriate legends, (or a book
entry in the case of shares that have not yet vested in full) representing the
number of whole shares of Acquiror Common Stock less the number of shares of
Acquiror Common Stock to be deposited in the Escrow Fund on such holder's behalf
pursuant to Article VIII hereof and payment in lieu of fractional shares which
such holder has the right to receive pursuant to Section 1.6, and the
Certificate so surrendered shall forthwith be canceled. Until so surrendered,
each outstanding Certificate that, prior to the Effective Time, represented
shares of Target Capital Stock will be deemed from and after the Effective Time,
for all corporate purposes, other than the payment of dividends, to evidence the
ownership of the number of full shares of Acquiror Common Stock into which such
shares of Target Capital Stock shall have been so converted and the right to
receive an amount in cash in lieu of the issuance of any fractional shares in
accordance with Section 1.6. As soon as practicable after the Effective Time,
and subject to and in accordance with the provisions of Article VIII hereof,
Acquiror shall cause to be distributed to the Escrow Agent (as defined in
Article VIII hereof) a certificate or certificates representing ten percent
(10%) of the shares of Acquiror Common Stock issued in the Merger (the "Escrow
Shares") which shall be registered in the name of the Escrow Agent as nominee
for the holders of Certificates cancelled pursuant to this Section 1.7. The
Escrow Shares shall be, to the extent possible, vested shares not subject to any
repurchase rights, shall be beneficially owned by such holders and shall be held
in escrow and shall be available to compensate Acquiror for certain damages as
provided in Article VIII. To the extent not used for such purposes, such shares
shall be released, all as provided in Article VIII hereof.
(ii) Any amounts of Acquiror Common Stock (and cash in
lieu of fractional shares) delivered or made available to the Exchange Agent
pursuant to this Section 1.7 and not exchanged for Target Capital Stock within
six months after the Effective Time pursuant to this Section 1.7 shall be
returned by the Exchange Agent to Acquiror, which thereafter shall act as
Exchange Agent subject to the rights of holders of unsurrendered Certificates
under this Article I. Thereafter such holders shall be entitled to look to the
Surviving Corporation (subject to abandoned property, escheat and other similar
laws) only as general creditors thereof with respect to any Acquiror Common
Stock (and cash in lieu of fractional shares) that may be payable upon due
surrender of the Target Capital Stock held by them. Notwithstanding the
foregoing, neither the Surviving Corporation nor the Exchange Agent shall be
liable to any holder of a share of Target Capital Stock for any Acquiror Common
Stock (and cash in lieu of fractional shares) delivered in respect of such share
to a public official pursuant to any abandoned property, escheat or other
similar law.
(d) Distributions With Respect to Unexchanged Shares. No
dividends or other distributions with respect to Acquiror Common Stock with a
record date after the Effective Time will be paid to the holder of any
unsurrendered Certificate with respect to the shares of Acquiror Common Stock
represented thereby until the holder of record of such Certificate shall
5
<PAGE>
surrender such Certificate. Subject to applicable law, following surrender of
any such Certificate, there shall be paid to the record holder of the
certificates representing whole shares of Acquiror Common Stock issued in
exchange therefor, without interest, at the time of such surrender, the amount
of any such dividends or other distributions with a record date after the
Effective Time theretofore payable (but for the provisions of this Section
1.7(d)) with respect to such shares of Acquiror Common Stock.
(e) Transfers of Ownership. If any certificate for shares
of Acquiror Common Stock is to be issued in a name other than that in which the
Certificate surrendered in exchange therefor is registered, it will be a
condition of the issuance thereof that the Certificate so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the person
requesting such exchange will have paid to Acquiror or any agent designated by
it any transfer or other taxes required by reason of the issuance of a
certificate for shares of Acquiror Common Stock in any name other than that of
the registered holder of the Certificate surrendered, or established to the
satisfaction of Acquiror or any agent designated by it that such tax has been
paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary
in this Section 1.7, none of the Exchange Agent, the Surviving Corporation or
any party hereto shall be liable to any person for any amount properly paid to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
(g) Dissenting Shares. The provisions of this Section 1.7
shall also apply to Dissenting Shares that lose their status as such, except
that the obligations of Acquiror under this Section 1.7 shall commence on the
date of loss of such status and the holder of such shares shall be entitled to
receive in exchange for such shares the number of shares of Acquiror Common
Stock and cash in lieu of any fractional shares to which such holder is entitled
pursuant to Section 1.6 hereof.
1.8 No Further Ownership Rights in Target Capital Stock. All
shares of Acquiror Common Stock issued upon the surrender for exchange of shares
of Target Capital Stock in accordance with the terms hereof (including any cash
paid in lieu of fractional shares) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Target Capital Stock,
and there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Target Capital Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any
Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof, such shares of
Acquiror Common Stock (and cash in lieu of fractional shares) as may be required
pursuant to Section 1.6; provided, however, that Acquiror may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed Certificates to indemnify Acquiror against any claim
that may be made against Acquiror, the Surviving Corporation or the Exchange
Agent with respect to the Certificates alleged to have been lost, stolen or
destroyed.
6
<PAGE>
1.10 Resale Restrictions. All shares of Acquiror Common Stock
issued pursuant to the Merger have been issued without registration under the
Securities Act of 1933, as amended (the "Securities Act"), and the securities
laws of the various states of the United States, and may not be re-offered or
resold other than in uniformity with the registration requirements of such acts
or pursuant to an exemption therefrom. In addition, all shares of Acquiror
Common Stock issued pursuant to the Merger shall be ineligible for resale,
either in the Easdaq market or otherwise, for a period of 180 days following the
Closing, and the Certificates issued by Acquiror with respect to such shares
shall be legended to that effect and shall include such additional legends as
necessary to comply with applicable U.S. federal securities laws, Blue Sky laws
and such other restrictions as shall be set forth in the Shareholder
Representation Agreements. Such restrictions shall not prohibit transfers by
operation of law, or bona fide gifts to family members of a shareholder, or
transfers among affiliates (as defined in Rule 144 of the Securities Act of
1933, as amended) of a shareholder, or to trusts established for the benefit of
such family members, so long as the transferees remain subject to the
restrictions set forth herein but shall otherwise prohibit transfer unless such
transfer complies with applicable U.S. federal securities and Blue Sky laws.
1.11 Tax and Accounting Consequences. It is intended by the
parties hereto that the Merger shall (a) constitute a reorganization within the
meaning of Section 368(a) of the Code and (b) qualify for accounting treatment
as a pooling of interests.
1.12 Exemption from Registration. The shares of Acquiror
Common Stock to be issued in connection with the Merger will be issued in a
transaction exempt from registration under the Securities Act, by reason of
Section 4(2) thereof, and from any applicable Blue Sky laws.
1.13 Taking of Necessary Action; Further Action. If, at any
time after the Effective Time, any further action is necessary or desirable to
carry out the purposes of this Agreement and to vest the Surviving Corporation
with full right, title and possession to all assets, property, rights,
privileges, powers and franchises of Target, the officers and directors of
Target are fully authorized in the name of their corporation or otherwise to
take, and will use good faith efforts to take, all such lawful and necessary
action, so long as such action is not inconsistent with this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF TARGET
In this Agreement, any reference to any event, change,
condition or effect being "material" with respect to any entity or group of
entities means any material event, change, condition or effect related to the
financial condition, properties, assets (including intangible assets),
liabilities, business, operations or results of operations of such entity or
group of entities taken as a whole. In this Agreement, any reference to a
"Material Adverse Effect" with respect to any entity or group of entities means
any event, change or effect that is materially adverse to the financial
condition, properties, assets, liabilities, business, operations or results of
operations of such entity and its subsidiaries, taken as a whole.
7
<PAGE>
In this Agreement, any reference to a party's "knowledge"
means actual knowledge of such party's officers, directors and other managers
provided that such persons shall have made due and diligent inquiry of those
employees of such party whom such officers, directors and managers reasonably
believe would have actual knowledge of the matters represented.
Except as disclosed in a document of even date herewith and
delivered by Target to Acquiror prior to the execution and delivery of this
Agreement and referring to the representations and warranties in this Agreement
(the "Target Disclosure Schedule"), Target represents and warrants to Acquiror
as follows:
2.1 Organization, Standing and Power. Target is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of organization. Target has the corporate power to own its
properties and to carry on its business as now being conducted and as currently
proposed to be conducted and is duly qualified to do business and is in good
standing in each jurisdiction in which the failure to be so qualified and in
good standing would have a Material Adverse Effect on Target. Target has
delivered a true and correct copy of the Certificate of Incorporation and Bylaws
or other charter documents, as applicable, of Target as amended to date, to
Acquiror. Target is not in violation of any of the provisions of its Certificate
of Incorporation or Bylaws or equivalent organizational documents. Target has no
subsidiaries or equity investments in any entity. Other than with respect to the
securities set forth on Schedule 2.2, there are no outstanding subscriptions,
options, warrants, puts, calls, rights, exchangeable or convertible securities
or other commitments or agreements of any character relating to the issued or
unissued capital stock or other securities, or otherwise obligating Target to
issue, transfer, sell, purchase, redeem or otherwise acquire any such
securities. Target does not directly or indirectly own any equity or similar
interest in, or any interest convertible or exchangeable or exercisable for, any
equity or similar interest in, any corporation, partnership, joint venture or
other business association or entity.
2.2 Capital Structure. The authorized capital stock of Target
consists of 10,000,000 shares of Common Stock, par value $0.01, and 5,000,000
shares of Preferred Stock, par value $0.01, of which there were issued and
outstanding as of the close of business on the date hereof, 1,186,667 shares of
Common Stock, 645,000 shares of Series A Preferred Stock (the "Series A
Preferred Stock"), and 453,795 shares of Series B Preferred Stock (the "Series B
Preferred Stock" and, collectively with the Series A Preferred Stock, the
"Preferred Stock") . There are no other outstanding shares of capital stock or
voting securities and no outstanding commitments to issue any shares of capital
stock or voting securities, other than pursuant to the exercise of options
outstanding as of such date under the Target Stock Option Plan and warrants
outstanding as of such date as set forth in Schedule 2.2. Attached to or as set
forth in Schedule 2.2 to the Target Disclosure Schedule is a true and correct
list of Target's shareholders and any persons with rights to acquire Target
securities, which list will be promptly updated from time to time prior to
Closing to reflect any changes thereto (which changes are in any event subject
to the restrictions imposed under Section 4.2 below). All outstanding shares of
Target Capital Stock are duly authorized, validly issued, fully paid and
non-assessable and are free of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders thereof, and, except as set
forth on Schedule 2.2, are not subject to preemptive rights or rights of first
refusal created by statute, the Certificate of Incorporation or Bylaws of Target
or any agreement to which Target is a party or by which it is bound. Target has
reserved (i) sufficient shares of Common Stock for issuance upon conversion of
the Preferred, and (ii) 150,000 shares of Common Stock for issuance to employees
8
<PAGE>
and consultants pursuant to the Target Stock Option Plan, of which no shares
have been issued pursuant to option exercises or direct stock purchases, 117,500
shares are subject to outstanding, unexercised options, and 32,500 shares are
available for issuance thereunder and (iii) 41,254 shares of Series B Preferred
Stock for issuance to upon exercise of the outstanding warrants to purchase
shares of Series B Preferred Stock as set forth on Schedule 2.2 (the
"Warrants"). Except for (i) the rights created pursuant to this Agreement and
(ii) Target's right to repurchase any unvested shares under the Target Stock
Option Plan and (iii) the Warrants, there are no other options, warrants, calls,
rights, commitments or agreements of any character to which Target is a party or
by which it is bound obligating Target to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of capital stock of Target or obligating Target to grant, extend,
accelerate the vesting of, change the price of, or otherwise amend or enter into
any such option, warrant, call, right, commitment or agreement. Except for the
agreements contemplated by this Agreement and the agreements set forth on
Schedule 2.2, there are no contracts, commitments or agreements relating to
voting, purchase or sale of Target's capital stock (i) between or among Target
and any of its securityholders and (ii) to the Target's knowledge, between or
among any of Target's securityholders. The terms of the Target Stock Option Plan
and the applicable stock option agreements do not prohibit the assumption or
substitution of options to purchase Acquiror Common Stock as provided in this
Agreement, nor is there any requirement for the consent or approval of the
holders of such securities, the Target Shareholders, or otherwise to such
assumption or substitution. True and complete copies of all agreements and
instruments relating to or issued under the Target Stock Option Plan have been
provided to Acquiror and such agreements and instruments have not been amended,
modified or supplemented other than has been provided to Acquiror, and there are
no agreements to amend, modify or supplement such agreements or instruments in
any case from the form provided to Acquiror. All outstanding shares of Common
Stock and Preferred Stock were issued in compliance with all applicable federal
and state securities laws.
2.3 Authority. Target has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Target, subject only to the
approval of the Merger by Target's shareholders as contemplated by Section
6.1(a). This Agreement has been duly executed and delivered by Target and
constitutes the valid and binding obligation of Target enforceable against
Target in accordance with its terms subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and other laws of general
applicability relating to or affecting creditors' rights and to general equity
principles. Except as set forth in Schedule 2.3, the execution and delivery of
this Agreement by Target does not, and the consummation of the transactions
contemplated hereby will not, conflict with, or result in any violation of, or
default under (with or without notice or lapse of time, or both), or give rise
to a right of termination, cancellation or acceleration of any obligation
(including, but not limited to, any increase in payments due to any entity or
person) or loss of any benefit under (i) any provision of the Certificate of
Incorporation or Bylaws of Target, as amended, or (ii) any material mortgage,
indenture, lease, contract or other material agreement or instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Target or any of its properties or
assets. No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
9
<PAGE>
other governmental authority or instrumentality ("Governmental Entity") is
required by or with respect to Target in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby, except for (i) the filing of the Certificate of Merger, together with
the required officers' certificates, as provided in Section 1.2; (ii) such
consents, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable state securities laws and the
securities laws of any foreign country; (iii) such filings as may be required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
("HSR"); and (iv) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not have a Material Adverse
Effect on Target and would not prevent, or materially alter or delay any of the
transactions contemplated by this Agreement.
2.4 Financial Statements. Target has delivered to Acquiror its
audited financial statements (including balance sheets and the related
statements of income, stockholders' equity and changes in financial position)
for the fiscal year ended December 31, 1998 certified by Arthur Andersen LLP,
certified public accountants, and its unaudited financial statements (balance
sheet, statement of operations and statement of cash flows) as at, and for the
three-month period ended March 31, 1999 (collectively, the "Financial
Statements"). The Financial Statements have been derived from the books and
records of Target and have been prepared in accordance with United States
generally accepted accounting principles ( "GAAP") (except that the unaudited
financial statements do not have notes thereto) applied on a consistent basis
throughout the periods indicated and with each other. The Financial Statements
fairly present the financial condition and operating results of Target as of the
dates, and for the periods, indicated therein, subject, the case of interim
statements, to normal year-end audit adjustments. Target maintains and will
continue to maintain an adequate system of internal controls established and
administered in accordance with GAAP.
2.5 Absence of Certain Changes. Since December 31, 1998, (the
"Target Balance Sheet Date"), Target has conducted its business in the ordinary
course consistent with past practice and there has not occurred: (i) any change,
event or condition (whether or not covered by insurance) that has resulted in,
or might reasonably be expected to result in, a Material Adverse Effect to
Target; (ii) any acquisition, sale or transfer of any material asset of Target;
(iii) any change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by Target or any revaluation by
Target of any of its assets; (iv) any declaration, setting aside, or payment of
a dividend or other distribution with respect to the shares of Target, or any
direct or indirect redemption, purchase or other acquisition by Target of any of
its shares of capital stock; (v) any Material Contract entered into by Target,
or any material amendment or termination of, or default under, any Material
Contract to which Target is a party or by which it is bound; (vi) any amendment
or change to the Certificate of Incorporation or Bylaws of Target; (vii) any
increase in or modification of the compensation or benefits payable or to become
payable by Target to any of its directors or employees, except in accordance
with agreements or course of practice entered into prior to December 31, 1998,
(viii) except as set forth in the Target Disclosure Schedule, any issuance of
any stock, notes, bonds or other securities other than pursuant to the exercise
of any previously granted Option to purchase stock or conversion of outstanding
securities; (ix) any mortgage, pledge or suffering to exist any lien or
10
<PAGE>
encumbrance or charge on any material assets or properties, tangible or
intangible, except for liens for taxes not yet delinquent and such other liens,
encumbrances or charges which would not, individually or in the aggregate, have
a Material Adverse Effect; (x) any waiver of any rights of material value or
cancellation of any material debts or claims; (xi) incurred any material
obligation or liability (absolute or contingent) except current liabilities and
obligations incurred in the ordinary course of business consistent with past
practice; (xii) except as set forth in Schedule 2.5, entered into any employment
agreement or adopted, or amended in any material respect, any collective
bargaining agreement or employee benefit plan; or (xiii) any negotiation or
agreement by Target to do any of the things described in the preceding clauses
(i) through (xii) (other than negotiations with Acquiror and its representatives
regarding the transactions contemplated by this Agreement).
2.6 Absence of Undisclosed Liabilities. Target has no material
obligations or liabilities of any nature (matured or unmatured, fixed or
contingent, whether due or to become due) other than (i) those set forth or
adequately provided for in the Balance Sheet included in the Financial
Statements as of March 31, 1999 (the "Target Balance Sheet"), (ii) those
incurred in the ordinary course of business since March 31, 1999 and not
required to be set forth in the Target Balance Sheet under GAAP, (iii) those
incurred in connection with the execution of this Agreement, and (iv) those set
forth on Schedule 2.6.
2.7 Litigation. Except as set forth on Schedule 2.7, there is
no private or governmental action, suit, proceeding, claim, arbitration or
investigation pending before any agency, court or tribunal, foreign or domestic,
or, to the knowledge of Target, threatened against Target or any of its
properties or any of its officers or directors (in their capacities as such).
There is no judgment, decree or order against Target, or, to the knowledge of
Target, any of its directors or officers (in their capacities as such), that
could prevent, enjoin, or materially alter or delay any of the transactions
contemplated by this Agreement, or that could reasonably be expected to have a
Material Adverse Effect on Target. The Target Disclosure Schedule also lists all
litigation that Target has pending against other parties.
2.8 Restrictions on Business Activities. There is no
agreement, judgment, injunction, order or decree binding upon Target, or
currently pending, threatened or under negotiation, which has or could
reasonably be expected to have the effect of prohibiting or impairing any
current or future business practice of Target, any acquisition of property by
Target or the conduct of business by Target as currently conducted or as
proposed to be conducted by Target.
2.9 Governmental Authorization. Target has obtained each
federal, state, county, local or foreign governmental consent, license, permit,
grant, or other authorization of a Governmental Entity (i) pursuant to which
Target currently operates or holds any interest in any of its properties or (ii)
that is required for the operation of Target's business or the holding of any
such interest ((i) and (ii) herein collectively called "Target Authorizations"),
and all of such Target Authorizations are in full force and effect, except where
the failure to obtain or have any such Target Authorizations could not
reasonably be expected to have a Material Adverse Effect on Target.
11
<PAGE>
2.10 Title to Property. Schedule 2.10 identifies each parcel
of real property leased by Target (the "Leased Property"). Target does not own
any interest in real property. Target has good, valid and subsisting leasehold
title to the Leased Property and good and valid title to the personal property,
tangible and intangible, reflected in the Target Balance Sheet or acquired after
the Target Balance Sheet Date (except properties, interests in properties and
assets sold or otherwise disposed of since the Target Balance Sheet Date in the
ordinary course of business), or with respect to leased or licensed properties
and assets, valid and subsisting leasehold or licensed interests in, free and
clear of all mortgages, liens, pledges, charges or encumbrances of any kind or
character, except (i) the lien of current taxes not yet due and payable, (ii)
such imperfections of title, liens and easements as do not and will not
materially detract from or interfere with the use of the properties subject
thereto or affected thereby, or otherwise materially impair business operations
involving such properties and (iii) liens securing debt which is reflected on
the Target Balance Sheet. Such assets constitute all of the assets and
properties, tangible and intangible, reasonably necessary to conduct Target's
business substantially as presently conducted. The plants, property and
equipment of Target that are used in the operations of its businesses are in
good operating condition and repair, subject to normal wear and tear. All
assets, tangible and intangible used in the operations of Target are reflected
in the Target Balance Sheet to the extent generally accepted accounting
principles require the same to be reflected.
2.11 Intellectual Property.
(a) Target owns, or is licensed or otherwise possesses
legally enforceable rights to use all patents, trademarks, trade names, domain
names, service marks, copyrights, and any applications therefor, schematics,
technology, know-how, trade secrets, inventions, ideas, algorithms, processes,
computer software programs or applications (in source code and/or object code
form), and tangible or intangible proprietary information or material
("Intellectual Property") that are used or proposed to be used in the business
of Target as currently conducted or as proposed to be conducted by Target
("Target Intellectual Property"). Except as set forth on Schedule 2.11, Target
has not (i) licensed, or agreed under any condition to license or deliver, any
of Target Intellectual Property (other than of its HTML pages) in source code
form to any party or (ii) entered into any exclusive agreements relating to its
Intellectual Property with any party (except with regard to any graphical user
interface).
(b) Schedule 2.11 lists (i) all patents and patent
applications and all registered trademarks (and trademarks for which an
application has been filed), trade names, domain names, and service marks,
registered copyrights, included in the Target Intellectual Property, including
the jurisdictions in which each such Intellectual Property right has been issued
or registered or in which any application for such issuance and registration has
been filed, (ii) all licenses, sublicenses and other agreements as to which
Target is a party and pursuant to which any person is authorized to use any
Intellectual Property (other than licenses to users of the prizepoint.com web
site pursuant to the web site's terms and conditions), and (iii) except as set
forth in Schedule 2.11, all licenses, sublicenses and other agreements as to
which Target is a party and pursuant to which Target is authorized to use any
third party patents, trademarks or copyrights, including software ("Third Party
Intellectual Property Rights") which are incorporated in, are, or form a part of
any Target product.
12
<PAGE>
(c) To Target's knowledge, there is no unauthorized use,
disclosure, infringement or misappropriation of any Target Intellectual
Property, or any Intellectual Property right of any third party to the extent
licensed by or through Target, by any third party, including any employee or
former employee of Target. Target has not entered into any agreement to
indemnify any other person against any charge of infringement of any
Intellectual Property, other than indemnification provisions contained in
purchase orders or license agreements arising in the ordinary course of
business.
(d) Except as set forth on Schedule 2.11, Target is not,
nor will it be as a result of the execution and delivery of this Agreement or
the performance of its obligations under this Agreement, in breach of any
license, sublicense or other agreement relating to the Target Intellectual
Property or Third Party Intellectual Property Rights.
(e) All patents, registered trademarks, registered
service marks and registered copyrights held by Target are valid and subsisting.
Target (i) has not been sued in any suit, action or proceeding which involves a
claim of infringement of any patents, trademarks, service marks, copyrights or
violation of any trade secret or other proprietary right of any third party;
(ii) has no knowledge that the manufacturing, marketing, licensing or sale of
its products infringes any patent, trademark, service mark, copyright, trade
secret or other proprietary right of any third party and (iii) has not brought
any action, suit or proceeding for infringement of Intellectual Property or
breach of any license or agreement involving Target Intellectual Property
against any third party.
(f) Target has secured valid written assignments from all
consultants and employees who contributed to the creation or development of
Target Intellectual Property of the rights to such contributions that Target
does not already own by operation of law.
(g) Target has taken all reasonable steps to protect and
preserve the confidentiality of all Target Intellectual Property not otherwise
protected by patents, patent applications or copyright ("Confidential
Information"). All use, disclosure or appropriation of Confidential Information
owned by Target by or to a third party (apart from counsel or others bound by
law to hold such information confidential) has been pursuant to the terms of a
written agreement between Target and such third party. All use, disclosure or
appropriation of Confidential Information not owned by Target has been pursuant
to the terms of a written agreement between Target and the owner of such
Confidential Information, or is otherwise lawful.
2.12 Environmental Matters.
(a) The following terms shall be defined as follows:
(i) "Environmental Laws" shall mean any federal,
state or local laws, ordinances, codes, regulations, rules, policies and orders
relating to the protection of the environment, or that classify, regulate, call
for the remediation of, require reporting with respect to, or list or define
air, water, groundwater, solid waste, hazardous or toxic substances, materials,
wastes, pollutants or contaminants.
13
<PAGE>
(ii) "Hazardous Materials" shall mean any toxic or
hazardous substance, material or waste or any pollutant or contaminant, or
infectious or radioactive substance or material, including without limitation,
those substances, materials and wastes defined in or regulated under any
Environmental Laws.
(b) To Target's knowledge, (i) Target has operated its
business in the Leased Property, and has disposed of all Hazardous Materials
therefrom, if any, in accordance with all Environmental Laws; and (ii) Target
has received no notice (verbal or written) of any noncompliance of the Leased
Property or Target's operations thereon with Environmental Laws; (iii) no
administrative actions or suits are pending or threatened in writing against
Target relating to a violation of any Environmental Laws; and (iv) Target is not
a potentially responsible party under the federal Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA), or state analog statute,
arising out of any action or inaction by Target occurring prior to the date
hereof;
2.13 Taxes.
(a) Target and any consolidated, combined, unitary or
aggregate group for Tax (as defined below) purposes of which Target is or has
been a member, have properly completed and timely filed all Tax Returns required
to be filed by them and have paid all Taxes shown thereon to be due. Target has
provided adequate accruals in accordance with generally accepted accounting
principles in its Financial Statements for any Taxes that have not been paid,
whether or not shown as being due on any Tax Returns. Target has no material
liability for unpaid Taxes accruing after the date of its latest Financial
Statements. There is (i) no material claim for Taxes that is a lien against the
property of Target or is being asserted against Target other than liens for
Taxes not yet due and payable, (ii) no audit of any Tax Return of Target being
conducted by a Tax Authority, (iii) no extension of the statute of limitations
on the assessment of any Taxes granted by Target and currently in effect, and
(iv) no agreement, contract or arrangement to which Target is a party that may
result in the payment of any amount that would not be deductible by reason of
Section 280G or Section 404 of the Code. There has been no change in ownership
of Target that has caused the utilization of any losses of such entities to be
limited pursuant to Section 382 of the Code. Target has not been and will not be
required to include any material adjustment in Taxable income for any Tax period
(or portion thereof) pursuant to Section 481 or 263A of the Code or any
comparable provision under state or foreign Tax laws as a result of
transactions, events or accounting methods employed prior to the Merger. Target
has not filed nor will file any consent to have the provisions of paragraph
341(f)(2) of the Code (or comparable provisions of any state Tax laws) apply to
Target. Target is not a party to any Tax sharing or Tax allocation agreement nor
does Target have any liability or potential liability to another party under any
such agreement. Target has not filed any disclosures under Section 6662 or
comparable provisions of state, local or foreign law to prevent the imposition
of penalties with respect to any Tax reporting position taken on any Tax Return.
Target has never been a member of a consolidated, combined or unitary group of
which Target was not the ultimate parent corporation. For purposes of this
Agreement, the following terms have the following meanings: "Tax" (and, with
correlative meaning, "Taxes" and "Taxable") means (i) any net income,
alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, withholding, payroll,
14
<PAGE>
employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax, governmental
fee or other like assessment or charge of any kind whatsoever, together with any
interest or any penalty, addition to tax or additional amount imposed by any
governmental entity (a "Tax Authority") responsible for the imposition of any
such tax (domestic or foreign), (ii) any liability for the payment of any
amounts of the type described in (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any Taxable period, and
(iii) any liability for the payment of any amounts of the type described in (i)
or (ii) as a result of being a transferee of or successor to any person or as a
result of any express or implied obligation to indemnify any other person. As
used herein, "Tax Return" shall mean any return, statement, report or form
(including, without limitation, estimated tax returns and reports, withholding
tax returns and reports and information reports and returns) required to be
filed with respect to Taxes. Target has in its possession receipts for any Taxes
paid to foreign Tax authorities. Target has never been a "personal holding
company" within the meaning of Section 542 of the Code or a "United States real
property holding corporation" within the meaning of Section 897 of the Code.
(b) Target has provided the following information to
Acquiror: (i) a complete list of the types of Tax Returns being filed by Target
in each taxing jurisdiction, (ii) the year of the commencement of the filing of
each such type of Tax Return, (iii) all closed years with respect to each such
type of Tax Return filed in each jurisdiction, (iv) all material Tax elections
filed in each jurisdiction by Target, (v) the loss carryovers of Target, and
(vi) receipts for any Taxes paid to foreign Tax authorities. Target shall
provide Acquiror and its accountants, counsel and other representatives
reasonable access, during normal business hours during the period prior to the
Effective Time, to all of Target's Tax Returns and other records and workpapers
relating to Taxes.
2.14 Employee Benefit Plans.
(a) Schedule 2.14 lists, with respect to Target and any
trade or business (whether or not incorporated) which is treated as a single
employer with Target (an "ERISA Affiliate") within the meaning of Section
414(b), (c), (m) or (o) of the Code, (i) all material employee benefit plans (as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), (ii) each outstanding loan to a non-officer employee in
excess of $10,000, loans to officers and directors and any stock option, stock
purchase, phantom stock, stock appreciation right, supplemental retirement,
severance, sabbatical, medical, dental, vision care, disability, employee
relocation, cafeteria benefit (Code Section 125) or dependent care (Code Section
129), life insurance or accident insurance plans, programs or arrangements,
(iii) all bonus, pension, profit sharing, savings, deferred compensation or
incentive plans, programs or arrangements, (iv) other fringe or employee benefit
plans, programs or arrangements that apply to senior management of Target and
that do not generally apply to all employees, and (v) any current or former
employment or executive compensation or severance agreements, written or
otherwise, as to which unsatisfied obligations of Target of greater than $10,000
remain for the benefit of, or relating to, any present or former employee,
consultant or director of Target (together, the "Target Employee Plans").
(b) Target has furnished to Acquiror a copy of each of
the Target Employee Plans and related plan documents (including trust documents,
insurance policies or contracts, employee booklets, summary plan descriptions
15
<PAGE>
and other authorizing documents, and any material employee communications
relating thereto) and has, with respect to each Target Employee Plan which is
subject to ERISA reporting requirements, provided copies of the Form 5500
reports filed for the last three plan years. Any Target Employee Plan intended
to be qualified under Section 401(a) of the Code has either obtained from the
Internal Revenue Service a favorable determination letter as to its qualified
status under the Code, including all amendments to the Code effected by the Tax
Reform Act of 1986 and subsequent legislation, or has applied to the Internal
Revenue Service for such a determination letter prior to the expiration of the
requisite period under applicable Treasury Regulations or Internal Revenue
Service pronouncements in which to apply for such determination letter and to
make any amendments necessary to obtain a favorable determination or has been
established under a standardized prototype plan for which an Internal Revenue
Service opinion letter has been obtained by the plan sponsor and is valid as to
the adopting employer. Target has also furnished Acquiror with the most recent
Internal Revenue Service determination or opinion letter issued with respect to
each such Target Employee Plan, and nothing has occurred since the issuance of
each such letter which could reasonably be expected to cause the loss of the
tax-qualified status of any Target Employee Plan subject to Code Section 401(a).
Target has also furnished Acquiror with all registration statements and
prospectuses prepared in connection with each Target Employee Plan.
(c) (i) None of the Target Employee Plans promises or
provides retiree medical or other retiree welfare benefits to any person; (ii)
there has been no "prohibited transaction," as such term is defined in Section
406 of ERISA and Section 4975 of the Code, with respect to any Target Employee
Plan, which could reasonably be expected to have, in the aggregate, a Material
Adverse Effect on Target; (iii) each Target Employee Plan has been administered
in accordance with its terms and in compliance with the requirements prescribed
by any and all statutes, rules and regulations (including ERISA and the Code),
except as would not have, in the aggregate, a Material Adverse Effect on Target,
and Target and each ERISA Affiliate have performed all obligations required to
be performed by them under, are not in any material respect in default under or
violation of, and have no knowledge of any material default or violation by any
other party to, any of the Target Employee Plans; (iv) neither Target nor any
subsidiary or ERISA Affiliate is subject to any liability or penalty under
Sections 4976 through 4980 of the Code or Title I of ERISA with respect to any
of the Target Employee Plans; (v) all material contributions required to be made
by Target or any subsidiary or ERISA Affiliate to any Target Employee Plan have
been made on or before their due dates and a reasonable amount has been accrued
for contributions to each Target Employee Plan for the current plan years; (vi)
with respect to each Target Employee Plan, no "reportable event" within the
meaning of Section 4043 of ERISA (excluding any such event for which the thirty
(30) day notice requirement has been waived under the regulations to Section
4043 of ERISA) nor any event described in Section 4062, 4063 or 4041 or ERISA
has occurred; (vii) no Target Employee Plan is covered by, and neither Target
nor any subsidiary or ERISA Affiliate has incurred or expects to incur any
liability under Title IV of ERISA or Section 412 of the Code; and (viii) each
Target Employee Plan can be amended, terminated or otherwise discontinued after
the Effective Time in accordance with its terms, without liability to Acquiror
(other than ordinary administrative expenses typically incurred in a termination
event). With respect to each Target Employee Plan subject to ERISA as either an
employee pension plan within the meaning of Section 3(2) of ERISA or an employee
welfare benefit plan within the meaning of Section 3(1) of ERISA, Target has
prepared in good faith and timely filed all requisite governmental reports
(which were true and correct as of the date filed) and has properly and timely
16
<PAGE>
filed and distributed or posted all notices and reports to employees required to
be filed, distributed or posted with respect to each such Target Employee Plan.
No suit, administrative proceeding, action or other litigation has been brought,
or to the best knowledge of Target is threatened, against or with respect to any
such Target Employee Plan, including any audit or inquiry by the IRS or United
States Department of Labor. No payment or benefit which will or may be made by
Target to any Employee will be characterized as an "excess parachute payment"
within the meaning of Section 280G(b)(1) of the Code.
(d) With respect to each Target Employee Plan, Target has
complied with (i) the applicable health care continuation and notice provisions
of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and the
regulations (including proposed regulations) thereunder, (ii) the applicable
requirements of the Family Medical and Leave Act of 1993 and the regulations
thereunder, except to the extent that such failure to comply would not, in the
aggregate, have a Material Adverse Effect on Target and (iii) the applicable
requirements of the Health Insurance Portability and Accountability Act of 1996
and the regulations (including proposed regulations) thereunder, except to the
extent that such failure to comply would not, in the aggregate, have a Material
Adverse Effect on Target.
(e) The consummation of the transactions contemplated by
this Agreement will not (i) entitle any current or former employee or other
service provider of Target or any ERISA Affiliate to severance benefits or any
other payment, except as expressly provided in this Agreement, or (ii)
accelerate the time of payment or vesting, or increase the amount of
compensation due any such employee or service provider.
(f) There has been no amendment to, written
interpretation or announcement (whether or not written) by Target or any ERISA
Affiliate relating to, or change in participation or coverage under, any Target
Employee Plan which would materially increase the expense of maintaining such
Plan above the level of expense incurred with respect to that Plan for the most
recent fiscal year included in Target's financial statements.
(g) Pension Plans. Target does not currently maintain,
sponsor, participate in or contribute to, nor has it ever maintained,
established, sponsored, participated in, or contributed to, any pension plan
(within the meaning of Section 3(2) of ERISA) which is subject to Part 3 of
Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of the Code.
(h) Multiemployer Plans. Neither Target nor any ERISA
Affiliate is a party to, or has made any contribution to or otherwise incurred
any obligation under, any "multiemployer plan" as defined in Section 3(37) of
ERISA.
2.15 Certain Agreements Affected by the Merger. Neither the
execution and delivery of this Agreement nor the consummation of the transaction
contemplated hereby will (i) result in any payment (including, without
limitation, severance, unemployment compensation, golden parachute, bonus or
17
<PAGE>
otherwise) becoming due to any director or employee of Target, (ii) materially
increase any benefits otherwise payable by Target to its employees, agents,
consultants and directors, or (iii) except as set forth in Schedule 2.15, result
in the acceleration of the time of payment or vesting of any such benefits.
2.16 Employee Matters. Target is in compliance in all material
respects with all currently applicable laws and regulations respecting
employment, discrimination in employment, terms and conditions of employment,
wages, hours and occupational safety and health and employment practices, and is
not engaged in any unfair labor practice. Target has withheld all amounts
required by law or by agreement to be withheld from the wages, salaries, and
other payments to employees; and is not liable for any arrears of wages or any
taxes or any penalty for failure to comply with any of the foregoing. Target is
not liable for any payment to any trust or other fund or to any governmental or
administrative authority, with respect to unemployment compensation benefits,
social security or other benefits or obligations for employees (other than
routine payments to be made in the normal course of business and consistent with
past practice). There are no pending claims against Target under any workers
compensation plan or policy or for long term disability. There are no
controversies pending or, to Target's knowledge, threatened, between Target and
any of its employees, which controversies have or could reasonably be expected
to result in an action, suit, proceeding, claim, arbitration or investigation
before any agency, court or tribunal, foreign or domestic. Target is not a party
to any collective bargaining agreement or other labor unions contract nor does
Target know of any activities or proceedings of any labor union or organize any
such employees. To Target's knowledge, no employees of Target are in violation
of any term of any employment contract, patent disclosure agreement,
noncompetition agreement, or any restrictive covenant to a former employer
relating to the right of any such employee to be employed by Target because of
the nature of the business conduced or presently proposed to be conducted by
Target or to the use of trade secrets or proprietary information of others. No
employees of Target have given notice to Target, nor is Target otherwise aware,
that any such employee intends to terminate his or her employment with Target.
2.17 Interested Party Transactions. Except as set forth on
Schedule 2.17, Target is not indebted to, nor does it owe any contractual
commitment or arrangement to, with or for the benefit of, any director, officer,
employee, affiliate or agent of Target (except for amounts due as normal
salaries and bonuses and in reimbursement of ordinary expenses), and is not
indebted to, nor does it owe any contractual commitment or arrangement to, with
or for the benefit of, Target. Except for normal salaries and bonuses and
reimbursement of ordinary expenses, since December 31, 1998, Target has not made
any payments, loans or advances of any kind, or paid any dividends or
distributions of any kind, to or for the benefit of any stockholder of Target,
or any of their respective affiliates, associates or family members.
2.18 Insurance. Schedule 2.18 is a complete and correct
schedule of all insurance policies held by Target. There is no material claim
pending under any of such policies or bonds as to which coverage has been
questioned, denied or disputed by the underwriters of such policies or bonds.
All premiums due and payable under all such policies and bonds have been paid
and Target is otherwise in compliance with the terms of such policies and bonds.
Target has no knowledge of any threatened termination of, or material premium
increase with respect to, any of such policies.
18
<PAGE>
2.19 Compliance With Laws. Target has complied in all material
respects with, are not, to Target's knowledge, in violation of, and have not
received any notices of violation with respect to, any federal, state, local or
foreign statute, law or regulation with respect to the conduct of its business,
or the ownership or operation of its business.
