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As filed with the Securities and Exchange Commission on November 5, 1999
Registration No. 333-86873
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
FORM SB-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NETWORD, INC.
(Name of Small Business Issuer in its Charter)
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Delaware 51410 552-2143430
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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702 Russell Avenue, Third Floor
Gaithersburg, Maryland 20877
1-800-NETWORD
(Address and Telephone Number of Principal Executive Offices and
Principal Place of Business)
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Michael Wise
President and Chief Executive Officer
702 Russell Avenue, Third Floor
Gaithersburg, Maryland 20877
1-800-NETWORD
(Name, Address, and Telephone number of Agent for Service)
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Copies to:
Russell S. Berman, Esq.
Kronish Lieb Weiner & Hellman LLP
1114 Avenue of the Americas
New York, New York 10036-7798
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Approximate date of Proposed Sale to the Public: From time to time
after the effective date of this Registration Statement.
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 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, please check the following box. [ ]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
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CALCULATION OF REGISTRATION FEE
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Title of Securities Amount to be Proposed Maximum Offering Proposed Maximum Amount of
to be Registered Registered Price per Share Aggregate Offering Price Registration Fee
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Common Stock, $.01 par value 6,784,733 shares (1) $0.875(2) $5,936,641.38(2) $1,650.40
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(1) Includes 2,000,000 outstanding shares and 4,784,733 shares issuable upon
exercise of outstanding warrants. Pursuant to Rule 416, an indeterminate
number of additional shares are registered for issuance in the event that
antidilution provisions in the outstanding warrants become operative.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) on the basis of the average of the last reported bid
and asked prices of the Common Stock in the over-the-counter-market, as
reported by the National Quotation Bureau, on September 7, 1999.
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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 this Registration Statement shall become
effective on such date or dates as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
Disclosure alternative used (check one): Alternative 1 Alternative 2 X
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PROSPECTUS
NETWORD, INC.
Common Stock
6,784,733 shares
This prospectus is being used in connection with the resale by certain of
our stockholders of up to:
o 4,784,733 shares of our common stock issuable upon the exercise of
outstanding redeemable warrants
o 2,000,000 shares of our outstanding common stock
The selling stockholders may sell shares either directly to purchasers or
through brokers, dealers or agents. We will receive no proceeds from the sale of
shares by the selling stockholders, although we may receive up to $5,980,916.25
from the exercise of the outstanding warrants before or in connection with the
resale of the underlying shares.
Shares of our common stock are traded in the over-the-counter-market,
through the NQB Pink Sheets under the symbol "NTWD." On November 4, 1999, the
average of the last reported bid and asked prices of our common stock in the
over-the-counter-market, as reported by the National Quotation Bureau, was
$0.8125 per share.
Investment in our common stock involves substantial risks. See "Risk
Factors" beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state or foreign jurisdiction where the offer or sale is not
permitted.
The date of this prospectus is November 5, 1999
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TABLE OF CONTENTS
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Page No.
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About Netword, Inc. ................................................................................................2
Forward Looking Statements..........................................................................................3
Risk Factors .......................................................................................................4
Because we have a limited operating history and our business model is still
developing, it is difficult to evaluate our prospects. We do not know when
or if we will become profitable...................................................................4
We may not be able to raise additional financing which we
need to support our business. ...................................................................4
Additional financing could result in the dilution of the interests of
current stockholders. ...............................................................................4
If Internet usage does not continue to expand and improve, there may be no need for
our product. ....................................................................................4
The use of Networds depends on the effective functioning of the Internet, which
remains subject to technical and other problems over which we have no control.....................4
We may be unable to market Networds successfully...........................................................5
We may not be able to adequately protect the benefits of our patent or our other
intellectual property rights. ....................................................................5
We are appealing a decision that could impair the protective scope of our patent...........................5
The market for our service is subject to domination by major competitors against
whom we may not be able to compete effectively....................................................5
We may not be able to keep up with rapid changes in technology as
necessary to maintain the utility and competitiveness of the Netword System......................6
Malfunctions and errors could cause a disruption of the Netword System.....................................6
Our failure and the failure of third parties to be Year 2000 compliant could negatively
impact our business...............................................................................6
We may be exposed to liability for trademark infringement..................................................6
Outstanding warrants, options and other rights to acquire our common stock may
dilute the value of our common stock and impair our ability to raise
additional equity capital.........................................................................6
The substantial number of our shares that will be eligible for sale in the future may
adversely effect the market for our common stock..................................................7
There is a limited market for the sale of our shares.......................................................7
Our Business and Property.......................................................................................... 8
Selling Stockholders................................................................................................17
Plan of Distribution................................................................................................24
Use of Proceeds.....................................................................................................25
Directors, Executive Officers and Significant Employees.............................................................26
Remuneration of Directors and Officers..............................................................................29
Security Ownership of Management and Certain Security Holders.......................................................32
Interest of Management and Others in Certain Transactions...........................................................35
Securities Being Offered............................................................................................36
Description of Securities...........................................................................................36
Significant Parties.................................................................................................40
Legal Proceedings ..................................................................................................41
Disclosure of Commission Position on Indemnification for Securities Acts Liabilities................................42
Legal Matters.......................................................................................................42
Experts.............................................................................................................43
Where You Can Find Additional Information...........................................................................43
Index to Financial Statements......................................................................................F-1
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ABOUT NETWORD, INC.