2.20 Minute Books. The minute books of Target made available
to Acquiror contain a complete and accurate summary of all meetings of the board
of directors or any committee thereof and shareholders or actions by written
consent since the time of incorporation of Target through the date of this
Agreement, and reflect all transactions referred to in such minutes accurately
in all material respects.
2.21 Brokers' and Finders' Fees. Target has not incurred, nor
will it incur, directly or indirectly, any liability for brokerage or finders'
fees or agents' commissions or investment bankers' fees or any similar charges
in connection with this Agreement or any transaction contemplated hereby.
2.22 Shareholder Agreement; Irrevocable Proxies. All of the
persons and/or entities deemed "Affiliates" of Target within the meaning of Rule
144 promulgated under the Securities Act and holders of more than 50% of the
outstanding Common Stock and Preferred Stock have agreed in writing to vote for
approval of the Merger pursuant to voting agreements attached hereto as Exhibit
A ("Shareholder Agreements"), and pursuant to Irrevocable Proxies attached
thereto as Exhibit A ("Irrevocable Proxies").
2.23 Vote Required. The affirmative vote of at least 50% of
the Target Common Stock and Target Preferred Stock outstanding on the record
date set for the Target Shareholders Meeting is the only vote of the holders of
any of Target's Capital Stock necessary to approve this Agreement and the
transactions contemplated hereby.
2.24 Board Approval. The Board of Directors of Target has
unanimously (i) approved this Agreement and the Merger, (ii) determined that the
Merger is in the best interests of the shareholders of Target and is on terms
that are fair to such shareholders and (iii) recommended that the shareholders
of Target approve this Agreement and the Merger.
2.25 Material Contracts. Except for the contracts and
agreements described in Schedule 2.25 (collectively, the "Material Contracts"),
Target is not a party to or bound by any Material Contract, including without
limitation:
(a) any distributor or manufacturer's representative
contract;
(b) any sales, advertising or agency contract in excess
of $25,000 over the life of the company;
(c) any continuing contract for the purchase of
materials, supplies, equipment or services involving in the case of any such
contact more than $25,000 over the life of the contract;
(d) any contract that expires or may be renewed at the
option of any person other than the Target so as to expire more than one year
after the date of this Agreement;
19
<PAGE>
(e) any trust indenture, mortgage, promissory note, loan
agreement or other contract for the borrowing of money, any currency exchange,
commodities or other hedging arrangement or any leasing transaction of the type
required to be capitalized in accordance with generally accepted accounting
principles;
(f) any contract for capital expenditures in excess of
$10,000 in the aggregate;
(g) any contract limiting the freedom of the Target to
engage in any line of business or to compete with any other corporation,
partnership, limited liability company, trust, individual or other entity, or
any confidentiality, secrecy or non-disclosure contract;
(h) any contract pursuant to which the Target is a lessor
of any machinery, equipment, motor vehicles, office furniture, fixtures or other
personal property, pursuant to which payments in excess of $25,000 remain
outstanding;
(i) any contract with any person with whom the Target
does not deal at arm's length; or
(j) any agreement of guarantee, support, indemnification,
assumption or endorsement of, or any similar commitment with respect to, the
obligations, liabilities (whether accrued, absolute, contingent or otherwise) or
indebtedness of any other Person.
2.26 No Breach of Material Contracts. The Target has performed
all of the obligations required to be performed by it and is entitled to all
benefits under, and is not alleged to be in default in respect of any Material
Contract. Each of the Material Contracts is in full force and effect, unamended
(except as disclosed on Schedule 2.25), and there exists no default or event of
default or event, occurrence, condition or act, with respect to Target or to
Target's knowledge with respect to the other contracting party, which, with the
giving of notice, the lapse of the time or the happening of any other event or
conditions, would become a default or event of default under any Material
Contract. True, correct and complete copies of all Material Contracts have been
delivered to the Acquiror.
2.27 Product Releases. Target has provided Acquiror a Schedule
of Product Releases, which Schedule is attached hereto as Schedule 2.27. Target
has a good faith reasonable belief that it can achieve the release of products
on the schedule described in Schedule 2.27 and is not currently aware of any
change in its circumstances or other fact that has occurred that would cause it
to believe that it will be unable to meet such release schedule.
2.28 Year 2000. None of the products and services sold,
licensed, rendered, or otherwise provided by Target in the conduct of its
business will malfunction, will cease to function, will generate materially
incorrect data or will produce materially incorrect results and will not cause
any of the above with respect to the property or business of third parties using
such products or services when processing, providing or receiving (i)
date-related data from, into and between the Twentieth (20th) and Twenty-First
(21st) centuries, or (ii) date-related data in connection with any valid date in
the Twentieth (20th) and Twenty-First (21st) centuries, causing a Material
Adverse Effect on Target, provided that the hardware, software and data
environment in which such products or services operate or with which they
interact does not malfunction, cease to function, generate materially incorrect
20
<PAGE>
data or produce materially incorrect results or cause any of the above with
respect to the property or business of third parties when processing, providing
or receiving such date-related data.
2.29 Accounting and Tax Matters. As of the date hereof,
neither Target nor any of its Affiliates has taken or agreed to take any action,
nor does Target have knowledge of any fact or circumstance, that would prevent
Acquiror from accounting for the business combination to be effected by the
Merger as a pooling of interests or prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
2.30 Representations Complete. None of the representations or
warranties made by Target herein or in any Schedule hereto, including the Target
Disclosure Schedule, or certificate furnished by Target pursuant to this
Agreement, when all such documents are read together in their entirety, contains
or will contain at the Effective Time any untrue statement of a material fact,
or omits or will omit at the Effective Time to state any material fact necessary
in order to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND ACQUISITION SUB
Except as disclosed in a document of even date herewith and
delivered by Acquiror and Acquisition Sub to Target prior to the execution and
delivery of this Agreement and referring to the representations and warranties
in this Agreement (the "Acquiror Disclosure Schedule"), Acquiror and Acquisition
Sub represent and warrant to Target as follows:
3.1 Organization, Standing and Power. Acquiror and Acquisition
Sub are each a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of organization. Acquiror and Acquisition Sub
each has the corporate power to own its properties and to carry on its business
as now being conducted and as proposed to be conducted and is duly qualified to
do business and is in good standing in each jurisdiction in which the failure to
be so qualified and in good standing would have a Material Adverse Effect on
Acquiror. Neither Acquiror nor Acquisition Sub is in violation of any of the
provisions of its Articles of Incorporation or Bylaws or equivalent
organizational documents.
3.2 Capital Structure. The authorized capital stock of
Acquiror consists of 28,000,000 shares of Common Stock, par value $0.05, of
which 459,698 were issued and outstanding as of the close of business on the
date hereof. There are no other outstanding shares of capital stock or voting
securities and no outstanding commitments to issue any shares of capital stock
or voting securities, other than pursuant to the exercise of options outstanding
as of such date under the Acquiror's stock option plan. All outstanding shares
of Acquiror Capital Stock are duly authorized, validly issued, fully paid and
non-assessable, and are not subject to preemptive rights or rights of first
refusal created by statute, the Certificate of Incorporation or Bylaws of
Acquiror or any agreement to which Acquiror is a party or by which it is bound.
Except for Acquiror's right to repurchase any unvested shares under its stock
option plan, there are no other options, warrants, calls, rights, commitments or
21
<PAGE>
agreements of any character to which Acquiror is a party or by which it is bound
obligating Acquiror to issue, deliver, sell, repurchase or redeem, or cause to
be issued, delivered, sold, repurchased or redeemed, any shares of capital stock
of Acquiror or obligating Acquiror to grant, extend, accelerate the vesting of,
change the price of, or otherwise amend or enter into any such option, warrant,
call, right, commitment or agreement and there are no outstanding rights to
compel Acquiror to register any shares of Acquiror's capital stock, whether
outstanding or to be issued upon the exercise or conversion of any security. A
true and complete copy of all of Acquiror's stock option plans shall be provided
to Target prior to the Effective Time and there is no agreement to effect any
modification, amendment or supplement such plans. All outstanding shares of
Common Stock were issued in compliance with all applicable federal and state
securities laws.
3.3 Authority. Acquiror and Acquisition Sub each has all
requisite corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Acquiror
and Acquisition Sub. This Agreement has been duly executed and delivered by
Acquiror and Acquisition Sub, and constitutes the valid and binding obligations
of Acquiror and Acquisition Sub, enforceable against them in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and other laws of general applicability relating to or affecting
creditors' rights and to general equity principles. The execution and delivery
of this Agreement do not, and the consummation of the transactions contemplated
hereby will not, conflict with, or result in any violation of, or default under
(with or without notice or lapse of time, or both), or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of a benefit
under (i) any provision of the Articles of Incorporation or Bylaws of Acquiror
or Acquisition Sub, as amended, or (ii) any material mortgage, indenture, lease,
contract or other agreement or instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Acquiror or Acquisition Sub, or to their respective properties or
assets. No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity, is required by or with
respect to Acquiror or Acquisition Sub in connection with the execution and
delivery of this Agreement by Acquiror and Acquisition Sub, or the consummation
by Acquiror and Acquisition Sub of the transactions contemplated hereby, except
for (i) the filing of the Certificate of Merger, together with the required
officers' certificates, as provided in Section 1.2, (ii) any filings as may be
required under applicable state securities laws and the securities laws of any
foreign country, and (iii) such other consents, authorizations, filings,
approvals and registrations which, if not obtained or made, would not have a
Material Adverse Effect on Acquiror and would not prevent, materially alter or
delay any of the transactions contemplated by this Agreement.
3.4 Financial Statements. Acquiror has made available to
Target its audited financial statements on a consolidated basis for the three
fiscal years ended December 31, 1996, 1997 and 1998 and its unaudited financial
statements (balance sheet, statement of operations and statement of cash flows)
on a consolidated basis as at, and for the three-month period ended, March 31,
1999 (collectively, the "Acquiror Financial Statements") certified by KPMG LLP,
certified public accountants. The Acquiror Financial Statements have been
prepared in accordance with GAAP (except that the unaudited financial statements
do not have notes thereto) applied on a consistent basis throughout the periods
indicated and with each other. The Acquiror Financial Statements fairly present
22
<PAGE>
the financial condition and operating results of Acquiror as of the dates, and
for the periods, indicated therein, subject to normal year-end audit
adjustments. Acquiror maintains and will continue to maintain an adequate system
of internal controls established and administered in accordance with GAAP.
3.5 EASDAQ Filing. Acquiror has delivered to Target its
Preliminary Prospectus in connection with its proposed EASDAQ offering, a draft
of which is attached hereto as Exhibit D which Acquiror expects to file with
EASDAQ (the "Acquiror EASDAQ Filing"). The Acquiror EASDAQ Filing was prepared
in accordance with the requirements of the EASDAQ Rule Book, Annex A, "Contents
of the Prospectus (EASDAQ IPO)" and does not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The financial statements of Acquiror and
its Subsidiaries included in the Acquiror EASDAQ Documents comply as to form in
all material respects with applicable accounting requirements, have been
prepared in accordance with GAAP applied on a consistent basis (except as may be
indicated in the notes thereto) and fairly present the consolidated financial
position of Acquiror and its consolidated Subsidiaries as of the dates thereof
and the consolidated results of their operations and cash flows and for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments).
3.6 Absence of Undisclosed Liabilities. Acquiror has no
material obligations or liabilities of any nature (matured or unmatured, fixed
or contingent) other than (i) those set forth or adequately provided for in the
balance sheet included in the Acquiror's financial statements as of March 31,
1999 (the "Acquiror Balance Sheet"), (ii) those incurred in the ordinary course
of business and not required to be set forth in the Acquiror Balance Sheet under
GAAP, and (iii) those incurred in connection with the execution of this
Agreement.
3.7 Tax Matters. The shares of Acquiror Common Stock to be
received by the shareholders of Target in the Merger (including the Escrow
Shares) represent less than 50% of the total voting power and less than 50% of
the total value of the outstanding stock of Acquiror. Acquiror satisfies the
"active trade or business" test as defined in paragraph (c)(3) of Section
1.367(a)-3 of the United States Income Tax Regulations. As of the date hereof,
neither Acquiror nor Acquisition Sub has taken or agreed to take any action, nor
does Acquiror have knowledge of any fact or circumstance, that would prevent the
Merger from qualifying as a reorganization within the meaning of Section 368(a)
of the Code.
3.8 Complete Copies of Materials. Acquiror has delivered or
made available true and complete copies of each document which has been
requested by Target or its counsel in connection with their legal and accounting
review of Acquiror.
3.9 Board Approval. The Board of Directors of Acquiror has
approved this Agreement and the Merger.
3.10 Representations Complete. None of the representations or
warranties made by Acquiror or Acquisition Sub herein or in any Schedule hereto,
including the Acquiror Disclosure Schedule, or certificate furnished by Acquiror
or Acquisition Sub pursuant to this Agreement, when all such documents are read
23
<PAGE>
together in their entirety, contains or will contain at the Effective Time any
untrue statement of a material fact, or omits or will omit at the Effective Time
to state any material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which made, not
misleading.
3.11 Intellectual Property.
(a) Acquiror owns, or is licensed or otherwise possess
legally enforceable rights to use all patents, trademarks, trade names, domain
names, service marks, copyrights, and any applications therefor, schematics,
technology, know-how, trade secrets, inventions, ideas, algorithms, processes,
computer software programs or applications (in source code and/or object code
form), and tangible or intangible proprietary information or material that are
used or proposed to be used in the business of Acquiror and its subsidiaries as
currently conducted or as proposed to be conducted by Acquiror and its
subsidiaries ("Acquiror Intellectual Property"). Acquiror has not (i) licensed,
or agreed under any condition to license or deliver, any of its Intellectual
Property in source code form to any party or (ii) entered into any exclusive
agreements relating to Acquiror Intellectual Property with any party.
(b) Except as set forth on Schedule 3.11, to Acquiror's
knowledge, there is no unauthorized use, disclosure, infringement or
misappropriation of any Acquiror Intellectual Property rights, or any
Intellectual Property right of any third party to the extent licensed by or
through Acquiror or any of its subsidiaries, by any third party, including any
employee or former employee of Acquiror or any of its subsidiaries. Neither
Acquiror nor any of its subsidiaries has entered into any agreement to indemnify
any other person against any charge of infringement of any Intellectual
Property, other than indemnification provisions contained in purchase orders or
license agreements arising in the ordinary course of business.
(c) To Acquiror's knowledge, Acquiror is not, nor will it
be as a result of the execution and delivery of this Agreement or the
performance of its obligations under this Agreement, in breach of any license,
sublicense or other agreement relating to the Acquiror Intellectual Property or
Third Party Intellectual Property Rights.
(d) All patents, registered trademarks, registered
service marks and registered copyrights held by Acquiror are valid and
subsisting. Acquiror (i) has not been sued in any suit, action or proceeding
which involves a claim of infringement of any patents, trademarks, service
marks, copyrights or violation of any trade secret or other proprietary right of
any third party; (ii) has no knowledge that the manufacturing, marketing,
licensing or sale of its products infringes any patent, trademark, service mark,
copyright, trade secret or other proprietary right of any third party and (iii)
has not brought any action, suit or proceeding for infringement of Intellectual
Property or breach of any license or agreement involving Intellectual Property
against any third party.
(e) Acquiror has taken all reasonable steps to protect
and preserve the confidentiality of all Acquiror Intellectual Property not
otherwise protected by patents, patent applications or copyright ("Confidential
Information"). All use, disclosure or appropriation of Confidential Information
owned by Acquiror by or to a third party (apart from counsel or others bound by
law to hold such information confidential) has been pursuant to the terms of a
written agreement between Acquiror and such third party. All use, disclosure or
24
<PAGE>
appropriation of Confidential Information not owned by Acquiror has been
pursuant to the terms of a written agreement between Acquiror and the owner of
such Confidential Information, or is otherwise lawful.
3.12 Year 2000. None of the products and services sold,
licensed, rendered, or otherwise provided by Acquiror in the conduct of its
business will malfunction, will cease to function, will generate materially
incorrect data or will produce materially incorrect results and will not cause
any of the above with respect to the property or business of third parties using
such products or services when processing, providing or receiving (i)
date-related data from, into and between the Twentieth (20th) and Twenty-First
(21st) centuries, or (ii) date-related data in connection with any valid date in
the Twentieth (20th) and Twenty-First (21st) centuries, causing a Material
Adverse Effect on Acquiror, provided that the hardware, software and data
environment in which such products or services operate or with which they
interact does not malfunction, cease to function, generate materially incorrect
data or produce materially incorrect results or cause any of the above with
respect to the property or business of third parties when processing, providing
or receiving such date-related data.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of Target . During the period from the
date of this Agreement and continuing until the earlier of the termination of
this Agreement or the Effective Time, Target agrees (except to the extent
expressly contemplated by this Agreement or as consented to in writing by
Acquiror), to carry on its business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted. Target further agrees to
pay debts and Taxes when due subject (i) to good faith disputes over such debts
or Taxes and (ii) to Acquiror's consent to the filing of material Tax Returns,
to pay or perform other obligations when due, and to use all reasonable efforts
consistent with past practice and policies to preserve intact its present
business organizations, keep available the services of its present officers and
key employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with it,
to the end that its goodwill and ongoing businesses shall be unimpaired at the
Effective Time. Target agrees to promptly notify Acquiror of any event or
occurrence which could have a Material Adverse Effect on Target.
4.2 Restriction on Conduct of Business of Target. During the
period from the date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time, except as set forth in the
Target Disclosure Schedule and as expressly contemplated by this Agreement,
Target shall not do, cause or permit any of the following, without the prior
written consent of Acquiror:
(a) Charter Documents. Cause or permit any amendments to
its Articles of Incorporation or Bylaws;
(b) Dividends; Changes in Capital Stock. Declare or pay
any dividends on or make any other distributions (whether in cash, stock or
property) in respect of any of its capital stock, or split, combine or
25
<PAGE>
reclassify any of its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock, or repurchase or otherwise acquire, directly or indirectly, any
shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of shares
in connection with any termination of service to it or its subsidiaries;
(c) Stock Option Plans, Etc. Except as provided in the
Target Stock Option Plan, accelerate, amend or change the period of
exercisability or vesting of options or other rights granted under its stock
plans or authorize cash payments in exchange for any options or other rights
granted under any of such plans;
(d) Material Contracts. Enter into any Material Contract
or commitment, or violate, amend or otherwise modify or waive any of the terms
of any of its Material Contracts, other than in the ordinary course of business
consistent with past practice;
(e) Issuance of Securities. Issue, deliver or sell or
authorize or propose the issuance, delivery or sale of, or purchase or propose
the purchase of, any shares of its capital stock or securities convertible into,
or subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue any such shares or other
convertible securities, other than the issuance of shares of its Common Stock
pursuant to the exercise of stock options and warrants, conversion of Preferred
Stock or other rights therefor outstanding as of the date of this Agreement;
(f) Intellectual Property. Transfer to any person or
entity any rights to its Intellectual Property other than in the ordinary course
of business consistent with past practice;
(g) Exclusive Rights. Enter into or amend any agreements
pursuant to which any other party is granted exclusive marketing or other
exclusive rights of any type or scope with respect to any of its products or
technology;
(h) Dispositions. Sell, lease, license or otherwise
dispose of or encumber any of its properties or assets which are material,
individually or in the aggregate, to its and its parent's/subsidiaries'
business, taken as a whole except for sales of products in the ordinary course;
(i) Indebtedness. Incur any indebtedness for borrowed
money in excess of $10,000 or guarantee any such indebtedness or issue or sell
any debt securities or guarantee any debt securities of others;
(j) Leases. Enter into any operating lease in excess of
$10,000;
(k) Payment of Obligations. Pay, discharge or satisfy in
an amount in excess of $25,000 in any one case or $100,000 in the aggregate, any
claim, liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) arising other than in the ordinary course of business
other than the payment, discharge or satisfaction of liabilities reflected or
reserved against in the Target Financial Statements;
26
<PAGE>
(l) Capital Expenditures. Make any capital expenditures,
capital additions or capital improvements except in the ordinary course of
business and consistent with past practice;
(m) Insurance. Materially reduce the amount of any
insurance coverage provided by existing insurance policies;
(n) Termination or Waiver. Terminate or waive any right
valued in excess of $25,000;
(o) Employee Benefit Plans; New Hires; Pay Increases.
Adopt or amend any employee benefit or stock purchase or option plan, or hire
any new director level or officer level employee, pay any special bonus or
special remuneration to any employee or director or increase the salaries or
wage rates of its employees other than in the ordinary course of business and
consistent with past practice;
(p) Severance Arrangements. Grant any severance or
termination pay (i) to any director or officer or (ii) to any other employee
except payments made pursuant to standard written agreements outstanding on the
date hereof;
(q) Lawsuits. Commence a lawsuit other than (i) for the
routine collection of bills, (ii) in such cases where it in good faith
determines that failure to commence suit would result in the material impairment
of a valuable aspect of its business, provided that it consults with Acquiror
prior to the filing of such a suit, or (iii) for a breach of this Agreement;
(r) Acquisitions. Acquire or agree to acquire by merging
or consolidating with, or by purchasing a substantial portion of the assets of,
or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or otherwise
acquire or agree to acquire any assets which are material, individually or in
the aggregate, to its and its subsidiaries' business, taken as a whole;
(s) Taxes. Other than in the ordinary course of business,
make or change any material election in respect of Taxes, adopt or change any
accounting method in respect of Taxes, file any material Tax Return or any
amendment to a material Tax Return, enter into any closing agreement, settle any
claim or assessment in respect of Taxes, or consent to any extension or waiver
of the limitation period applicable to any claim or assessment in respect of
Taxes;
(t) Revaluation. Revalue any of its assets, including
without limitation writing down the value of inventory or writing off notes or
accounts receivable other than in the ordinary course of business; or
(u) Other. Take or agree in writing or otherwise to take,
any of the actions described in Sections 4.2(a) through (t) above, or any action
which would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not to
perform its covenants hereunder.
27
<PAGE>
4.3 No Solicitation. Target and its subsidiaries and the
officers, directors, employees or other agents of Target and its subsidiaries
will not, directly or indirectly, (i) take any action to solicit, initiate or
encourage any Takeover Proposal (as defined below) or (ii) engage in
negotiations with, or disclose any nonpublic information relating to Target or
any of its subsidiaries to, or afford access to the properties, books or records
of Target to any person that has advised Target that it may be considering
making, or that has made, a Takeover Proposal. Target shall not, and shall not
permit any of its officers, directors, employees or other representatives to
agree to or endorse any Takeover Proposal. Target will promptly notify Acquiror
after receipt of any Takeover Proposal or any notice that any person is
considering making a Takeover Proposal or any request for nonpublic information
relating to Target or for access to the properties, books or records of Target
by any person that has advised Target that it may be considering making, or that
has made, a Takeover Proposal and will keep Acquiror fully informed of the
status and details of any such Takeover Proposal notice, request or any
correspondence or communications related thereto and shall provide Acquiror with
a true and complete copy of such Takeover Proposal notice or request or
correspondence or communications related thereto, if it is in writing, or a
written summary thereof, if it is not in writing. For purposes of this
Agreement, "Takeover Proposal" means any bona fide offer or proposal for, or any
indication of interest in, a merger or other business combination involving
Target or the acquisition of more than 50% of the outstanding shares of capital
stock of Target, or a significant portion of the assets of, Target, other than
the transactions contemplated by this Agreement. Target shall not release any
third party from, or waive any provision of, any confidentiality or standstill
agreement to which Target is a party
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of Information Statement. As soon as
practicable after the execution of this Agreement, Target shall prepare, with
the cooperation of Acquiror, an Information Statement for the shareholders of
Target to approve this Agreement, the Certificate of Merger and the transactions
contemplated hereby and thereby. The Information Statement shall constitute a
disclosure document for the offer and issuance of the shares of Acquiror Common
Stock to be received by the holders of Target Capital Stock in the Merger and an
information statement for solicitation of shareholder approval of the Merger.
Each of Acquiror and Target shall use its best efforts to cause the Information
Statement to comply with applicable federal and state securities laws
requirements. Each of Acquiror and Target agrees to provide promptly to the
other such information concerning its business and financial statements and
affairs as, in the reasonable judgment of the providing party or its counsel,
may be required or appropriate for inclusion in the Information Statement, or in
any amendments or supplements thereto, and to cause its counsel and auditors to
cooperate with the other's counsel and auditors in the preparation of the
Information Statement. Target will promptly advise Acquiror, and Acquiror will
promptly advise Target, in writing if at any time prior to the Effective Time
either Target or Acquiror shall obtain knowledge of any facts that might make it
necessary or appropriate to amend or supplement the Information Statement in
order to make the statements contained or incorporated by reference therein not
misleading or to comply with applicable law. The Information Statement shall
contain the recommendation of the Board of Directors of Target that the Target
Shareholders approve the Merger and this Agreement and the conclusion of the
Board of Directors that the terms and conditions of the Merger are fair and
28
<PAGE>
reasonable to the shareholders of Target. The Board of Directors of Target shall
not withdraw, amend or modify such recommendation unless required to do so by
its fiduciary obligations as advised in writing by Target's legal counsel
following the receipt of a Takeover Proposal. Anything to the contrary contained
herein notwithstanding, Target shall not include in the Information Statement
any information with respect to Acquiror or its affiliates or associates, the
form and content of which information shall not have been approved by Acquiror
prior to such inclusion. Target shall use its best efforts to obtain approval of
its stockholders of the transactions contemplated by this Agreement as promptly
as practicable after the date hereof.
5.2 Meeting of Shareholders. If required, Target shall
promptly after the date hereof act in accordance with Delaware Law and its
Certificate of Incorporation and Bylaws to convene the Target Shareholders
Meeting or to secure the written consent of its shareholders within thirty (30)
days of the date of this Agreement. Target shall consult with Acquiror regarding
the date of the Target Shareholders Meeting and use all reasonable efforts and
shall not postpone or adjourn (other than for the absence of a quorum) the
Target Shareholders Meeting without the consent of Acquiror. Target shall use
its best efforts to solicit from shareholders of Target proxies in favor of the
Merger and shall take all other reasonable action to secure the vote or consent
of shareholders required to effect the Merger.
5.3 Access to Information.
(a) Target shall afford Acquiror and its accountants,
counsel and other representatives, reasonable access during normal business
hours during the period prior to the Effective Time to (i) all of Target's
properties, books, contracts, commitments and records, and (ii) all other
information concerning the business, properties and personnel of Target as
Acquiror may reasonably request. Target agrees to provide to Acquiror and its
accountants, counsel and other representatives copies of internal financial
statements promptly upon request.
(b) Subject to compliance with applicable law, from the
date hereof until the Effective Time, each of Acquiror and Target shall confer
on a regular and frequent basis with one or more representatives of the other
party to report operational matters of materiality and the general status of
ongoing operations.
(c) No information or knowledge obtained in any
investigation pursuant to this Section 5.3 shall affect or be deemed to modify
any representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the Merger.
5.4 Confidentiality. The parties acknowledge that Acquiror and
Target have previously executed a non-disclosure agreement dated April 16, 1999
(the "Confidentiality Agreement"), the form of which is attached hereto as
Exhibit B, which Confidentiality Agreement shall continue in full force and
effect in accordance with its terms.
5.5 Public Disclosure. Unless otherwise permitted by this
Agreement, Acquiror and Target shall consult with each other before issuing any
press release or otherwise making any public statement or making any other
public (or non-confidential) disclosure (whether or not in response to an
29
<PAGE>
inquiry) regarding the terms of this Agreement and the transactions contemplated
hereby, and neither shall issue any such press release or make any such
statement or disclosure without the prior approval of the other (which approval
shall not be unreasonably withheld), except as may be required by law or by
obligations pursuant to any listing agreement with any securities exchange.
Notwithstanding the foregoing, the parties agree that neither party shall engage
in general solicitation or other public announcement that will have the effect
of making the issuances of Acquiror Common Stock pursuant to the Merger fail to
comply with Section 4(2) or Regulation D of the rules and regulations
promulgated under the Securities Act.
5.6 Consents; Cooperation.
(a) Each of Acquiror and Target shall promptly apply for
or otherwise seek, and use its best efforts to obtain, all consents and
approvals required to be obtained by it for the consummation of the Merger, and
shall use commercially reasonable efforts to obtain all necessary consents,
waivers and approvals under any of its Material Contracts in connection with the
Merger for the assignment thereof or otherwise. The parties hereto will consult
and cooperate with one another, and consider in good faith the views of one
another, in connection with any analyses, appearances, presentations, memoranda,
briefs, arguments, opinions and proposals made or submitted by or on behalf of
any party hereto in connection with proceedings under or relating to any
federal, state or foreign antitrust or fair trade law.
(b) Without limiting any of the foregoing, in connection
with obtaining the consent of the landlord to the Merger under Target's lease
for the Leased Property (the "Real Property Lease"), Acquiror shall promptly
provide to the landlord all information and materials requested in connection
with such consent, and shall take all commercially reasonable actions to secure
such consent and to effect the execution and delivery by the landlord to
Christopher Hassett and Janet Hassett (the "Hassetts") of a termination and
release, effective as of the Effective Time, in form and substance acceptable to
the Hassetts, of any and all guarantees by the Hassetts of the Real Property
Lease (including pursuant to Section 80 of the Real Property Lease) (the
"Release of Guaranty").
5.7 Shareholder Representation Agreements. Target shall use
commercially reasonable efforts to deliver or cause to be delivered to Acquiror,
prior to the Effective Time, from each of the security holders of Target who has
not executed a Shareholder Agreement, an executed Shareholder Representation
Agreement (the "Shareholder Representation Agreement") in the form attached
hereto as Exhibit C, pursuant to which Target's securityholders will agree to a
lock-up for 180 days following Acquiror's first day of trading on EASDAQ,
provided that the officers, directors and 10% shareholders of Acquiror are bound
to an equivalent lock-up period.
5.8 Shareholder Agreement/Irrevocable Proxies.
(a) Acquiror shall be entitled to place appropriate
legends on the certificates evidencing any Acquiror Common Stock to be received
by such Target Shareholders pursuant to the terms of this Agreement and to issue
appropriate stock transfer instructions to the transfer agent for Acquiror
Common Stock.
30
<PAGE>
(b) Target shall use its commercially reasonable efforts,
on behalf of Acquiror and pursuant to the request of Acquiror, to cause (a) each
officer and director of Target and (b) each holders of five percent (5%) or more
of the issued and outstanding Target Capital Stock to execute and deliver to
Acquiror a Shareholder Agreement substantially in the form of Exhibit A and an
Irrevocable Proxy substantially in the form of Exhibit A attached thereto
concurrently with the execution of this Agreement and in any event prior to the
time that the Information Statement is mailed to the shareholders of Target.
5.9 Legal Requirements. Each of Acquiror and Target will, and
will cause their respective subsidiaries to, take all reasonable actions
necessary to comply promptly with all legal requirements which may be imposed on
them with respect to the consummation of the transactions contemplated by this
Agreement and will promptly cooperate with and furnish information to any party
hereto necessary in connection with any such requirements imposed upon such
other party in connection with the consummation of the transactions contemplated
by this Agreement and will take all reasonable actions necessary to obtain (and
will cooperate with the other parties hereto in obtaining) any consent,
approval, order or authorization of, or any registration, declaration or filing
with, any Governmental Entity or other person, required to be obtained or made
in connection with the taking of any action contemplated by this Agreement.
5.10 Federal Securities and Blue Sky Laws. Acquiror shall take
such steps as may be necessary to comply with the U.S. federal securities laws
as well as the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the Acquiror Common Stock in connection with the
Merger. Without limiting the foregoing, Acquiror shall not take any action that
will make the resale provisions of Regulation S of the Securities Act of 1933,
as amended, unavailable to the holders that are not affiliates of shares
received therein for those of Acquiror, provided that the parties acknowledge
that, at such time that Acquiror may do so in compliance with the U.S. federal
securities laws, the Acquiror may engage in marketing efforts in the United
States in connection with a public offering of its securities on the NASDAQ
stock market. Target shall use its best efforts to assist Acquiror as may be
necessary to comply with the U.S. federal securities laws as well as the
securities and blue sky laws of all jurisdictions which are applicable in
connection with the issuance of Acquiror Common Stock in connection with the
Merger.
5.11 Employee Benefit Plans.
(a) Assumption of Options. At the Effective Time, the
Target Stock Option Plan, and each outstanding option to purchase shares of
Target Common Stock under the Target Stock Option Plan, whether vested or
unvested, will be assumed by Acquiror. Schedule 5.11 hereto sets forth a true
and complete list as of the date hereof of all holders of outstanding options
under the Target Stock Option Plan including the number of shares of Target
Capital Stock subject to each such option, the exercise or vesting schedule, the
exercise price per share and the term of each such option. On the Closing Date,
Target shall deliver to Acquiror an updated Schedule 5.11 current as of such
date. Each such option so assumed by Acquiror under this Agreement shall
continue to have, and be subject to, the same terms and conditions set forth in
the Target Stock Option Plan and the applicable stock option agreement
immediately prior to the Effective Time, except that (i) such option will be
exercisable for that number of whole shares of Acquiror Common Stock equal to
the product of the number of shares of Target Common Stock that were issuable
31
<PAGE>
upon exercise of such option immediately prior to the Effective Time multiplied
by the Exchange Ratio and rounded down to the nearest whole number of shares of
Acquiror Common Stock, and (ii) the per share exercise price for the shares of
Acquiror Common Stock issuable upon exercise of such assumed option will be
equal to fifty percent (50%) of the market price per share of Acquiror's common
stock on the Vienna Stock Exchange as of the market close at the Effective Time.
It is the intention of the parties that the options so assumed by Acquiror
qualify, to the maximum extent permissible, following the Effective Time as
incentive stock options as defined in Section 422 of the Code to the extent such
options qualified as incentive stock options prior to the Effective Time.
Following the Effective Time, Acquiror will issue to each person who,
immediately prior to the Effective Time was a holder of an outstanding option
under the Target Stock Option Plan a document in form and substance satisfactory
to Target evidencing the foregoing assumption of such option by Acquiror.
(b) Assignment of Repurchase Options. All outstanding
rights of Target which it may hold immediately prior to the Effective Time to
repurchase unvested shares of Target Common Stock (the "Repurchase Options")
shall be assigned to Acquiror in the Merger and shall thereafter be exercisable
by Acquiror upon the same terms and conditions in effect immediately prior to
the Effective Time, except that the shares purchasable pursuant to the
Repurchase Options and the purchase price per shall be adjusted to reflect the
Exchange Ratio.
5.12 Escrow Agreement. On or before the Effective Time, the
Escrow Agent, the Shareholders' Agent (as defined in Article VIII hereto),
Target and Acquiror will execute the Escrow Agreement contemplated by Article
VIII in the form and substance reasonably satisfactory to each of Acquiror and
Target ("Escrow Agreement").
5.13 Employees. Set forth on Schedule 5.13 is a list of
employees of Target to whom Acquiror will make an offer of employment pursuant
to an Employment and Non-Competition Agreement, the form and substance of which
to be reasonably satisfactory to each of Acquiror and Target. Acquiror will
negotiate in good faith to enter into an agreement with the employees listed on
Schedule 5.13. Target shall cooperate with Acquiror to assist Acquiror in
entering into an agreement with such employees. Acquiror shall have no
obligation to make an offer of employment to any employee of Target except those
listed on Schedule 5.13.
5.14 Expenses. Whether or not the Merger is consummated, all
costs and expenses incurred in connection with this Agreement, the Certificate
of Merger and the transactions contemplated hereby and thereby shall be paid by
the party incurring such expense; provided, however, that any out-of-pocket
expenses incurred by Target in excess of $200,000 for fees and expenses of legal
counsel plus any other expenses, including, without limitation, fees and
expenses of financial advisors and accountants, if any, shall remain an
obligation of Target's shareholders. If Acquiror or Target receives any invoices
for amounts in excess of said amount, it may, with Acquiror's written approval,
pay such fees; provided, however, that such payment shall, if not promptly
reimbursed by the Target Shareholders at Acquiror's request, constitute
"Damages" recoverable under the Escrow Agreement and such Damages shall not be
subject to the Escrow Basket.
32
<PAGE>
5.15 Treatment as Reorganization. Following the Effective
Time, Acquiror shall cause Target to comply with all the reporting requirements
set forth in paragraph (c)(6) of Section 1.367(a)-(3) of the United States
Income Tax Regulations. Neither Target nor Acquiror shall take any action prior
to or following the Closing that would cause the merger to fail to qualify as a
"reorganization" within the meaning of Section 368(a) of the Code.
5.16 Further Assurances. Each of the parties to this Agreement
shall use commercially reasonable efforts to effectuate the transactions
contemplated hereby and to fulfill and cause to be fulfilled the conditions to
closing under this Agreement. Each party hereto, at the reasonable request of
another party hereto, shall execute and deliver such other instruments and do
and perform such other acts and things as may be necessary or desirable for
effecting completely the consummation of this Agreement and the transactions
contemplated hereby.
5.17 Preferred Stock. Target shall use commercially reasonable
efforts to ensure that either all of Target's outstanding Preferred Stock shall
have been converted into Common Stock in accordance with the Articles of
Incorporation of Target or that the Articles of Incorporation of Target shall
provide that the Merger shall cause a liquidation event with respect to the
Target Preferred Stock, with the holders of the Target Preferred Stock receiving
in the Merger, in exchange for their shares of Target Preferred Stock shares of
Acquiror Common Stock.
5.18 Pooling Accounting. Acquiror and Target shall each use
commercially reasonable efforts to cause the business combination to be effected
by the Merger to be accounted for as a pooling of interests. Each of Acquiror
and Target shall use commercially reasonable efforts to cause its officers,
directors and 10% shareholders not to take any action that would adversely
affect the ability of Acquiror to account for the business combination to be
effected by the merger as a pooling of interests.
5.19 Pooling Letter. Acquiror shall use its commercially
reasonable efforts to cause to be delivered to Acquiror a letter of KPMG LLP,
Acquiror's independent auditors, dated a date on or before the Effective Time to
the effect that, assuming Acquiror is a corporation eligible to be a party to a
transaction seeking pooling of interests accounting treatment and that the
participation of Acquiror in the Merger will not, in and of itself, disqualify
the Merger from qualifying for pooling of interests accounting treatment, the
Merger qualifies for pooling of interests accounting treatment if consummated in
accordance with this Agreement. Such letter shall be in a form reasonably
satisfactory to each of Target and Acquiror and shall be customary in scope and
substance for letters delivered by independent public accountants in connection
with transactions of this type.
5.20 Easdaq Listing. Acquiror shall use commercially
reasonable efforts to (i) list Acquiror on the Easdaq stock market and (ii)
comply with all requirements for such listing within the time periods specified
by Easdaq and as set forth in all Easdaq manuals and guides, including the
Admission to Trading on Easdaq manual. Following its listing on Easdaq, Acquiror
will not take any action which would disqualify Target Shareholders from
availing themselves of the provisions of Regulation S of the Securities Act of
1933, as amended.
33
<PAGE>
5.21 Pooling Memorandum. Target shall use its commercially
reasonable efforts to obtain from its certified public accountants a memorandum
summarizing such accountants' review of the ability of the Merger to be
accounted for as a pooling-of-interests solely with respect to Target on or
before 12:00 p.m. New York time, on Thursday, May 6, 1999.
5.22 Employee Bonuses.
(a) After the Effective Time, Acquiror shall pay to such
employees of Target, as of immediately prior to the Effective Time, as
designated by Acquiror's management in its sole discretion, signing bonuses in
an aggregate amount of not less than $250,000 upon such terms and conditions as
Acquiror's management may determine.
(b) Acquiror shall establish a retention bonus
arrangement in favor of certain employees of Target as of immediately prior to
the Effective Time, pursuant to which two million dollars ($2,000,000) in cash
or options with a value at the time of grant of at least $2,000,000 (or any
combination thereof with an aggregate value of $2,000,000) shall be paid to such
employees as determined by Acquiror management upon such terms and conditions
and at such times as Acquiror's senior management may determine.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the
Merger. The respective obligations of each party to this Agreement to consummate
and effect this Agreement and the transactions contemplated hereby shall be
subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, any of which may be waived, in writing, by agreement of
all the parties hereto:
(a) Shareholder Approval. This Agreement and the Merger
shall have been approved and adopted by the holders of a majority of the shares
of Target Common Stock and Target Preferred Stock outstanding as of the record
date set for the Target Shareholders Meeting (or through action by written
consent), and any agreements or arrangements that may result in the payment of
any amount that would not be deductible by reason of Section 280G of the Code
shall have been approved by such number of shareholders of Target as is required
by the terms of Section 280G(b)(5)(B) and shall be obtained in a manner which
satisfies all applicable requirements of such Code Section 280(G)(b)(5)(B) and
the proposed Treasury Regulations thereunder, including (without limitation) Q-7
of Section 1.280G-1 of such proposed regulations. In addition, not more than ten
percent (10%) of the issued and outstanding shares of Target shall be eligible
to be Dissenting Shares.
(b) No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect, nor
shall any proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
34
<PAGE>
rule, regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal. In the event an
injunction or other order shall have been issued, each party agrees to use its
reasonable efforts to have such injunction or other order lifted.
(c) Escrow Agreement. Acquiror, Target, Escrow Agent and
the Shareholder's Agent (as defined in Article VIII hereto) shall have entered
into an Escrow Agreement in the form and substance reasonably satisfactory to
each of Acquiror and Target.
(d) Board Seat. Chris Hassett shall have been appointed,
and accepted such appointment, to serve on Acquiror's Board of Directors
consistent with the terms of the Consulting Agreement described in Section
6.2(f).
(e) Tax Opinion. Legal counsel for each of Acquiror and
Target shall have provided legal opinion as to the tax-free nature of the
transaction, in the form and substance reasonably satisfactory to each of
Acquiror and Target.
(f) Acquiror shall have delivered to Target a certificate
of good standing with respect to the Acquisition Sub and a Certificate of
Compliance with respect to itself.
(g) Target shall have delivered to Acquiror a certificate
of good standing with respect to itself.
6.2 Additional Conditions to Obligations of Target. The
obligations of Target to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, by Target:
(a) Representations, Warranties and Covenants. Except as
disclosed in the Acquiror Disclosure Schedule dated the date of this Agreement,
(i) the representations and warranties of Acquiror and Acquisition Sub in this
Agreement shall be true and correct in all material respects (except for such
representations and warranties that are qualified by their terms by a reference
to materiality which representations and warranties as so qualified shall be
true in all respects) on and as of the Effective Time as though such
representations and warranties were made on and as of such time and (ii)
Acquiror shall have performed and complied in all material respects with all
covenants, obligations and conditions of this Agreement required to be performed
and complied with by them as of the Effective Time.
(b) Certificate of Acquiror and Acquisition Sub. Target
shall have been provided with a certificate executed on behalf of Acquiror and
Acquisition Sub by their respective Presidents to the effect set forth in
Section 6.2(a).
(c) Release of Lease Guaranty. Target shall have received
the Release of Guaranty described in Section 5.6(b) or if, after compliance with
Section 5.6(b), Acquiror has not obtained the Release of Guaranty, Acquiror
shall have indemnified the Hassetts, in a form satisfactory to Target, from and
against any and all liability arising thereunder.
35
<PAGE>
(d) Legal Opinion. Target shall have received a legal
opinion from Acquiror's legal counsels, in the form and substance reasonably
satisfactory to each of Acquiror and Target.
(e) No Material Adverse Changes. There shall not have
occurred any material adverse change in the condition (financial or otherwise)
properties, assets (including intangible assets), liabilities, business,
operations, results of operations or prospects of Acquiror and its subsidiaries,
taken as a whole.
(f) Hassett Consulting Agreement. Acquiror shall have
entered into a Consulting Agreement with Chris Hassett in the form and substance
reasonably satisfactory to each of Acquiror and Target, which agreement shall
include (i) the right to be nominated to the board of directors of Acquiror each
of the next two annual meetings and until such time as either (a) Acquiror
Common Stock is listed for trading on NASDAQ or (b) the PrizePoint holders
collectively hold shares equal to six percent (6%) or less of all outstanding
common stock of Acquiror, (ii) an obligation to provide consulting services for
a minimum of sixty (60) hours per month during standard working hours; (iii) a
term of twelve (12) months; (iv) a right to reimbursement for reasonable
business expenses; and (v) the provision of reasonable and adequate office
services and support.
6.3 Additional Conditions to the Obligations of Acquiror and
Acquisition Sub. The obligations of Acquiror and Acquisition Sub to consummate
and effect this Agreement and the transactions contemplated hereby shall be
subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, any of which may be waived, in writing, by Acquiror:
(a) Representations, Warranties and Covenants. Except as
disclosed in the Target Disclosure Schedule dated the date of this Agreement (i)
the representations and warranties of Target in this Agreement shall be true and
correct in all material respects (except for such representations and warranties
that are qualified by their terms by a reference to materiality which
representations and warranties as so qualified shall be true in all respects) on
and as of the Effective Time as though such representations and warranties were
made on and as of such time and (ii) Target shall have performed and complied in
all material respects with all covenants, obligations and conditions of this
Agreement required to be performed and complied with by it as of the Effective
Time.
(b) Certificate of Target. Acquiror shall have been
provided with a certificate executed on behalf of Target by its President to the
effect that set forth in Section 6.3(a).
(c) Legal Opinion. Acquiror shall have received a legal
opinion from Target's legal counsel, in the form and substance reasonably
satisfactory to each of Acquiror and Target.
(d) No Material Adverse Changes. There shall not have
occurred any material adverse change in the condition, (financial or otherwise)
36
<PAGE>
properties, assets (including intangible assets), liabilities, business,
operations, results of operations or prospects of Target and its subsidiaries,
taken as a whole.
(e) Shareholder Agreements. Acquiror shall have received
from each officer and director of Target, and from each holder of ten percent
(10%) or more of the Target Common Stock and the Target Preferred issued and
outstanding an executed Shareholder Agreement in substantially the form attached
hereto as Exhibit A.
(f) Resignation of Directors and Officers. The directors
and officers of Target in office immediately prior to the Effective Time shall
have resigned as directors and officers, as applicable, of Target effective as
of the Effective Time.
(g) Preferred Stock. All of Target's outstanding Preferred
Stock shall have been converted into Common Stock in accordance with the
Articles of Incorporation of Target or the terms of such Preferred Stock shall
provide for their exchange in the Merger for shares of Acquiror Common Stock.
(h) Employment and Non-Competition Agreements. The
employees of Target specifically identified on Schedule 5.13 shall have accepted
employment with Acquiror and shall have entered into an Employment and
Non-Competition Agreement in the form and substance reasonably satisfactory to
each of Acquiror and Target.
(i) Hassett Consulting Agreement. Chris Hassett shall have
entered into a Consulting Agreement with Acquiror in the form and substance
reasonably satisfactory to each of Acquiror and Target.
(j) Certificates of Good Standing. Target shall, prior to
the Closing Date, provide Acquiror with certificates from the Secretaries of
State of Delaware and New York as to Target's good standing and payment of all
applicable taxes.
(k) Dissenting Shares. No more than ten percent (10%) of
Target's capital stock shall be Dissenting Shares.
(l) Cancellation of Registration Rights. Target shall
cause all registration rights of its shareholders to be cancelled.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. At any time prior to the Effective Time,
whether before or after approval of the matters presented in connection with the
Merger by the shareholders of Target, this Agreement may be terminated:
(a) by mutual consent duly authorized by the Board of
Directors of Acquiror and Target;
37
<PAGE>
(b) by either Acquiror or Target, if the Closing shall not
have occurred on or before June 15, 1999 (provided, a later date may be agreed
upon in writing by the parties hereto, and provided further that the right to
terminate this Agreement under this Section 7.1(b) shall not be available to any
party whose action or failure to act has been the cause or resulted in the
failure of the Merger to occur on or before such date and such action or failure
to act constitutes a breach of this Agreement);
(c) by Acquiror, if (i) Target shall breach any
representation, warranty, obligation or agreement hereunder and such breach
shall not have been cured within five (5) business days of receipt by Target of
written notice of such breach provided that the right to terminate this
Agreement by Acquiror under this Section 7.1(c)(i) shall not be available to
Acquiror where Acquiror is at that time in breach of this Agreement, (ii) the
Board of Directors of Target shall have withdrawn or modified its recommendation
of this Agreement or the Merger in a manner adverse to Acquiror or shall have
resolved to do any of the foregoing, or (iii) for any reason Target fails to
call and hold the Target Shareholders Meeting or obtain stockholder consents
sufficient to satisfy the condition to closing set forth in Section 6.1(a) by
June 30, 1999.
(d) by Target, if Acquiror shall breach any
representation, warranty, obligation or agreement hereunder and such breach
shall not have been cured within five (5) days following receipt by Acquiror of
written notice of such breach, provided that the right to terminate this
Agreement by Target under this Section 7.1(d) shall not be available to Target
where Target is at that time in breach of this Agreement;
(e) by Acquiror or Target if (i) any permanent injunction
or other order of a court or other competent authority preventing the
consummation of the Merger shall have become final and nonappealable or (ii) if
any required approval of the shareholders of Target shall not have been obtained
by reason of the failure to obtain the required vote upon a vote held at a duly
held meeting of shareholders or at any adjournment thereof or Target, despite
its best efforts, is unable to obtain the written consent of its stockholders
sufficient to approve the merger and the other transactions contemplated
therein; or
(f) by Acquiror no later than 5:00 p.m. New York time,
Thursday, May 6, 1999, if Acquiror has not received by such time a satisfactory
memorandum from Target's accountants pursuant to Section 5.21.
7.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 7.1, this Agreement shall forthwith become void
and there shall be no liability or obligation on the part of Acquiror or Target
or their respective officers, directors, shareholders or affiliates, except to
the extent that such termination results from the breach by a party hereto of
any of its representations, warranties or covenants set forth in this Agreement;
provided that the provisions of Section 5.4 (Confidentiality), 5.15 (Expenses)
and of Article IX shall remain in full force and effect and survive any
termination of this Agreement.
7.3 Amendment. The boards of directors of the parties hereto
may cause this Agreement to be amended at any time by execution of an instrument
in writing signed on behalf of each of the parties hereto; provided that an
amendment made subsequent to adoption of the Agreement by the shareholders of
38
<PAGE>
Target shall not (i) alter or change the amount or kind of consideration to be
received on conversion of the Target Capital Stock, (ii) alter or change any
term of the Articles of Incorporation of the Surviving Corporation to be
effected by the Merger, or (iii) alter or change any of the terms and conditions
of the Agreement if such alteration or change would materially adversely affect
the holders of Target Capital Stock.
7.4 Extension; Waiver. At any time prior to the Effective Time
any party hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE VIII
ESCROW AND INDEMNIFICATION
8.1 Escrow Fund. As soon as practicable after the Effective
Time, the Escrow Shares shall be registered in the name of, and be deposited
with an escrow agent mutually satisfactory to each of Acquiror and Target (the
"Escrow Agent"), such deposit (together with interest and other income thereon)
to constitute the Escrow Fund and to be governed by the terms set forth herein
and in an Escrow Agreement, in the form and substance reasonable satisfactory to
Acquiror and Target. The Escrow Fund shall be available to compensate Acquiror
pursuant to the indemnification obligations of the shareholders of Target set
forth in Section 8.2(a).
8.2 Indemnification.
(a) Subject to the limitations set forth in this Article
VIII, the shareholders of Target as in effect immediately prior to the Effective
Time (collectively, the "Target Stockholders" and each a "Target Stockholder"),
will indemnify and hold harmless Acquiror and its officers, directors, agents
and employees, and each person, if any, who controls or may control Acquiror
within the meaning of the Securities Act (hereinafter referred to individually
as an "Acquiror Indemnified Person" and collectively as "Acquiror Indemnified
Persons") from and against any and all losses, costs, damages, liabilities and
expenses arising from claims, demands, actions, causes of action, including,
without limitation, reasonable legal fees, net of any recoveries by Acquiror
under existing insurance policies or indemnities from third parties
(collectively, "Acquiror Damages") arising out of (i) any misrepresentation or
breach of or default in connection with any of the representations, warranties,
covenants and agreements given or made by Target in this Agreement, the Target
Disclosure Schedules or any exhibit or schedule to this Agreement or (ii) those
matters described in Section 2.7 of the Target Disclosure Schedules. The Escrow
Fund shall be security for this indemnity obligation subject to the limitations
in this Agreement. The maximum aggregate liability of the Target Stockholders
pursuant to this Section 8.2(a) shall be limited to the Escrow Shares held in
the Escrow Fund.
39
<PAGE>
(b) Subject to the limitations set forth in this Article
VIII, Acquiror will indemnify and hold harmless the Target Stockholders, and
their officers, directors, agents, employees, affiliates (as defined in Rule 144
of the Securities Act of 1933, as amended) (hereinafter referred to individually
as a "Target Indemnified Person" and collectively as "Target Indemnified
Persons") from and against any and all losses, costs, damages, liabilities and
expenses arising form claims, demands, actions, causes of action, including,
without limitation, reasonable legal fees, net of any recoveries by any Target
Stockholder under existing insurance policies or indemnities from third parties
(collectively, "Target Damages") arising out of (i) any misrepresentation or
breach of or default in connection with any of the representations, warranties,
covenants and agreements given or made by Acquiror in this Agreement, the
Acquiror Disclosure Schedules or any exhibit or schedule to this Agreement.
Additional shares of Acquiror Common Stock ("Indemnity Shares") shall be issued
by Acquiror to the Target Indemnified Parties to compensate the Target
Indemnified Parties pursuant to the indemnification obligations of Acquiror set
forth in Section 8.2(b). Acquiror's maximum aggregate liability pursuant to this
Section 8.2(b) shall be limited to the issuance of the same number of shares of
Acquiror's Common Stock as shall initially be in the Escrow Fund; provided that
such limitation shall not apply to Target Damages relating to a breach of
Acquiror's representation and warranty under Section 3.7.
(c) Acquiror and Target each acknowledge that (i) the
Acquiror Damages, if any, would relate to unresolved contingencies existing at
the Effective Time, which if resolved at the Effective Time would have led to a
reduction in the total number of shares Acquiror would have agreed to issue in
connection with the Merger and (ii) the Target Damages, if any, would relate to
unresolved contingencies existing at the Effective Time, which if resolved at
the Effective Time would have led to an increase in the total number of shares
Acquiror would have agreed to issue in connection with the Merger.
8.3 Damage Threshold.
(a) Notwithstanding the foregoing, Acquiror may not
receive any shares from the Escrow Fund unless and until an Acquiror Officer's
Certificate or Certificates (as defined in Section 8.5 below) identifying
Acquiror Damages the aggregate amount of which exceeds $100,000 has been
delivered to the Escrow Agent as provided in Section 8.5 below and such amount
is determined pursuant to this Article VIII to be payable, in which case
Acquiror shall receive shares equal in value to the full amount of Acquiror
Damages; provided, however, that in no event shall Acquiror receive more than
the number of shares of Acquiror Common Stock originally placed in the Escrow
Fund indemnification. In determining the amount of any Acquiror Damage
attributable to a breach, any materiality standard contained in a
representation, warranty or covenant of Acquiror shall be disregarded.
(b) Notwithstanding the foregoing, the Target Indemnified
Persons may not receive any Indemnity Shares from Acquiror unless and until a
Target Certificate or Certificates (as defined in Section 8.5 below) identifying
Target Damages the aggregate amount of which exceeds $100,000 has been delivered
to Acquiror as provided in Section 8.5 below and such amount is determined
pursuant to this Article VIII to be payable, in which case the Target
Indemnified Persons shall receive Indemnity Shares equal in value to the full
amount of Target Damages. In determining the amount of any Target Damage
40
<PAGE>
attributable to a breach, any materiality standard contained in a
representation, warranty or covenant provided by Acquiror shall be disregarded.
8.4 Escrow Period. Subject to the last sentence of this
Section 8.4, the period during which the indemnification rights under this
Article VIII may be asserted shall terminate upon the one year anniversary of
the Effective Time (the "Escrow Period"); provided, however, that (i) a portion
of the Escrow Shares, which is necessary to satisfy any unsatisfied claims
specified in any Acquiror Officer's Certificate theretofore delivered to the
Escrow Agent prior to termination of the Escrow Period with respect to facts and
circumstances existing prior to expiration of the Escrow Period, shall remain in
the Escrow Fund until such claims have been resolved and (ii) the right to
receive Indemnity Shares necessary to satisfy any unsatisfied claims specified
in any Target Certificate theretofore delivered to Acquiror prior to termination
of the Escrow Period with respect to facts and circumstances existing prior to
expiration of the Escrow Period, shall remain in full force and effect until
such claims have been resolved. Notwithstanding anything set forth in this
Article VIII, indemnification claims based upon breaches of Section 3.7 may be
asserted before and after the end of the Escrow Period. Acquiror shall deliver
to the Escrow Agent a certificate specifying the Effective Time.
8.5 Claims upon Escrow Fund.
(a) Upon receipt by the Escrow Agent on or before the last
day of the Escrow Period of a certificate signed by any officer of Acquiror (an
"Acquiror Officer's Certificate"):
(i) stating that, Acquiror Damages exist in an
aggregate amount greater than $100,000; and
(ii) specifying in reasonable detail the individual
items of such Acquiror Damages included in the amount so stated, the date each
such item was paid, or properly accrued or arose, the nature of the
misrepresentation, breach of warranty or claim to which such item is related,
the Escrow Agent shall, subject to the provisions of Section 8.6 and 8.7 below,
deliver to Acquiror out of the Escrow Fund, as promptly as practicable, Acquiror
Common Stock or other assets held in the Escrow Fund having a value equal to
such Damages.
(b) Upon receipt by Acquiror on or before the last day of
the Escrow Period of a certificate signed by the Stockholder's Agent (a "Target
Certificate"):
(i) stating that, Target Damages exist in an aggregate
amount greater than $100,000; and
(ii) specifying in reasonable detail the individual
items of such Target Damages included in the amount so stated, the date each
such item was paid, or properly accrued or arose, the nature of the
misrepresentation, breach of warranty or claim to which such item is related,
41
<PAGE>
Acquiror shall, subject to the provisions of Section 8.6 and
8.7 below, deliver, as promptly as practicable, to the Target Indemnified
Persons (pro rata in accordance with the shares of Target Capital Stock
exchanged by each Target Indemnified Person for shares of Acquiror Common Stock
in the Merger), Acquiror Common Stock, as Indemnification Shares, having a value
equal to such Target Damages.
(c) For the purpose of compensating Acquiror or any Target
Indemnified Person for its Damages pursuant to this Agreement, the Acquiror
Common Stock to be used as Escrow Shares or Indemnification Shares shall be
valued at $649 per share (subject to equitable adjustment upon any
reclassification, share combination, share subdivision, share dividend, share
exchange or other similar transaction or event).
8.6 Objections to Claims.
(a) At the time of delivery of any Acquiror Officer's
Certificate to the Escrow Agent, a duplicate copy of such Acquiror Officer's
Certificate shall be delivered to the Shareholders' Agent (defined in Section
8.8 below) and for a period of forty-five (45) days after such delivery to the
Escrow Agent of such Certificate, the Escrow Agent shall make no delivery of
Acquiror Common Stock or other property pursuant to Section 8.5 hereof unless
the Escrow Agent shall have received written authorization from the
Shareholders' Agent to make such delivery. After the expiration of such
forty-five (45) day period, the Escrow Agent shall make delivery of the Acquiror
Common Stock or other property in the Escrow Fund in accordance with Section 8.5
hereof, provided that no such payment or delivery may be made if the
Shareholders' Agent shall object in a written statement to the claim made in the
Acquiror Officer's Certificate, and such statement shall have been delivered to
the Escrow Agent and to Acquiror prior to the expiration of such forty-five (45)
day period.
(b) Within 45 days of the time of delivery of any Target
Certificate to Acquiror, Acquiror shall issue to the Target Indemnified Parties
shares of Acquiror Common Stock in accordance with Section 8.5 hereof; provided
that no such payment or delivery shall be made under this Section 8.6(b) if
Acquiror shall object in a written statement to the claims made in the Target
Certificate provided that such statement shall have been delivered to the
Shareholders' Agent prior to the expiration of such forty-five (45) day period.
8.7 Resolution of Conflicts; Arbitration.
(a) In case the Shareholders' Agent shall so object in
writing to any claim or claims by Acquiror made in any Acquiror Officer's
Certificate, Acquiror shall have forty-five (45) days after receipt by the
Escrow Agent of an objection by the Shareholders' Agent to respond in a written
statement to the objection of the Shareholders' Agent. If after such forty-five
(45) day period there remains a dispute as to any claims, the Shareholders'
Agent and Acquiror shall attempt in good faith for sixty (60) days to agree upon
the rights of the respective parties with respect to each of such claims. If the
Shareholders' Agent and Acquiror should so agree, a memorandum setting forth
such agreement shall be prepared and signed by both parties and shall be
furnished to the Escrow Agent. The Escrow Agent shall be entitled to rely on any
such memorandum and shall distribute the Acquiror Common Stock or other property
from the Escrow Fund in accordance with the terms thereof.
42
<PAGE>
(b) If no agreement can be reached after good faith
negotiation in accordance with Section 8.7(a) or Acquiror objects under Section
8.6(b) to the claims asserted against Acquiror by the Shareholders' Agent,
either Acquiror or the Shareholders' Agent may, by written notice to the other,
demand arbitration of the matter unless the amount of the damage or loss is at
issue in pending litigation with a third party, in which event arbitration shall
not be commenced until such amount is ascertained or both parties agree to
arbitration; and in either such event the matter shall be settled by arbitration
conducted by three arbitrators. Within fifteen (15) days after such written
notice is sent, Acquiror and the Shareholders' Agent shall each select one
arbitrator, and the two arbitrators so selected shall select a third arbitrator.
The decision of the arbitrators as to the validity and amount of any claim in
such Certificate shall be binding and conclusive upon the parties to this
Agreement, and notwithstanding anything in Section 8.6 hereof, (i) in the case
of claims against the Escrow Fund, the Escrow Agent shall be entitled to act in
accordance with such decision and make or withhold payments out of the Escrow
Fund in accordance therewith and (ii) in the case of claims against Acquiror,
Acquiror shall issue and deliver to the Target Indemnified Party the required
number of Indemnity Shares in accordance with this Article VIII.
(c) Judgment upon any award rendered by the arbitrators
may be entered in any court having jurisdiction. Any such arbitration shall be
held in New York, New York under the commercial rules then in effect of the
American Arbitration Association. For purposes of this Section 8.7(c), in any
arbitration hereunder in which any claim or the amount thereof stated in the
Certificate is at issue, Acquiror shall be deemed to be the Non-Prevailing Party
unless the arbitrators award Acquiror more than one-half (1/2) of the amount in
dispute, plus any amounts not in dispute; otherwise, the Target Shareholders
shall be deemed to be the Non-Prevailing Party. The Non-Prevailing Party to an
arbitration shall pay its own expenses, the fees of each arbitrator, the
administrative fee of the American Arbitration Association, and the expenses,
including without limitation, attorneys' fees and costs, reasonably incurred by
the other party to the arbitration.
8.8 Shareholders' Agent.
(a) Christopher Hassett shall be constituted and appointed
as agent ("Shareholders' Agent") for and on behalf of the Target Shareholders to
give and receive notices and communications (including Target Certificates), to
authorize delivery to Acquiror of the Acquiror Common Stock or other property
from the Escrow Fund in satisfaction of claims by Acquiror, to object to such
deliveries, to agree to, negotiate, enter into settlements and compromises of,
and demand arbitration and comply with orders of courts and awards of
arbitrators with respect to such claims, and to take all actions necessary or
appropriate in the judgment of the Shareholders' Agent for the accomplishment of
the foregoing. Such agency may be changed by the holders of a majority in
interest of the Escrow Fund from time to time upon not less than ten (10) days'
prior written notice to Acquiror. No bond shall be required of the Shareholders'
Agent, and the Shareholders' Agent shall receive no compensation for his
services. Notices or communications to or from the Shareholders' Agent shall
constitute notice to or from each of the Target Shareholders. The parties
acknowledge that in no event may any individual other than the Shareholder's
Agent make any claim against Acquiror pursuant to this Section 8.
43
<PAGE>
(b) The Shareholders' Agent shall not be liable for any
act done or omitted hereunder as Shareholders' Agent while acting in good faith
and in the exercise of reasonable judgment, and any act done or omitted pursuant
to the advice of counsel shall be conclusive evidence of such good faith. The
Target Shareholders shall severally indemnify the Shareholders' Agent and hold
him harmless against any loss, liability or expense incurred without gross
negligence or bad faith on the part of the Shareholders' Agent and arising out
of or in connection with the acceptance or administration of his duties
hereunder.
(c) The Shareholders' Agent shall have reasonable access
to information about Target and the reasonable assistance of Target's officers
and employees for purposes of performing its duties and exercising its rights
hereunder, provided that the Shareholders' Agent shall treat confidentially and
not disclose any nonpublic information from or about Target to anyone (except on
a need to know basis to individuals who agree to treat such information
confidentially).
8.9 Actions of the Shareholders' Agent. A decision, act,
consent or instruction of the Shareholders' Agent shall constitute a decision of
all Target Shareholders for purposes of this Article VIII and shall be final,
binding and conclusive upon each such Target Shareholder, and the Escrow Agent,
if applicable, and Acquiror may rely upon any decision, act, consent or
instruction of the Shareholders' Agent as being the decision, act, consent or
instruction of each and every such Target Shareholder. The Escrow Agent, if
applicable, and Acquiror are hereby relieved from any liability to any person
for any acts done by them in accordance with such decision, act, consent or
instruction of the Shareholders' Agent.
8.10 Third-Party Claims. In the event Acquiror becomes aware
of a third-party claim which Acquiror believes may result in a demand against
the Escrow Fund, the Indemnification Shares, or Acquiror's ability to issue the
Indemnification Shares, Acquiror shall promptly notify the Shareholders' Agent
of such claim, and the Shareholders' Agent and the Target Shareholders, at their
expense, to participate in any defense of such claim. Acquiror shall have the
right in its sole discretion to settle any such claim; provided, however, that
Acquiror may not effect the settlement of any such claim without the consent of
the Shareholders' Agent, which consent shall not be unreasonably withheld. In
the event that the Shareholders' Agent has consented to any such settlement, the
Shareholders' Agent shall have no power or authority to object under Section 8.6
or any other provision of this Article VIII to the amount of any claim by
Acquiror against the Escrow Fund for indemnity with respect to such settlement.
8.11 Exclusive Remedy. Following the Effective Time, the
remedies set forth in this Article VIII shall be the sole remedy for a breach of
this agreement by the other party.
ARTICLE IX
GENERAL PROVISIONS
9.1 Non-Survival at Effective Time. The representations and
warranties set forth in Articles II and III will survive until the first
anniversary of the Closing; provided, however, that the representations and
warranties as to tax matters set forth in Sections 3.7 (Tax Matters) will
survive until the expiration of the applicable statute of limitations. The
44
<PAGE>
agreements set forth in this Agreement shall terminate at the Effective Time,
except that the agreements set forth in Article I, Section 3.7 (Tax Matters),
Section 5.4 (Confidentiality) Section 5.5 (Public Disclosure), 5.7 (Shareholder
Representation Agreements), 5.8 (Shareholder Agreement), 5.11 (Employee Benefit
Plans), 5.15 (Treatment as Reorganization) 5.18 (Best Efforts and Further
Assurances), 7.3 (Expenses and Termination Fees), 7.4 (Amendment), Article VIII
and this Article IX shall survive the Effective Date and the Closing.
9.2 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally or by
commercial delivery service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with confirmation of receipt) to the
parties at the following address (or at such other address for a party as shall
be specified by like notice):
(a) if to Acquiror or Acquisition Sub, to:
Uproar Ltd.
Bermuda Commercial Bank Building
44 Church Street
Hamilton HM12 Bermuda
Attention: CEO
Facsimile No.: +1 (441) 292-8899
Telephone No.: +1 (441) 292-7070
with a copy to:
Brobeck, Phleger & Harrison LLP
1633 Broadway, 47th Floor
New York, New York 10019
Attention: Eric Simonson
Facsimile No.: (212) 586-7878
Telephone No.: (212) 237-2528
(b) if to Target, to:
PrizePoint Entertainment Corporation
240 West 35th Street
New York, NY 10001
Attn: President
Facsimile: (212) 244-5288
Telephone No.: (212) 244-5295
45
<PAGE>
with a copy to:
Howard Smith & Levin LLP
1330 Avenue of the Americas
New York, NY 10019
Attn: Scott F. Smith
Facsimile: (212) 841-1010
Telephone No.: (212) 841-1000
9.3 Interpretation. When a reference is made in this Agreement
to Exhibits, such reference shall be to an Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The phrase "made available" in this Agreement shall mean that the
information referred to has been made available if requested by the party to
whom such information is to be made available. The phrases "the date of this
Agreement", "the date hereof", and terms of similar import, unless the context
otherwise requires, shall be deemed to refer to April 29, 1999. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
9.4 Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
9.5 Entire Agreement; Nonassignability; Parties in Interest.
This Agreement and the documents and instruments and other agreements
specifically referred to herein or delivered pursuant hereto, including the
Exhibits, the Schedules, including the Target Disclosure Schedule and the
Acquiror Disclosure Schedule (a) constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof, except for the Confidentiality Agreement,
which shall continue in full force and effect, and shall survive any termination
of this Agreement or the Closing, in accordance with its terms (b) are not
intended to confer upon any other person any rights or remedies hereunder,
except as set forth in Sections 1.6(a) and (c)-(g), 1.7, 1.9, 1.10, 1.11, 5.11,
5.13 and 5.22; and (c) shall not be assigned by operation of law or otherwise
except as otherwise specifically provided.
9.6 Severability. In the event that any provision of this
Agreement, or the application thereof, becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder of
this Agreement will continue in full force and effect and the application of
such provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further agree
to replace such void or unenforceable provision of this Agreement with a valid
and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
46
<PAGE>
9.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of New York without reference to such
state's principles of conflicts of law. Each of the parties hereto irrevocably
consents to the exclusive jurisdiction of any court located within the State of
New York, in connection with any matter based upon or arising out of this
Agreement or the matters contemplated herein, agrees that process may be served
upon them in any manner authorized by the laws of the State of New York for such
persons and waives and covenants not to assert or plead any objection which they
might otherwise have to such jurisdiction and such process. EACH OF THE PARTIES
HERETO HEREBY WAIVES TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
BROUGHT BY OR AGAINST IT ON ANY MATTERS WHATSOEVER, IN CONTRACT OR IN TORT,
ARISING OUT OF OR IN ANY WAY CONNECTED TO THIS AGREEMENT.
[Signature page follows]
47
<PAGE>
IN WITNESS WHEREOF, Target. Acquiror and Acquisition Sub have
caused this Agreement to be executed and delivered by their respective officers
thereunto duly authorized, all as of the date first written above.
PrizePoint Entertainment Corporation
By: Christopher R. Hassett
---------------------------------
Name: Christopher R. Hassett
Title: Chief Executive Officer
Uproar Ltd.
By: David A. Becker
---------------------------------
Name: David A. Becker
Title: Chief Operating Officer
Uproar Acquisition, Inc.
By: David A. Becker
---------------------------------
Name: David A. Becker
Title: President
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION]
<PAGE>
SCHEDULE 2.3
AGREEMENTS REQUIRING CONSENT
1. Standard Form of Loft Lease, dated March 20, 1998, between Target and
Nassau Bay Associates, L.P. as amended by a Lease Amendment dated December 28,
1998, between Target and Nassau Bay Associates, L.P.
<PAGE>
SCHEDULE 2.5
CERTAIN CHANGES
1. Issuance of Series B Preferred Stock to Kenneth Cron pursuant to Stock
Purchase Agreement dated January 7, 1999 between Target and Mr. Cron.
2. Employment commitment letters between Target and the following employees
employed after December 31, 1998:
Allyne Mills Guna Chinnaguravagrai Robert Sheppard
Robin Romi Alan Lewis Patrick Harris
Arturo Falck Wai Lee
Kendall Briggs Eduardo de Sampaio
3. Material Contracts entered into after December 31, 1998 as set forth on
Schedule 2.27.
4. Options issued under the Target Stock Option Plan after December 31,
1998 as set forth on Schedule 5.12.
<PAGE>
SCHEDULE 2.6
UNDISCLOSED LIABILITIES
[None]
<PAGE>
SCHEDULE2.7
TARGET LITIGATION
Letter, dated February 11, 1999, to Target from Hunton & Williams, as
counsel to Bottle Rocket, Inc., alleging that use of the term "Bottle Rox" (as
the term "BattleRox" was misquoted in a published article) infringed upon a
trademark owned by Bottle Rocket.
<PAGE>
SCHEDULE 2.10
TARGET REAL PROPERTY
Target leases the 9th and 18th floors of the facility located at 240 West
35th Street, New York, NY 10001-2506 pursuant to the Standard Form of Lease and
subsequent amendment as set forth in Schedule 2.3.
<PAGE>
SCHEDULE 2.11
TARGET INTELLECTUAL PROPERTY
Trademarks
PRIZEPOINT (registration pending)
PRIZEPOINTS (registration pending)
PLAY TO WIN (registration pending)
Domain name
www.prizepoint.com
www.buyandwin.com
www.buyandwin.net
www.scratchticket.com
Licenses authorizing third party use of Target's Intellectual Property
1. Content Provider Agreement, dated February 10, 1999, between Target and
InfoSeek Corporation. (contains exclusivity provisions)
2. Marketing Agreement, dated as of December 29, 1998, between Target and
CENDANT Interactive Services, Inc.
Licenses for Target's use of third party Intellectual Property
1. License Agreement, dated as of January 14, 1999, between Target and Ben
Librojo.
2. License Agreement, dated as of September, 1998, between Target and Burkhard
Ratheiser.
3. License Agreement, dated as of January 7, 1999, between Target and Chris
Goringe.
4. License Agreement, dated as of December 4, 1998, between Target and Chris
Goringe.
5. License Agreement, dated as of October 15, 1998, between Target and David
Brackeen.
6. License Agreement, dated as of November 10, 1998, between Target and Gary
Kramer.
7. License Agreement, dated as of January 14, 1999, between Target and Jim
Turner.
8. License Agreement, dated as of October 25, 1998, between Target and Jimmy
Hu.
9. License Agreement, dated as of November 30, 1998, between Target and Keith
Barrett.
<PAGE>
10. License Agreement, dated as of January 1, 1999, between Target and Michael
LaLena.
11. License Agreement, dated as of October 27, 1998, between Target and Mike
Hall.
12. License Agreement, dated as of November 10, 1998, between Target and Ravi
Damarla.
13. License Agreement, dated as of December 14, 1998, between Target and
Volodymyr Kindratenko.
14. License Agreement, dated as of January 11, 1999, between Target and Michael
Lalena.
15. License Agreement, dated as of October 27, 1998, between Target and Mike
Hall.
16. License Agreement, dated as of November 10, 1998, between Target and Ravi
Damarla.
17. License Agreement, dated as of December 14, 1998, between Target and
Volodymyr Kindratenko.
<PAGE>
SCHEDULE 2.14
TARGET EMPLOYEE PLANS
1. Standardized 401(k) Profit Sharing Plan, effective January 1, 1998.
2. PrizePoint 1998 Stock Option Plan.
<PAGE>
SCHEDULE 2.15
AGREEMENTS AFFECTED BY MERGER
1. Employee Confidentiality, Non-Solicitation and Share Repurchase Agreement,
between Target and Christopher R. Hassett, dated March 4, 1998.
2. Employee Confidentiality, Non-Solicitation and Share Repurchase Agreement,
between Target and Francis G. Blot, dated March 4, 1998.
3. Employee Confidentiality, Non-Solicitation and Share Repurchase Agreement,
between Target and Harry Collins, dated March 4, 1998.
4. Employee Confidentiality, Non-Solicitation and Share Repurchase Agreement,
between Target and Janet L. Hassett, dated March 4, 1998.
5. Employee Confidentiality, Non-Solicitation and Share Repurchase Agreement,
between Target and John Nogrady, dated March 4, 1998.
6. Employee Confidentiality, Non-Solicitation and Share Repurchase Agreement,
between Target and Rosemarie Panzarella, dated March 4, 1998.
7. 25% of the current unvested options granted to Target's employees pursuant
to the 1998 PrizePoint Stock Option Plan shall accelerate upon the
consummation of the transaction contemplated in the Reorganization
Agreement.
<PAGE>
SCHEDULE 2.17
INTERESTED PARTY TRANSACTIONS
1. Registration Rights Agreement, dated as of October 15, 1998, by and among
Target and various investors.
2. Amended and Restated Shareholders' Agreement, dated as of October 15, 1998,
among Target and various shareholders, as amended on December 8, 1998.
<PAGE>
SCHEDULE 2.18
TARGET INSURANCE POLICIES
1. Workers Compensation and Employers Liability Policy issued to Target by
Hartford Underwriters Insurance Company, covering the period from May 18,
1998 to May 18, 1999.
2. Liability Insurance issued to Target by Hartford, covering the period from
May 15, 1998 to May 15, 1999 (commercial general liability) and from May 18,
1998 through May 18, 1999 (umbrella form).
3. Commercial Crime Policy issued to Target's 401 (k) Profit Sharing Plan and
Trust by the Travelers Property Casualty for the period beginning November
11, 1998.
4. Term Life Insurance (key-man for Chris Hassett) issued to Target by The
Travelers Insurance Company for the period beginning November 19, 1998.
<PAGE>
SCHEDULE 2.25
LIST OF MATERIAL CONTRACTS
1. Consulting, Services Agreement, dated July 6, 1998, between Target and mBed
Software Inc.
2. Consulting Services Agreement, dated July 6, 1998 between Target and mBed
Software Inc.
3. Service Provider Agreement, dated January 26, 1999, between Target and
Forest Lake Travel.
4. Internet Data Center Services Agreement, dated as of June 1, 1998, between
Target and Exodus Communications, Inc.