Netword, Inc. owns and operates the Netword System, a patented Internet
utility which offers a simple, consumer-friendly way to reach any destination on
the Internet. Through the Netword System, we provide a service that enables
individual and business users of the Internet to create simple and memorable
words, phrases, numbers or other sequences of characters, called Networds, which
are used as Internet keywords to identify and access Internet resources
(including Web pages, alphanumeric pagers, files to transfer and e-mail
addresses) in place of more complex Internet addresses known as universal
resource locators or URLs.
As the Internet is currently administered, creation of a separate
registered domain name for any Internet resource is time consuming and difficult
to manage. The available naming structure has a limited character set and
frequently results in URLs containing complex non-memorable sequences of
characters. By contrast, a user-friendly Netword corresponding to any Internet
address (including a specific location within a Web site) can be created
virtually instantaneously. Once a Netword is created, it can be edited or
directed to a new Internet address in seconds.
Using Networds can facilitate direct access to specific Internet
resources anywhere on the Internet. Unlike limited keyword systems within the
infrastructure of a proprietary network, such as America-On-Line's keyword
system, or bookmarks generated by Internet users for use on their own computers,
Networds are universal and may be used from any computer linked to the Internet.
As a cornerstone of our business model, it is our policy to allow every
Internet user to create FREE Networds for non-commercial purposes and to make
all FREE Networds instantly available to all Internet users. We intend to use
the convenience of FREE Networds as a tool to spread the use of Networds across
the Internet, with the object of creating a significant potential market of
Internet users who regularly employ our system. As this market develops, we
intend to promote its availability to attract commercial Web resource owners
willing to pay appropriate fees for the rights to register Networds.
If we successfully implement our business model, we expect to earn
revenues from registration of specific Networds by commercial Web resource
owners, payments by these owners for hits on their sites, sales of banner ads
and other advertising on our Web site, and expanded service offerings to users
of FREE Networds.
While we introduced an early version of the Netword System on the
Internet in May 1997, our operations are still in the development stage. We do
not have significant revenues.
Our principal offices are located at 702 Russell Avenue, Third Floor,
Gaithersburg, Maryland 20877. Our telephone number is 1-800-NETWORD.
As used in this Prospectus, the terms "we", "us" and "Netword" refer to
Netword, Inc. and its predecessors, unless the context otherwise requires.
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FORWARD LOOKING STATEMENTS
Some of the statements in this prospectus that are not historical facts
are forward-looking statements. Forward-looking statements can be identified by
the use of words such as estimates, projects, anticipates, expects, intends,
believes or the negative thereof or other variations thereon or by discussions
of strategy that involve risks and uncertainties. We caution you that all the
forward-looking statements contained in this prospectus are only estimates and
predictions. Our actual results could differ materially from those anticipated
in the forward-looking statements due to risks, uncertainties or actual events
differing from the assumptions underlying these statements. The risks,
uncertainties and assumptions include, but are not limited to, those discussed
in this prospectus.
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RISK FACTORS
Because we have a limited operating history and our business model is still
developing, it is difficult to evaluate our prospects. We do not know when or if
we will become profitable.
We have a limited operating history and are still in the development
stage of our business. As a result, there is limited historical financial
information about us upon which to base an evaluation of our future prospects or
performance. Our business model is still new and developing and may not
materialize or prove successful. In light of the developing nature of our
business and our marketing plans, we expect to continue to sustain substantial
operating expenses without generating significant revenues for the foreseeable
future. From December 2, 1996 through September 30, 1999, we incurred
cumulative net losses of $3,855,068.
We may not be able to raise additional financing which we need to support our
business.
We have approximately $3.1 million currently available for our working
capital and other business needs. Since our business and marketing plans are in
a development stage, we cannot accurately calculate the cost of achieving them,
but it is unlikely that our available funds will be adequate to support the
successful implementation of a marketing strategy, and we are currently seeking
additional private sources of equity capital. We have no continuing source of
financing currently available. If we are unable to obtain additional financing
on satisfactory terms, we may be forced to curtail or cease our operations.
Additional financing could result in dilution of the interests of current
stockholders.
If we are able to raise additional funds by issuing new equity or debt
securities, the interests of our prior stockholders may be diluted and the
holders of the newly issued securities may have rights, preferences or
privileges which are senior to the rights of our prior stockholders.
If Internet usage does not continue to expand and improve, there may be no need
for our product.
The success of our business depends on the anticipated continued growth
of the Internet, which should increase the need for expedited access to a
greater number of Internet resources and, correspondingly, expand the market for
Internet keywords. Market acceptance of the Internet remains subject to
uncertainty.