5. Internet Data Center Services Agreement, dated as of June 30, 1998, between
Target and Exodus Communications, Inc.
6. Service Provider Agreement, dated January 25, 1999, between Target and
Forest Lake Travel.
7. Commercial Sales Proposal/Agreement, dated May 21, 1998, between Target and
ADT Security Services, Inc.
8. Insertion Order, dated March 29, 1999, between Target and UBID.
9. Insertion Order, dated March 26, 1999, between Target and National
Thoroughbred Racing.
10. Standard Form of Loft Lease, dated March 20, 1998, between Target and Nassau
Bay Associates, L.P. as amended by a Lease Amendment dated December 28,
1998, between Target and Nassau Bay Associates, L.P.
11. Master Lease Agreement, dated as of January 8, 1998, between Target and
Steelcase Financial Services, Inc.
12. Modified Retained Search Agreement, dated November 16, 1998, between Target
and Management Search, Inc.
13. PrizePoint Consulting Services Agreement, dated February 22, 1999, between
Target and Optimal Solutions Inc.
14. Content Provider Agreement, dated February 10, 1999, between Target and
InfoSeek Corporation. (contains exclusivity provisions)
15. Target has Confidentiality Agreements, Option Agreements and Employment
Agreements with various officers, directors and employees.
16. See Schedule 2.17.
<PAGE>
SCHEDULE 2.27
PRODUCT RELEASES
[None]
<PAGE>
SCHEDULE 5.13
EMPLOYEES
1. Francis G. Blot
2. John W. Nogrady
3. Douglas M. Wintz
<PAGE>
SCHEDULE 3.11
Schedule 3.11 (a) - Exceptions to Schedule 3.11 (c)
Word Mark UPROAR A RIPROARING GAME
Owner Name (REGISTRANT) Gilhuis, Mark G.
Serial Number 74-447289
Registration Number 1851579
International Class 028
Goods and Services board games; DATE OF FIRST USE: 1993.05.27; DATE OF
FIRST USE IN COMMERCE: 1993.09.20
<PAGE>
EXHIBIT A
<PAGE>
SHAREHOLDER AGREEMENT
This Shareholder Agreement (the "Shareholder Agreement") is made and
entered into as of April _, 1999, between Uproar Ltd., a Bermuda corporation
("Acquiro"), and the undersigned shareholders ("Shareholders", and each
individually, "Shareholder") of PrizePoint Entertainment, Inc., a Delaware
corporation ("Target").
RECITALS
WHEREAS, pursuant to an Agreement and Plan of Reorganization dated as of
April _, 1999, by and between Acquiror, Uproar Acquisition, Inc., a Delaware
corporation ("Merger Sub"), and Target (such agreement as it may be amended or
restated hereinafter referred to as the "Reorganization Agreement"), the parties
agreed that on the signing of the Reorganization Agreement Target would use its
best efforts to cause Shareholders to execute and deliver a Shareholder
Agreement substantially in the form set forth in an Exhibit to the
Reorganization Agreement;
WHEREAS, Acquiror has agreed to acquire the outstanding securities of
Target pursuant to a merger of Merger Sub with and into Target (the "Merger")
and pursuant to which each outstanding share of capital stock of Target (the
"Target Capital Stock") will be converted into the right to receive shares of
common stock of Acquiror (the "Acquiror Shares") at the rates set forth in the
Reorganization Agreement (the "Transaction");
WHEREAS, in order to induce Acquiror to enter into the Transaction, Target
has agreed to solicit the proxy of certain significant shareholders of Target on
behalf of Acquiror, and to cause certain significant shareholders of Target to
execute and deliver voting agreements to Acquiror,
WHEREAS, each Shareholder is the registered and beneficial owner of such
number of shares of Target Capital Stock as is indicated on the signature page
of this Shareholder Agreement (the "Shares"); and
WHEREAS, in order to induce Acquiror to enter into the Transaction, each
Shareholder agrees not to transfer or otherwise dispose of any of the Shares, or
any other shares of Target Capital Stock acquired by Shareholder hereafter and
prior to the Expiration Date (as defined in Section 1.1 below), and agrees to
vote the Shares and any other such acquired shares of Target Capital Stock so as
to facilitate consummation of the Transaction.
NOW, THEREFORE, the parties agree as follows:
1 . Share Ownership and Agreement to Retain Shares.
1.1 Transfer and Encumbrance.
(a) Each Shareholder is the beneficial owner of that number of Shares of
Target Capital Stock set forth on the signature page hereto and, except as
otherwise set forth on the signature page hereto, (i) has held such Target
Capital Stock at all times since the date set
<PAGE>
forth on such signature page and (ii) did not acquire any shares of Target
Capital Stock in contemplation of the Merger. These Shares constitute each
Shareholder's entire interest in the outstanding Target Capital Stock. No other
person or entity not a signatory to this Shareholder Agreement has a beneficial
interest in or a right to acquire such Shares or any portion of such Shares
(except, with respect to shareholders which are partnerships, partners of such
shareholders). The Shares are and will be at all times up until the Expiration
Date free and clear of any liens, claims, options, charges or other
encumbrances. As used herein, the term "Expiration Date" shall mean the earlier
to occur of (x) the Effective Time of the Transaction and (y) the termination of
the Reorganization Agreement. Each Shareholder's principal residence or place of
business is set forth on the signature page hereto.
(b) Each Shareholder agrees not to transfer (except as may be
specifically required by court order or by operation of law), sell, exchange,
pledge or otherwise dispose of or encumber the Shares or any New Shares (as
defined below), or to make any offer or agreement relating thereto, at any time
prior to the Expiration Date.
1.2 New Shares. Each Shareholder agrees that any shares of Target Capital
Stock that Shareholder purchases or with respect to which Shareholder otherwise
acquires beneficial ownership after the date of this Shareholder Agreement and
prior to the Expiration Date ("New Shares") shall be subject to the terms and
conditions of this Shareholder Agreement to the same extent as if they
constituted Shares.
2. Agreement to Vote Shares. Prior to the Expiration Date, at every
meeting of the shareholders of Target called with respect to any of the
following, and at every adjournment thereof, and on every action or approval by
written consent of the shareholders of Target with respect to any of the
following, each Shareholder shall vote the Shares and any New Shares (i) in
favor of approval of the Transaction and any matter that could reasonably be
expected to facilitate the Transaction and (ii) against any proposal for any
recapitalization, merger, sale of assets or other business combination (other
than the Transaction) between Target and any person or entity other than
Acquiror.
3. Irrevocable Proxy. Each Shareholder hereby agrees to timely deliver to
Acquiror a duly executed proxy in the form attached hereto as Exhibit A (the
"Proxy") with respect to each meeting of shareholders of Target prior to the
Expiration Date, such Proxy to cover the total number of Shares and New Shares
in respect of which Shareholder is entitled to vote at any such meeting. In the
event that any Shareholder is unable to provide any such Proxy in a timely
manner, such Shareholder hereby grants Acquiror a power of attorney to execute
and deliver such Proxy for and on behalf of Shareholder, such power of attorney,
which being coupled with an interest, shall survive any death, disability,
bankruptcy or any other such impediment and shall terminate on the Expiration
Date. Upon the execution of this Shareholder Agreement by the Shareholders, each
Shareholder hereby revokes any and all prior proxies given by the Shareholder
with respect to the Shares and agrees not to grant any subsequent proxies
with respect to the Shares until after the Expiration Date.
4. Representations. Warranties and Covenants of Shareholder. Each
Shareholder hereby represents, warrants and covenants to Acquiror as follows:
2
<PAGE>
(a) Purchase Entirely for Own Account. The Acquiror Shares being
acquired by such Shareholder in connection with the Merger will be acquired for
investment for such Shareholder's own account, not as a nominee or agent, and
not with a view to the resale or distribution of any part thereof, and such
Shareholder has no present intention of selling, granting any participation in,
or otherwise distributing the same. By executing this Shareholder Agreement,
Shareholder further represents that such Shareholder does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of
such Acquiror Shares.
(b) Investment Experience. Such Shareholder has substantial
experience evaluating and investing in securities of companies and acknowledges
that it has the capacity to protect its own interests in connection therewith,
can bear the economic risk of its investment and has such knowledge and
experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Acquiror Shares. If other than an
individual, such Shareholder also represents it has not been organized for the
purpose of acquiring the Acquiror Shares.
(c) Accredited Investor. Such Shareholder is and at the Closing (as
defined in the Reorganization Agreement) will be an "accredited investor" within
the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation
D, as presently in effect.
(d) Restricted Securities. Such Shareholder understands that the
Acquiror Shares are characterized as "restricted securities" under the United
States federal securities laws inasmuch as they are being acquired from the
Acquiror in a transaction not involving a public offering and that under such
laws and applicable regulations such securities may be resold without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), only in certain limited circumstances. In this connection, such
Shareholder represents that it is familiar with SEC Rule 144 (a copy of which is
attached hereto as Appendix A) as presently in effect, and understands the
resale limitations imposed thereby and by the Securities Act.
(e) Further Limitations on Disposition. In addition to such further
restrictions that each Shareholder may be subject to pursuant to the Shareholder
Representation Agreement to be executed by such Shareholders pursuant to the
Reorganization Agreement, each Shareholder agrees not to offer, sell, exchange,
transfer, pledge or otherwise dispose of any of the Acquiror Shares unless at
that time either:
(i) such transaction is permitted pursuant to the provisions of
Rule 144 under the Securities Act;
(ii) counsel representing the undersigned Shareholders,
reasonably satisfactory to Acquiror, shall have advised Acquiror in a written
opinion letter reasonably satisfactory to Acquiror and Acquiror's counsel, and
upon which Acquiror and its counsel may rely, that no registration under the
Securities Act and relevant state securities laws is required in connection with
the proposed sale, transfer or other disposition;
(iii) a registration statement under the Securities Act (a
"Registration Statement") covering the Acquiror Shares proposed to be sold,
transferred or
3
<PAGE>
otherwise disposed of, describing the manner and terms of the proposed sale,
transfer or other disposition, and containing a current prospectus, is filed
with the SEC and made effective under the Securities Act; or
(iv) an authorized representative of the SEC shall have rendered
written advice to such undersigned Shareholder (sought by the undersigned
Shareholder or counsel to the undersigned Shareholder, with a copy thereof and
of all other related communications delivered to Acquiror) to the effect that
the SEC will take no action, or that the staff of the SEC will not recommend
that the SEC take action, with respect to the proposed offer, sale, exchange,
transfer, pledge or other disposition if consummated.
(f) (i) Each undersigned Shareholder will observe and comply with the
Securities Act and the General Rules and Regulations thereunder, as now in
effect and as from time to time amended and including those hereafter enacted or
promulgated, in connection with any offer, sale, exchange, transfer, pledge or
other disposition of the Acquiror Shares or any part thereof.
(ii) Each undersigned Shareholder undertakes and agrees to
indemnify and hold harmless Acquiror, Target and each of their respective
current and future officers and directors and each person, if any, who now or
hereafter controls or may control Acquiror or Target within the meaning of the
Securities Act (an "Indemnified Person") from and against any and all claims,
demands, actions, causes of action, losses, costs, damages, liabilities and
expenses ("Claims") based upon, arising out of or resulting from any breach or
nonfulfillment of any undertaking, covenant or agreement made herein by such
Shareholder, or caused by or attributable to such Shareholder, or such
Shareholder's agents or employees, or representatives, brokers, dealers and/or
underwriters insofar as they are acting on behalf of and in accordance with the
instruction of or with the knowledge of such Shareholder, in connection with or
relating to any offer, sale, pledge, transfer or other disposition of any of the
Acquiror Shares by or on behalf of such Shareholder, which claim or claims
result from any breach or nonfulfillment as set forth above. The indemnification
set forth herein shall be in addition to any liability that such Shareholder may
otherwise have to the Indemnified Persons.
(g) Promptly after receiving definitive notice of any Claim in
respect of which an Indemnified Person may seek indemnification under this
Shareholder Agreement, such Indemnified Person shall submit notice thereof to
the Shareholders. The omission by the Indemnified Person so to notify the
undersigned Shareholders of any such Claim shall not relieve the undersigned
Shareholders from any liability the undersigned Shareholders may have hereunder
except to the extent that (A) such liability was caused or increased by such
omission, or (B) the ability of the undersigned Shareholders to reduce or defend
against such liability was adversely affected by such omission. The omission of
the Indemnified Person so to notify the undersigned Shareholders of any such
Claim shall not relieve the undersigned Shareholders from any liability the
undersigned Shareholders may have otherwise than hereunder. The Indemnified
Persons and the undersigned Shareholders shall cooperate with and assist one
another in the defense of any Claim and any action, suit or proceeding arising
in connection therewith.
(h) Until the Expiration Date, each Shareholder will not (and will use
such Shareholder's reasonable efforts to cause Target, its affiliates, officers,
directors and
4
<PAGE>
employees and any investment banker, attorney, accountant or other agent
retained by such Shareholder or them, not to) directly or indirectly: (i) take
any action to solicit, initiate or encourage any Acquisition Proposal (as
defined below); (ii) initiate any contact with any person in an effort to or
with a view towards soliciting any Acquisition Proposal; (iii) furnish
information concerning Target's business, properties or assets to any
corporation, partnership, person or other entity or group (other than Acquiror,
or any associate, agent or representative of Acquiror) under any circumstances
that could reasonably be expected to relate to an actual or potential
Acquisition Proposal; or (iv) negotiate or enter into discussions or an
agreement with any entity or group with respect of any potential Acquisition
Proposal. In the event the Shareholder shall receive or become aware of any
Acquisition Proposal subsequent to the date hereof, such Shareholder shall
promptly inform Acquiror as to any such matter and the details thereof to the
extent possible without breaching any other agreement to which such Shareholder
is a party or violating its fiduciary duties. For purposes of this Shareholder
Agreement, "Acquisition Proposal" means any bona fide offer or proposal for, or
any indication of interest in, a merger or other business combination involving
Target or any of its subsidiaries or the acquisition of 50% or more of the
outstanding shares of capital stock of Target, or a significant portion of the
assets of, Target or any of its subsidiaries, other than the transactions
contemplated by this Agreement.
(i) Each Shareholder understands that pursuant to the Reorganization
Agreement, Acquiror and the Shareholders' Agent shall enter into the Escrow
Agreement and that Shareholder shall be bound by the provisions of the Escrow
Agreement, in the form attached as an Exhibit to the Merger Agreement, and
Article VIII of the Reorganization Agreement, and as such, Shareholder agrees to
appoint a Shareholders' Agent prior to the Closing and further agrees to be
bound by the terms of the Escrow Agreement and Article VIII of the
Reorganization Agreement.
5. Additional Documents. Each Shareholder hereby covenants and agrees to
execute and deliver any additional documents necessary or desirable, in the
reasonable opinion of Acquiror, to carry out the purpose and intent of this
Shareholder Agreement.
6. Consent and Waiver. Each Shareholder hereby gives any consents or
waivers that are reasonably required for the consummation of the Transaction
under the terms of any agreement to which Shareholder is a party or pursuant to
any rights Shareholder may have.
7. Termination. This Shareholder Agreement and the Proxy delivered in
connection herewith shall terminate and shall have no further force or effect as
of the Expiration Date.
8. Confidentiality. Each Shareholder agrees (i) to hold any information
regarding this Shareholder Agreement and the Transaction in strict confidence
and (ii) not to divulge any such information to any third person, until such
time as the Transaction has been publicly disclosed by Acquiror, provided,
however that Shareholder may disclose such information to Shareholder's legal
and financial advisors who agree to be bound by this covenant.
5
<PAGE>
9. Miscellaneous.
9.1 Severability. If any term, provision, covenant or restriction of
this Shareholder Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Shareholder Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
9.2 Binding Effect and Assignment. This Shareholder Agreement and all of
the provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Shareholder
Agreement nor any of the rights, interests or obligations of the parties hereto
may be assigned by either of the parties without the prior written consent of
the other. This Shareholder Agreement is intended to bind Shareholder as a
shareholder of Target only with respect to the specific matters set forth
herein.
9.3 Amendment and Modification. This Shareholder Agreement may not be
modified, amended, altered or supplemented except by the execution and delivery
of a written agreement executed by the parties hereto.
9.4 Specific Performance: Injunctive Relief. The parties hereto
acknowledge that Acquiror will be irreparably harmed and that there will be no
adequate remedy at law for a violation of any of the covenants or agreements of
Shareholders set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Acquiror upon any such violation,
Acquiror shall have the right to enforce such covenants and agreements by
specific performance, injunctive relief or by any other means available to
Acquiror at law or in equity and each Shareholder hereby waives any and all
defenses which could exist in its favor in connection with such enforcement and
waives any requirement for the security or posting of any bond in connection
with such enforcement.
9.5 Notices. All notices, requests, demands or other communications that
are required or may be given pursuant to the terms of this Shareholder Agreement
shall be in writing and shall be deemed to have been duly given if delivered by
hand or mailed by registered or certified mail, postage prepaid, as follows:
(a) If to the Shareholders, at the addresses set forth below each
Shareholder's signature at the end hereof.
(b) If to Acquiror:
Uproar Ltd.
375 West Broadway, 5th Floor
New York, New York 10012
Attention: President and CEO
Facsimile No.: (212) 334-4646
Telephone No.: (212) 334-5151
6
<PAGE>
with a copy to:
Brobeck, Phleger & Harrison LLP
1633 Broadway, 47th Floor
New York, New York 10019
Attention: Eric Simonson
Facsimile No.: (212) 586-7878
Telephone No.: (212) 237-2528
(c) if to Target, to:
PrizePoint Entertainment Corporation
240 West 35th Street
New York, New York 10001
Attention: President
Facsimile No.: (212) 244-5288
Telephone No.: (212) 244-5295
with a copy to:
Howard Smith & Levin LLP
1330 Avenue of the Americas
New York, New York 10019
Attention: Scott F. Smith
Facsimile No.: (212) 841-1010
Telephone No.: (212) 841-1000
or to such other address as any party hereto or any Indemnified Person may
designate for itself by notice given as herein provided.
9.6 Governing Law. This Shareholder Agreement shall be governed by,
construed and enforced in accordance with the laws of the State of New York.
9.7 Entire Agreement. This Shareholder Agreement and the Proxy contain
the entire understanding of the parties in respect of the subject matter hereof,
and supersede all prior negotiations and understandings between the parties with
respect to such subject matter.
9.8 Counterpart. This Shareholder Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
9.9 Effect of Headings. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this Shareholder
Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Shareholder Agreement
to be executed as of the date first above written.
ACQUIROR
_____________________________________
Name:
Title:
<PAGE>
EXHIBIT A
---------
IRREVOCABLE PROXY
TO VOTE STOCK OF
TARGET
The undersigned shareholder of Prize Point Entertainment, Inc., a
Delaware corporation ("Target"), hereby irrevocably (to the full extent
permitted by Delaware law) appoints the members of the Board of Directors of
Uproar Ltd., a Bermuda corporation ("Acquiror"), and each of them, or any other
designee of Acquiror, as the sole and exclusive attorneys and proxies of the
undersigned, with full power of substitution and resubstitution, to vote and
exercise all voting and related rights (to the full extent that the undersigned
is entitled to do so) with respect to all of the shares of capital stock of
Target that now are or hereafter may be beneficially owned by the undersigned,
and any and all other shares or securities of Target issued or issuable in
respect thereof on or after the date hereof (collectively, the "Shares" in
accordance with the terms of this Irrevocable Proxy. The Shares beneficially
owned by the undersigned shareholder of Target as of the date of this
Irrevocable Proxy are listed on the final page of this Irrevocable Proxy. Upon
the undersigned's execution of this Irrevocable Proxy, any and all prior proxies
given by the undersigned with respect to any Shares are hereby revoked and the
undersigned agrees not to grant any subsequent proxies with respect to the
Shares until after the Expiration Date (as defined below). As used herein, the
term "Expiration Date" shall mean the earlier to occur of (i) such date and time
as the Merger shall become effective in accordance with the terms and provisions
of the Reorganization Agreement and (ii) termination of the Reorganization
Agreement.
This Irrevocable Proxy is irrevocable (to the extent provided in
Delaware law), is coupled with an interest, including, but not limited to, that
certain Shareholder Agreement dated as of even date herewith by and among
Acquiror and the undersigned, and is granted in consideration of Acquiror
entering into that certain Agreement and Plan of Reorganization between Target,
Uproar Acquisition, Inc., a Delaware corporation "Merger Sub"), and Acquiror
(the "Reorganization Agreement"), which agreement provides for the merger of
Merger Sub with and into Target (the "Merger").
The attorneys and proxies named above, and each of them are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date, to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting and other rights of the undersigned with respect to the
Shares (including, without limitation, the power to execute and deliver written
consents pursuant to Delaware law), at every annual, special or adjourned
meeting of the shareholders of Target and in every written consent in lieu of
such meeting as follows:
[X] In favor of approval of the Reorganization Agreement, in favor of any
matter that could reasonably be expected to facilitate the Merger and
against any proposal for
<PAGE>
any recapitalization, merger, sale of assets or other business
combination relating to the Target (other than the Merger) and against
any other action or agreement that would result in a breach of any
covenant, representation or warranty or any other obligation or
agreement of Target under an acquisition agreement in respect of the
Merger or which would result in any of the conditions to the completion
of the Merger not being fulfilled.
The attorneys and proxies named above may not exercise this Irrevocable
Proxy on any other matter except as provided above. The undersigned shareholder
may vote the Shares on all other matters.
All authority herein conferred shall survive the death or incapacity of
the undersigned and any obligation of the undersigned hereunder shall be binding
upon the heirs, personal representatives, successors and assigns of the
undersigned.
This Irrevocable Proxy is coupled with an interest as aforesaid and is
irrevocable.
Dated: April 1999
_________________________________________
(Signature of Shareholder)
_________________________________________
(Print Name of Shareholder)
Shares beneficially owned:
______ shares of Target Common Stock
______ shares of Target Series A Preferred Stock
______ shares of Target Series B Preferred Stock
<PAGE>
APPENDIX A
RULE 144 UNDER THE SECURITIES ACT OF 1933, AS AMENDED
<PAGE>
EXHIBIT B
<PAGE>
CONFIDENTIAL DISCLOSURE AGREEMENT
Uproar Ltd. (First Party), having an office at 44 Church Street,
Hamilton, Bermuda HM12, and PrizePoint Entertainment, Inc. (Second Party),
having an office at 240 West 35 Street, New York, NY 10001, have a mutual
interest in discussing the development of trade secrets, customers lists, sales
strategies and materials, and solicitation, membership and marketing methods,
concepts and techniques, product information, pricing, computer hardware and
software usages, costs of production, overhead and business practices in
general, whether communicated orally, in written form or electronically, all
such information to be hereafter referred to as "Confidential Information." In
order to facilitate this discussion, it may be necessary for either Party
(Discloser) to disclose to the other Party (Recipient) confidential information
useful in evaluating the feasibility of such development.
Therefore, in order to induce Discloser to disclose and Recipient to
accept such confidential information:
1) Discloser agrees to identify in writing as confidential or mark as
confidential any information which it deems to be confidential;
2) Recipient agrees to receive in confidence any such confidential
information delivered or made available thereto and to;
3) Recipient agrees not to disclose the received confidential
information to any third parties except on the conditions stated in
this agreement and to use such confidential information only in
connection with the abovementioned evaluation, for a period of three
(3) years from the date of receipt of such confidential information,
unless otherwise instructed in writing by Discloser;
4) From time to time Recipient may find it necessary to disclose
confidential information of Discloser to third parties. Recipient
shall disclose such confidential information only if, prior to
disclosure: (a) Recipient acquires Discloser's approval of such third
party and (b) such third party executes a Confidential Disclosure
Agreement with Recipient similar in scope to this Confidential
Disclosure Agreement.
5) Recipient agrees to use the same level of care to prevent
disclosure or unauthorized use of the received confidential
information as it exercises in protecting its own information of
similar nature; and
6) Recipient agrees that all confidential information is the property
of Discloser and agrees promptly to return to Disclosure, upon
demand, any confidential information furnished under this Agreement
which is either received in or reduced to material form.
<PAGE>
7) Recipient and Discloser agree that the above-stated obligations
under this Agreement shall not apply to any information which:
a. as shown by reasonably-documented proof, was in Recipient's
possession prior to receipt thereof from Discloser;
b. as shown by reasonably-documented proof, is developed by
Recipient completely independently of confidential information
received from Discloser;
c. now is or later becomes publicly known without breach by
Recipient of the confidentiality obligation established by this
Agreement;
d. is released in writing by Discloser;
e. Recipient receives in good faith from a third party not
subject to a confidentiality obligation therefor to Discloser;
or
f. Recipient is required to produce by a judicial order or
decree by a governmental law or regulation; however, Recipient
shall make every effort to protect information so produced
against public disclosure.
8) No license to a party, under any trademark, patent, copyright,
mask work protection right or any other intellectual property right,
is either granted or implied by the conveying of information to
Recipient. None of the information which may be disclosed or
exchanged by the parties shall constitute any representation,
warranty, assurance, guarantee or inducement by either party to the
other of any kind, and, in particular, with respect to the
non-infringement of trademarks, patents, copyrights, mask protection
rights or any other intellectual property rights, or other rights of
third persons.
9) Neither this agreement nor the disclosure or receipt of
information shall constitute or imply any promise or intention to
make any purchase of products or services by either party or its
affiliated companies with respect to the present or future marketing
of any product or service.
This Agreement shall terminate one year from the date of the latest
signature below, unless sooner terminated in writing by Discloser or Recipient,
except that the obligations of confidentiality and non-use with respect to
confidential information disclosed to Recipient prior to such termination shall
survive such termination until the end of the period set forth in the above
paragraph 3.
<PAGE>
By:___________________________________
Date April 14, 1999 Title: Michael Simon
Chairman Uproar Ltd.
By:___________________________________
Date Title:
<PAGE>
EXHIBIT C
---------
<PAGE>
SHAREHOLDER REPRESENTATION AGREEMENT
THIS SHAREHOLDER REPRESENTATION AGREEMENT (the "Shareholder's
Agreement") is entered into as of the __ day of ___, 1999 between Uproar Ltd., a
Bermuda corporation ("Acquiror"), and the undersigned shareholder (the
"Shareholder") of Prize Point Entertainment, Inc., a Delaware corporation
("Target").
RECITALS
A. Target, Uproar Acquisition, Inc., a Delaware corporation ("Merger
Sub"), and Acquiror have entered into an Agreement and Plan of Reorganization,
dated as of April _, 1999 (the "Reorganization Agreement"), pursuant to which
Merger Sub will merge with and into Target (the "Merger").
B. Upon the consummation of the Merger and in connection therewith,
the undersigned Shareholder will become the owner of shares of common stock of
Acquiror (the "Acquiror Shares").
C. Pursuant to the Reorganization Agreement, an Escrow Agreement (the
"Escrow Agreement"), has been entered into between the Acquiror and an agent
of the former shareholders of Target ("Shareholders' Agent");
D. Concurrent with the execution of the Reorganization Agreement and as
an inducement to Acquiror to enter into the Reorganization Agreement, certain of
Target's shareholders have entered into an agreement, to, among other things,
vote the shares of capital stock of Target ("Target Capital Stock") owned by
such person to approve the Merger and against any competing proposals.
E. The undersigned Shareholder understands and acknowledges that Target,
Acquiror and their respective shareholders, as well as legal counsel to Target
and Acquiror, are entitled to rely on (x) the truth and accuracy of the
undersigned Shareholder's representations contained herein and (y) the
undersigned Shareholder's performance of the obligations set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements, provisions and covenants set forth in the Reorganization Agreement
and in this Shareholder's Agreement, it is hereby agreed as follows:
1. Share Ownership and Agreement to Retain Shares.
1.1 Transfer and Encumbrance.
(a) Immediately prior to the Effective Time (as defined in the
Merger Agreement), Shareholder was the beneficial owner of that number of shares
of Target Capital Stock set forth on the signature page hereto (the "Shares")
and, except as otherwise set forth on the signature page hereto, (i) held such
Target Capital Stock at all times since the date set forth on such signature
page, and (ii) did not acquire any shares of Target Capital Stock in
contemplation of the Merger. These Shares constituted the Shareholder's entire
interest in the outstanding Target Capital Stock. No other person or entity not
a signatory to this Agreement had as of the Effective Time, or has a beneficial
interest in or a right to acquire such Shares or any portion of such Shares
(except, with respect to shareholders which are partnerships, partners of such
shareholders). The Shares were at all times up until the Effective Time free and
clear of any liens, claims, options, charges or other encumbrances.
<PAGE>
(b) In addition to any other restrictions set forth in this
Shareholder's Agreement, Shareholder agrees not to transfer (except as may be
specifically required by court order or by operation of law), sell, exchange,
pledge or otherwise dispose of or encumber the shares of Acquiror, shares
received by Shareholder pursuant to the Merger (as defined below), or to make
any offer or agreement relating thereto, at any time prior to the 180th day
following the first day Acquiror Shares are listed for trading on EASDAQ if
any shareholders of Acquiror are subject to the same restriction pursuant to any
understanding arrangement relating to such EASDAQ listing, except such
restriction shall not prohibit transfers by operations of law, or bona fide
gifts to family members if Shareholder, to an affiliate of Shareholder (as such
term is defined in Section 1.10 of the Merger Agreement), or to trusts
established for the benefit of Shareholder's family members, so long as the
transferees remain subject to the restrictions set forth herein.
(c) [FOR OFFICERS, DIRECTORS AND 5% STOCKHOLDERS OF TARGET:] [The
undersigned Stockholder will not sell, exchange, transfer pledge, dispose of or
otherwise reduce the undersigned Stockholder's risk relative to the Acquiror
Shares or any part thereof until such time after the Effective Time of the
Merger as financial results covering at least thirty (30) days of the combined
operations of Acquiror and Target after the Effective Time of the Merger have
been, within the meaning of said Release No. 130, filed by Acquiror with the
SEC or published by Acquiror in an Annual Report on Form 10-K, a Quarterly
Report on Form 10-Q, a Current Report on Form 8-K, a quarterly earnings report,
a press release or other public issuance that includes combined sales and net
income of Target and Acquiror. Acquiror agrees to make such filing or
publication as soon as practicable and to notify the undersigned Stockholder
promptly upon making such filing or publication. The undersigned has not, during
the thirty (30) day period prior to the Effective Time of the Merger, sold,
exchanged, transferred, pledged, disposed of or otherwise reduced the
undersigned Stockholder's risk relative to the Acquiror Shares or any part
thereof (including any disposition, within such period, of Stockholder's shares
of, or options to purchase, Target Capital Stock.]
2. Representations, Warranties and Covenants of Shareholder.
Shareholder hereby represents, warrants and covenants to Acquiror as follows:
(a) Purchase Entirely for Own Account. The Acquiror Shares being
acquired by such Shareholder pursuant to the Merger will be acquired for
investment for such Shareholder's own account, not as a nominee or agent, and
not with a view to the resale or distribution of any part thereof, and such
Shareholder has no present intention of selling, granting any participation in,
or otherwise distributing the same. By executing this Agreement, Shareholder
further represents that such Shareholder does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of
such Acquiror Shares.
2
<PAGE>
(b) Investment Experience. Such Shareholder has substantial
experience evaluating and investing in securities of companies and acknowledges
that it has the capacity to protect its own interests in connection therewith,
can bear the economic risk of its investment and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment in the Acquiror Shares. If other than an
individual, such Shareholder also represents it has not been organized for the
purpose of acquiring the Acquiror Shares.
(c) Accredited Investor/Suitability Questionnaire. Such Shareholder
is an "accredited investor" within the meaning of Securities and Exchange
Commission ("SEC") Rule 501 of Regulation D, as presently in effect, (ii) has
delivered an Investor Suitability Questionnaire to Acquiror describing
Shareholder's ability to evaluate an investment in Acquiror Shares or (iii) has
appointed a "purchaser representative" as defined in SEC Rule 501 of Regulation
D to evaluate Shareholder's investment in Acquiror Shares.
(d) Restricted Securities. Such Shareholder understands that the
Acquiror Shares are characterized as "restricted securities" under the United
States federal securities laws inasmuch as they are being acquired from the
Acquiror in a transaction not involving a public offering and that under such
laws and applicable regulations such securities may be resold without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), only in certain limited circumstances. In this connection, such
Shareholder represents that it is familiar with SEC Rule 145 (a copy of which is
attached hereto as Appendix A) as presently in effect, and understands the
resale limitations imposed thereby and by the Securities Act.
(e) Further Limitations on Disposition. The Shareholder agrees not
to offer, sell, exchange, transfer, pledge or otherwise dispose of any of the
Acquiror Shares unless at that time either:
(i) such transaction is permitted pursuant to the provisions of
Rule 145 under the Securities Act;
(ii) counsel representing the undersigned Shareholder,
reasonably satisfactory to Acquiror, shall have advised Acquiror in a written
opinion letter reasonably satisfactory to Acquiror and Acquiror's counsel, and
upon which Acquiror and its counsel may rely, that no registration under the
Securities Act is required in connection with the proposed sale, transfer or
other disposition;
(iii) a registration statement under the Securities Act (a
"Registration Statement") covering the Acquiror Shares proposed to be sold,
transferred or otherwise disposed of, describing the manner and terms of the
proposed sale, transfer or other disposition, and containing a current
prospectus, is filed with the SEC and made effective under the Securities Act;
or
(iv) an authorized representative of the SEC shall have rendered
written advice to the undersigned Shareholder (sought by the undersigned
Shareholder or counsel to the undersigned Shareholder, with a copy thereof and
of all other related communications delivered to Acquiror) to the effect that
the SEC will take no action, or that the staff of the SEC will not recommend
that the SEC take action, with respect to the proposed offer, sale, exchange,
transfer, pledge or other disposition if consummated.
3
<PAGE>
(f) All certificates representing Acquiror Shares deliverable to
a Shareholder pursuant to the Reorganization Agreement and in connection with
the Merger and any certificates subsequently issued with respect thereto or in
substitution therefor shall bear a legend that such shares of Acquiror Common
Stock may only be sold or disposed of in accordance with (i) the provisions of
Rule 145 under the Securities Act, (ii) pursuant to an effective Registration
Statement or (iii) pursuant to an exemption provided by the Securities Act and
additional legends relating to the restrictions set forth in Section 1(b) [and
1(c)] of this Shareholder's Agreement. Acquiror, at its discretion, may cause
stop transfer orders to be placed with its transfer agent with respect to the
certificates for such Acquiror Shares but not as to the certificates for any
part of the Acquiror Shares as to which said legend is no longer appropriate.
(g) The undersigned Shareholder will observe and comply with the
Securities Act and the General Rules and Regulations thereunder, as now in
effect and as from time to time amended and including those hereafter enacted or
promulgated, in connection with any offer, sale, exchange, transfer, pledge or
other disposition of the Acquiror Shares or any part thereof
(h) Shareholder understands that pursuant to the Reorganization
Agreement, Acquiror and the Shareholders' Agent entered into the Escrow
Agreement and that Shareholder are bound by the provisions of the Escrow
Agreement, in the form attached as an exhibit to the Reorganization Agreement,
and Article VIII of the Reorganization Agreement, and as such, Shareholder
ratifies the appointment of the Shareholders' Agent prior to the Closing, and
further agrees to be bound by the terms of the Escrow Agreement and Article VIII
of the Reorganization Agreement.
3. Additional Documents. Shareholder hereby covenants and agrees to
execute and deliver any additional documents necessary or desirable, in the
reasonable opinion of Acquiror, to carry out the purpose and intent of this
Agreement.
4. Consent and Waiver. Shareholder hereby gives any consents or
waivers that are reasonably required for the consummation of the Transaction
under the terms of any agreement to which Shareholder is a party or pursuant to
any rights Shareholder may have.
5. Confidentiality. Shareholder agrees (i) to hold any information
regarding this Agreement and the Transaction in strict confidence and (ii) not
to divulge any such information to any third person until such time as the
Transaction has been publicly disclosed by Acquiror; provided, however, that
Shareholder may disclose such information to Shareholder's legal and financial
advisors who agree to be bound by this covenant.
6. Miscellaneous.
6.1 Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
4
<PAGE>
6.2 Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by either
of the parties without the prior written consent of the other. This Agreement is
intended to bind Shareholder as a shareholder of Target only with respect to the
specific matters set forth herein.
6.3 Amendment and Modification. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of a
written agreement executed by the parties hereto.
6.4 Specific Performance: Injunctive Relief. The parties hereto
acknowledge that Acquiror will be irreparably harmed and that there will be no
adequate remedy at law for a violation of any of the covenants or agreements of
Shareholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Acquiror upon any such violation,
Acquiror shall have the right to enforce such covenants and agreements by
specific performance, injunctive relief or by any other means available to
Acquiror at law or in equity and the Shareholder hereby waives any and all
defenses which could exist in its favor in connection with such enforcement and
waives any requirement for the security or posting of any bond in connection
with such enforcement.
6.5 Notices. All notices, requests, demands or other communications
that are required or may be given pursuant to the terms of this Shareholder's
Agreement shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed by registered or certified mail, postage prepaid, as
follows:
(a) If to the Shareholder, at the address set forth below the
Shareholder's signature at the end hereof.
(b) If to Acquiror:
Uproar Ltd.
375 West Broadway, 5th Floor
New York, New York 10012
Attention: President and CEO
Facsimile No.: (212) 334-4646
Telephone No.: (212) 334-5151
5
<PAGE>
with a copy to:
Brobeck, Phleger & Harrison LLP
1633 Broadway, 47th Floor
New York, New York 10019
Attention: Eric Simonson
Facsimile No.: (212) 586-7878
Telephone No.: (212) 237-2528
(c) if to Target, to:
PrizePoint Entertainment Corporation
240 West 35th Street
New York, New York 10001
Attention: President
Facsimile No.: (212) 244-5288
Telephone No.: (212) 244-5295
with a copy to:
Howard Smith & Levin LLP
1330 Avenue of the Americas
New York, New York 10019
Attention: Scott F. Smith
Facsimile No.: (212) 841-1010
Telephone No.: (212) 841-1000
or to such other address as any party hereto or any Indemnified Person may
designate for itself by notice given as herein provided.
6.6 Governing Law. This Amendment shall be governed by,
construed and enforced in accordance with the laws of the State of New York.
6.7 Entire Agreement. This Agreement and the Proxy contain the
entire understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties with
respect to such subject matter.
6.8 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
6.9 Effect of Headings. The section headings herein are for
convenience only and shall not affect the construction or interpretation of this
Agreement.
6
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first above written.
ACQUIROR
____________________________________
Name:
Title:
SHAREHOLDER
____________________________________
Name:
____________________________________
____________________________________
(Address)
____________________________________
(Telephone Number)
____________________________________
(Social Security or Tax I.D. Number)
Total Number of Shares of Target Capital Stock owned on the date hereof:
Common Stock: _____________________________
Series A Preferred Stock: _____________________________
Series B Preferred Stock: _____________________________
State of Residence: _____________________________
<PAGE>
APPENDIX A
RULE 145 UNDER THE SECURITIES ACT OF 1933, AS AMENDED
<PAGE>
EXHIBIT D
<PAGE>
ANNEX I
Agreement and Plan of Reorganization (with Exhibits)
<PAGE>
ANNEX II
Amendment No. 1 to Agreement and Plan of Reorganization.