The use of Networds depends on the effective functioning of the Internet, which
remains subject to technical and other problems over which we have no control.
The Internet has experienced frequent periods of performance degradation,
requiring the upgrade of routers and switches, telecommunications links and
other components which form the infrastructure of the Internet by organizations
with links to the Internet. Any perceived degradation in the performance of the
Internet as a whole could undermine the benefits of the Netword System. The
potential utility of Networds is ultimately limited by and reliant upon the
speed and reliability of networks operated by third parties.
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We may be unable to market Networds successfully.
Our ultimate success depends upon our ability to adopt and successfully
implement a marketing strategy which will promote widespread acceptance and use
of Networds by Internet users. Such acceptance will depend upon a number of
factors, including:
o the inherent appeal of our marketing strategy in attracting our
target audience
o the adequacy of the resources available to implement our strategy
o our ability to attract Internet service providers and others to enter
into teaming arrangements with us
o the performance of the Netword System; and
o the extent of competitive products and activity.
Our present strategy is relatively new and remains subject to change. There is
no certainty that we will ever implement a successful marketing strategy. See
"Our Business and Property - Marketing Strategy" on page 11.
We may not be able to adequately protect the benefits of our patent or our other
intellectual property rights.
The potential success of the Netword System may depend on our ability
to maintain proprietary rights to our technology. To protect these rights, we
rely primarily upon our patent and employee and third party confidentiality and
non-disclosure agreements. Although our patent provides some protection against
third parties copying the Netword System, it may not preclude third parties from
creating systems similar to the Netword System. The steps we have taken may not
deter unauthorized use of our proprietary information, and we may not be able to
afford the high cost of enforcing our intellectual property rights.
We are appealing a decision that could impair the protective scope of our
patent.
As discussed in detail under "Legal Proceedings" on page 41, we are
currently engaged in litigation to enforce our patent. An adverse decision on
our pending appeal in that litigation could impair the protective scope of our
patent.
The market for our service is subject to domination by major competitors against
whom we may not be able to compete effectively.
The market for our services is new, intensely competitive, quickly
evolving and subject to rapid technological changes. Keyword systems tend to be
mutually exclusive, and the competition among providers of such systems to
capture users or access to users in this early stage of the market's development
may determine the ultimate success of each of the competing systems. We
currently face competition from a number of recognized industry players,
including Netscape, Microsoft and America-On-Line, as well as RealNames. All of
these competitors have much greater financial and other resources than we have.
Unless we are able to establish market share and/or marketing relationships
which give us a strong competitive position, we may become irrelevant to, or
limited to a small portion of the Internet keyword system market. See "Our
Business and Property - Competition" on page 14.
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We may not be able to keep up with rapid changes in technology as necessary to
maintain the utility and competitiveness of the Netword System.
Internet technologies are constantly evolving, and we are continuously
upgrading the Netword System to accommodate these changes. Our future success
depends on our ability to respond quickly and successfully to technological
advances by continuously updating and developing the Netword System. We may not
be able to foresee and respond to such technological advances.
Malfunctions and errors could cause a disruption of the Netword System.
The Netword System is subject to risks associated with:
o systems errors and malfunctions;
o viruses;
o hackers;
o human error;
o fire;
o natural disaster;
o breaches of security;
o telecommunications failures;
o sabotage;
and similar events, which could result in service interruptions or reduced
capacity for Netword users. Prolonged service interruptions could materially
impair our reputation and the usefulness of the Netword System, with potentially
material adverse impact on our business and prospects.
Our failure and the failure of third parties to be Year 2000 compliant could
negatively impact our business
For a discussion of risks presented by our ability and the ability of
others on whom we rely to successfully make computer systems and other
technology Year 2000 compliant, see "Our Business and Property - Impact of Year
2000" on page 13.
We may be exposed to liability for trademark infringement.
The use of Networds entails the potential risk of possible infringement
of third party rights. The law regarding liability for contributory trademark
infringement or facilitation of unfair competition on the Internet is still
unsettled. Our published terms and conditions and operating procedures include
measures to protect the rights of owners of registered trademarks. These
measures however, may not be enough to shield us from liability in the event of
trademark infringement, dilution or unfair competition by the creator of a
Netword.
Outstanding warrants, options and other rights to acquire our common stock may
dilute the value of our common stock and impair our ability to raise additional
equity capital.
We have issued currently outstanding options, warrants and other rights
to acquire a total of 14,475,464 shares of our common stock at prices from $0.16
to $1.50 per share. Included in these rights are outstanding warrants held by
Net2Phone, Inc. to purchase up to 15% of our fully-diluted common
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stock (currently 4,197,573 shares) for approximately $3,000,000. We have agreed
to issue additional warrants for 336,000 shares of our common stock to NorthStar
Capital Partners LLC upon the election of W. Edward Scheetz to our board of
directors. If all of these warrants and other rights were exercised as of a
current date, the underlying shares would constitute approximately 46% of our
outstanding common stock. The existence of these potentially dilutive rights may
limit our ability to raise additional equity capital.