<PAGE>
Amendment No. 1 to the Agreement and Plan of Reorganization
by and between Uproar Ltd., Uproar Acquisition, Inc.
and PrizePoint Entertainment Corporation dated April 29, 1999
THIS AMENDMENT NUMBER 1 (the "Amendment") to the AGREEMENT AND PLAN OF
REORGANIZATION between UPROAR LTD. ("Acquiror") UPROAR ACQUISITION, INC.
("Acquisition Sub") and PRIZEPOINT ENTERTAINMENT CORPORATION, ("Target"), dated
as of April 29, 1999, (the "Agreement") is hereby entered into as of May 6,
1999, by agreement of the parties in the manner set forth below. Any capitalized
term that is not defined herein shall have the meaning assigned to such term in
the Agreement. Notwithstanding any contrary provision of the Agreement, in the
case of inconsistency, the terms of this Amendment shall prevail over other
contract terms included in the Agreement.
RECITALS
WHEREAS, the parties have entered into the Agreement, and
WHEREAS, the parties desire to amend the Agreement.
NOW THEREFORE, in consideration of the foregoing premises and mutual
promises set forth below, and for other good and valuable consideration, the
receipt of which is hereby acknowledged, both parties to this Amendment mutually
agree to amend the Agreement as follows:
1. Section 5.11(a). Section 5.11(a) is deleted and replaced with the following:
Assumption of Options. At the Effective Time, the Target Stock Option
Plan, and each outstanding option to purchase shares of Target Common
Stock under the Target Stock Option Plan (whether vested or unvested and
whether exercisable or non-exercisable) will be assumed by Acquiror.
Schedule 5.11 hereto sets forth a true and complete list as of the date
hereof of all holders of outstanding options under the Target Stock
Option Plan including the number of shares of Target Capital Stock
subject to each such option, the exercise or vesting schedule, the
exercise price per share and the term of each such option. On the
Closing Date, Target shall deliver to Acquiror an updated Schedule 5.11
hereto current as of such date. Each such option so assumed by Acquiror
under this Agreement shall continue to have, and be subject to, the same
terms and conditions set forth in the Target Stock Option Plan and the
applicable stock option agreement immediately prior to the Effective
Time, except that (i) such option will be exercisable for that number of
whole shares of Acquiror Common Stock equal to the product of the number
of shares of Target Common Stock that were issuable upon exercise of
such option immediately prior to the Effective Time multiplied by the
Exchange Ratio and rounded down to the nearest whole number of shares of
Acquiror Common Stock, (ii) the per share exercise price for the shares
of Acquiror Common Stock issuable upon exercise of such assumed option
will be equal to the exercise price per share of Target Common Stock
prior to the Effective Time divided by the Exchange Ratio, (iii) such
newly granted options shall be deemed substituted for the options
granted under the Target Stock Option Plan and (iv) prior to the
issuance of Acquiror Common Stock upon exercise of any such option, the
holder of such option shall execute a Shareholder Representation
Agreement substantially in the form of Exhibit C hereto. It is the
intention of the parties that the options so assumed by Acquiror
qualify, to the maximum extent permissible, following the Effective Time
as incentive stock options as defined in Section 422 of the Code to the
extent such options qualified as incentive stock options prior to the
Effective Time. Following the Effective Time, Acquiror will issue to
each person who, immediately prior to the Effective Time was a holder of
an outstanding option under the Target Stock Option Plan a document in
form and substance satisfactory to Target evidencing the foregoing
assumption and substitution of such option by Acquiror.
<PAGE>
2. Section 5.22 is deleted in its entirety and replaced with the following
paragraph:
5.22 Qualification of Tax Payment Shares. Acquiror shall use
its best efforts to qualify the Tax Payment Shares (as defined in the
Shareholder Representation Agreement) for trading on EASDAQ or another
"Designated Offshore Securities Market" (as defined in Rule 902 of
Regulation S under the Securities Act). Acquiror agrees to take all such
other steps as may be necessary to permit the Target Stockholders (as
defined below) to sell the Tax Payment Shares in accordance with all
non-United States law or regulation applicable to the sale of the Tax
Payment Shares outside of the United States.
3. Exhibit C is hereby amended and restated to read as set forth in Attachment A
hereto.
4. Section 1.7 (a) Section 13(a) is deleted and replaced with the following:
(a) Exchange Agent. Acquiror shall act as its own exchange
agent (the "Exchange Agent") in the Merger.
5. This Amendment shall be deemed an amendment to the Agreement and shall become
effective upon the execution of Acquiror, Acquisition Sub and Target.
6. Except as expressly amended pursuant this Amendment, the Agreement shall
continue in full force and effect.
7. This Amendment shall be governed by the internal laws of the State of New
York, without regard to its conflict of law principles.
8. This Amendment may be executed in counterparts, each of which shall be
enforceable against the Party actually executing such counterpart, and which
together shall constitute one instrument.
(remainder of page intentionally left blank)
2
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed and delivered this
Amendment to the Agreement by their duly authorized representatives as of the
date first written above.
Acquiror Target
By: /s/ Michael Simon By:
----------------------------- ---------------------
Name: Michael Simon Name:
Title: Chief Executive Title:
Date: Date:
Acquisition Sub
By: /s/ Michael Simon
-----------------------------
Name: Michael Simon
Title:
Date:
3
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed and delivered this
Amendment to the Agreement by their duly authorized representatives as of the
date first written above.
Acquiror Target
By: By: /s/ Christopher Hassett
------------------------------ -------------------------
Name: Name: Christopher Hassett
Title: Title: President
Date: Date: 5/6/99
Acquisition Sub
By:
-------------------------------
Name:
Title:
Date:
4
<PAGE>
ANNEX III
Section 262 of the Delaware General Corporation Law
<PAGE>
DELAWARE APPRAISAL RIGHTS
ss. 262. Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to ss. 228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section.
As used in this section, the word "stockholder" means a holder of record
of stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be effected
pursuant to ss. 251 (other than a merger effected pursuant to ss. 251(g) of this
title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date
fixed to determine the stockholders entitled to receive notice of and to
vote at the meeting of stockholders to act upon the agreement of merger
or consolidation, were either
(i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system
by the National Association of Securities Dealers, Inc. or
(ii) held of record by more than 2,000 holders; and further provided
that no appraisal rights shall be available for any shares of stock
of the constituent corporation surviving a merger if the merger did
not require for its approval the vote of the stockholders of the
surviving corporation as provided in subsection (f) of ss. 251 of
this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation
pursuant to ss. 251, 252, 254, 257, 258, 263 and 264 of this title to
accept for such stock anything except:
<PAGE>
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof)or depository receipts at the effective date of the
merger or consolidation will be either listed on a national
securities exchange or designated as a national market system
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more
than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss. 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware
corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights, shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting
of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of
this section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking
of the vote on the merger or consolidation, a written demand for
appraisal of such stockholder's shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the
stockholder and that'the stockholder intends thereby to demand the
appraisal of such stockholder's shares. A proxy or vote against the
merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
<PAGE>
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to ss. 228 or
ss. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that appraisal
rights are available for any or all shares of such class or series of
stock of such constituent corporation, and shall include in such notice
a copy of this section; provided that, if the notice is given on or
after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation
that are entitled to appraisal rights. Such notice may, and, if given on
or after the effective date of the merger or consolidation, shall, also
notify such stockholders of the effective date of the merger or
consolidation. Any stockholder entitled to appraisal rights may, within
20 days after the date of mailing of such notice, demand in writing from
the surviving or resulting corporation the appraisal of such holder's
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger
or consolidation, either
(i) each such constituent corporation shall send a second notice
before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the effective date
of the merger or consolidation or
(ii) the surviving or resulting corporation shall send such a second
notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than 20
days following the sending of the first notice, such second notice need
only be sent to each stockholder who is entitled to appraisal rights and
who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or
of the transfer agent of the corporation that is required to give
either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes
of determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided,
that if the notice is given on or after the effective date of the merger
or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective
date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
<PAGE>
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the stockholders
who have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element of
value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
<PAGE>
such stockholder's certificates of stock to the Register in Chancery, if such
is required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares, together
with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(1) The shares of the surviving or resulting corporation to which the shares of
such objecting Shareholders would have been converted had they assented to the
merger or consolidation shall have the status of authorized and unissued shares
of the surviving or resulting corporation.
<PAGE>
ANNEX IV
Prize Point Financial Statements
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PrizePoint Entertainment Corporation:
We have audited the accompanying balance sheet of PrizePoint Entertainment
Corporation (a Delaware corporation) as of December 31, 1998, and the related
statements of operations, stockholder's equity and cash flows for the period
from inception (March 4, 1998) to December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our 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 financial statements referred to above present fairly, in
all material respects, the financial position of PrizePoint Entertainment
Corporation as of December 31, 1998, and the results of its operations and its
cash flows for the period from inception (March 4, 1998) to December 31, 1998,
in conformity with generally accepted accounting principles.
Authur Andersen LLP
New York, New York
April 29, 1999
<PAGE>
PRIZEPOINT ENTERTAINMENT CORPORATION
------------------------------------
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1998 1999
------ ------------ ---------
(Unauditited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,870,075 $1,244,072
Accounts receivable - 21,250
Prepaid expenses and other current assets - 40,054
---------- ----------
Total current assets 1,870,075 1,305,376
PROPERTY AND EQUIPMENT, net 127,337 366,219
DEPOSITS AND OTHER ASSETS 61,239 78,495
---------- ----------
Total assets $2,058,651 $1,750,090
=========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
-----------------------------------
CURRENT LIABILITIES:
Accounts payable $ 63,457 $ 146,634
Accrued expenses 25,867 33,497
Current portion of capital lease obligations 25,949 102,777
---------- ----------
Total current liabilities 115,273 282,908
CAPITAL LEASE OBLIGATIONS 15,134 107,513
COMMITMENTS (Note 7)
STOCKHOLDER'S EQUITY:
Preferred Stock, $.01 par value; 5,000,000 shares authorized:
Series A Preferred Stock, 645,000 shares designated, issued and
outstanding as of December 31, 1998 and March 31, 1999
(unaudited), respectively; liquidation value of $645,000 6,450 6,450
Series B Preferred Stock, 495,049 shares designated; 412,541 and 453,795
shares issued and outstanding as of December 31, 1998 and March
31, 1999 (unaudited), respectively; liquidation value of
$2,500,000 and $2,750,000 (unaudited), respectively 4,125 4,538
Common stock, $.01 par value; 10,000,000 shares authorized 1,186,667 shares
issued and outstanding as of December 31, 1998 and March 31, 1999
(unaudited), respectively 11,867 11,867
Additional paid-in capital 3,134,425 3,384,012
Accumulated deficit (1,228,623) (2,047,198)
---------- ----------
Total stockholders' equity 1,928,244 1,359,669
---------- ----------
Total liabilities and stockholders' equity $2,058,651 $1,750,090
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
PRIZEPOINT ENTERTAINMENT CORPORATION
------------------------------------
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
For the Period For the Three
From Inception Months
(March 4, 1998) Ended
to December 31, March 31,
1998 1999
--------------- -------------
(Unaudited)
<S> <C> <C>
REVENUES $ - $ 47,750
----------- ----------
COSTS AND EXPENSES:
Direct costs 353,279 305,385
Selling and marketing expenses 214,290 209,299
General and administrative expenses 675,514 321,535
----------- ----------
Operating loss (1,243,083) (836,219)
OTHER INCOME (EXPENSE):
Interest income, net 14,460 17,644
----------- ----------
Loss before income taxes (1,228,623) (818,575)
BENEFIT FOR INCOME TAXES - -
Net loss $(1,228,623) $ (818,575)
=========== ==========
PER SHARE INFORMATION:
Net loss per share --
Basic and Diluted $ (1.04) $ (.68)
=========== ==========
Weighted average common shares outstanding --
Basic and Diluted 1,186,667 1,186,667
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
PRIZEPOINT ENTERTAINMENT CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock
------------------- ------------------- ------------------ Additional Accumulated
Shares Par Value Shares Par Value Shares Par Value Paid-in Capital Deficit Total
------- --------- ------ --------- ------ --------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March 4, 1998 - $ - - $ - - $ - $ - $ - $ -
Issuance of common stock - - - - 1,186,667 11,867 - - 11,867
Issuance of Series A
Preferred Stock 645,000 6,450 - - - - 638,550 - 645,000
Issuance of Series B
Preferred Stock - - 412,541 4,125 - - 2,495,875 - 2,500,000
Net loss - - - - - - - (1,228,623) (1,228,623)
------- ------ ------- ------ --------- ------- ---------- ----------- ----------
BALANCE, December 31, 1998 645,000 6,450 412,541 4,125 1,186,667 11,867 3,134,425 (1,228,623) 1,928,244
Issuance of Series B
Preferred Stock - - 41,254 413 - - 249,587 - 250,000
Net loss - - - - - - - (818,575) (818,575)
------- ------ ------- ------ --------- ------- ---------- ----------- ----------
BALANCE, March 31, 1999
(unaudited) 645,000 $6,450 453,795 $4,538 1,186,667 $11,867 $3,384,012 $(2,047,198) $1,359,669
======= ====== ======= ====== ========= ======= ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
PRIZEPOINT ENTERTAINMENT CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
From Inception For the Three
(March 4, 1998) to Months Ended
December 31, March 31,
1998 1999
------------------ ----------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,228,623) $ (818,575)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 23,156 19,875
Changes in assets and liabilities
Increase in accounts receivable -- (21,250)
Increase in prepaid expenses and other current assets -- (40,054)
Increase in deposits and other assets (61,239) (17,256)
Increase in accounts payable 63,457 83,177
Increase in accrued expenses 25,867 7,630
----------- ----------
Net cash used in operating activities (1,177,382) (786,453)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (98,598) (72,747)
----------- ----------
Net cash used in investing activities (98,598) (72,747)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations (10,812) (16,803)
Issuance of Series A Preferred Stock 645,000 --
Issuance of Series B Preferred Stock 2,500,000 250,000
Issuance of common stock 11,867 --
----------- ----------
Net cash provided by financing activities 3,146,055 233,197
----------- ----------
Net increase (decrease) in cash and cash equivalents 1,870,075 (626,003)
CASH AND CASH EQUIVALENTS, beginning of period -- 1,870,075
----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 1,870,075 $1,244,072
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ -- $ --
Cash paid for income taxes -- --
Capital lease obligations 56,608 186,010
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
PRIZEPOINT ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Organization
PrizePoint Entertainment Corporation ("PrizePoint" or the "Company") was
formed as a Delaware corporation on March 4, 1998. The Company is engaged in the
marketing and promotion forum of games of chance and advertising via its
Internet web site. Individuals or "players" can log on to the Company's site and
earn points for participating in the various product and trivia promotions
offered in the Company's site. Individuals can redeem these points for various
awards. Sponsors provide some of the awards and gifts for the winning
participants in exchange for advertising services.
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.
Revenue Recognition
Revenues are derived from the sale of advertising on the Company's web
site. Advertising revenues are recognized in the period the advertisement is
displayed provided that no significant Company obligations remain and collection
of the resulting receivable is probable. Company obligations typically include
guarantees of a minimum number of "impressions", or number of times that any
advertisement is viewed by users on the Company's web sites. To the extent
minimum guaranteed impressions are not met, the Company defers recognition of
the corresponding revenues until guaranteed impression levels are achieved.
Direct Costs
Direct costs consist primarily of cash prizes paid to participants, payroll
and related expenses for personnel, systems consultants and systems and
telecommunications infrastructures for web site development. To date, all direct
costs have been expensed as incurred.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
<PAGE>
Property and Equipment, net
Property and equipment are recorded at cost and depreciated on the
straight-line method over their estimated useful lives, ranging from three to
five years.
Costs of maintenance and repairs are charged to expense as incurred.
Accounting for Long-Lived Assets
The Company accounts for long-lived assets under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement establishes financial accounting and reporting standards for
the impairment of long-lived assets and for long-lived assets to be disposed of.
Management has performed a review of all long-lived assets and has determined
that no impairment of the respective carrying value has occurred as of December
31, 1998.
Income Taxes
The Company accounts for its income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax
liabilities and assets for the estimated future tax effects of events that have
been recognized in the financial statements or income tax returns. Under this
method, deferred tax liabilities and assets are determined based on differences
between the financial accounting and income tax bases of assets and liabilities,
and the use of carryforwards, if any, using enacted tax rates in effect for the
years in which the differences and carryforwards are expected to reverse and be
utilized. Any deferred assets have been reserved for their full value until the
future realizability can be determined.
Stock-Based Compensation
The Company accounts for its employee stock option plans in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Compensation expense related to employee stock options is recorded only if, on
the date of grant, the fair value of the underlying stock exceeds the exercise
price. The Company adopted the disclosure-only requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," which allows entities to continue to
apply the provisions of APB Opinion No. 25 for transactions with employees and
to provide pro forma net income (loss) and pro forma earnings per share
disclosures (Note 8) for employee stock options as if the fair value based
method of accounting in SFAS No. 123 had been applied to these transactions.
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more readily determinable.
-2-
<PAGE>
Basic and Diluted Net Loss Per Common Share
The Company accounts for net loss per common share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share." In accordance with SFAS No.
128, basic earnings per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding and diluted earnings per
share is computed by dividing net income (loss) by the weighted average number
of common shares and dilutive common equivalent shares outstanding during the
period. Common equivalent shares have been excluded from the calculation of
diluted earnings per share, as their effect is anti-dilutive.
Business and Credit Concentrations
Financial instruments, which subject the Company to concentrations of
credit risk, consist primarily of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses. The carrying amounts of these
instruments approximate fair value. The carrying amount of the Company's capital
leases approximate the fair value of these instruments based upon management's
best estimate of interest rates.
The Company maintains cash with a domestic financial institution. The
Company performs periodic evaluations of the relative credit standing of this
institution From time to time, the Company's cash balances with this financial
institution may exceed Federal Deposit Insurance Corporation insurance limits.
Unaudited Interim Financial Statements
The unaudited consolidated financial information included herein for the
three months ended March 31, 1999, has been prepared in accordance with
generally accepted accounting principles for interim financial statements. In
the opinion of the Company, these unaudited financial statements, reflect all
adjustments necessary, consisting of normal recurring adjustments, for a fair
presentation of such data on a basis consistent with that of the audited data
presented herein. The results of operations for interim periods are not
necessarily indicative of the results expected for a full year.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." This statement establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Company adopted this statement in 1998. The adoption of this
statement did not have an impact on the Company's financial condition or results
of operations. Accordingly, the Company's comprehensive net loss is equal to its
net loss for the period from inception (March 4, 1998) to December 31, 1998.
Additionally, in June 1997, the FASB issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information. This statement
establishes standards for the way the public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. The Company adopted this
statement in 1998. In the initial year of application, comparative information
for earlier years must be restated. Management has determined that it does not
have any separately reportable business segments.
-3-
<PAGE>
April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. SOP 98-1 is effective for fiscal years
beginning after December 31, 1998. The Company has expensed all software
development costs and does not expect the adoption of SOP 98-1 to have a
material effect on its financial statements.
2. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following at December 31, 1998:
Computer equipment and software $ 121,601
Furniture and fixtures 28,892
---------
150,493
Less-Accumulated depreciation and
amortization 23,156
---------
$ 127,337
=========
3. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1998:
Accrued Vacation $ 15,835
Accrued Rent 10,032
---------
Total $ 25,267
=========
4. INCOME TAXES
No provision for U.S. federal or state income taxes has been recorded for
the period from inception (March 4, 1998) to December 31, 1998 as the Company
has incurred an operating loss.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets for federal and state income taxes at
December 31, 1998 are as follows:
Deferred tax assets, net:
Net operating loss carryforwards $ 493,334
Other 5,000
---------
498,334
Less Valuation allowance (498,334)
---------
Deferred tax assets, net $ --
=========
Realization of deferred tax assets is dependent upon future earnings, if
any. The Company has recorded a full valuation allowance against its deferred
tax assets since management believes that it is
-4-
<PAGE>
not more likely than not that these assets will be realized. No income tax
benefit has been recorded for the period from inception (March 4, 1998) to
December 31, 1998 as a result of the valuation allowance.
As of December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $1,229,000. There can be no
assurance that the Company will realize the benefit of the net operating loss
carryforwards. The federal net operating loss carryforwards are available to
offset future taxable income and expire in 2019 if not utilized.
5. CAPITAL LEASE OBLIGATIONS
At December 31, 1998 the Company was committed under a capital lease
agreement for office equipment. The asset and liability under the capital lease
is recorded at the lower of the present value of minimum lease payments or the
fair market value of the asset. The interest rate on the capital lease was
approximately 1% at December 31, 1998.
Future minimum payments under the capital lease agreements are as follows:
Year ending December 31:
1999 $ 28,308
2000 16,513
--------
Total minimum lease payments 44,821
Less-
Amounts representing interest 3,738
--------
41,083
Current portion 25,949
--------
Long-term portion $ 15,134
========
6. STOCKHOLDERS' EQUITY
Preferred Stock
The Company's stockholders authorized 5,000,000 shares of preferred stock.
The Company has designated 645,000 shares as Series A Preferred Stock and
495,049 shares as Series B Preferred Stock.
Series A Preferred
On April 1, 1998, the Company sold 645,000 shares of Series A Preferred
Stock for net proceeds of $645,000. The Series A Preferred Stock is convertible
into an equal number of common shares at the holder's option, subject to
adjustment for antidilution, and is automatically converted to common stock in
the event of a public offering of securities of the Company. The holders of
Series A Preferred Stock are entitled to receive dividends as and if declared by
the Board of Directors. In the event of liquidation or dissolution of the
Company, the holders of Series A Preferred Stock are entitled to receive all
accrued dividends, if applicable, plus a liquidation price per share of $1.00.
Subject to certain provision, registration rights, as defined in the
Certificate of Designation of Series A Convertible Preferred Stock agreement,
may be exercised after the earlier of (a) the date specified by a Convertible
Preferred Stock agreement, may be exercised after the earlier (a) the date
specified by a xxxxxx or written consent or agreement of holders of at least
two-thirds of the shares of Series A Preferred Stock then outstanding, approving
such conversion, or (b) the effective date of the first registration statement
for a public offering of securities of the Company.
-5-
<PAGE>
Series B Preferred Stock
On December 8, 1998, the Company sold 412,541 shares of Series B Preferred
Stock for net proceeds of $2,500,000. The Series B Preferred Stock is
convertible into an equal number of common shares at the holder's option,
subject to adjustment for antidilution, and is automatically converted to
common stock in the event of a public offering of securities of the Company.
The holders of Series B Preferred Stock are entitled to receive dividends as and
if declared by the Board of Directors. In the event of liquidation or
dissolution of the Company, the holders of Series B Preferred Stock are entitled
to receive all accrued dividends, if applicable, plus a liquidation price per
share of $6.06. Certain of the Series B Preferred Stock holders also received
warrants to receive 41,254 common shares into Series B Convertible Preferred
Stock of the Company at a purchase price equal to $6.06 per share. The warrants
expire at the earlier of (a) 18 months after the effective date of the
registration statement for an initial public offering by the Company and with a
price per share of not less than $6.06 and (b) 60 months after the first date
set forth above.
Subject to certain provisions, registration rights, as defined in the
Certificate of Designation of Series B Convertible Preferred Stock agreement,
may be exercised after the earlier of (a) the date specified by vote or written
consent or agreement of holders of at least two-thirds of the shares of Series B
Preferred Stock then outstanding approving such conversion, or (b) the effective
date of the first registration statement for a public offering of securities of
the Company.
Common Stock
The Company issued 1,186,667 common shares to its founders in April 1998
for total proceeds of $11,867.
7. COMMITMENTS
Operating Leases
The Company leases office space, equipment security and trash removal
services under operating leases expiring through February 29, 2004. At December
31, 1998, minimum lease commitments under noncancelable leases are as follows:
Equipment/
Year Office Services
---- -------- ----------
1999 $ 245,040 $2,225
2000 293,005 1,781
2001 299,480 1,194
2002 305,469 684
2003 320,818 342
Thereafter 54,190 --
---------- ------
$1,518,002 $6,226
========== ======
Rent expense for the year ended December 31, 1998 was $97,545 for office space.
-6-
<PAGE>
Advertising and Sponsorship Contracts
The Company entered into several advertising and sponsorship agreements
with third parties, with terms ranging from one to six months whereby the
Company provides advertising in exchange for cash payments or goods. The goods
are used as awards for winning participants in the Company's online games and
sweepstakes. No revenue was earned on such contracts for the year ended December
31, 1998.
8. STOCK OPTIONS
On April 1, 1998, in order to promote the interests of the Company and
retain persons necessary for the success of the Company, the Company adopted its
1998 Stock Option Plan ("Option Plan") covering up to 150,000 shares, pursuant
to which employees (including officers), directors and independent contractors
of the Company and its present or future subsidiaries and affiliates are
eligible to receive incentive and/or nonstatutory stock options. The Option
Plan, which expires within ten years, will be administered by the Plan
Administrator. The selection of participants, allotment of units, determination
of price and other conditions relating to the purchase of options will be
determined by the Plan Administrator. Options granted under the Option Plan are
exercisable for a period of up to 10 years from the date of grant at an exercise
price, which may be less than, equal to or greater than the fair market value
per unit on the date of the grant. Incentive Options, however, may only be
granted to employees, the exercise price per share may not be less than 100% of
the fair market value per share of common stock on the option grant date, and
for a stockholder owning more than 10% of the outstanding common stock, its
exercise price may not be less than 110% of the fair market value of the common
stock on the date of the grant
Pursuant to SFAS No. 123, the Company has elected to account for its Option
Plan under APB Opinion No. 25, under which no compensation expense is recognized
for unit option awards granted at or above fair market value. In 1998, the
Company granted 95,000 incentive stock options to various employees. The option
exercise price equals the stock's fair market value at the grant date, and the
options are exercisable over a four-year period, with 25% of options granted
becoming exercisable on the one-year anniversary of the grant date and the
remaining options becoming exercisable at the rate of 1/48 at the end of each
month thereafter. All options will terminate no later than 10 years from the
date of grant. Under SFAS No. 123, compensation cost is measured at the grant
date based on the fair value of the award and is recognized over the service (or
vesting) period. For the year ended December 31, 1998, the compensation cost for
this plan determined in accordance with SFAS No. 123, net of compensation
expense recognized under APB No. 25, is an immaterial amount. As such the
Company's pro-forma net loss has not been presented.
The following table summarizes information about stock options outstanding at
December 31, 1998:
Number Weighted Average Weighted
Outstanding Remaining Average
Exercise Prices at December 31, 1998 Contractual Life Exercise Price
- --------------------------------------------------------------------------------
$.01 40,000 9.56 $.01
$.10 55,000 9.95 $.10
------
95,000
======
-7-
<PAGE>
As of December 31, 1998, none of the outstanding options were exercisable.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 4.87 percent, expected dividend yield of
0 percent; expected life of 5 years; expected volatility of 100 percent.
The following table summarizes information about stock options outstanding
at December 31, 1998:
December 31, 1998
-----------------------------
Weighted Average
Shares Exercise Price
-------- ------------------
Outstanding at beginning of period - $ --
Granted 95,000 .06
Cancelled --
Terminated --
Exercised --
------- -------
Outstanding at end of period 95,000 $ .06
======= =======
Options exercisable at end of period --
=======
Weighted average fair value of options granted $ .05
=======
9. SUBSEQUENT EVENTS
On January 7, 1999, the Company issued additional 41,254% shares of Series
B Preferred stock for $250,000 in proceeds.
On April 29, 1999 the Company entered into a merger agreement with Uproar
Ltd., a Bermuda corporation, which is a provider of online entertainment and
game shows. Under the provisions of the merger agreement, each share of common
and preferred stock of the Company will be converted into and exchanged for
common stock of Uproar Ltd. based upon a stated conversion rate.
-8-
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), dated as of September 6, 1999,
between UPROAR LIMITED, a corporation with registered offices at 44 Church
Street, Hamilton, Bermuda HM12 (the "Company"), and CHRISTOPHER R. HASSETT,
residing at 1 Central Park West, New York, New York (the "Executive").
W I T N E S S E T H
WHEREAS, the Company desires to employ the Executive, and the
Executive desires to accept such employment, on the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the mutual promises,
representations and warranties set forth herein, and for other good and valuable
consideration, it is hereby agreed as follows:
1. Employment. The Company hereby agrees to employ the
Executive, and the Executive hereby accepts such employment, upon the terms and
conditions set forth herein.
2. Term. The Executive's employment under this Agreement shall
commence on September 6, 1999 (the "Effective Date") and shall continue at-will
until terminated, for any or no reason, by the Executive, upon advance notice to
the Company or by the Company, upon advance notice to the Executive (the date of
such termination hereinafter called the "Termination Date").
3. Position and Duties.
(a) During the Executive's employment hereunder, the
Executive shall serve as the Chief Operating Officer of the Company and shall
have such duties consistent with such office as from time to time may be
reasonably prescribed by the Board of Directors of the Company (the "Board").
(b) During the Executive's employment hereunder, the
Executive shall perform and discharge the duties that may reasonably be assigned
to him by the Board from time to time in accordance with this Agreement, and the
Executive shall devote his best talents, efforts and abilities to the
performance of his duties hereunder.
(c) During his employment hereunder, the Executive shall
perform his duties hereunder on a substantially full-time basis. Notwithstanding
the foregoing, the Executive shall not be precluded from engaging in other
outside business and/or investment activities, provided that such activities do
not materially interfere with the Executive's performance of his duties
hereunder.
<PAGE>
(d) During his employment hereunder, the Executive shall be
provided, at the Company's sole expense, with the exclusive services of a
full-time executive assistant selected by the Executive, in his sole discretion.
4. Consideration.
(a) Option Grant. On September 9, 1999, the Executive shall
be granted an option for the purchase of 343,489 shares of the common stock of
the Company, par value $.05 (the "Option"), on the terms and conditions set
forth on the Notice of Grant and Share Option Agreement, attached hereto as
Exhibit A and incorporated herein by reference, which the Company hereby
represents and warrants constitutes a valid and enforceable grant of a stock
option pursuant to the Uproar Ltd. Share Option/Share Issuance Plan.
(b) Option Plans. The Executive shall be eligible to
participate in the Uproar Ltd. Share Option/Share Issuance Plan and such other
equity-based compensation arrangements as the Company may make available to its
executive employees, in accordance with the terms and conditions of such
arrangements as applicable to such other executive employees.
5. Benefits.
(a) Medical and Health Insurance Benefits. The Company
shall, at its sole expense, provide the Executive and his eligible dependents
with medical, health and dental insurance coverage at least comparable to such
coverage enjoyed by the Executive immediately prior to the execution of this
Agreement or, at the election of the Executive, the coverage generally provided
by the Company to its other executive employees.
(b) Split Dollar Life Insurance.
(1) The Company shall pay on the Executive's behalf all
premiums that become due during his employment hereunder that are required to
maintain in effect a whole life insurance policy, selected by the Executive, on
the Executive's life with a face value of up to $2,000,000, as determined by the
Executive (the "Split Dollar Policy"); provided, however, that the Executive
executes an irrevocable collateral assignment and split dollar agreement in a
form prescribed by the Executive and acceptable to the Company assigning to the
Company the right to recover, following the earlier of the Executive's death or
the Executive's cancellation of the Split Dollar Policy, from the cash value and
any death proceeds of the Split Dollar Policy, any and all amounts paid by the
Company with respect to the Split Dollar Policy and otherwise setting forth the
terms and conditions of maintaining this split dollar life insurance
arrangement.
-2-
<PAGE>
(2) Notwithstanding the foregoing, the Company shall
not be obligated to pay annual premiums in excess of $50,000 under this Section
5(b).
(c) Disability and Accident Insurance Benefits. The
Company, at its sole expense, shall provide the Executive with long term
disability insurance (providing benefit payments at least equal to $1,000,000
per year), business travel accident and accidental death and dismemberment
insurance coverage.
(d) Other Benefits. During the Term, the Company shall
provide the Executive with any and all other employee or fringe benefits (in
accordance with their terms and conditions) which the Company may generally make
available to its other executive employees.
6. Reimbursement of Expenses.
(a) The Company shall pay or reimburse the Executive for
all reasonable travel (at business class level), entertainment and other
business expenses actually incurred or paid by the Executive in the performance
of his duties hereunder upon presentation of expense statements and/or such
other supporting information as the Company may reasonably require of the
Executive.
(b) (1) The Company shall also pay or reimburse the
Executive for any and all costs and expenses associated with the Executive's
travelling between his home and the Company's offices utilizing such means and
methods of transportation as the Executive shall determine, in his sole
discretion.
(2) Notwithstanding the foregoing, the Company shall
not be obligated to pay expenses under this Section 6(b) in excess of $4,166.67
per month.
(c) The Executive shall be provided with the directors and
officers liability insurance coverage generally provided to officers of the
Company. Notwithstanding the foregoing, the Company agrees to indemnify the
Executive against all costs, damages and expenses, including attorneys' fees,
incurred by the Executive as a result of claims by third parties arising out of
or from the Executive's lawful acts as an employee of the Company, provided such
acts are not grossly negligent and are performed in good faith and in a manner
reasonably believed by the Executive to be in the Company's best interests. Any
counsel employed to defend the Executive in any such action shall be reasonably
acceptable to the Executive and the Company. Any counsel appointed by any
insurance carrier for the Company shall be deemed acceptable to the Company.
7. Vacations. The Executive shall be entitled to such vacation
as the Company may generally make available to its executive employees. Unused
vacation may be carried over to successive years.
-3-
<PAGE>
8. Excise Taxes.
(a) In the event that any payments made and/or benefits
provided to the Executive under this Agreement (including, without limitation,
pursuant to the Option and/or the Notice of Grant and Share Option Agreement
attached hereto as Exhibit A) (hereinafter called the "Payments") are subject to
any excise taxes, including, without limitation, excise taxes imposed by Section
4999 of the Internal Revenue Code of 1986, as amended (the "Code") (the "Excise
Taxes"), the Company shall pay the Executive such additional cash payment(s)
(hereinafter collectively called the "Gross Up Payment") such that the net
amount that the Executive would retain after deduction and/or payment of any
Excise Taxes on the Payments, and any interest and/or penalties assessed by the
Internal Revenue Service with respect to the Excise Taxes, and taking into
account the tax consequences of all additional cash payments made by the Company
pursuant to this Section 8, shall be equal to the aggregate value of Payments.
The determination of whether such Excise Taxes are payable and the amount
thereof shall be based upon the opinion of counsel selected by the Executive and
acceptable to the Company. Any such additional cash payment by the Company shall
be paid by the Company to the Executive in one lump sum cash payment within
thirty (30) days following the date such opinion of counsel is rendered. If such
opinion is not accepted by the Internal Revenue Service, then the Executive
shall determine and notify the Company of the appropriate adjustments in the
Gross Up Payment (taking into account any and all Excise Taxes, interest,
penalties and the tax consequences of all additional cash payments made by the
Company pursuant to this Section 8) and the Company shall pay the Executive the
difference between the final amount of the Gross Up Payment and the amount
previously paid, if any, to the Executive by the Company pursuant to this
Section 8 (hereinafter called the "Adjustment Payment"). Any such Adjustment
Payment shall be paid by the Company to the Executive in one lump sum cash
payment within ten (10) days following such notification.
(b) Notwithstanding the provisions of paragraph (a) of this
Section 8, the Company shall not be obligated to make any Gross Up Payment
unless:
(1) the counsel selected pursuant to Section 8(a)
above, and/or the Internal Revenue Service, determines that there has been a
change in the ownership or effective control of the Company or a change in the
ownership of a substantial portion of the assets of the Company, all as defined
in Section 280G of the Code and the proposed regulations thereunder (each, a
"Change of Control"), and
(2) at the time of the Change of Control (as determined
by such counsel), either:
(A) the Executive is employed by the Company, or
(B) if the Executive is not employed by the
Company, his employment with the Company was not terminated for "Cause" (as
hereinafter defined).
-4-
<PAGE>
9. Materials; Confidential Information and Documents.
(a) Materials. The Executive agrees that all ideas, plans
and materials directly related to the online multi-user game business of the
Company which are prepared by the Executive both (i) in connection with his
employment hereunder, and (ii) during the period beginning on the Effective Date
and ending on the Termination Date (hereinafter called the "Materials") are
works-made-for-hire and are the Company's sole and exclusive property. In the
event that any Materials are not copyrightable subject matter or, for any
reason, are deemed not to be works-made-for-hire, the Executive hereby assigns
all right, title and interest to such Materials to the Company, free of any
reversionary rights or restrictions Without limiting the foregoing, it is
specifically understood and agreed that the Executive retains no ownership
rights whatsoever in or to the Materials.
(b) Confidential Information and Documents.
(i) The Executive's duties hereunder will include,
among other things, representation of the Company in high-level dealings with
the Company's clients, accounts, suppliers and financial institutions with which
the Company does business and the authority to discuss and negotiate, on the
Company's behalf, with the executives and upper management personnel of such
clients, accounts, suppliers and financial institutions. These dealings,
together with the Executive's other duties, will result in the Executive
becoming familiar with the proprietary materials, trade secrets, financial
matters, confidential requirements and resources (hereinafter, the "Confidential
Information") of both the Company and its clients. The Executive hereby agrees
that he will not, either during his employment with the Company or thereafter,
disclose to anyone any Confidential Information of the Company or its clients,
or use such Confidential Information for his own benefit or for the benefit of
anyone other than the Company (or its clients, in the case of Confidential
Information of the such client), except that disclosure of such Confidential
Information will be permitted: (A) to the Company and/or its affiliates and the
advisors of the Company and/or its affiliates; (B) in the case of Confidential
Information of any of the Company's clients, to such client and/or its
affiliates and the advisors of such client and/or its affiliates; (C) if such
Confidential Information has previously become available to the public through
no fault of the Executive; (D) if required by any court or governmental agency
or body or is otherwise required by law; (E) if necessary to establish or assert
the rights of the Executive hereunder; (F) if expressly consented to in writing
by the Company (or its client, in the case of Confidential Information of such
client); or (G) if necessary to carry on the Company's business in the ordinary
course or to perform the Executive's duties hereunder.
-5-
<PAGE>
(ii) The Executive further agrees that all memoranda,
notes, records or other documents compiled by him or made available to him in
connection with and during his employment hereunder concerning the Company's
business or that of its clients (hereinafter called the "Confidential
Documents") shall be the property of the Company. The Executive further agrees
that he shall deliver to the Company all Confidential Documents in his
possession or control following the termination of his employment with the
Company or at any other time following the Company's written notice to do so.
(iii) The Executive and the Company agree that the
provisions of this Section 9(b) are of the essence to this Agreement and that
the provisions of this Section 9(b) shall survive the termination of this
Agreement and the Executive's employment with the Company.
10. Restrictive Covenants.
(a) Noncompetition. During the Executive's employment
hereunder and, in the event that the Company terminates the Executive's
employment hereunder for "Cause" (as hereinafter defined) or the Executive
terminates his employment hereunder without "Good Reason" (as hereinafter
defined), during the one-year period commencing on the Termination Date, the
Executive shall not knowingly, other than in connection with the performance of
his duties hereunder:
(i) own, be employed by, or exercise any material
control with respect to the online multi-user games business of any person or
entity, or subsidiary, subdivision, division or joint venture of such entity
(other than the Company), including, without limitation, SONY Station,
Gamesville, Playsite, Yahoo Games, Total Entertainment Network, Excite Games,
Mpath and Sierra Online (hereinafter called "Competitive Entities").
Notwithstanding the foregoing, nothing contained in this Agreement shall be
construed to prohibit the Executive from holding a passive equity ownership
interest as a limited partner in a limited partnership or of less than 2% of any
class of the outstanding equity of a publicly traded entity;
(ii) render any services in connection with or in any
way relating to Competitive Entities;
(iii) solicit or encourage any of the employees of the
Company, other than the Executive's assistant described in Section 3(d) hereof,
to leave the employ of the Company or to terminate or alter their contractual
relationships with the Company in a way that is adverse to the interests of the
Company; or
(iv) hire away any of the employees of the Company,
other than the Executive's assistant described in Section 3(d) hereof, to work
for any new employer without the prior written consent of the Company.
-6-
<PAGE>
(b) For purposes of this Agreement:
(i) "Cause" shall exist if, and only if, the Executive
(A) willfully and habitually fails in any material respect to perform his
obligations hereunder as provided herein, provided that such Cause shall not
exist unless the Company shall first have provided the Executive with written
notice specifying in reasonable detail the factors constituting such material
failure and such material failure shall not have been cured by the Executive
within 60 days after such notice or, if impracticable of being cured within such
60 day period, such longer period as may reasonably be necessary to accomplish
the cure; or (B) has been convicted of a crime which constitutes a felony under
applicable law and such conviction is not subject to appeal under applicable
law.
(ii) "Good Reason" means the occurrence of any of the
following events:
(A) the assignment to the Executive of any duties
inconsistent in any material respect with the Executive's then position
(including status, offices, titles and reporting relationships), authority,
duties or responsibilities, or any other action or actions by the Company which
when taken as a whole results in a significant diminution in the Executive's
position, authority, duties or responsibilities, excluding for this purpose any
isolated, immaterial and inadvertent action not taken in bad faith and which is
remedied by the Company immediately after receipt of notice thereof given by the
Executive;
(B) a material breach by the Company of one or more
provisions of this Agreement, provided that such Good Reason shall not exist
unless the Executive shall first have provided the Company with written notice
specifying in reasonable detail the factors constituting such material breach
and such material breach shall not have been cured by the Company within 60 days
after such notice or, if impracticable of being cured within such 60 day period,
such longer period as may reasonably be necessary to accomplish the cure;
(C) the Company requiring the Executive to be based
at any location other than within 40 miles driving distance of the Executive's
home, except for requirements of reasonable temporary travel on the Company's
business; and
(D) the failure of the Executive to be elected to
the Board within 90 days of the Effective Date.
11. Severability. Should any provision of this Agreement be
held, by a court of competent jurisdiction, to be invalid or unenforceable, such
invalidity or unenforceability shall not render the entire Agreement invalid or
unenforceable, and this Agreement and each other provision hereof shall be
enforceable and valid to the fullest extent permitted by law.
-7-
<PAGE>
12. Arbitration. Any and all disputes, controversies or claims
arising out of or relating to this Agreement, or the enforcement or breach
thereof, shall be settled by arbitration conducted in the County of New York, in
the State of New York, and in accordance with the Commercial Arbitration Rules
(the "Arbitration Rules") of the American Arbitration Association ("AAA") and
the Supplementary Procedures for Large, Complex Disputes; provided, however,
that any dispute, controversy or claim with respect to Section 9 and/or 10 may
not be submitted to arbitration and shall only be submitted to a court in
accordance with Section 13 for an equitable remedy; provided, however, that no
breach of Section 9 and/or 10 of this Agreement shall exist unless the Company
shall first have provided the Executive with written notice specifying in
reasonable detail the factors constituting such breach and such breach shall not
have been cured by the Executive within 60 days after such notice or, if
impracticable of being cured within such 60 day period, such longer period as
may reasonably be necessary to accomplish the cure. The arbitral tribunal shall
consist of three arbitrators. The Company and the Executive shall each select
and appoint one arbitrator within 30 days of initiation of the arbitration and
those arbitrators shall jointly appoint a third arbitrator within 30 days of
their selection and appointment. If the third arbitrator is not appointed as
provided above, such arbitrator shall be appointed by the AAA as provided in the
Arbitration Rules.
Any decision or award of the arbitral tribunal shall be final
and binding upon the parties to the arbitration proceeding. The parties hereto
hereby waive to the extent permitted by law any rights to appeal or to seek
review of such award by any tribunal. The parties hereto agree that the arbitral
award may be enforced against the parties to the arbitration proceeding or their
assets wherever they may be found and that a judgment upon the arbitral award
may be entered in court in accordance with the provisions of Section 13 hereof.
13. Consent to Jurisdiction. Subject to Section 12 hereof, the
Company and the Executive irrevocably and voluntarily submit to personal
jurisdiction in the State of New York and in the Federal and state courts in
such state located in the Southern District of New York in any action or
proceeding arising out of or relating to this Agreement and agree that all
claims in respect of such action or proceeding may be heard and determined in
any such court. The Company and the Executive further consent and agree that the
parties hereto may be served with process in the same manner as a notice may be
given under Section 16. The Company and the Executive agree that any action or
proceeding instituted by one party against the other party with respect to this
Agreement will be instituted exclusively in the state courts located in, and in
the United States District Court for the Southern District of New York. The
Company and the Executive irrevocably and unconditionally waive and agree not to
plead, to the fullest extent permitted by law, any objection that they may now
or hereafter have to the laying of venue or the convenience of the forum of any
action or proceeding with respect to this Agreement in any such courts.
-8-
<PAGE>
14. Successors and Assigns.
(a) This Agreement and all rights under this Agreement are
personal to the Executive and shall not be assignable other than by will or the
laws of descent. All of the Executive's rights under this Agreement shall inure
to the benefit of his heirs, personal representatives, designees or other legal
representatives, as the case may be.
(b) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns. Any Person succeeding
to the business of the Company by merger, purchase, consolidation or otherwise
shall assume by contract or operation of law the obligations of the Company
under this Agreement.
15. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of New York, without
regard to any rules concerning the conflicts of laws.
16. Notices. All notices, requests and demands given to or
made upon the respective parties hereto shall be deemed to have been given or
made three business days after the date of mailing when mailed by registered or
certified mail, postage prepaid, or on the date of delivery if delivered by
hand, or one business day after the date of delivery by Federal Express or other
reputable overnight delivery service, addressed to the parties at their
addresses set forth below or to such other addresses furnished by notice given
in accordance with this Section 16 (a) if to the Company, to Uproar Limited, 44
Church Street, Hamilton, Bermuda HM12, and (b) if to the Executive, to
Christopher R. Hassett, at 1 Central Park West, New York, New York 10023.
17. Withholding. All payments required to be made by the
Company to the Executive under this Agreement shall be subject to any
withholding taxes, social security and other payroll deductions required under
applicable law.
18. Complete Understanding. Except as expressly provided
below, this Agreement supersedes any prior contracts, understandings,
discussions and agreements relating to employment between the Executive and the
Company, including, without limitation, that certain Consulting Agreement, dated
as of June 7, 1999, by and between the Executive and PrizePoint Entertainment
Corporation, and constitutes the complete understanding between the parties with
respect to the subject matter hereof. No statement, representation, warranty or
covenant has been made by either party with respect to the subject matter hereof
except as expressly set forth herein.
19. Modification; Waiver.
(a) This Agreement may be amended or waived if, and only
if, such amendment or waiver is in writing and signed, in the case of an
amendment, by the Company and the Executive or in the case of a waiver, by the
party against whom the waiver is to be effective. Any such waiver shall be
effective only to the extent specifically set forth in such writing.
-9-
<PAGE>
(b) No failure or delay by any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege.
20. Headings. The headings in this Agreement are for
convenience of reference only and shall not control or affect the meaning or
construction of this Agreement.
21. Counterparts. This Agreement may be signed in any number
of counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument. This Agreement
shall become effective when each party hereto shall have received counterparts
hereof signed by the other party hereto.
[The Rest of this Page is Intentionally Left Blank]
-10-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed in its corporate name by one of its officers duly authorized to
enter into and execute this Agreement, and the Executive has manually signed his
name hereto, all as of the day and year first above written.
UPROAR LIMITED
/s/ Joel Wilhite By: /s/ Michael K. Simon
- ------------------------- ---------------------------------
Witness
/s/ Rachel Warner By: /s/ Christopher R. Hassett
- ------------------------- ---------------------------------
Witness CHRISTOPHER R. HASSETT
-11-
<PAGE>
EXHIBIT A
UPROAR LTD.
NOTICE OF GRANT AND SHARE OPTION AGREEMENT
Notice is hereby given of the following option grant (the "Option") to
purchase Shares of Uproar Ltd. (the "Corporation"):
Optionee: Christopher R. Hassett
Grant Date: September 9, 1999
Vesting Commencement Date: September 9, 1999
Exercise Price: US$18.85 per share
Number of Option Shares: 343,489 Shares
Expiration Date: September 8, 2009
Type of Option: Incentive Share Option
Vesting Schedule:
(a) On or after September 9, 1999, the Option is
vested and exercisable for up to 85,872 Shares subject to this Option;
(b) On or after December 6, 1999, the Option is
vested and exercisable for up to 171,744 Shares subject to this Option;
(c) On or after September 6, 2000, the Option is
vested and exercisable for up to 257,616 Shares subject to this Option;
(d) On or after October 6, 2000, the Option is vested
and exercisable for up to 264,772 Shares subject to this Option; and
(e) On or after November 6, 2000, the Option is
vested and exercisable for up to 271,928 of the total number of Shares subject
to this Option; and
(f) On or after December 6, 2000, the Option is
vested and exercisable for up to 279,084 Shares subject to this Option;
(g) On or after January 6, 2001, the Option is vested
and exercisable for up to 286,240 Shares subject to this Option;
(h) On or after February 6, 2001, the Option is
vested and exercisable for up to 293,396 Shares subject to this Option;
(i) On or after March 6, 2001, the Option is vested
and exercisable for up to 300,552 of the total number of Shares subject to this
Option;
A-1
<PAGE>
(j) On or after April 6, 2001, the Option is vested
and exercisable for up to 307,708 Shares subject to this Option;
(k) On or after May 6, 2001, the Option is vested and
exercisable for up to 314,864 of the total number of Shares subject to this
Option;
(l) On or after June 6, 2001, the Option is vested
and exercisable for up to 322,020 Shares subject to this Option;
(m) On or after July 6, 2001, the Option is vested
and exercisable for up to 329,176 Shares subject to this Option;
(n) On or after August 6, 2001, the Option is vested
and exercisable for up to 336,332 Shares subject to this Option; and
(o) On or after September 6, 2001, the Option is
vested and exercisable for up to the total number of Shares subject to this
Option.
Pursuant to the provisions of Clause 2 of Subsection C of Section I of Article
Two of the Uproar Ltd. 1999 Share Option/Share Issuance Plan (the "Plan") and
notwithstanding anything in this Notice of Grant and Share Option Agreement or
the Plan to the contrary, the Option shall be vested and exercisable for up to
the total number of Shares subject to this Option effective as of the earlier to
occur of (i) the date of the termination of the Optionee's employment with the
Corporation, other than by reason of a termination by the Corporation for
"Cause" (as such term is defined in the Employment Agreement, effective as of
September 6, 1999, by and between the Optionee and the Corporation), or (ii) the
date of a "Corporate Transaction" (as such term is defined in the Plan);
provided that in the case of either event described in (i) and (ii) above, the
Option shall remain exercisable until September 8, 2009.
Optionee understands and agrees that except as expressly provided herein, the
Option is granted subject to and in accordance with the terms of the Plan and
Optionee further agrees to be bound by the terms of the Plan. Optionee hereby
acknowledges receipt of a copy of the Plan in the form attached hereto as
Attachment A. Notwithstanding anything herein to the contrary, no suspension,
termination, modification, or amendment of the Plan or this Notice of Grant and
Share Option Agreement may, without the express written consent of the Optionee,
adversely affect the rights of the Optionee under this Option.
No Employment or Service Contract. Nothing in this Notice of Grant and Share
Option Agreement or the attached Plan shall confer upon Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining Optionee) or of Optionee, which rights are
hereby expressly reserved by each, to terminate Optionee's Service at any time
for any reason, with or without cause.
A-2
<PAGE>
No Obligation to Exercise Option. The granting of the Option shall impose no
obligation upon the Optionee to exercise the Option.
DATED: September 9, 1999
UPROAR LTD.
By: /s/ Michael K. Simon
------------------------------
Title: Chairman
/s/ Christopher R. Hassett
----------------------------------
OPTIONEE
Address:--------------------------
----------------------------------
ATTACHMENT
Attachment A -1999 Share Option/Share Issuance Plan
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), dated as of October 25, 1999,
between UPROAR LIMITED, a corporation with registered offices at 44 Church
Street, Hamilton, Bermuda HM12 (the "Company"), and ROBERT D. MARAFIOTI,
residing at 7 Withington Road, Scarsdale, New York 10583 (the "Executive").
W I T N E S S E T H
WHEREAS, the Company desires to employ the Executive, and the
Executive desires to accept such employment, on the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the mutual promises,
representations and warranties set forth herein, and for other good and valuable
consideration, it is hereby agreed as follows:
1. Employment. The Company hereby agrees to employ the
Executive, and the Executive hereby accepts such employment, upon the terms and
conditions set forth herein.
2. Term. The Executive's employment under this Agreement shall
commence on October 25, 1999 (the "Effective Date") and shall continue at-will
until terminated, for any or no reason, by the Executive, upon advance notice to
the Company or by the Company, upon advance notice to the Executive (the date of
such termination hereinafter called the "Termination Date").
3. Position and Duties.
(a) During the Executive's employment hereunder, the
Executive shall serve as the Executive Vice President and General Counsel of the
Company and shall have such duties consistent with such office as from time to
time may be reasonably prescribed by the Chief Executive Officer of the Company.
(b) During the Executive's employment hereunder, the
Executive shall perform and discharge the duties that may reasonably be assigned
to him by the Chief Executive Officer of the Company from time to time in
accordance with this Agreement, and the Executive shall devote his best talents,
efforts and abilities to the performance of his duties hereunder.
(c) During his employment hereunder, the Executive shall
perform his duties hereunder on a substantially full-time basis. Notwithstanding
the foregoing, the Executive shall not be precluded from engaging in other
outside business and/or investment activities, provided that such activities do
not materially interfere with the Executive's performance of his duties
hereunder.
<PAGE>
(d) During his employment hereunder, the Executive shall be
provided, at the Company's sole expense, with the services of an executive
assistant selected by the Executive, in his sole discretion.
4. Consideration.
(a) Option Grant. On October 25, 1999, the Executive shall
be granted an option for the purchase of 250,000 shares of the common stock of
the Company, par value $0.05 (the "Option"), on the terms and conditions set
forth on the Notice of Grant and Share Option Agreement, attached hereto as
Exhibit A and incorporated herein by reference, which the Company hereby
represents and warrants constitutes a valid and enforceable grant of a stock
option pursuant to the Uproar Ltd. Share Option/Share Issuance Plan.
(b) Option Plans. The Executive shall be eligible to
participate in the Uproar Ltd. Share Option/Share Issuance Plan and such other
equity-based compensation arrangements as the Company may make available to its
executive employees, in accordance with the terms and conditions of such
arrangements as applicable to such other executive employees.
5. Benefits.
(a) Medical and Health Insurance Benefits. The Company
shall, at its sole expense, provide the Executive and his eligible dependents
with medical, health and dental insurance coverage at least comparable to such
coverage enjoyed by the Executive immediately prior to the execution of this
Agreement or, at the election of the Executive, the coverage generally provided
by the Company to its other executive employees.
(b) Other Benefits. During the Term, the Company shall
provide the Executive with any and all other employee or fringe benefits (in
accordance with their terms and conditions) which the Company may generally make
available to its other executive employees.
(c) Benefits in Event of a Corporate Transaction. In the
event that the Executive's employment is terminated as a result of a "Corporate
Transaction" (as such term is defined in the Option Plan), the Company shall, at
its sole cost and expense, continue to provide the Executive (and his
dependents) with coverage under (and in accordance with the terms and conditions
of ) the medical, health and dental insurance plans under which the Executive
was receiving coverage on the date of such termination of employment for the
period of three years (the "Three Year Period") from the date of such
termination of employment; provided that to the extent such coverage may be
unavailable under such medical, health and dental insurance plans due to
restrictions imposed by the insurer(s) under such plans, the Company shall take
such actions as may be required to provide equivalent benefits from other
sources. Notwithstanding the foregoing, the Company's obligations under this
Paragraph (c) shall terminate if and to the extent that, prior to the expiration
of the Three Year Period, the Executive begins to receive medical, health and
dental insurance benefits from a third party which are substantially equivalent
to the medical, health and dental insurance benefits provided for by the Company
hereunder.
-2-
<PAGE>
6. Reimbursement of Expenses.
(a) The Company shall pay or reimburse the Executive for
all reasonable travel (at business class level), entertainment and other
business expenses actually incurred or paid by the Executive in the performance
of his duties hereunder upon presentation of expense statements and/or such
other supporting information as the Company may reasonably require of the
Executive, including, without limitation, expenses incurred in connection with
continuing legal education, professional journal subscriptions and membership in
professional organizations .
(b) The Company shall also pay or reimburse the Executive
for any and all costs and expenses (in an amount equaling up to $600 per month)
associated with the Executive's travelling between his home and the Company's
offices utilizing such means and methods of transportation as the Executive
shall determine, in his sole discretion.
(c) The Executive shall be required to have a mobile phone
and to maintain an office in his home with fax and Internet access, and the
Company shall pay or reimburse the Executive for any and all expenses, not in
excess of $1,000 per month, associated with the Executive's use of such mobile
phone and maintenance of such office in his home.
(d) The Executive shall be provided with professional
liability insurance coverage and the directors and officers liability insurance
coverage generally provided to officers of the Company. Notwithstanding the
foregoing, the Company agrees to indemnify the Executive to the maximum extent
permitted by law against all costs, damages and expenses, including attorneys'
fees, incurred by the Executive as a result of claims by third parties arising
out of or from the Executive's lawful acts as an employee of the Company,
provided such acts are not grossly negligent and are performed in good faith and
in a manner reasonably believed by the Executive to be in the Company's best
interests. Any counsel employed to defend the Executive in any such action shall
be reasonably acceptable to the Executive and the Company. Any counsel appointed
by any insurance carrier for the Company shall be deemed acceptable to the
Company.
-3-
<PAGE>
7. Vacations. The Executive shall be entitled to such vacation
as the Company may generally make available to its executive employees, but in
no event less than four weeks for each year of employment. Unused vacation may
be carried over to successive years.
8. Excise Taxes.
(a) In the event that any payments made and/or benefits
provided to the Executive under this Agreement (including, without limitation,
pursuant to the Option and/or the Notice of Grant and Share Option Agreement
attached hereto as Exhibit A) (hereinafter called the "Payments") are subject to
any excise taxes, including, without limitation, excise taxes imposed by Section
4999 of the Internal Revenue Code of 1986, as amended (the "Code") (the "Excise
Taxes"), the Company shall pay the Executive such additional cash payment(s)
(hereinafter collectively called the "Gross Up Payment") such that the net
amount that the Executive would retain after deduction and/or payment of any
Excise Taxes on the Payments, and any interest and/or penalties assessed by the
Internal Revenue Service with respect to the Excise Taxes, and taking into
account the tax consequences of all additional cash payments made by the Company
pursuant to this Section 8, shall be equal to the aggregate value of Payments.
The determination of whether such Excise Taxes are payable and the amount
thereof shall be based upon the opinion of counsel selected by the Executive and
acceptable to the Company. Any such additional cash payment by the Company shall
be paid by the Company to the Executive in one lump sum cash payment within
thirty (30) days following the date such opinion of counsel is rendered. If such
opinion is not accepted by the Internal Revenue Service, then the Executive
shall determine and notify the Company of the appropriate adjustments in the
Gross Up Payment (taking into account any and all Excise Taxes, interest,
penalties and the tax consequences of all additional cash payments made by the
Company pursuant to this Section 8) and the Company shall pay the Executive the
difference between the final amount of the Gross Up Payment and the amount
previously paid, if any, to the Executive by the Company pursuant to this
Section 8 (hereinafter called the "Adjustment Payment"). Any such Adjustment
Payment shall be paid by the Company to the Executive in one lump sum cash
payment within ten (10) days following such notification.
(b) Notwithstanding the provisions of paragraph (a) of this
Section 8, the Company shall not be obligated to make any Gross Up Payment
unless:
(1) the counsel selected pursuant to Section 8(a)
above, or the Internal Revenue Service, determines that there has been a change
in the ownership or effective control of the Company or a change in the
ownership of a substantial portion of the assets of the Company, all as defined
in Section 280G of the Code and the proposed regulations thereunder (each, a
"Change of Control"), and
-4-
<PAGE>
(2) at the time of the Change of Control (as determined
by such counsel), either:
(A) the Executive is employed by the Company, or
(B) if the Executive is not employed by the
Company, his employment with the Company was not terminated for "Cause" (as
hereinafter defined).
9. Materials; Confidential Information and Documents.
(a) Materials. The Executive agrees that all ideas, plans
and materials directly related to the online multi-user game business of the
Company which are prepared by the Executive both (i) in connection with his
employment hereunder, and (ii) during the period beginning on the Effective Date
and ending on the Termination Date (hereinafter called the "Materials") are
works-made-for-hire and are the Company's sole and exclusive property. In the
event that any Materials are not copyrightable subject matter or, for any
reason, are deemed not to be works-made-for-hire, the Executive hereby assigns
all right, title and interest to such Materials to the Company, free of any
reversionary rights or restrictions Without limiting the foregoing, it is
specifically understood and agreed that the Executive retains no ownership
rights whatsoever in or to the Materials.
(b) Confidential Information and Documents.
(i) The Executive's duties hereunder will include,
among other things, representation of the Company in high-level dealings with
the Company's clients, accounts, suppliers and financial institutions with which
the Company does business and the authority to discuss and negotiate, on the
Company's behalf, with the executives and upper management personnel of such
clients, accounts, suppliers and financial institutions. These dealings,
together with the Executive's other duties, will result in the Executive
becoming familiar with the proprietary materials, trade secrets, financial
matters, confidential requirements and resources (hereinafter, the "Confidential
Information") of both the Company and its clients. The Executive hereby agrees
that he will not, either during his employment with the Company or thereafter,
disclose to anyone any Confidential Information of the Company or its clients,
or use such Confidential Information for his own benefit or for the benefit of
anyone other than the Company (or its clients, in the case of Confidential
Information of the such client), except that disclosure of such Confidential
Information will be permitted: (A) to the Company and/or its affiliates and the
advisors of the Company and/or its affiliates; (B) in the case of Confidential
Information of any of the Company's clients, to such client and/or its
affiliates and the advisors of such client and/or its affiliates; (C) if such
Confidential Information has previously become available to the public through
no fault of the Executive; (D) if required by any court or governmental agency
or body or is otherwise required by law; (E) if necessary to establish or assert
the rights of the Executive hereunder; (F) if expressly consented to in writing
by the Company (or its client, in the case of Confidential Information of such
client); or (G) if necessary to carry on the Company's business in the ordinary
course or to perform the Executive's duties hereunder.
-5-
<PAGE>
(ii) The Executive further agrees that all memoranda,
notes, records or other documents compiled by him or made available to him in
connection with and during his employment hereunder concerning the Company's
business or that of its clients (hereinafter called the "Confidential
Documents") shall be the property of the Company. The Executive further agrees
that he shall deliver to the Company all Confidential Documents in his
possession or control following the termination of his employment with the
Company or at any other time following the Company's written notice to do so.
(iii) The Executive and the Company agree that the
provisions of this Section 9(b) are of the essence to this Agreement and that
the provisions of this Section 9(b) shall survive the termination of this
Agreement and the Executive's employment with the Company.
10. Restrictive Covenants.
(a) Noncompetition. During the Executive's employment
hereunder and, in the event that the Company terminates the Executive's
employment hereunder for "Cause" (as hereinafter defined) or the Executive
terminates his employment hereunder without "Good Reason" (as hereinafter
defined), during the one-year period commencing on the Termination Date, the
Executive shall not knowingly, other than in connection with the performance of
his duties hereunder:
(i) own, be employed by, or exercise any material
control with respect to the online multi-user games business of any person or
entity, or subsidiary, subdivision, division or joint venture of such entity
(other than the Company), including, without limitation, SONY Station,
Gamesville, Playsite, Yahoo Games, Total Entertainment Network, Excite Games,
Mpath and Sierra Online (hereinafter called "Competitive Entities").
Notwithstanding the foregoing, nothing contained in this Agreement shall be
construed to prohibit the Executive from holding a passive equity ownership
interest as a limited partner in a limited partnership or of less than 2% of any
class of the outstanding equity of a publicly traded entity;
(ii) render any services in connection with or in any
way relating to Competitive Entities;
(iii) solicit or encourage any of the employees of the
Company, other than the Executive's assistant described in Section 3(d) hereof,
to leave the employ of the Company or to terminate or alter their contractual
relationships with the Company in a way that is adverse to the interests of the
Company; or
-6-
<PAGE>
(iv) hire away any of the employees of the Company,
other than the Executive's assistant described in Section 3(d) hereof, to work
for any new employer without the prior written consent of the Company.
(b) For purposes of this Agreement:
(i) "Cause" shall exist if, and only if, the Executive
(A) willfully and habitually fails in any material respect to perform his
obligations hereunder as provided herein, provided that such Cause shall not
exist unless the Company shall first have provided the Executive with written
notice specifying in reasonable detail the factors constituting such material
failure and such material failure shall not have been cured by the Executive
within 60 days after such notice or, if impracticable of being cured within such
60 day period, such longer period as may reasonably be necessary to accomplish
the cure; or (B) has been convicted of a crime which constitutes a felony under
applicable law and such conviction is not subject to appeal under applicable
law.
(ii) "Good Reason" means the occurrence of any of the
following events:
(A) the assignment to the Executive of any duties
inconsistent in any material respect with the Executive's then position
(including status, offices, titles and reporting relationships), authority,
duties or responsibilities, or any other action or actions by the Company which
when taken as a whole results in a significant diminution in the Executive's
position, authority, duties or responsibilities, excluding for this purpose any
isolated, immaterial and inadvertent action not taken in bad faith and which is
remedied by the Company immediately after receipt of notice thereof given by the
Executive;
(B) a material breach by the Company of one or
more provisions of this Agreement, provided that such Good Reason shall not
exist unless the Executive shall first have provided the Company with written
notice specifying in reasonable detail the factors constituting such material
breach and such material breach shall not have been cured by the Company within
60 days after such notice or, if impracticable of being cured within such 60 day
period, such longer period as may reasonably be necessary to accomplish the
cure; and
(C) the Company requiring the Executive to be
based at any location other than within 25 miles driving distance of the
Executive's home, except for requirements of reasonable temporary travel on the
Company's business.
-7-
<PAGE>
11. Severability. Should any provision of this Agreement be
held, by a court of competent jurisdiction, to be invalid or unenforceable, such
invalidity or unenforceability shall not render the entire Agreement invalid or
unenforceable, and this Agreement and each other provision hereof shall be
enforceable and valid to the fullest extent permitted by law.
12. Arbitration. Any and all disputes, controversies or claims
arising out of or relating to this Agreement, or the enforcement or breach
thereof, shall be settled by arbitration conducted in the County of New York, in
the State of New York, and in accordance with the Commercial Arbitration Rules
(the "Arbitration Rules") of the American Arbitration Association ("AAA") and
the Supplementary Procedures for Large, Complex Disputes; provided, however,
that any dispute, controversy or claim with respect to Section 9 and/or 10 may
not be submitted to arbitration and shall only be submitted to a court in
accordance with Section 13 for an equitable remedy; provided, however, that no
breach of Section 9 and/or 10 of this Agreement shall exist unless the Company
shall first have provided the Executive with written notice specifying in
reasonable detail the factors constituting such breach and such breach shall not
have been cured by the Executive within 60 days after such notice or, if
impracticable of being cured within such 60 day period, such longer period as
may reasonably be necessary to accomplish the cure. The arbitral tribunal shall
consist of three arbitrators. The Company and the Executive shall each select
and appoint one arbitrator within 30 days of initiation of the arbitration and
those arbitrators shall jointly appoint a third arbitrator within 30 days of
their selection and appointment. If the third arbitrator is not appointed as
provided above, such arbitrator shall be appointed by the AAA as provided in the
Arbitration Rules.
Any decision or award of the arbitral tribunal shall be final
and binding upon the parties to the arbitration proceeding. The parties hereto
hereby waive to the extent permitted by law any rights to appeal or to seek
review of such award by any tribunal. The parties hereto agree that the arbitral
award may be enforced against the parties to the arbitration proceeding and
their assets wherever they may be found and that a judgment upon the arbitral
award may be entered in court in accordance with the provisions of Section 13
hereof.
13. Consent to Jurisdiction. Subject to Section 12 hereof, the
Company and the Executive irrevocably and voluntarily submit to personal
jurisdiction in the State of New York and in the Federal and state courts in
such state located in the Southern District of New York in any action or
proceeding arising out of or relating to this Agreement and agree that all
claims in respect of such action or proceeding may be heard and determined in
any such court. The Company and the Executive further consent and agree that the
parties hereto may be served with process in the same manner as a notice may be
given under Section 16 as well as in any other manner permitted by applicable
law. The Company and the Executive agree that any action or proceeding
instituted by one party against the other party with respect to this Agreement
will be instituted exclusively in the state courts located in, and in the United
States District Court for the Southern District of New York. The Company and the
Executive irrevocably and unconditionally waive and agree not to plead, to the
fullest extent permitted by law, any objection that they may now or hereafter
have to the laying of venue or the convenience of the forum of any action or
proceeding with respect to this Agreement in any such courts.
-8-
<PAGE>
14. Successors and Assigns.
(a) This Agreement and all rights under this Agreement are
personal to the Executive and shall not be assignable other than by will or the
laws of descent. All of the Executive's rights under this Agreement shall inure
to the benefit of his heirs, personal representatives, designees or other legal
representatives, as the case may be.
(b) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns. Any person or entity
succeeding to the business of the Company by merger, purchase, consolidation or
otherwise shall assume by contract or operation of law the obligations of the
Company under this Agreement.
15. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of New York, without
regard to any rules concerning the conflicts of laws.
16. Notices. All notices, requests and demands given to or
made upon the respective parties hereto shall be deemed to have been given or
made three business days after the date of mailing when mailed by registered or
certified mail, postage prepaid, or on the date of delivery if delivered by
hand, or one business day after the date of delivery by Federal Express or other
reputable overnight delivery service, addressed to the parties at their
addresses set forth below or to such other addresses furnished by notice given
in accordance with this Section 16 (a) if to the Company, to Uproar Limited, 44
Church Street, Hamilton, Bermuda HM12, and (b) if to the Executive, to Robert D.
Marafioti, at 7 Withington Road, Scarsdale, New York 10583.
17. Withholding. All payments required to be made by the
Company to the Executive under this Agreement shall be subject to any
withholding taxes, social security and other payroll deductions required under
applicable law.
18. Complete Understanding. Except as expressly provided
below, this Agreement supersedes any prior contracts, understandings,
discussions and agreements relating to employment between the Executive and the
Company and constitutes the complete understanding between the parties with
respect to the subject matter hereof. No statement, representation, warranty or
covenant has been made by either party with respect to the subject matter hereof
except as expressly set forth herein.
-9-
<PAGE>
19. Modification; Waiver.
(a) This Agreement may be amended or waived if, and only
if, such amendment or waiver is in writing and signed, in the case of an
amendment, by the Company and the Executive or in the case of a waiver, by the
party against whom the waiver is to be effective. Any such waiver shall be
effective only to the extent specifically set forth in such writing.
(b) No failure or delay by any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege.
20. Headings. The headings in this Agreement are for
convenience of reference only and shall not control or affect the meaning or
construction of this Agreement.
21. Counterparts. This Agreement may be signed in any number
of counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument. This Agreement
shall become effective when each party hereto shall have received counterparts
hereof signed by the other party hereto.
[The Rest of this Page is Intentionally Left Blank]
-10-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed in its corporate name by one of its officers duly authorized to
enter into and execute this Agreement, and the Executive has manually signed his
name hereto, all as of the day and year first above written.
UPROAR LIMITED
/s/ Rachel Warner By: /s/ Kenneth D. Cron
- ------------------------- ---------------------------------
Witness
/s/ Rachel Warner /s/ Robert D. Marafioti
- ------------------------- ----------------------------------
Witness ROBERT D. MARAFIOTI
-11-
<PAGE>
UPROAR LTD.
NOTICE OF GRANT AND SHARE OPTION AGREEMENT
Notice is hereby given of the following option grant (the "Option") to
purchase Shares of Uproar Ltd. (the "Corporation"):
Optionee: Robert D. Marafioti
Grant Date: October 25, 1999
Vesting Commencement Date: October 25, 1999
Exercise Price: US$21.64 per share
Number of Option Shares: 250,000 Shares
Expiration Date: October 25, 2009
Type of Option: Incentive Share Option
Vesting Schedule:
(a) On or after October 25, 1999, the Option is
vested and exercisable for up to 10,416 Shares subject to this Option;
(b) On or after November 25, 1999, the Option is
vested and exercisable for up to 20,833 Shares subject to this Option;
(c) On or after December 25, 1999, the Option is
vested and exercisable for up to 31,249 Shares subject to this Option;
(d) On or after January 25, 2000, the Option is
vested and exercisable for up to 41,666 Shares subject to this Option;
(e) On or after February 25, 2000, the Option is
vested and exercisable for up to 52,083 of the total number of Shares subject to
this Option;
(f) On or after March 25, 2000, the Option is vested
and exercisable for up to 62,499 Shares subject to this Option;
(g) On or after April 25, 2000, the Option is vested
and exercisable for up to 72,916 Shares subject to this Option;
(h) On or after May 25, 2000, the Option is vested
and exercisable for up to 83,333 Shares subject to this Option;
(i) On or after June 25, 2000, the Option is vested
and exercisable for up to 93,749 of the total number of Shares subject to this
Option;
A-1
<PAGE>
(j) On or after July 25, 2000, the Option is vested
and exercisable for up to 104,166 Shares subject to this Option;
(k) On or after August 25, 2000, the Option is vested
and exercisable for up to 114,583 of the total number of Shares subject to this
Option;
(l) On or after September 25, 2000, the Option is
vested and exercisable for up to 124,999 Shares subject to this Option;
(m) On or after October 25, 2000, the Option is
vested and exercisable for up to 135,416 Shares subject to this Option;
(n) On or after November 25, 2000, the Option is
vested and exercisable for up to 145,833 Shares subject to this Option;
(o) On or after December 25, 2000, the Option is
vested and exercisable for up to 156,249 Shares subject to this Option;
(p) On or after January 25, 2001, the Option is
vested and exercisable for up to 166,666 Shares subject to this Option;
(q) On or after February 25, 2001, the Option is
vested and exercisable for up to 177,083 Shares subject to this Option;
(r) On or after March 25, 2001, the Option is vested
and exercisable for up to 187,499 Shares subject to this Option;
(s) On or after April 25, 2001, the Option is vested
and exercisable for up to 197,916 Shares subject to this Option;
(t) On or after May 25, 2001, the Option is vested
and exercisable for up to 208,333 Shares subject to this Option;
(u) On or after June 25, 2001, the Option is vested
and exercisable for up to 218,749 Shares subject to this Option;
(v) On or after July 25, 2001, the Option is vested
and exercisable for up to 229,166 Shares subject to this Option;
(w) On or after August 25, 2001, the Option is vested
and exercisable for up to 239,583 Shares subject to this Option; and
(x) On or after September 25, 2001, the Option is
vested and exercisable for up to the total number of Shares subject to this
Option.
A-2
<PAGE>
Pursuant to the provisions of Clause 2 of Subsection C of Section I of Article
Two of the Uproar Ltd. 1999 Share Option/Share Issuance Plan (the "Plan")
and notwithstanding anything in this Notice of Grant and Share Option Agreement
or the Plan to the contrary, the Option shall be vested and exercisable for up
to the total number of Shares subject to this Option effective as of the
earliest to occur of (i) the date of the termination of the Optionee's
employment with the Corporation by reason of the Optionee's resignation with
"Good Reason" (as such term is defined in the Employment Agreement, effective as
of October 25, 1999, by and between the Optionee and the Corporation (the
"Employment Agreement")), (ii) the date of termination of the Optionee's
employment with the Corporation by reason of a termination by the Corporation
without "Cause" (as such term is defined in the Employment Agreement), or (iii)
the date of a "Corporate Transaction" (as such term is defined in the Plan);
provided that in the case of any event described in (i), (ii) or (iii) above,
the Option shall remain exercisable until October 25, 2009.
Optionee understands and agrees that except as expressly provided herein, the
Option is granted subject to and in accordance with the terms of the Plan and
Optionee further agrees to be bound by the terms of the Plan. Optionee hereby
acknowledges receipt of a copy of the Plan in the form attached hereto as
Attachment A. Notwithstanding anything herein to the contrary, no suspension,
termination, modification, or amendment of the Plan or this Notice of Grant and
Share Option Agreement may, without the express written consent of the Optionee,
adversely affect the rights of the Optionee under this Option.
No Employment or Service Contract. Nothing in this Notice of Grant and Share
Option Agreement or the attached Plan shall confer upon Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining Optionee) or of Optionee, which rights are
hereby expressly reserved by each, to terminate Optionee's Service at any time
for any reason, with or without cause.
A-3
<PAGE>
No Obligation to Exercise Option. The granting of the Option shall impose no
obligation upon the Optionee to exercise the Option.
DATED: October 25, 1999
UPROAR LTD.
By: /s/ Kenneth D. Cron
----------------------------------
Title: Chief Executive Officer
/s/ Robert D. Marafioti
--------------------------------------
OPTIONEE
Address:
------------------------------
--------------------------------------
ATTACHMENT
Attachment A -1999 Share Option/Share Issuance Plan
A-4
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), dated as of October 25, 1999,
between UPROAR LIMITED, a corporation with registered offices at 44 Church
Street, Hamilton, Bermuda HM12 (the "Company"), and JEFFREY L. STRIEF, residing
at 18 Lefferts Road, Garden City, New York 11530 (the "Executive").