The substantial number of our shares that will be eligible for sale in the
future may adversely effect the market for our common stock.
At present only 6,000,000 of our shares plus the shares offered by this
prospectus are eligible for public sale. If all currently outstanding and
proposed rights to acquire our common stock were immediately exercised, there
would be a total of 32,517,388 shares of common stock outstanding, with the
effect that an additional 19,732,655 shares of our common stock would become
eligible for public sale within the next 12 months. Particularly in light of the
limited market for our common stock (discussed below), efforts by holders to
sell a significant number of these shares could glut the market and adversely
affect the market price of our common stock.
There is a limited market for the sale of our shares.
Quotation of our common stock in the NQB Pink Sheets began on July 29,
1999. Actual trading volume since that date has been limited. The market for our
common stock may not provide enough liquidity to enable investors to dispose of
any shares offered by this prospectus or the substantial number of other shares
that may become eligible for sale (as discussed above).
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OUR BUSINESS AND PROPERTY
The Netword System
We believe that the growth of the Internet, resulting in the
proliferation of its resources and the increasing scarcity of user-friendly
URLs, has created a business opportunity for Internet keyword systems. The
Netword System has been developed to take advantage of this opportunity. In
short, Networds are meant to make it easier for people to navigate the Internet.
We offer all Internet users the opportunity to use the Netword System without
charge to reach Internet resources.
Any Internet user or owner of an Internet resource can create a Netword
to facilitate direct access to a specific Internet resource. After logging on to
the Internet, a user merely enters an existing Netword, like The Yankees or
SesameStreet, in any Netword-enabled browser or slot and is instantly
transferred to the Internet address corresponding to the Netword. If the entry
is not an existing Netword, the Netword System offers the user a variety of
default options which may include the use of search engines to seek out URLs
employing the entered term and the opportunity to create a Netword for the
desired site.
A user may enter Networds at the user's own Netword-enabled browser,
our Web site at netword.com, Netword slots at sites belonging to other entities
operating under arrangements with us, or a Netword-enabled slot on the user's
home page. A user can Netword-enable a browser or homepage by installing our
software agent, which is available as a free one-minute download from our own
Web site. As soon as the download is completed, the user can access any Web site
for which a Netword exists (or for which the user creates a FREE Netword) merely
by entering the Netword in the user's own browser.
See "About Netword, Inc." on page 2.
To date, our promotional and marketing strategy has focused on
establishing teaming agreements with Web communities (i.e., affinity groups
which offer various Web-related services to their members), through which
Internet users can learn about Networds and create and use FREE Networds. We
believe that as more Internet users employ our system to help navigate the Web,
more commercial Web resource owners will recognize a need to register Networds
to encourage access to their sites. See "Marketing Strategy" below.
An early version of the Netword System was introduced on the Internet
in May, 1997, and we have continued to improve it since then. Until recently,
however, we lacked the resources to market Networds. We have used the proceeds
of recent financings to initiate a marketing effort, which is described below.
Nevertheless, we continue to be a development stage business. Our ability to
generate revenues sufficient to sustain the Netword System and to achieve
profitability will probably depend initially upon the outcome of our expanded
marketing efforts.
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Our History
Netword Inc. is a Delaware corporation which was formed on February 18,
1999. Immediately following its formation, it merged with Netword LLC, a
Delaware limited liability company which owned and operated the Netword System.
The sole purpose of the merger was to reorganize Netword LLC as a corporation.
Netword LLC had been formed in December, 1996, when it acquired the
assets of Birdshell Corporation, L.L.C., comprising various computer programs
and systems that were key elements of the Netword System as it then existed.
Birdshell had been formed in April, 1995, to develop and market the concept that
became the Netword System.
Industry Background
According to reports published by International Data Corporation,
commerce conducted over the Web will exceed $1 trillion by 2003 and the number
of users who make purchases over the Web will increase from 31,000,000 in 1998
to more than 183,000,000 in 2003. Forrester Research, Inc. estimates that online
advertising will reach $33 billion by 2004.
The Netword Opportunity And Solution
We expect the increased use of the Internet to create a heightened
demand for quick, easy and direct access to Web resources. The proliferation of
complex URLs is an obstacle to satisfaction of this demand.
The protocol currently governing the registration of Internet domain
names requires the inclusion of .com or another suffix in every URL that
identifies a top level Internet domain. Creating a separate top level domain
name for every resource is theoretically possible but is not currently
practicable because of constraints resulting from the way the Internet is
administered and the systems through which it operates. Below the level of the
top level domain names, the density and diversity of information available on
many Web sites and the methods of indexing and accessing information within
these sites lead to the denomination of various levels and sublevels of
identification. The layering of resources within any site can result in extended
URLs characterized by multiple words or characters or combinations of words or
characters separated by reverse slashes. As these URLs become increasingly
lengthy and complex, they become increasingly difficult to remember and, when
identified or remembered, are subject to greater risk of faulty entry. It seems
obvious that commercial Web resource owners can benefit from systems which
simplify the names by which their customers can identify and access their
resources.