W I T N E S S E T H
WHEREAS, the Company desires to employ the Executive, and the
Executive desires to accept such employment, on the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the mutual promises,
representations and warranties set forth herein, and for other good and valuable
consideration, it is hereby agreed as follows:
1. Employment. The Company hereby agrees to employ the
Executive, and the Executive hereby accepts such employment, upon the terms and
conditions set forth herein.
2. Term. The Executive's employment under this Agreement shall
commence on October 25, 1999 (the "Effective Date") and shall continue at-will
until terminated, for any or no reason, by the Executive, upon advance notice to
the Company or by the Company, upon advance notice to the Executive (the date of
such termination hereinafter called the "Termination Date").
3. Position and Duties.
(a) During the Executive's employment hereunder, the
Executive shall serve as the Executive Vice President of Sales and Marketing of
the Company and shall have such duties consistent with such office as from time
to time may be reasonably prescribed by the Chief Executive Officer of the
Company.
(b) During the Executive's employment hereunder, the
Executive shall perform and discharge the duties that may reasonably be assigned
to him by the Chief Executive Officer from time to time in accordance with this
Agreement, and the Executive shall devote his best talents, efforts and
abilities to the performance of his duties hereunder.
(c) During his employment hereunder, the Executive
shall perform his duties hereunder on a substantially full-time basis.
Notwithstanding the foregoing, the Executive shall not be precluded from
engaging in other outside business and/or investment activities, provided that
such activities do not materially interfere with the Executive's performance of
his duties hereunder.
<PAGE>
(d) During his employment hereunder, the Executive
shall be provided, at the Company's sole expense, with the services of an
executive assistant selected by the Executive, in his sole discretion.
4. Consideration.
(a) Option Grant. On October 25, 1999, the Executive
shall be granted an option for the purchase of 350,000 shares of the common
stock of the Company, par value $0.05 (the "Option"), on the terms and
conditions set forth on the Notice of Grant and Share Option Agreement, attached
hereto as Exhibit A and incorporated herein by reference, which the Company
hereby represents and warrants constitutes a valid and enforceable grant of a
stock option pursuant to the Uproar Ltd. Share Option/Share Issuance Plan.
(b) Option Plans. The Executive shall be eligible to
participate in the Uproar Ltd. Share Option/Share Issuance Plan and such other
equity-based compensation arrangements as the Company may make available to its
executive employees, in accordance with the terms and conditions of such
arrangements as applicable to such other executive employees.
5. Benefits.
(a) Medical and Health Insurance Benefits. The
Company shall, at its sole expense, provide the Executive and his eligible
dependents with medical, health and dental insurance coverage at least
comparable to such coverage enjoyed by the Executive immediately prior to the
execution of this Agreement or, at the election of the Executive, the coverage
generally provided by the Company to its other executive employees.
(b) Other Benefits. During the Term, the Company
shall provide the Executive with any and all other employee or fringe benefits
(in accordance with their terms and conditions) which the Company may generally
make available to its other executive employees.
(c) Benefits in Event of a Corporate Transaction. In
the event that the Executive's employment is terminated as a result of a
"Corporate Transaction" (as such term is defined in the Option Plan), the
Company shall, at its sole cost and expense, continue to provide the Executive
(and his dependents) with coverage under (and in accordance with the terms and
conditions of ) the medical, health and dental insurance plans under which the
Executive was receiving coverage on the date of such termination of employment
for the period of three years (the "Three Year Period") from the date of such
termination of employment; provided that to the extent such coverage may be
unavailable under such medical, health and dental insurance plans due to
restrictions imposed by the insurer(s) under such plans, the Company shall take
such actions as may be required to provide equivalent benefits from other
sources. Notwithstanding the foregoing, the Company's obligations under this
Paragraph (c) shall terminate if and to the extent that, prior to the expiration
of the Three Year Period, the Executive begins to receive medical, health and
dental insurance benefits from a third party which are substantially equivalent
to the medical, health and dental insurance benefits provided for by the Company
hereunder.
-2-
<PAGE>
6. Reimbursement of Expenses.
(a) The Company shall pay or reimburse the Executive
for all reasonable travel (at business class level), entertainment and other
business expenses actually incurred or paid by the Executive in the performance
of his duties hereunder upon presentation of expense statements and/or such
other supporting information as the Company may reasonably require of the
Executive.
(b) The Company shall also pay or reimburse the
Executive for any and all costs and expenses (in an amount equaling up to $600
per month) associated with the Executive's travelling between his home and the
Company's offices utilizing such means and methods of transportation as the
Executive shall determine, in his sole discretion.
(c) The Executive shall be required to have a mobile
phone and to maintain an office in his home with fax and Internet access and the
Company shall pay or reimburse the Executive for any and all expenses, not in
excess of $1,000 per month, associated with the Executive's use of such mobile
phone and maintenance of such office in his home.
(d) The Executive shall be provided with the
directors and officers liability insurance coverage generally provided to
officers of the Company. Notwithstanding the foregoing, the Company agrees to
indemnify the Executive to the maximum extent permitted by law against all
costs, damages and expenses, including attorneys' fees, incurred by the
Executive as a result of claims by third parties arising out of or from the
Executive's lawful acts as an employee of the Company, provided such acts are
not grossly negligent and are performed in good faith and in a manner reasonably
believed by the Executive to be in the Company's best interests. Any counsel
employed to defend the Executive in any such action shall be reasonably
acceptable to the Executive and the Company. Any counsel appointed by any
insurance carrier for the Company shall be deemed acceptable to the Company.
7. Vacations. The Executive shall be entitled to such vacation
as the Company may generally make available to its executive employees, but in
no event less than four weeks for each year of employment. Unused vacation may
be carried over to successive years.
-3-
<PAGE>
8. Excise Taxes.
(a) In the event that any payments made and/or
benefits provided to the Executive under this Agreement (including, without
limitation, pursuant to the Option and/or the Notice of Grant and Share Option
Agreement attached hereto as Exhibit A) (hereinafter called the "Payments") are
subject to any excise taxes, including, without limitation, excise taxes imposed
by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code")
(the "Excise Taxes"), the Company shall pay the Executive such additional cash
payment(s) (hereinafter collectively called the "Gross Up Payment") such that
the net amount that the Executive would retain after deduction and/or payment of
any Excise Taxes on the Payments, and any interest and/or penalties assessed by
the Internal Revenue Service with respect to the Excise Taxes, and taking into
account the tax consequences of all additional cash payments made by the Company
pursuant to this Section 8, shall be equal to the aggregate value of Payments.
The determination of whether such Excise Taxes are payable and the amount
thereof shall be based upon the opinion of counsel selected by the Executive and
acceptable to the Company. Any such additional cash payment by the Company shall
be paid by the Company to the Executive in one lump sum cash payment within
thirty (30) days following the date such opinion of counsel is rendered. If such
opinion is not accepted by the Internal Revenue Service, then the Executive
shall determine and notify the Company of the appropriate adjustments in the
Gross Up Payment (taking into account any and all Excise Taxes, interest,
penalties and the tax consequences of all additional cash payments made by the
Company pursuant to this Section 8) and the Company shall pay the Executive the
difference between the final amount of the Gross Up Payment and the amount
previously paid, if any, to the Executive by the Company pursuant to this
Section 8 (hereinafter called the "Adjustment Payment"). Any such Adjustment
Payment shall be paid by the Company to the Executive in one lump sum cash
payment within ten (10) days following such notification.
(b) Notwithstanding the provisions of paragraph (a)
of this Section 8, the Company shall not be obligated to make any Gross Up
Payment unless:
(1) the counsel selected pursuant to Section 8(a)
above, or the Internal Revenue Service, determines that there has been a change
in the ownership or effective control of the Company or a change in the
ownership of a substantial portion of the assets of the Company, all as defined
in Section 280G of the Code and the proposed regulations thereunder (each, a
"Change of Control"), and
(2) at the time of the Change of Control (as
determined by such counsel), either:
-4-
<PAGE>
(A) the Executive is employed by the
Company, or
(B) if the Executive is not employed by the
Company, his employment with the Company was not terminated for "Cause" (as
hereinafter defined).
9. Materials; Confidential Information and Documents.
(a) Materials. The Executive agrees that all ideas,
plans and materials directly related to the online multi-user game business of
the Company which are prepared by the Executive both (i) in connection with his
employment hereunder, and (ii) during the period beginning on the Effective Date
and ending on the Termination Date (hereinafter called the "Materials") are
works-made-for-hire and are the Company's sole and exclusive property. In the
event that any Materials are not copyrightable subject matter or, for any
reason, are deemed not to be works-made-for-hire, the Executive hereby assigns
all right, title and interest to such Materials to the Company, free of any
reversionary rights or restrictions Without limiting the foregoing, it is
specifically understood and agreed that the Executive retains no ownership
rights whatsoever in or to the Materials.
(b) Confidential Information and Documents.
(i) The Executive's duties hereunder will
include, among other things, representation of the Company in high-level
dealings with the Company's clients, accounts, suppliers and financial
institutions with which the Company does business and the authority to discuss
and negotiate, on the Company's behalf, with the executives and upper management
personnel of such clients, accounts, suppliers and financial institutions. These
dealings, together with the Executive's other duties, will result in the
Executive becoming familiar with the proprietary materials, trade secrets,
financial matters, confidential requirements and resources (hereinafter, the
"Confidential Information") of both the Company and its clients. The Executive
hereby agrees that he will not, either during his employment with the Company or
thereafter, disclose to anyone any Confidential Information of the Company or
its clients, or use such Confidential Information for his own benefit or for the
benefit of anyone other than the Company (or its clients, in the case of
Confidential Information of the such client), except that disclosure of such
Confidential Information will be permitted: (A) to the Company and/or its
affiliates and the advisors of the Company and/or its affiliates; (B) in the
case of Confidential Information of any of the Company's clients, to such client
and/or its affiliates and the advisors of such client and/or its affiliates; (C)
if such Confidential Information has previously become available to the public
through no fault of the Executive; (D) if required by any court or governmental
agency or body or is otherwise required by law; (E) if necessary to establish or
assert the rights of the Executive hereunder; (F) if expressly consented to in
writing by the Company (or its client, in the case of Confidential Information
of such client); or (G) if necessary to carry on the Company's business in the
ordinary course or to perform the Executive's duties hereunder.
-5-
<PAGE>
(ii) The Executive further agrees that all
memoranda, notes, records or other documents compiled by him or made available
to him in connection with and during his employment hereunder concerning the
Company's business or that of its clients (hereinafter called the "Confidential
Documents") shall be the property of the Company. The Executive further agrees
that he shall deliver to the Company all Confidential Documents in his
possession or control following the termination of his employment with the
Company or at any other time following the Company's written notice to do so.
(iii) The Executive and the Company agree
that the provisions of this Section 9(b) are of the essence to this Agreement
and that the provisions of this Section 9(b) shall survive the termination of
this Agreement and the Executive's employment with the Company.
10. Restrictive Covenants.
(a) Noncompetition. During the Executive's employment
hereunder and, in the event that the Company terminates the Executive's
employment hereunder for "Cause" (as hereinafter defined) or the Executive
terminates his employment hereunder without "Good Reason" (as hereinafter
defined), during the one-year period commencing on the Termination Date, the
Executive shall not knowingly, other than in connection with the performance of
his duties hereunder:
(i) own, be employed by, or exercise any
material control with respect to the online multi-user games business of any
person or entity, or subsidiary, subdivision, division or joint venture of such
entity (other than the Company), including, without limitation, SONY Station,
Gamesville, Playsite, Yahoo Games, Total Entertainment Network, Excite Games,
Mpath and Sierra Online (hereinafter called "Competitive Entities").
Notwithstanding the foregoing, nothing contained in this Agreement shall be
construed to prohibit the Executive from holding a passive equity ownership
interest as a limited partner in a limited partnership or of less than 2% of any
class of the outstanding equity of a publicly traded entity;
(ii) render any services in connection with
or in any way relating to Competitive Entities;
(iii) solicit or encourage any of the
employees of the Company, other than the Executive's assistant described in
Section 3(d) hereof, to leave the employ of the Company or to terminate or alter
their contractual relationships with the Company in a way that is adverse to the
interests of the Company; or
-6-
<PAGE>
(iv) hire away any of the employees of the
Company, other than the Executive's assistant described in Section 3(d) hereof,
to work for any new employer without the prior written consent of the Company.
(b) For purposes of this Agreement:
(i) "Cause" shall exist if, and only if, the
Executive (A) willfully and habitually fails in any material respect to perform
his obligations hereunder as provided herein, provided that such Cause shall not
exist unless the Company shall first have provided the Executive with written
notice specifying in reasonable detail the factors constituting such material
failure and such material failure shall not have been cured by the Executive
within 60 days after such notice or, if impracticable of being cured within such
60 day period, such longer period as may reasonably be necessary to accomplish
the cure; or (B) has been convicted of a crime which constitutes a felony under
applicable law and such conviction is not subject to appeal under applicable
law.
(ii) "Good Reason" means the occurrence of
any of the following events:
(A) the assignment to the Executive of any
duties inconsistent in any material respect with the Executive's then position
(including status, offices, titles and reporting relationships), authority,
duties or responsibilities, or any other action or actions by the Company which
when taken as a whole results in a significant diminution in the Executive's
position, authority, duties or responsibilities, excluding for this purpose any
isolated, immaterial and inadvertent action not taken in bad faith and which is
remedied by the Company immediately after receipt of notice thereof given by the
Executive;
(B) a material breach by the Company of one
or more provisions of this Agreement, provided that such Good Reason shall not
exist unless the Executive shall first have provided the Company with written
notice specifying in reasonable detail the factors constituting such material
breach and such material breach shall not have been cured by the Company within
60 days after such notice or, if impracticable of being cured within such 60 day
period, such longer period as may reasonably be necessary to accomplish the
cure; and
(C) the Company requiring the Executive to
be based at any location other than within 25 miles driving distance of the
Executive's home, except for requirements of reasonable temporary travel on the
Company's business.
-7-
<PAGE>
11. Severability. Should any provision of this Agreement be
held, by a court of competent jurisdiction, to be invalid or unenforceable, such
invalidity or unenforceability shall not render the entire Agreement invalid or
unenforceable, and this Agreement and each other provision hereof shall be
enforceable and valid to the fullest extent permitted by law.
12. Arbitration. Any and all disputes, controversies or claims
arising out of or relating to this Agreement, or the enforcement or breach
thereof, shall be settled by arbitration conducted in the County of New York, in
the State of New York, and in accordance with the Commercial Arbitration Rules
(the "Arbitration Rules") of the American Arbitration Association ("AAA") and
the Supplementary Procedures for Large, Complex Disputes; provided, however,
that any dispute, controversy or claim with respect to Section 9 and/or 10 may
not be submitted to arbitration and shall only be submitted to a court in
accordance with Section 13 for an equitable remedy; provided, however, that no
breach of Section 9 and/or 10 of this Agreement shall exist unless the Company
shall first have provided the Executive with written notice specifying in
reasonable detail the factors constituting such breach and such breach shall not
have been cured by the Executive within 60 days after such notice or, if
impracticable of being cured within such 60 day period, such longer period as
may reasonably be necessary to accomplish the cure. The arbitral tribunal shall
consist of three arbitrators. The Company and the Executive shall each select
and appoint one arbitrator within 30 days of initiation of the arbitration and
those arbitrators shall jointly appoint a third arbitrator within 30 days of
their selection and appointment. If the third arbitrator is not appointed as
provided above, such arbitrator shall be appointed by the AAA as provided in the
Arbitration Rules.
Any decision or award of the arbitral tribunal shall be final
and binding upon the parties to the arbitration proceeding. The parties hereto
hereby waive to the extent permitted by law any rights to appeal or to seek
review of such award by any tribunal. The parties hereto agree that the arbitral
award may be enforced against the parties to the arbitration proceeding and
their assets wherever they may be found and that a judgment upon the arbitral
award may be entered in court in accordance with the provisions of Section 13
hereof.
-8-
<PAGE>
13. Consent to Jurisdiction. Subject to Section 12 hereof, the
Company and the Executive irrevocably and voluntarily submit to personal
jurisdiction in the State of New York and in the Federal and state courts in
such state located in the Southern District of New York in any action or
proceeding arising out of or relating to this Agreement and agree that all
claims in respect of such action or proceeding may be heard and determined in
any such court. The Company and the Executive further consent and agree that the
parties hereto may be served with process in the same manner as a notice may be
given under Section 16 as well as in any other manner permitted by applicable
law. The Company and the Executive agree that any action or proceeding
instituted by one party against the other party with respect to this Agreement
will be instituted exclusively in the state courts located in, and in the United
States District Court for the Southern District of New York. The Company and the
Executive irrevocably and unconditionally waive and agree not to plead, to the
fullest extent permitted by law, any objection that they may now or hereafter
have to the laying of venue or the convenience of the forum of any action or
proceeding with respect to this Agreement in any such courts.
14. Successors and Assigns.
(a) This Agreement and all rights under this
Agreement are personal to the Executive and shall not be assignable other than
by will or the laws of descent. All of the Executive's rights under this
Agreement shall inure to the benefit of his heirs, personal representatives,
designees or other legal representatives, as the case may be.
(b) This Agreement shall inure to the benefit of and
be binding upon the Company and its successors and assigns. Any person or entity
succeeding to the business of the Company by merger, purchase, consolidation or
otherwise shall assume by contract or operation of law the obligations of the
Company under this Agreement.
15. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of New York, without
regard to any rules concerning the conflicts of laws.
16. Notices. All notices, requests and demands given to or
made upon the respective parties hereto shall be deemed to have been given or
made three business days after the date of mailing when mailed by registered or
certified mail, postage prepaid, or on the date of delivery if delivered by
hand, or one business day after the date of delivery by Federal Express or other
reputable overnight delivery service, addressed to the parties at their
addresses set forth below or to such other addresses furnished by notice given
in accordance with this Section 16 (a) if to the Company, to Uproar Limited, 44
Church Street, Hamilton, Bermuda HM12, and (b) if to the Executive, to Jeffrey
L. Strief, at 18 Lefferts Road, Garden City, New York 11530.
-9-
<PAGE>
17. Withholding. All payments required to be made by the
Company to the Executive under this Agreement shall be subject to any
withholding taxes, social security and other payroll deductions required under
applicable law.
18. Complete Understanding. Except as expressly provided
below, this Agreement supersedes any prior contracts, understandings,
discussions and agreements relating to employment between the Executive and the
Company and constitutes the complete understanding between the parties with
respect to the subject matter hereof. No statement, representation, warranty or
covenant has been made by either party with respect to the subject matter hereof
except as expressly set forth herein.
19. Modification; Waiver.
(a) This Agreement may be amended or waived if, and
only if, such amendment or waiver is in writing and signed, in the case of an
amendment, by the Company and the Executive or in the case of a waiver, by the
party against whom the waiver is to be effective. Any such waiver shall be
effective only to the extent specifically set forth in such writing.
(b) No failure or delay by any party in exercising
any right, power or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.
20. Headings. The headings in this Agreement are for
convenience of reference only and shall not control or affect the meaning or
construction of this Agreement.
21. Counterparts. This Agreement may be signed in any number
of counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument. This Agreement
shall become effective when each party hereto shall have received counterparts
hereof signed by the other party hereto.
[The Rest of this Page is Intentionally Left Blank]
-10-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed in its corporate name by one of its officers duly authorized to
enter into and execute this Agreement, and the Executive has manually signed his
name hereto, all as of the day and year first above written.
UPROAR LIMITED
/s/ Robert D. Marafioti By: /s/ Kenneth D. Cron
- ------------------------- ------------------------------
Witness
/s/ Robert D. Marafioti /s/ Jeffrey L. Strief
- ------------------------- ---------------------------------
Witness JEFFREY L. STRIEF
-11-
<PAGE>
UPROAR LTD.
NOTICE OF GRANT AND SHARE OPTION AGREEMENT
Notice is hereby given of the following option grant (the "Option") to
purchase Shares of Uproar Ltd. (the "Corporation"):
Optionee: Jeffrey L. Strief
Grant Date: October 25, 1999
Vesting Commencement Date: October 25, 1999
Exercise Price: US$21.64 per share
Number of Option Shares: 350,000 Shares
Expiration Date: October 25, 2009
Type of Option: Incentive Share Option
Vesting Schedule:
(a) On or after October 25, 1999, the Option is
vested and exercisable for up to 14,583 Shares subject to this Option;
(b) On or after November 25, 1999, the Option is
vested and exercisable for up to 29,166 Shares subject to this Option;
(c) On or after December 25, 1999, the Option is
vested and exercisable for up to 43,749 Shares subject to this Option;
(d) On or after January 25, 2000, the Option is
vested and exercisable for up to 58,333 Shares subject to this Option;
(e) On or after February 25, 2000, the Option is
vested and exercisable for up to 72,916 of the total number of Shares subject to
this Option;
(f) On or after March 25, 2000, the Option is vested
and exercisable for up to 87,499 Shares subject to this Option;
(g) On or after April 25, 2000, the Option is vested
and exercisable for up to 102,083 Shares subject to this Option;
(h) On or after May 25, 2000, the Option is vested
and exercisable for up to 116,666 Shares subject to this Option;
(i) On or after June 25, 2000, the Option is vested
and exercisable for up to 131,249 of the total number of Shares subject to this
Option;
A-1
<PAGE>
(j) On or after July 25, 2000, the Option is vested
and exercisable for up to 145,833 Shares subject to this Option;
(k) On or after August 25, 2000, the Option is vested
and exercisable for up to 160,416 of the total number of Shares subject to this
Option;
(l) On or after September 25, 2000, the Option is
vested and exercisable for up to 174,999 Shares subject to this Option;
(m) On or after October 25, 2000, the Option is
vested and exercisable for up to 189,583 Shares subject to this Option;
(n) On or after November 25, 2000, the Option is
vested and exercisable for up to 204,166 Shares subject to this Option;
(o) On or after December 25, 2000, the Option is
vested and exercisable for up to 218,749 Shares subject to this Option;
(p) On or after January 25, 2001, the Option is
vested and exercisable for up to 233,333 Shares subject to this Option;
(q) On or after February 25, 2001, the Option is
vested and exercisable for up to 247,916 Shares subject to this Option;
(r) On or after March 25, 2001, the Option is vested
and exercisable for up to 262,499 Shares subject to this Option;
(s) On or after April 25, 2001, the Option is vested
and exercisable for up to 277,083 Shares subject to this Option;
(t) On or after May 25, 2001, the Option is vested
and exercisable for up to 291,666 Shares subject to this Option;
(u) On or after June 25, 2001, the Option is vested
and exercisable for up to 306,249 Shares subject to this Option;
(v) On or after July 25, 2001, the Option is vested
and exercisable for up to 320,833 Shares subject to this Option;
(w) On or after August 25, 2001, the Option is vested
and exercisable for up to 335,416 Shares subject to this Option; and
(x) On or after September 25, 2001, the Option is
vested and exercisable for up to the total number of Shares subject to this
Option.
A-2
<PAGE>
Pursuant to the provisions of Clause 2 of Subsection C of Section I of Article
Two of the Uproar Ltd. 1999 Share Option/Share Issuance Plan (the "Plan")
and notwithstanding anything in this Notice of Grant and Share Option Agreement
or the Plan to the contrary, the Option shall be vested and exercisable for up
to the total number of Shares subject to this Option effective as of the
earliest to occur of (i) the date of the termination of the Optionee's
employment with the Corporation by reason of the Optionee's resignation with
"Good Reason" (as such term is defined in the Employment Agreement, effective as
of October 25, 1999, by and between the Optionee and the Corporation (the
"Employment Agreement")), (ii) the date of termination of the Optionee's
employment with the Corporation by reason of a termination by the Corporation
without "Cause" (as such term is defined in the Employment Agreement), or (iii)
the date of a "Corporate Transaction" (as such term is defined in the Plan);
provided that in the case of any event described in (i), (ii) or (iii) above,
the Option shall remain exercisable until October 25, 2009.
Optionee understands and agrees that except as expressly provided herein, the
Option is granted subject to and in accordance with the terms of the Plan
and Optionee further agrees to be bound by the terms of the Plan. Optionee
hereby acknowledges receipt of a copy of the Plan in the form attached hereto as
Attachment A. Notwithstanding anything herein to the contrary, no suspension,
termination, modification, or amendment of the Plan or this Notice of Grant and
Share Option Agreement may, without the express written consent of the Optionee,
adversely affect the rights of the Optionee under this Option.
No Employment or Service Contract. Nothing in this Notice of Grant and Share
Option Agreement or the attached Plan shall confer upon Optionee any right
to continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining Optionee) or of Optionee, which rights are
hereby expressly reserved by each, to terminate Optionee's Service at any time
for any reason, with or without cause.
A-3
<PAGE>
No Obligation to Exercise Option. The granting of the Option shall impose no
obligation upon the Optionee to exercise the Option.
DATED: October 25, 1999
UPROAR LTD.
By: /s/ Kenneth D. Cron
---------------------------------
Title: Chief Executive Officer
/s/ Jeffery L. Strief
-------------------------------------
OPTIONEE
Address:
-----------------------------
-------------------------------------
ATTACHMENT
Attachment A -1999 Share Option/Share Issuance Plan
A-4
<PAGE>
COMMON STOCK PURCHASE AGREEMENT
This Common Stock Purchase Agreement (the "Agreement") is made as of
February 1, 2000 by and among Uproar Inc., a Delaware corporation (the
"Company"), and Trans Cosmos USA Inc., a Washington corporation (the
"Purchaser").
SECTION 1
Sale of Common Stock
Sale of Common Stock. Subject to the terms and conditions of this
Agreement, Purchaser agrees to purchase from the Company, and the Company agrees
to sell and issue to Purchaser, at the Closing (as defined below) such number of
shares of the Company's Common Stock (the "Common Stock") as shall equal Twenty
Five Million U.S. Dollars ($25,000,000) in aggregate Fair Market Value. For the
purpose of calculating such number of shares, the "Fair Market Value" of one (1)
share of the Common Stock shall be deemed to be the average of the last
per-share price at which shares of the Common Stock traded on each of the five
(5) trading days immediately preceding the Closing Date (as defined below), as
reported by the European Association of Securities Dealers Automated Quotation
(EASDAQ) system. The aggregate purchase price for such number of shares of the
Common Stock (the "Shares") shall be Twenty Five Million U.S. Dollars
($25,000,000.00).
SECTION 2
Closing Dates, Delivery
2.1 Closing Dates. The closing of the purchase of the Shares by
Purchaser shall be held at the offices of Brobeck, Phleger & Harrison LLP at
1633 Broadway, New York, NY 10019, U.S.A., on or before February 4, 2000, (the
"Closing") or at such other time and place as the Company and the Purchaser
shall agree. The date of the Closing is herein referred to as the "Closing
Date."
2.2 Delivery. At the Closing, the Company will deliver to Purchaser a
certificate or certificates, registered in the Purchaser's name, representing
the Shares to be issued to such Purchaser at Closing. At the Closing, delivery
of the certificates for the Shares will be made against delivery to the Company
of the purchase price therefor by (i) certified check payable to the Company or
(ii) wire transfer of immediately available funds according to the Company's
instructions.
<PAGE>
SECTION 3
Representations and Warranties of the Company
The Company hereby represents, warrants and covenants to and with the
Purchaser as follows:
3.1 Corporate Organization and Authority. The Company is a corporation
duly organized and existing under and is in good standing under the laws of the
State of Delaware. The Company is qualified to do business in the State of New
York, has the corporate power and corporate authority to own and operate its
properties and to carry on its business as now conducted and as proposed to be
conducted and is qualified to do business as a foreign corporation in all
jurisdictions except where a failure to so qualify would not have a material
adverse effect on the Company.
3.2 Capitalization. Immediately prior to the Closing, the authorized
capital stock of the Company shall consist of:
(a) Common Stock. A total of 112, 000,000 shares of Common Stock, of
which 11,986,234 shares are duly and validly issued and outstanding, fully-paid,
nonassessable. The Company has reserved 2,700,000 shares of Common Stock under
its 1999 Share Option/Share Issuance Plan for issuance to employees and
directors of, and consultants to, the Company ,of which 2,438,853 shares of
Common Stock are subject to outstanding options. The Company has also granted or
assumed options to purchase 514,353 shares of Common Stock not pursuant to any
plan. Except as set forth in the Company's Registration Statement filed with the
Securities and Exchange Commission (the "SEC") on Form S-1, there are no other
outstanding warrants, options, conversion privileges, preemptive rights, or
other rights or agreements to purchase or otherwise acquire or issue any equity
securities of the Company. (b) Preferred Stock. A total of 48,000,000 shares of
Preferred Stock, of which no shares have been issued or are outstanding as of
the date hereof; and none of which shares of Preferred Stock will be issued or
outstanding prior to the Closing.
3.3 Authorization. All corporate action on the part of the Company, its
officers, directors and stockholders necessary for the authorization, execution,
delivery and performance of all of its obligations under this Agreement and for
the sale, issuance and delivery of the Shares has been taken or will be taken
prior to the Closing. This Agreement and the Registration Rights Agreement in
the form attached hereto as Exhibit A (the "Registration Rights Agreement"),
when executed and delivered by the Company, will constitute legally binding and
valid obligations of the Company, enforceable in accordance with their terms.
3.4 Validity of Shares. The Shares, when issued, sold and delivered in
accordance with the terms and for the consideration expressed in this Agreement,
shall be duly and validly issued (including, without limitation, issued in
compliance with applicable U.S. federal and state securities laws, assuming the
accuracy of the representations and warranties of the Purchaser set forth
herein), fully-paid and non-assessable and free and clear of all liens and
encumbrances (other than those, if any, created or imposed by a Purchaser).
3.5 Financial Statements. The Company has delivered to Purchaser
audited balance sheet, profit and loss statement, statement of shareholders'
equity and statement of cash flows including notes thereto at December 31, 1999
and for the fiscal year then ended (the "Company Financial Statements"), which
comply as to form in all material respects with all applicable accounting
requirements with respect thereto and have been prepared in accordance with
generally accepted accounting principles consistently applied (except as may be
indicated in the notes thereto) and fairly present the financial position of
Company as at the date thereof and the results of its operations and cash flows
for the period then ended.
<PAGE>
SECTION 4
Representations and Warranties of the Purchaser
Purchaser hereby represents, warrants and covenants to and with the
Company as follows:
4.1 Experience. Purchaser has substantial experience in evaluating and
investing in private placement transactions so that Purchaser is capable of
evaluating the merits and risks of Purchaser's investment in the Company.
Purchaser, by reason of its business or financial experience or the business or
financial experience of its professional advisors who are unaffiliated with and
who are not compensated by the Company or any affiliate or selling agent of the
Company, directly or indirectly, has the capacity to protect its own interests
in connection with the purchase of the Shares under this Agreement.
4.2 Purchase Entirely for Own Account. This Agreement is made with the
Purchaser in reliance upon the Purchaser's representation to the Company, which
by the Purchaser's execution of this Agreement the Purchaser hereby confirms,
that the Shares to be received by the Purchaser will be acquired for investment
for the Purchaser's own account, not as a nominee or agent, and not with a view
to the resale or distribution of any part thereof, and that the Purchaser has no
present intention of selling, granting any participation in or otherwise
distributing the same. By executing this Agreement, the Purchaser further
represents that it does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant participations to such
person or to any third person, with respect to any of the Shares.
4.3 Restricted Securities. The Purchaser understands that the Shares it
is purchasing are characterized as "restricted securities" under the U.S.
federal securities laws inasmuch as they are being acquired from the Company in
a transaction not involving a public offering and that under such laws and
applicable regulations such Shares may be resold without registration under the
Securities Act of 1933, as amended (the "Securities Act"), only in certain
limited circumstances. In the absence of an effective registration statement
covering the Shares or an available exemption from registration under the
Securities Act, the Shares must be held indefinitely. In this connection, the
Purchaser represents that it is familiar with Rule 144 under the Securities Act,
as presently in effect, and understands the resale limitations imposed thereby
and by the Securities Act, including without limitation the Rule 144 condition
that current information about the Company be available to the public, and
further understands that such information is not now available.
4.4 Access to Data. Purchaser and its representatives have met with
representatives of the Company and have had the opportunity to ask questions of,
and receive answers from, said representatives concerning the Company and the
terms and conditions of this transaction as well as to obtain any information
requested by Purchaser. Any questions raised by Purchaser or its representatives
concerning the transaction have been answered to the satisfaction of Purchaser
and its representatives. Purchaser's decision to purchase the Shares is based in
part on the answers to such questions as Purchaser and its representatives have
raised concerning the transaction and on its own evaluation of the risks and
merits of the purchase and the Company's proposed business activities.
<PAGE>
4.5 Accredited Investor. The Purchaser is either (i) a "qualified
institutional buyer" within the meaning of such term under paragraph (a) of Rule
144A under the Securities Act, or (ii) a large institutional "accredited
investor" within the meaning of such term under paragraph (a)(1), (a)(2),
(a)(3), (a)(7) or (a)8 of Rule 501 of Regulation D under the Securities Act as
further discussed in SEC No-Action Letter regarding Black Box Incorporated, 1992
WL 55818 (S.E.C.), dated February 28, 1992 and SEC No-Action Letter regarding
Black Box Incorporated, 1990 WL 286633 (S.E.C.), dated June 26, 1990.
4.6 Further Limitations on Disposition. Without in any way limiting the
representations set forth above, the Purchaser further agrees not to make any
disposition of all or any portion of the Shares unless and until the transferee
has agreed in writing for the benefit of the Company to be bound by this Section
4, and: (a) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or (b) (i) The Purchaser shall
have notified the Company of the proposed disposition and shall have furnished
the Company with a detailed statement of the circumstances surrounding the
proposed disposition, and (ii) if requested by the Company, the Purchaser shall
have furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company that such disposition will not require registration of such
Shares under the Securities Act. It is agreed that the Company will not require
opinions of counsel for transactions made pursuant to Rule 144 except in unusual
circumstances.
Notwithstanding the provisions of subsections (a) and (b) above, no
such registration statement or opinion of counsel shall be necessary for a
transfer by the Purchaser, if it is a partnership, to a partner of such
partnership or a retired partner of such partnership who retires after the date
hereof, or to the estate of any such partner or retired partner or the transfer
by gift, will or intestate succession of any partner to his or her spouse or to
the siblings, lineal descendants or ancestors of such partner or his or her
spouse, if the transferee agrees in writing to be subject to the terms hereof to
the same extent as if he or she were the original Purchaser hereunder.
4.7 Legends. It is understood that the certificates evidencing the
Shares may bear one or all of the following legends: (a) These securities have
not been registered under the Securities Act of 1933, as amended (the "Act").
They may not be sold, offered for sale, pledged or hypothecated in the absence
of a registration statement in effect with respect to the securities under such
Act or an opinion of counsel satisfactory to the Company that such registration
is not required or unless sold pursuant to Rule 144 of such Act.
(b) Any legend required by the laws of the State of Delaware, including
any legend required by the Delaware General Corporation Law.
<PAGE>
4.8 Further Representations by Foreign Investors. If it is not a United
States person, the Purchaser hereby represents that it has satisfied itself as
to the full observance of the laws of its jurisdiction in connection with any
purchase of the Shares or any use of this Agreement, including (i) the legal
requirements within its jurisdiction for the purchase of the Shares, (ii) any
foreign exchange restrictions applicable to such purchase, (iii) any
governmental or other consents that may need to be obtained and (iv) the income
tax and other tax consequences, if any, that may be relevant to the purchase,
holding, redemption, sale or transfer of the Shares. The Purchaser further
represents that its purchase and payment for, and its continued beneficial
ownership of the Shares, will not violate any applicable securities or other
laws of its jurisdiction
4.9 Organization; Authorization. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of Washington.
All corporate action on the part of Purchaser, its officers, directors and
stockholders necessary for the authorization, execution, delivery and
performance of all of its obligations under this Agreement has been taken or
will be taken prior to the Closing. This Agreement when executed and delivered
by the Purchaser will constitute a valid and legally binding obligation of the
Purchaser, enforceable in accordance with its terms.
<PAGE>
SECTION 5
Conditions to Closing of Purchaser
Purchaser's obligation to purchase the Shares at the Closing is, at the
option of the Purchaser, subject to the fulfillment or waiver as of the Closing
Date of the following conditions:
5.1 Representations and Warranties Correct. The representations and
warranties made by the Company in Section 3 of this Agreement shall be true and
correct in all material respects when made, and shall be true and correct in all
material respects on the Closing Date with the same force and effect as if they
had been made on and as of said date.
5.2 Covenants. All covenants, agreements and conditions contained in
this Agreement to be performed by the Company on or prior to the Closing Date
shall have been performed or complied with in all respects.
5.3 Registration Rights Agreement. The Company shall have entered into
the Registration Rights Agreement.
5.4 Authorization of Stock Issuance. The Board of Directors shall have
authorized the sale and issuance of the Shares to Purchaser.
5.5 Election of Board Member. The Board of Directors of the Company
shall have elected Purchaser's representative James Geddes as a director of the
Company effective upon the consummation of the Closing, to hold office until the
next annual meeting of stockholders and until his successor is elected and
qualified, or until his earlier death, resignation or removal. The Company shall
also use all reasonable efforts to cause the Board of Directors to nominate Mr.
Geddes for re-election to the Board of Directors of the Company at the next
annual meeting of stockholders.
SECTION 6
Conditions to Closing of Company
The Company's obligation to sell and issue the Shares at the Closing
is, at the option of the Company, subject to the fulfillment or waiver of the
following conditions:
6.1 Representations. The representations made by Purchaser in Section 4
of this Agreement shall be true and correct when made, and shall be true and
correct on the Closing Date.
6.2 Covenants. All covenants, agreements and conditions contained in
this Agreement to be performed by the Purchaser on or prior to the Closing Date
shall have been performed or complied with in all material respects.
<PAGE>
SECTION 7
Joint Venture Partners
Japanese Joint Venture. The Company and the Purchaser covenant and
agree that Purchaser or an affiliate of Purchaser will be the exclusive joint
venture or Japanese KK partner for all the Company's operations in Japan. The
Company and Purchaser shall negotiate a Joint Venture or KK Agreement ("KK
Agreement"), using good faith negotiations, during the 180 day period following
the Closing Date, which KK Agreement shall include the substantive terms set
forth in the Joint Venture Term Sheet attached hereto as Exhibit B.
SECTION 8
Miscellaneous
8.1 Entire Agreement. This Agreement and the Exhibits hereto constitute
the entire agreement of the parties, and supersede all prior written or oral
understandings between the parties, with respect to the matters set forth
herein.
8.2 Binding Effect. This Agreement shall be binding upon and shall
inure to the benefit of the parties and their respective successors and
permitted assigns.
8.3 No Assignment. Without the prior written consent of the other
party, neither party may assign any of its rights or delegate any of its duties
under this Agreement except to an entity controlling, controlled by or under
common control with the assigning party (an "Affiliate"); provided, however,
that no assignment to an Affiliate shall relieve the assigning party of its
liabilities to the other party hereunder.