We believe Networds offer an efficient and affordable solution. Using
the Netword System, commercial Web resource owners can identify each of their
resources with a Netword which may be a familiar product or service name or
slogan that is easy to remember. The entry of the designated Netword will
provide direct access to the resource.
Creating Networds
A Netword for any URL may be created or edited at our Web site at any
time by following a simple on-line procedure. FREE Networds may be created
without charge. Registered Networds may
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be created by opening an account with us and following a registration procedure
described at our Web site, www.netword.com. A FREE Netword may, however, be
bumped or displaced by a Registered Netword. Networds can be created for both
commercial and non-commercial purposes.
To create a Netword:
o The user enters the proposed name, phrase or number into our
database by following simple online instructions at our Web
site.
o If the proposed name, phrase or number is not available,
either because of trademark restrictions or prior use for
another URL, the Netword System immediately reports the
conflict and offers the user the option to propose an
alternative.
o The creation of the new Netword is confirmed to the user in
its browser and by e-mail and becomes instantly available to
all other users.
o The user who created a Netword can revisit our Web site to
edit or change the Netword online at any time.
Our terms and conditions are printed in full on our Web site and
explain, among other things, that Networds are registered on a priority basis to
countries, government agencies, established companies, public figures, and
registered holders of trademarks, service marks, and other similar intellectual
property rights. Subject to these priorities, Networds are registered on a
first-come, first-served basis.
To support our policy of protecting registered trademarks and trade
names, before a Netword is created we conduct a rapid online search of the U.S.
Patent and Trademark Office files to determine if use of the proposed Netword
will conflict with a federally registered trademark or tradename. We do not
conduct any other independent investigation, such as an investigation of
registered corporate or other business names or state trademark or tradename
filings, to seek out potentially conflicting rights to the use of a proposed
Netword.
Registration of Networds
Owners of Web resources can register a Netword for any of their sites
for a fee of $30 per year. Volume discounts are available. Branch Networds or
subcategories of Networds (for example, a name like cnnfood as opposed to
www.cnn.com/food) can be registered for $10 per Netword per year. Registrants
agree to pay us $.03 per Netword-generated hit on each Web site in excess of
1,000 hits per month. Networds can be registered on a first-come first-served
basis, subject to our standard terms and conditions.
Revenues, Extent of Netword Use and Expenditures
Our revenues for the first nine months of 1999 were derived exclusively
from Netword registrations.
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Approximately 250,000 Networds are available on the Netword System.
Specifically:
o We have placed approximately 55,000 familiar Networds in our
database. These Networds provide links to a number of U.S.
businesses, TV and radio stations, mainstream publications,
manufactured products, government sites, movie and TV programs and
sports teams. We receive no payment for the creation or use of
these Networds.
o Internet users have created more than 200,000 FREE Networds.
Over the two fiscal years ended December 31, 1998, we had spent
approximately $746,000 for research and development.
Marketing Strategy
Our business model is to promote the convenience of FREE Networds in
order to increase the number of Internet users who are familiar with Networds.
As substantial numbers of users come to understand the benefits of Networds, we
will market that information to owners of commercial Web resources willing to
pay appropriate fees to register Networds for their resources.
To implement our marketing strategy, we have begun and intend to
continue to expose the Netword System to consumers through programs that:
o Promote and give access to the Netword System on Web community
sites like GeoCities, Tripod, FortuneCity, Angelfire and Homestead.
Although we have contacted a number of Web communities, we do not
currently have agreements with any of them.
o Promote and advertise Networds in online and offline publications,
and on television and radio.
o Establish alliances with Internet service providers like Verio. At
present, we have no such alliances.
o Establish alliances with owners of search engines and telephone
access facilities, especially those willing to provide a Netword
logo and slot on their sites and promote Networds to users and
customers who establish Web sites on their sites. At present we
have no such alliances.
We have also created and continue to expand our existing Logo program,
an initiative to assist not-for-profit organizations in promoting their
Networds. This program allows members to display a Netword logo and slot on
their sites to enable visitors to download our software and enter Networds
directly in their own browsers. Revenue sharing is not offered as part of this
program. Approximately 25 organizations are currently participating in this
program and have been important factors in driving traffic to our Web site.
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From November, 1998 until June, 1999, we had an active teaming
agreement with GeoCities, Inc. under which GeoCities made available and
communicated to its members who create Web sites on the GeoCities site (referred
to as homesteaders) the advantages of the Netword System and FREE Networds in
exchange for our payment of certain fees and a percentage of related revenues.
This agreement was terminated following Yahoo!, Inc.'s acquisition of GeoCities
in June, 1999. The GeoCities relationship resulted in more than 2,000,000 hits
to our Web site by GeoCities homesteaders, and they created more than 50,000
FREE Networds 0which are linked to their personal GeoCities Web pages. More than
3,000 homesteaders placed our logo and slot on personal homepages at their
GeoCities Web sites.
Apart from occasional press releases, several articles about us in
local papers and trade publications and publicity generated by our Web site and
under our teaming agreement with GeoCities, there has not been significant
publicity about the Netword System.
Net2Phone Agreement. In connection with our efforts to expand the
distribution of the Netword System, we have recently entered into an agreement
with Net2Phone, Inc. under which a newly developed version of our software agent
will be shipped with Net2Phone's software together with our logo and slot and a
direct link to our Web site. Net2Phone's software enables low-cost high quality
calls to be placed from computers, telephones or fax machines to any world wide
telephone or fax machine.
Under the new agreement, we granted Net2Phone rights to freely register
Networds to facilitate use of its system. The agreement also provides that
Net2Phone is responsible for maintaining a database of URLs and associated phone
numbers and is entitled to share in certain of our revenues attributable to the
registration and use of Networds sourced from Net2Phone's Web site. The
agreement has an initial one-year term (expiring September 29, 2000), subject to
renewal for successive additional one-year terms and to early termination by
Net2Phone. In connection with the new agreement, we granted Net2Phone warrants
to acquire up to 15% of our fully-diluted common stock for approximately
$3,000,000.
The Netword Directory
In July 1999, we introduced the Netword Directory, an on-line facility
at our Web site which organizes all Networds by subject categories. We intend to
offer advertising in this directory as a potential additional source of revenue.
Netword System Components
The Netword System currently runs on our own cluster of five PCs
installed at the McLean Virginia facility of Exodus Communications, Inc., a
tier-1 communications and co-location provider. We also maintain a back-up
cluster of PCs at our Maryland offices. Our current services agreement with
Exodus is for a one-year period, expiring August 23, 2000, subject to successive
one year renewals. The cost of this services agreement is $4,830 per month. This
services agreement provides us with round the clock Internet access, manned
security and technical monitoring.
12
<PAGE>
In June, 1999, we purchased additional equipment to facilitate
installation of additional network access points for Internet connections in
North America and Europe to provide additional redundancy and assure effective
administration of traffic.
Most of the non-proprietary components of the hardware and operations
software in the Netword System are generally available from conventional
commercial sources. The custom program software for the Netword System is
written by our senior software engineers and maintained in a version control
database, which is backed up and stored in a secure facility. Although we rely
for programming on our current senior software engineers, we believe we can find
comparable substitute engineers if and when we need them.
We believe that the operation of the Netword System is subject to
minimal security risks. Our PC cluster is accessible only by layered passwords.
If a fire or other major disaster were to destroy our co-location provider's
facility, we believe that we could provide effective substitute service within
24 to 48 hours through the PC cluster at our offices and could return to 100%
capacity with an alternate co-location provider within one to two weeks. If one
of the five PCs in a cluster fails, any of the other four has capacity to serve
as an immediately effective substitute. We have established a firewall which
limits access to the Netword System and helps to insulate it from viruses.
Impact of Year 2000
The year 2000 issue, commonly referred to as Y2K, is a result of the
way some computer systems store dates. In many cases, when a date is stored by a
computer, a two digit field has been used to store the year (i.e., 01/01/98 =
January 1, 1998). The system assumes that the first two digits in the year field
are "19." With the end of the century approaching, those same systems should
reflect 01/01/00 as being "January 1, 2000." However, a non-compliant system
will read 01/01/00 as January 1, 1900.
We have been focused on year 2000 issues since our inception. Since we
are young, the hardware and software we currently use to operate our business
was developed or purchased with Y2K readiness in mind, relying principally on
representations of our vendors as to the Y2K capabilities of the hardware and
software we have purchased. We cannot assure you the vendor representations we
relied upon are accurate or that we will have effective recourse against any
vendors whose representations prove misleading. Separately, our co-location
provider has assured us that it is Y2K compliant, but we have not made an
independent investigation of its facility.
On a broader level, we depend on the availability of the Internet
infrastructure to make the Netword System available to Internet users.
Disruptions in the Internet infrastructure arising from Year 2000 problems could
limit Internet users' ability to use Networds to access Web resources.
Our business and financial condition could be adversely affected by the
failure of the systems and applications of third parties on which we rely,
including a disruption to the Internet infrastructure, to properly operate after
1999.
13
<PAGE>
Patent and Other Intellectual Property
On June 9, 1998, we were issued patent No. 5764906 which describes the
Netword System as a Universal Electronic Resource Denotation, Request and
Delivery System that shares information and aliases among owners of Internet Web
sites and other resources and Internet users. A recent court decision which we
have appealed could impair the patent's protective scope. See "Legal
Proceedings" on page 41.
We also own various copyrighted software with special purpose
components not found in any existing off-the-shelf software of which we are
aware.