8.4 Amendment; Waiver. No amendment or waiver of any provision of this
Agreement shall be effective except to the extent set forth in a writing signed
on behalf of the party against whom the enforcement of such amendment or waiver
is sought.
8.5 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of New York without giving effect to the conflicts of laws
principles thereof, and by the General Corporation Law of the State of Delaware
to the extent applicable to any corporate action related to the Company
hereunder.
8.6 Expenses. The Company and the Purchaser shall each bear their own
expenses incurred on their behalf with respect to this Agreement and the
transactions contemplated hereby.
8.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
8.8 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
<PAGE>
The foregoing COMMON STOCK PURCHASE AGREEMENT is hereby executed as of
the date first above written.
"COMPANY" UPROAR INC.
a Delaware corporation
By: /s/ Kenneth D. Cron
-------------------------
Kenneth D. Cron
Chairman and CEO
"PURCHASER" TRANS COSMOS USA INC.
a Washington corporation
By: /s/ Shozo Okuda
-------------------------
Name: Shozo Okuda
Title: Chairman
<PAGE>
EXHIBIT B
Trans Cosmos/Uproar
Joint Venture Term Sheet
o Formation. As soon as practicable but in no event later than 180 days
after Trans Cosmos' investment of $25 million in Uproar, Uproar and
Trans Cosmos would form a Japanese joint venture ("Uproar KK") to
produce a Japanese-localized version of Uproar's www.uproar.com game
site (the "KK Game Site").
o Ownership. Uproar KK would be owned 50% each by Uproar and Trans
Cosmos.
o Capital Contributions. Uproar would contribute US$500,000 in capital to
Uproar KK and Trans Cosmos would contribute US$4,500,000. (Based on $1
- 100 yen conversion rate.)
o Uproar Intellectual Property.
o License. Uproar would grant Uproar KK an exclusive and perpetual
license in Japan to use Uproar's trademarks, technology and content
("Intellectual Property") on the KK Game Site. Uproar would also
license Uproar KK any Intellectual Property which Uproar develops in
the future and which Uproar KK wishes to utilize on the KK Game Site.
o Fee. For the first 2 years of the license term, Uproar KK would pay
Uproar a license fee of $1 million per year (payable in equal quarterly
installments). Thereafter, Uproar KK shall pay Uproar 15% of the
revenue Uproar KK derives from the Intellectual Property.
o Uproar will pay Uproar KK 15% of revenue Uproar derives from its
distribution of content licensed by Uproar from Uproar KK.
o Board of Directors. The Board of Directors of Uproar KK would consist
of 5 members: 2 appointed by Uproar, 2 appointed by Trans Cosmos, and 1
appointed by mutual agreement of the partners.
o Management. Uproar KK would be managed day-to-day by a President who
would be jointly appointed by the partners and who would be the fifth
Board member.
o Employee Options. Uproar KK would grant share options to its employees
for up to 10% of its equity.
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made
as of this 1st day of February, 2000, by and between Uproar Inc., a Delaware
corporation (the "Company"), and Trans Cosmos USA Inc., a Washington corporation
(the "Purchaser").
R E C I T A L S
WHEREAS, the Company and the Purchaser are parties to the
Common Stock Purchase Agreement of even date herewith (the "Purchase
Agreement"); and
WHEREAS, in order to induce the Purchaser to enter into the
Purchase Agreement, the Purchaser and the Company hereby agree that this
Agreement shall govern the rights of the Purchaser to cause the Company to
register shares of Common Stock issuable to the Purchaser and certain other
matters as set forth herein.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Registration Rights. The Company covenants and agrees as follows:
1.1. Definitions. For purposes of this Agreement:
(a) The term "Affiliate" of the Purchaser shall mean an entity that
directly or indirectly, through one or more intermediaries, controls, is
controlled by or is under common control with the Purchaser. For purposes of
this definition, an entity shall be deemed to control another entity if such
first entity possesses directly or indirectly the power to direct, or cause the
direction of, the management and policies of the second entity, whether through
the ownership of voting securities, by contract or otherwise.
(b) The term "Holder" means any person owning or having the right to
acquire Registrable Securities or any assignee thereof in accordance with
Section 1.11 hereof.
(c) The term "Initial Public Offering" means the closing of the first
sale of securities pursuant to an effective registration statement filed by the
Company under the Securities Act in connection with a firm commitment
underwritten offering of its securities to the general public.
<PAGE>
(d) The term "1934 Act" means the Securities Exchange Act of 1934, as
amended.
(d) The term "Permitted Transferee" means an Affiliate of the
Purchaser.
(e) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document.
(f) The term "Registrable Securities" means the Common Stock sold and
issued to the Purchaser pursuant to the Purchase Agreement.
(g) The number of shares of "Registrable Securities then outstanding"
shall be determined by the number of shares of Common Stock outstanding which
are Registrable Securities.
(h) The term "SEC" means the Securities and Exchange Commission.
(i) The term "Securities Act" means the Securities Act of 1933, as
amended.
1.2. Company Registration. If (but without any obligation to do so) the
Company proposes to register (including for this purpose a registration effected
by the Company for stockholders other than the Holders) any of its stock or
other securities under the Securities Act in connection with the public offering
of such securities solely for cash (other than an Initial Public Offering or a
registration statement relating either to the sale of securities to employees of
the Company pursuant to a stock option, stock purchase or similar plan or a Rule
145 transaction), the Company shall, at such time, promptly give each Holder at
least ten (10) days written notice of such registration. Upon the written
request of each Holder given within ten (10) days after mailing of such notice
by the Company in accordance with Section 2.5, the Company shall, subject to the
provisions of Section 1.8, cause to be registered under the Securities Act all
of the Registrable Securities that each such Holder has requested to be
registered.
1.3. Form S-3 Registration. In case the Company shall receive from the
Purchaser a written request that the Company effect a registration on Form S-3
or a comparable form ("Form S-3") with respect to the Registrable Securities
owned by the Purchaser, the Company will:
(a) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of the Purchaser's
Registrable Securities as are specified in such request; provided, however, that
the Company shall not be obligated to effect any such registration,
qualification or compliance, pursuant to this Section 1.3: (1) if Form S-3 is
not available for such offering by the Purchaser; (2) if the Purchaser proposes
to sell the Registrable Securities at an aggregate price to the public (net of
any underwriters' discounts or commissions) of less than $2,000,000; (3) if the
Company shall furnish the Purchaser a certificate signed by the Chief Executive
Officer of the Company stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the Company and
its stockholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S-3
registration statement for a period of not more than ninety (90) days after
receipt of the request of the Purchaser under this Section 1.3, provided,
however, that the Company shall not utilize this right more than once in any
twelve (12) month period; (4) in any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance; or (5) after the Company has effected two (2) registrations pursuant
to this Section 1.3 and such registrations have been declared effective.
<PAGE>
(b) Subject to the foregoing, the Company shall file a registration
statement covering the Registrable Securities as soon as practicable after
receipt of the request of the Purchaser.
1.4. Obligations of the Company. Whenever required under this Section 1
to effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Use its reasonable best efforts to prepare and file with the SEC a
registration statement with respect to such Registrable Securities and use
reasonable efforts to cause such registration statement to become effective,
and, upon the request of the Holders of a majority of the Registrable Securities
registered thereunder, keep such registration statement effective for a period
of up to the earlier of one hundred twenty (120) days or until the distribution
contemplated in the Registration Statement has been completed.
(b) Use its reasonable best efforts to prepare and file with the SEC
such amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(d) Use its reasonable best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders; provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions, unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
(f) Use its reasonable best efforts to cause all such Registrable
Securities registered pursuant hereunder to be listed on each securities
exchange on which similar securities issued by the Company are then listed.
<PAGE>
1.5. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company in writing such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall be requested by the Company in order to effect the
registration of such Holder's Registrable Securities.
1.6. Expenses of Registration. All reasonable expenses (other than
underwriting discounts and commissions and fees and disbursements of counsel for
the selling Holders) incurred in connection with registrations, filings or
qualifications pursuant to Section 1.2, including (without limitation) all
registration, filing and qualification fees, printers' and accounting fees, and
fees and disbursements of counsel for the Company, shall be borne by the
Company.
1.7. Underwriting Requirements. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.2 to include any of the Holders'
securities in such underwriting unless such Holders accept the terms of the
underwriting as agreed upon between the Company and the underwriters selected by
the Company (or by other persons entitled to select the underwriters), and then
only in such quantity as the underwriters determine in their sole discretion
will not jeopardize the success of the offering by the Company. If the total
amount of securities, including Registrable Securities, requested by
stockholders to be included in such offering exceeds the amount of securities
sold other than by the Company that the underwriters determine in their sole
discretion is compatible with the success of the offering, then the Company
shall be required to include in the offering only that number of such
securities, including Registrable Securities, which the underwriters determine
in their sole discretion will not jeopardize the success of the offering (the
securities so included to be apportioned pro rata among the selling Holders
according to the total amount of securities entitled to be included therein
owned by each selling Holder or in such other proportions as shall mutually be
agreed to by such selling Holders). For purposes of the preceding parenthetical
concerning apportionment, for any selling Holder that is a holder of Registrable
Securities and that is a partnership or corporation, the partners, retired
partners and stockholders of such holder, or the estates and family members of
any such partners and retired partners and any trusts for the benefit of any of
the foregoing persons, shall be deemed to be a single "selling Holder," and any
pro rata reduction with respect to such "selling Holder" shall be based upon the
aggregate amount of shares carrying registration rights owned by all entities
and individuals included in such "selling Holder," as defined in this sentence.
1.8. Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.
<PAGE>
1.9. Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each Holder, any underwriter (as defined in the Securities Act) for
such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Securities Act or the 1934 Act, against any losses,
claims, damages, or liabilities (joint or several) to which they may become
subject under the Act, the 1934 Act or other federal or state law, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations (collectively, a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the 1934 Act or any state securities law, and the Company will pay to each such
Holder, underwriter or controlling person, as incurred, any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this Section 1.9(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such loss, claim, damage, liability, or action to the extent that
it arises out of or is based upon a Violation which occurs in reliance upon and
in conformity with written information furnished expressly for use in connection
with such registration by any such Holder, underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will indemnify
and hold harmless the Company, each of its directors, each of its officers who
has signed the registration statement, each person, if any, who controls the
Company within the meaning of the Securities Act, any underwriter, any other
Holder selling securities in such registration statement and any controlling
person of any such underwriter or other Holder, against any losses, claims,
damages, or liabilities (joint or several) to which any of the foregoing persons
may become subject, under the Securities Act, the 1934 Act or other federal or
state law, insofar as such losses, claims, damages, or liabilities (or actions
in respect thereto) arise out of or are based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs in reliance
upon and in conformity with written information furnished by such Holder
expressly for use in connection with such registration; and each such Holder
will pay, as incurred, any legal or other expenses reasonably incurred by any
person intended to be indemnified pursuant to this Section 1.9(b), in connection
with investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the indemnity agreement contained in this
Section 1.9(b) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Holder, which consent shall not be unreasonably withheld;
provided, that, in no event shall any indemnity under this Section 1.9(b) exceed
the gross proceeds from the offering received by such Holder.
<PAGE>
(c) Promptly after receipt by an indemnified party under this Section
1.9 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 1.9, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if materially prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 1.9, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 1.9.
(d) If the indemnification provided for in this Section 1.9 is held by
a court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, liability, claim, damage, or expense referred to therein,
then the indemnifying party, in lieu of indemnifying such indemnified party
hereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such loss, liability, claim, damage, or expense in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage, or expense as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the indemnified
party and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in the underwriting agreement entered
into in connection with the underwritten public offering are in conflict with
the foregoing provisions, the provisions in the underwriting agreement shall
control.
<PAGE>
(f) The obligations of the Company and Holders under this Section 1.9
shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1, and otherwise.
1.10. Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to a Permitted
Transferee of such securities, provided: (a) the Company is, within a reasonable
time after such transfer, furnished with written notice of the name and address
of such Permitted Transferee and the securities with respect to which such
registration rights are being assigned; (b) upon such transfer, such Permitted
Transferee holds at least thirty percent (30%) of the Registrable Securities (on
a fully-diluted basis and as adjusted for stock splits or combinations); (c)
such Permitted Transferee agrees in writing to be bound by and subject to the
terms and conditions of this Agreement; and (d) such assignment shall be
effective only if immediately following such transfer the further disposition of
such securities by the Permitted Transferee is restricted under the Securities
Act. For the purposes of determining the number of shares of Registrable
Securities held by a Permitted Transferee, the holdings of Permitted Transferees
of a partnership who are partners or retired partners of such partnership
(including spouses and ancestors, lineal descendants and siblings of such
partners or spouses who acquire Registrable Securities by gift, will or
intestate succession) shall be aggregated together and with the partnership;
provided that all Permitted Transferees who would not qualify individually for
assignment of registration rights shall have a single attorney-in-fact for the
purpose of exercising any rights, receiving notices or taking any action under
this Section 1.
1.11. "Market Stand-Off" Agreement. The Purchaser hereby agrees that,
during the period of duration specified by the Company and an underwriter of
Common Stock or other securities of the Company, following the date of the
Initial Public Offering or any subsequent public offering, the Purchaser shall
not, to the extent requested by the Company and such underwriter, directly or
indirectly sell, offer to sell, contract to sell (including, without limitation,
any short sale), grant any option to purchase or otherwise transfer or dispose
of (other than to Permitted Transferees in accordance with Section 1.10) any
securities of the Company held by it at any time during such period except
Common Stock included in the Initial Public Offering or such subsequent public
offering; provided, however, that this agreement shall be applicable for a
maximum period of one hundred eighty (180) days following the Initial Public
Offering and for a maximum period of ninety (90) days following any subsequent
public offering of the Company.
<PAGE>
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of the
Purchaser (and the shares or securities of every other person subject to the
foregoing restriction) until the end of the applicable period.
Notwithstanding the foregoing, the obligations described in this
Section 1.11 shall not apply to a registration relating solely to employee
benefit plans on Form S-8 or similar forms which may be promulgated in the
future, or a registration relating solely to a SEC Rule 145 transaction on Form
S-4 or similar forms which may be promulgated in the future.
1.12. Termination of Registration Rights. Notwithstanding anything to
the contrary set forth herein, the covenants set forth in Section 1 and the
Company's obligations thereunder shall terminate and be of no further force and
effect upon the closing of the first Company-initiated registered public
offering of common stock of the Company if all shares of Registrable Securities
held by such Holder may immediately be sold under Rule 144 during any 90-day
period, or on such date after the closing of the first Company-initiated
registered public offering of common stock of the Company as all shares of
Registrable Securities held by such Holder may immediately be sold under Rule
144 during any 90-day period.
2. Miscellaneous.
2.1. Successors and Assigns. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Registrable Securities). Nothing in this Agreement, express
or implied, is intended to confer upon any party other than the parties hereto
or their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
2.2. Governing Law. This Agreement shall be governed by and construed
under the laws of the State of Delaware.
2.3. Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
2.4. Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
<PAGE>
2.5. Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
2.6. Expenses. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
2.7. Amendments and Waivers. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively) only with
the written consent of the Company and the Purchaser; provided that any party
hereto may waive any of its rights hereunder without obtaining the consent of
any other party hereto. Any amendment or waiver effected in accordance with this
paragraph shall be binding upon each holder of any Registrable Securities then
outstanding, each future holder of all such Registrable Securities, and the
Company.
2.8. Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
2.9. Aggregation of Stock. All shares of Registrable Securities held or
acquired by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Agreement.
2.10. Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
hereof.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this
Registration Rights Agreement as of the date first above written.
UPROAR INC.
By: /s/ Kenneth D. Cron
---------------------------------------
Name: Kenneth D. Cron
Title: Chairman and CEO
Address: 240 West 35th Street
9th Floor
New York, New York 10001
TRANS COSMOS USA INC.
By: /s/ Shozo Okuda
---------------------------------------
Name: Shozo Okuda
Title: Chairman
Address: 777 108th Avenue N.E.
Suite 2300
Bellevue, Washington 98004
<PAGE>
PricewaterhouseCoopers
Wilton Place
Dublin 2
Ireland
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
4 February 2000
Gentlemen:
We have read the Section entitled "Change in Independent Accountants" included
in Amendment No. 1 to the Form S-1 of Uproar Inc, formerly Uproar Ltd, and are
in agreement with the statements contained in the first and third paragraphs on
page 69 therein. We have no basis to agree or disagree with other statements of
the registrant contained therein.
/s/ PricewaterhouseCoopers
- --------------------------------------
PricewaterhouseCoopers
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Uproar Inc.:
We consent to the use of our report included herein (Amendment No. 1 to
Form S-1) and to the references to our firm under the headings "Selected
Consolidated Financial Data" and "Experts" in the prospectus.
(signed) KPMG LLP
New York, New York
February 4, 2000
<PAGE>
EXHIBIT 23.3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PrizePoint Entertainment Corporation:
We have audited the accompanying balance sheet of PrizePoint Entertainment
Corporation (a Delaware corporation) as of December 31, 1998, and the related
statements of operations, stockholders' equity and cash flows for the period
from inception (March 4, 1998) to December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our 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 financial statements referred to above present fairly,
in all material respects, the financial position of PrizePoint Entertainment
Corporation as of December 31, 1998, and the results of its operations and its
cash flows for the period from inception (March 4, 1998) to December 31, 1998,
in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
New York, New York
April 29, 1999
1
<PAGE>
PRIZEPOINT ENTERTAINMENT CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 1,870,075 $ 1,244,072
Accounts receivable ....................................................... -- 21,250
Prepaid expenses and other current assets ................................. -- 40,054
----------- -----------
Total current assets .................................................... 1,870,075 1,305,376
PROPERTY AND EQUIPMENT, net ................................................. 127,337 366,219
DEPOSITS AND OTHER ASSETS ................................................... 61,239 78,495
----------- -----------
Total assets ............................................................ $ 2,058,651 $ 1,750,090
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................... $ 63,457 $ 146,634
Accrued expenses .......................................................... 25,867 33,497
Current portion of capital lease obligations .............................. 25,949 102,777
----------- -----------
Total current liabilities ............................................... 115,273 282,908
CAPITAL LEASE OBLIGATIONS ................................................... 15,134 107,513
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 5,000,000 shares authorized:
Series A Preferred Stock, 645,000 shares designated, issued and
outstanding as of December 31, 1998 and March 31, 1999 (unaudited),
respectively; liquidation value of $645,000 ............................. 6,450 6,450
Series B Preferred Stock, 495,049 shares designated; 412,541 and 453,795
shares issued and outstanding as of December 31, 1998 and March 31,
1999 (unaudited), respectively; liquidation value of $2,500,000 and
$2,750,000 (unaudited), respectively .................................... 4,125 4,538
Common stock, $.01 par value; 10,000,000 shares authorized 1,186,667
shares issued and outstanding as of December 31, 1998 and March 31,
1999 (unaudited), respectively .......................................... 11,867 11,867
Additional paid-in capital ................................................ 3,134,425 3,384,012
Accumulated deficit ....................................................... (1,228,623) (2,047,198)
----------- -----------
Total stockholders' equity .............................................. 1,928,244 1,359,669
----------- -----------
Total liabilities and stockholders' equity .............................. $ 2,058,651 $ 1,750,090
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
2
<PAGE>
PRIZEPOINT ENTERTAINMENT CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
From Inception For the Three
(March 4, Months
1998) to Ended
December 31, March 31,
1998 1999
------------- ------------
(Unaudited)
<S> <C> <C>
REVENUES ............................................ $ -- $ 47,750
------------- -----------
COSTS AND EXPENSES:
Direct costs ...................................... 353,279 305,385
Selling and marketing expenses .................... 214,290 209,299
General and administrative expenses ............... 675,514 321,535
------------- -----------
Operating loss .................................. (1,243,083) (836,219)
OTHER INCOME (EXPENSE):
Interest income, net .............................. 14,460 17,644
------------- -----------
Loss before income taxes ........................ (1,228,623) (818,575)
BENEFIT FOR INCOME TAXES ............................ -- --
------------- -----------
Net loss ........................................ $(1,228,623) $(818,575)
============= ===========
PER SHARE INFORMATION:
Net loss per share--
Basic and Diluted ............................... $ (1.04) $ (.68)
------------- -----------
Weighted average common shares outstanding--
Basic and Diluted ............................... 1,186,667 1,186,667
============= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
PRIZEPOINT ENTERTAINMENT CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock
------------------ ----------------- ------------------
Shares Par Value Shares Par Value Shares Par Value
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 4, 1998 .................... -- $ -- -- $ -- $ --
Issuance of common stock ................ -- -- -- -- 1,186,667 11,867
Issuance of Series A Preferred Stock .... 645,000 6,450 -- -- -- --
Issuance of Series B Preferred Stock .... -- -- 412,541 4,125 -- --
Net loss ................................ -- -- -- -- -- --
------- ------ ------- ------ --------- -------
BALANCE, December 31, 1998 ................ 645,000 6,450 412,541 4,125 1,186,667 11,867
Issuance of Series B Preferred Stock .... -- -- 41,254 413 -- --
Net loss ................................ -- -- -- -- -- --
------- ------ ------- ------ --------- -------
BALANCE, March 31, 1999 (unaudited) ....... 645,000 $6,450 453,795 $4,538 1,186,667 $11,867
======= ====== ======= ====== ========= =======
</TABLE>
(RESTUBBED FROM ABOVE TABLE)
<TABLE>
<CAPTION>
Additional Accumulated
Paid-in Capital Deficit Total
--------------- ----------- -----
<S> <C> <C> <C>
BALANCE, March 4, 1998 .................... $ -- $ -- $ --
Issuance of common stock ................ -- -- 11,867
Issuance of Series A Preferred Stock .... 638,550 -- 645,000
Issuance of Series B Preferred Stock .... 2,495,875 -- 2,500,000
Net loss ................................ -- (1,228,623) (1,228,623)
---------- ----------- -----------
BALANCE, December 31, 1998 ................ 3,134,425 (1,228,623) 1,928,244
Issuance of Series B Preferred Stock .... 249,587 -- 250,000
Net loss ................................ -- (818,575) (818,575)
---------- ----------- -----------
BALANCE, March 31, 1999 (unaudited) ....... $3,384,012 $(2,047,198) $ 1,359,669
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
PRIZEPOINT ENTERTAINMENT CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period For the Three
From Inception Months
(March 4, 1998) to Ended
December 31, March 31,
1998 1999
----------- ----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................... $(1,228,623) $ (818,575)
Adjustments to reconcile net loss to net cash used in operating
activities-
Depreciation and amortization .................................... 23,156 19,875
Changes in assets and liabilities-
Increase in accounts receivable ................................ -- (21,250)
Increase in prepaid expenses and other current assets .......... -- (40,054)
Increase in deposits and other assets .......................... (61,239) (17,256)
Increase in accounts payable ................................... 63,457 83,177
Increase in accrued expenses ................................... 25,867 7,630
----------- ----------
Net cash used in operating activities ........................ (1,177,382) (786,453)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............................... (98,598) (72,747)
----------- ----------
Net cash used in investing activities ........................ (98,598) (72,747)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations ........................... (10,812) (16,803)
Issuance of Series A Preferred Stock ............................. 645,000 --
Issuance of Series B Preferred Stock ............................. 2,500,000 250,000
Issuance of common stock ......................................... 11,867 --
----------- ----------
Net cash provided by financing activities .................... 3,146,055 233,197
----------- ----------
Net increase (decrease) in cash and cash equivalents ......... 1,870,075 (626,003)
CASH AND CASH EQUIVALENTS, beginning of period ..................... -- 1,870,075
----------- ----------
CASH AND CASH EQUIVALENTS, end of period ........................... $ 1,870,075 $1,244,072
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest ......................... $ -- $ --
Cash paid for income taxes ....................................... -- --
Capital lease obligations ........................................ 56,608 186,010
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
PRIZEPOINT ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
PrizePoint Entertainment Corporation ("PrizePoint" or the "Company") was
formed as a Delaware corporation on March 4, 1998. The Company is engaged in the
marketing and promotion forum of games of chance and advertising via its
Internet web site. Individuals or "players" can log on to the Company's site and
earn points for participating in the various product and trivia promotions
offered in the Company's site. Individuals can redeem these points for various
awards. Sponsors provide some of the awards and gifts for the winning
participants in exchange for advertising services.
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.
Revenue Recognition
Revenues are derived from the sale of advertising on the Company's web
site. Advertising revenues are recognized in the period the advertisement is
displayed provided that no significant Company obligations remain and collection
of the resulting receivable is probable. Company obligations typically include
guarantees of a minimum number of "impressions", or number of times that any
advertisement is viewed by users on the Company's web sites. To the extent
minimum guaranteed impressions are not met, the Company defers recognition of
the corresponding revenues until guaranteed impression levels are achieved.
Direct Costs
Direct costs consist primarily of cash prizes paid to participants, payroll
and related expenses for personnel, systems consultants and systems and
telecommunications infrastructures for web site development. To date, all direct
costs have been expensed as incurred.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Property and Equipment, net
Property and equipment are recorded at cost and depreciated on the
straight-line method over their estimated useful lives, ranging from three to
five years.
6
<PAGE>
Costs of maintenance and repairs are charged to expense as incurred.
Accounting for Long-Lived Assets
The Company accounts for long-lived assets under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement establishes financial accounting and reporting standards for
the impairment of long-lived assets and for long-lived assets to be disposed of.
Management has performed a review of all long-lived assets and has determined
that no impairment of the respective carrying value has occurred as of December
31, 1998.
Income Taxes
The Company accounts for its income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax
liabilities and assets for the estimated future tax effects of events that have
been recognized in the financial statements or income tax returns. Under this
method, deferred tax liabilities and assets are determined based on differences
between the financial accounting and income tax bases of assets and liabilities,
and the use of carryforwards, if any, using enacted tax rates in effect for the
years in which the differences and carryforwards are expected to reverse and be
utilized. Any deferred assets have been reserved for their full value until the
future realizability can be determined.
Stock-Based Compensation
The Company accounts for its employee stock option plans in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Compensation expense related to employee stock options is recorded only if, on
the date of grant, the fair value of the underlying stock exceeds the exercise
price. The Company adopted the disclosure-only requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," which allows entities to continue to
apply the provisions of APB Opinion No. 25 for transactions with employees and
to provide pro forma net income (loss) and pro forma earnings per share
disclosures (Note 8) for employee stock options as if the fair value based
method of accounting in SFAS No. 123 had been applied to these transactions.
The Company accounts for nonemployee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more readily determinable.
Basic and Diluted Net Loss Per Common Share
The Company accounts for net loss per common share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share." In accordance with SFAS No.
128, basic earnings per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding and diluted earnings per
share is computed by dividing net income (loss) by the weighted average number
of common shares and dilutive common equivalent shares
7
<PAGE>
outstanding during the period. Common equivalent shares have been excluded from
the calculation of diluted earnings per share, as their effect is anti-dilutive.
Business and Credit Concentrations
Financial instruments, which subject the Company to concentrations of
credit risk, consist primarily of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses. The carrying amounts of these
instruments approximate fair value. The carrying amount of the Company's capital
leases approximate the fair value of these instruments based upon management's
best estimate of interest rates.
The Company maintains cash with a domestic financial institution. The
Company performs periodic evaluations of the relative credit standing of this
institution. From time to time, the Company's cash balances with this financial
institution may exceed Federal Deposit Insurance Corporation insurance limits.
Unaudited Interim Financial Statements
The unaudited consolidated financial information included herein for the
three months ended March 31, 1999, has been prepared in accordance with
generally accepted accounting principles for interim financial statements. In
the opinion of the Company, these unaudited financial statements, reflect all
adjustments necessary, consisting of normal recurring adjustments, for a fair
presentation of such data on a basis consistent with that of the audited data
presented herein. The results of operations for interim periods are not
necessarily indicative of the results expected for a full year.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." This statement establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Company adopted this statement in 1998. The adoption of this
statement did not have an impact on the Company's financial condition or results
of operations. Accordingly, the Company's comprehensive net loss is equal to its
net loss for the period from inception (March 4, 1998) to December 31, 1998.
Additionally, in June 1997, the FASB issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information." This statement
establishes standards for the way the public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. The Company adopted this
statement in 1998. In the initial year of application, comparative information
for earlier years must be restated. Management has determined that it does not
have any separately reportable business segments.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
8
<PAGE>
developed or obtained for internal use. SOP 98-1 is effective for fiscal years
beginning after December 31, 1998. The Company has expensed all software
development costs and does not expect the adoption of SOP 98-1 to have a
material effect on its financial statements.
2. Property and Equipment, Net
Property and equipment consist of the following at December 31, 1998:
Computer equipment and software ......................... $121,601
Furniture and fixtures .................................. 28,892
--------
150,493
Less- Accumulated depreciation and amortization ......... 23,156
--------
$127,337
========
3. Accrued Expenses
Accrued expenses consist of the following at December 31, 1998:
Accrued Vacation ........................................ $ 15,835
Accrued Rent ............................................ 10,032
--------
Total ................................................... $ 25,867
========
4. Income Taxes
No provision for U.S. federal or state income taxes has been recorded for
the period from inception (March 4, 1998) to December 31, 1998 as the Company
has incurred an operating loss.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets for federal and state income taxes at December
31,1998 are as follows:
Deferred tax assets, net:
Net operating loss carryforwards ........................ $ 493,334
Other ................................................... 5,000
---------
498,334
Less- Valuation allowance ............................... (498,334)
---------
Deferred tax assets, net ................................ $ --
=========
Realization of deferred tax assets is dependent upon future earnings, if
any. The Company has recorded a full valuation allowance against its deferred
tax assets since management believes that it is not more likely than not that
these assets will be realized. No income tax benefit has been recorded for the
period from inception (March 4,1998) to December 31, 1998 as a result of the
valuation allowance.
As of December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $1,229,000. There can be no
assurance that the Company will realize the benefit of the net operating loss
carryforwards. The federal net
9
<PAGE>
operating loss carryforwards are available to offset future taxable income and
expire in 2019 if not utilized.
5. Capital Lease Obligations
At December 31, 1998 the Company was committed under a capital lease
agreement for office equipment. The asset and liability under the capital lease
is recorded at the lower of the present value of minimum lease payments or the
fair market value of the asset. The interest rate on the capital lease was
approximately 1% at December 31, 1998.
Future minimum payments under the capital lease agreements are as follows:
Year ending December 31:
1999 .................................................... $28,308
2000 .................................................... 16,513
-------
Total minimum lease payments ........................ 44,821
Less--
Amounts representing interest ......................... 3,738
-------
41,083
Current portion ....................................... 25,949
-------
Long-term portion ................................... $15,134
=======
6. Stockholders' Equity
Preferred Stock
The Company's stockholders authorized 5,000,000 shares of preferred stock.
The Company has designated 645,000 shares as Series A Preferred Stock and
495,049 shares as Series B Preferred Stock.
Series A Preferred
On April 1, 1998, the Company sold 645,000 shares of Series A Preferred
Stock for net proceeds of $645,000. The Series A Preferred Stock is convertible
into an equal number of common shares at the holder's option, subject to
adjustment for antidilution, and is automatically converted to common stock in
the event of a public offering of securities of the Company. The holders of
Series A Preferred Stock are entitled to receive dividends as and if declared by
the Board of Directors. In the event of liquidation or dissolution of the
Company, the holders of Series A Preferred Stock are entitled to receive all
accrued dividends, if applicable, plus a liquidation price per share of $1.00.
Subject to certain provision, registration rights, as defined in the
Certificate of Designation of Series A Convertible Preferred Stock agreement,
may be exercised after the earlier of (a) the date specified by a vote or
written consent or agreement of holders of at least two-thirds of the shares of
Series A Preferred Stock then outstanding, approving such conversion, or (b) the
effective date of the first registration statement for a public offering of
securities of the Company.
10
<PAGE>
Series B Preferred Stock
On December 8, 1998, the Company sold 412,541 shares of Series B Preferred
Stock for net proceeds of $2,500,000. The Series B Preferred Stock is
convertible into an equal number of common shares at the holder's option,
subject to adjustment for antidilution, and is automatically converted to common
stock in the event of a public offering of securities of the Company. The
holders of Series B Preferred Stock are entitled to receive dividends as and if
declared by the Board of Directors. In the event of liquidation or dissolution
of the Company, the holders of Series B Preferred Stock are entitled to receive
all accrued dividends, if applicable, plus a liquidation price per share of
$6.06. Certain of the Series B Preferred Stock holders also received warrants to
receive 41,254 common shares into Series B Convertible Preferred Stock of the
Company at a purchase price equal to $6.06 per share. The warrants expire at the
earlier of (a) 18 months after the effective date of the registration statement
for an initial public offering by the Company and with a price per share of not
less than $6.06 and (b) 60 months after the first date set forth above.
Subject to certain provisions, registration rights, as defined in the
Certificate of Designation of Series B Convertible Preferred Stock agreement,
may be exercised after the earlier of (a) the date specified by vote or written
consent or agreement of holders of at least two-thirds of the shares of Series B
Preferred Stock then outstanding, approving such conversion, or (b) the
effective date of the first registration statement for a public offering of
securities of the Company.
Common Stock
The Company issued 1,186,667 common shares to its founders in April 1998
for total proceeds of $11,867.
7. Commitments
Operating Leases
The Company leases office space, equipment security and trash removal
services under operating leases expiring through February 29, 2004. At December
31, 1998, minimum lease commitments under noncancelable leases are as follows:
Equipment/
Year Office Services
- ---- ------ ----------
1999 ........................................ $ 245,040 $2,225
2000 ........................................ 293,005 1,781
2001 ........................................ 299,480 1,194
2002 ........................................ 305,469 684
2003 ........................................ 320,818 342
Thereafter .................................. 54,190 --
---------- ------
$1,518,002 $6,226
========== ======
Rent expense for the year ended December 31, 1998 was $97,545 for office
space.
11
<PAGE>
Advertising and Sponsorship Contracts
The Company entered into several advertising and sponsorship agreements
with third parties, with terms ranging from one to six months whereby the
Company provides advertising in exchange for cash payments or goods. The goods
are used as awards for winning participants in the Company's online games and
sweepstakes. No revenue was earned on such contracts for the year ended December
31, 1998.
8. Stock Options
On April 1, 1998, in order to promote the interests of the Company and
retain persons necessary for the success of the Company, the Company adopted its
1998 Stock Option Plan ("Option Plan") covering up to 150,000 shares, pursuant
to which employees (including officers), directors and independent contractors
of the Company and its present or future subsidiaries and affiliates are
eligible to receive incentive and/or nonstatutory stock options. The Option
Plan, which expires within ten years, will be administered by the Plan
Administrator. The selection of participants, allotment of units, determination
of price and other conditions relating to the purchase of options will be
determined by the Plan Administrator. Options granted under the Option Plan are
exercisable for a period of up to 10 years from the date of grant at an exercise
price, which may be less than, equal to or greater than the fair market value
per unit on the date of the grant. Incentive Options, however, may only be
granted to employees, the exercise price per share may not be less than 100% of
the fair market value per share of common stock on the option grant date, and
for a stockholder owning more than 10% of the outstanding common stock, its
exercise price may not be less than 110% of the fair market value of the common
stock on the date of the grant.
Pursuant to SFAS No. 123, the Company has elected to account for its Option
Plan under APB Opinion No. 25, under which no compensation expense is recognized
for unit option awards granted at or above fair market value. In 1998, the
Company granted 95,000 incentive stock options to various employees. The option
exercise price equals the stock's fair market value at the grant date, and the
options are exercisable over a four-year period, with 25% of options granted
becoming exercisable on the one-year anniversary of the grant date and the
remaining options becoming exercisable at the rate of 1/48 at the end of each
month thereafter. All options will terminate no later than 10 years from the
date of grant. Under SFAS No. 123, compensation cost is measured at the grant
date based on the fair value of the award and is recognized over the service (or
vesting) period. For the year ended December 31, 1998, the compensation cost for
this plan determined in accordance with SFAS No. 123, net of compensation
expense recognized under APB No. 25, is an immaterial amount. As such the
Company's pro-forma net loss has not been presented.
The following table summarizes information about stock options outstanding
at December 31, 1998:
Number Weighted Average Weighted
Outstanding Remaining Average
Exercise Prices at December 31, 1998 Contractual Life Exercise Price
- --------------- -------------------- ---------------- --------------
$.01 ............... 40,000 9.56 $.01
$.10 ............... 55,000 9.95 $.10
------
95,000
======
12
<PAGE>
As of December 31, 1998, none of the outstanding options were exercisable.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 4.87 percent; expected dividend yield of
0 percent; expected life of 5 years; expected volatility of 100 percent.
The following table summarizes information about stock options outstanding
at December 31, 1998:
December 31, 1998
--------------------------
Weighted Average
Shares Exercise Price
------- ----------------
Outstanding at beginning of period ............. -- $ --
Granted ..................................... 95,000 .06
Cancelled ................................... --
Terminated .................................. --
Exercised ................................... --
------- ----
Outstanding at end of period ................... 95,000 $.06
======= ====
Options exercisable at end of period ........... --
=======
Weighted average fair value of options granted . $ .05
=======
9. Subsequent Events
On January 7, 1999, the Company issued additional 41,254 shares of Series B
Preferred stock for $250,000 in proceeds.
On April 29, 1999 the Company entered into a merger agreement with Uproar
Ltd., a Bermuda corporation, which is a provider of online entertainment and
game shows. Under the provisions of the merger agreement, each share of common
and preferred stock of the Company will be converted into and exchanged for
common stock of Uproar Ltd. based upon a stated conversion rate.
13
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated April 29, 1999 for PrizePoint Entertainment Corporation included in or
made a part of Uproar Inc.'s Registration Statement on Form S-1, and to all
references to our Firm included in this Registration Statement.
/s/ Arthur Andersen LLP
-------------------------------
ARTHUR ANDERSEN LLP
New York, New York
February 4, 2000
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 of our
report dated August 4, 1999 and December 16, 1999 relating to the consolidated
balance sheets of Uproar Inc and subsidiaries (formerly Uproar Limited) as of
December 31, 1997 and 1998 and the related consolidated statements of
operations, stockholders' equity and comprehensive loss, and cash flows for each
of the years in the three-year period ended December 31, 1998. We also consent
to the reference to our firm under the caption "Experts".
/s/ KPMG Hungaria Kft.
Budapest, Hungary
February 3, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0001101179
<NAME> UPROAR INC.
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 15,135,742
<SECURITIES> 0
<RECEIVABLES> 3,767,769
<ALLOWANCES> 270,913
<INVENTORY> 0
<CURRENT-ASSETS> 24,114,394
<PP&E> 5,031,429
<DEPRECIATION> (1,047,645)
<TOTAL-ASSETS> 42,815,641
<CURRENT-LIABILITIES> 5,559,654
<BONDS> 0
1,198,597
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 42,815,641
<SALES> 10,391,527
<TOTAL-REVENUES> 10,391,527
<CGS> (2,533,294)
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 46,772,558
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (7,050)
<INCOME-PRETAX> (38,696,641)
<INCOME-TAX> 28,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (38,724,641)
<EPS-BASIC> 1.77
<EPS-DILUTED> 1.77
</TABLE>