Netword is registered as a trademark with the U.S. Patent and Trademark
Office. On April 30, 1996, we acquired the exclusive rights to the common law
and registered trademarks and trade names "Netword" and "Netword, Inc." for
aggregate payments of $40,600 over seven years.
Competition
The market for Internet services is relatively new, intensely
competitive, quickly evolving and subject to rapid technological changes. The
Netword System already faces significant competition which may be expected to
continue and intensify in the future. We have limited financial, marketing,
research and development resources, but we need to continue to invest in the
development of the Netword System and the expansion and enhancement of our
marketing and customer support services in order to compete effectively. There
are no assurances that we will have sufficient resources to make the required
investments.
We classify the systems currently offered by competitors into the
following categories:
o keyword systems which operate through browsers, such as Netscape's
Communicator versions 4.5 and higher and Microsoft's Internet
Explorer 5.0, and RealNames Corporation's keyword system which
operates in a manner similar to the Netword System;
o keyword systems within a proprietary network, such as
America-On-Line's keyword system; and
o Internet search engines and directories, such as Yahoo, AltaVista
and Hotbot.
These competitive systems are operated or backed by established
companies, which have vastly greater financial, marketing, research and
development resources than ours. Microsoft, AltaVista and Network Solutions have
invested in or entered into agreements with RealNames, and RealNames has
substantially greater financial resources than ours. Additionally, RealNames has
allied itself and intends to pursue additional relationships with third party
Internet browser providers and providers of search, directory, e-commerce,
portal and content services as a means of distributing its service. Other
established companies may decide to expand their operations to offer a full
range of Internet services which could potentially include a service such as
ours.
Despite this array of competition, we believe we can compete
effectively in our marketplace based upon our quick, efficient, easy-to use
product that is free to Internet users and reasonably priced to
14
<PAGE>
owners of commercial Web resources. Other than RealNames' system, which is an
Internet keyword system that directly competes with the Netword System, we are
not aware of any service currently offered by our competitors which provides the
range of functions made available through the Netword System.
In practice, our system is broadly aimed to allow users to employ
Networds across the entire Web. By contrast, we believe that the RealNames'
system is more narrowly focused on the use of keywords in the search engines of
RealNames' search partners. We believe the RealNames system materially infringes
our patent rights. See, however, "Legal Proceedings" on page 41 for a
description of pending litigation involving RealNames which may impair the
protective scope of our patent.
Services currently offered by our principal competitors have certain
comparative limitations:
o America-On-Line's keyword system registers keywords which point
only to content on the America-On-Line network. This system does
not permit Internet users to create their own free America-On-Line
keywords, and owners of commercial content who desire to create
keywords for use within America-On-Line's network are subject to a
limited and expensive registration process.
o Netscape's keyword system which operates through certain recent
versions of its Communicator does not permit private registration
of keywords. The keywords are created by Netscape and point to
NetCenter portal content and other Web resources.
o Microsoft's Internet Explorer 5.0 browser does not permit Internet
users or owners of commercial Web resources to register keywords.
o The registration of a keyword on RealName's system can be a lengthy
process and costs more than registration of a Netword. RealNames'
keyword system offers a facility for Internet users to create one
free Internet keyword for their homepage on a selected list of
Internet communities. It does not offer them the opportunity to
create unlimited numbers of free Internet keywords that can point
to any resource.
o Search engines provide multiple responses to a keyword entry and
many of the responses may be unrelated to a user's query.
Government Approvals and Regulation
We are not currently subject to direct federal, state or local
government regulation, other than regulations applicable to businesses
generally. There is only a small body of laws and regulations directly
applicable to access to or commerce on the Internet.
Due to the increasing popularity and use of the Internet, it is likely
that a number of additional laws and regulations may be adopted at the federal,
state and local levels with respect to the Internet, covering issues such as
intellectual property rights, user privacy, taxation, access charges,
characteristics and quality of products and services, liability for third-party
activities, transmission of sexually explicit material and jurisdiction. The
adoption of any such laws or regulations might decrease the growth of the
15
<PAGE>
Internet, which in turn could decrease the demand for Networds or increase the
cost of doing business or in some other manner harm our business. In addition,
applicability to the Internet of existing laws governing issues such as
intellectual property, taxation, obscenity and personal privacy is uncertain.
The vast majority of such laws were adopted before the advent of the Internet
and related technologies and, as a result, do not contemplate or address the
unique issues of the Internet and related technologies.
In particular, the use of Networds entails the potential risk of
possible infringement of third party rights. The law regarding liability for
contributory trademark infringement or facilitation of unfair competition on the
Internet is still unsettled. Our published terms and conditions and operating
procedures include measures to protect the rights of owners of registered
trademarks. These measures however, may not be adequate to shield us from
liability in the event of trademark infringement, dilution or unfair competition
by the creator of a Netword.
Employees
As of October 15, 1999, we had 10 full time employees and six
consultants who provided services on an as-needed basis. We believe that our
success will depend in part on our continued ability to attract, hire and retain
qualified personnel. The competition for such personnel is intense and we may
not be able to readily identify, attract and retain such personnel in the
future. We believe that our relationship with our employees is satisfactory. As
of the date hereof, we believe that we have an appropriate mix of employee
skills for our current business needs. None of our employees is represented by a
labor union or retained under an employment contract. All of our employees are
bound by confidentiality agreements.
Description of Property
We do not own real property. Our principal offices located at 702
Russell Avenue, Third Floor, Gaithersburg, Maryland 20877 are leased until
September 2003 and cover approximately 2000 square feet of office space at a
monthly rent of approximately $3,300. We do not consider this leased location to
be material to our operations, and we believe that equally suitable alternative
locations are available.
16
<PAGE>
SELLING STOCKHOLDERS
The table below provides, as of November 5, 1999, information regarding
the number and percentage of shares held by the selling stockholders before and
after this offering. The calculations are based on 17,705,924 outstanding
shares. If an * appears in a column next to a stockholder's name, that
stockholder owns less than one percent of our common stock. If a X appears next
to a stockholder's name, that stockholder received warrants in our merger with
Netword LLC. Unless disclosed in the footnotes to the table, no selling
stockholder has held any position or office or had any other material
relationship with us during the past three years.
For purposes of this table, a person is deemed to be the beneficial
owner of our common stock if such person:
o has or shares the power to vote or direct the voting of the common
stock or to dispose or direct the disposition of the common stock;
or
o has the right to acquire beneficial ownership of the common stock
within 60 days.
Accordingly, more than one person may be deemed to be a beneficial owner of the
same securities. Except as otherwise indicated in a footnote to this chart, each
stockholder has sole voting and dispositive power with respect to the shares of
common stock he holds. The shares of common stock of each stockholder other than
Batya Wise do not include shares held by that person's spouse or children.
The number of shares offered for sale for the account of a stockholder
and the number and percentage of shares owned by a stockholder before this
offering includes the shares of common stock held by the stockholder as of the
date of this prospectus and shares that are issuable upon the exercise of
warrants which were issued to the stockholder in our merger with Netword LLC or
in our Regulation S offering. See "Description of Securities" on page 36. The
number and percentage of shares beneficially owned by each stockholder after
this offering assumes the sale of all shares offered for sale for the account of
that stockholder.
The names of additional selling stockholders may be provided later in
accordance with Section 424 (c) of the Securities Act.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Number of
Shares Offered
Beneficially Owned by for Sale for the Beneficially Owned by
Name of Selling Stockholder Before Account of Stockholder after
Stockholder this Offering Stockholder this Offering
- ----------------------------------------------------------------------------------------------------------------------------------
Number Percentage Number of Percentage
of Shares of Shares Shares of Shares
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Philip S. Abrams (1)[CHECK MARK] 35,952 * 9,456 26,496 *
- ----------------------------------------------------------------------------------------------------------------------------------
Laurie Adler [CHECK MARK] 25,968 * 5,933 20,035 *
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Number of
Shares Offered
Beneficially Owned by for Sale for the Beneficially Owned by
Name of Selling Stockholder Before Account of Stockholder after
Stockholder this Offering Stockholder this Offering
- ----------------------------------------------------------------------------------------------------------------------------------
Number Percentage Number of Percentage
of Shares of Shares Shares of Shares
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alize Limited 1,007,500 5.7% 270,000 737,500 4.1%
- ----------------------------------------------------------------------------------------------------------------------------------
Amaranth Resources
Limited (2) 205,000 1.2% 180,000 25,000 *
- ----------------------------------------------------------------------------------------------------------------------------------
Richard Anderson [CHECK MARK] 5,191 * 1,365 3,826 *
- ----------------------------------------------------------------------------------------------------------------------------------
Keith B. Ballurio [CHECK MARK] 1,833 * 482 1,351 *
- ----------------------------------------------------------------------------------------------------------------------------------
Wendy L. Beck [CHECK MARK] 365 * 96 269 *
- ----------------------------------------------------------------------------------------------------------------------------------
Vincent H. Bono (3) [CHECK MARK] 15,627 * 4,110 11,517 *
- ----------------------------------------------------------------------------------------------------------------------------------
Shepard C. Bostin (4) [CHECK MARK] 402,236 2.2% 6,625 395,611 2.2%
- ----------------------------------------------------------------------------------------------------------------------------------
Cheltenham Capital
Enterprises Limited (5) 610,000 3.4% 360,000 250,000 1.4%
- ----------------------------------------------------------------------------------------------------------------------------------
John J. Curley [CHECK MARK] 46,652 * 12,270 34,382 *
- ----------------------------------------------------------------------------------------------------------------------------------
G. Mark Curry 180,000 1.0% 180,000 0 *
- ----------------------------------------------------------------------------------------------------------------------------------
Amy Diamond [CHECK MARK] 167 * 44 123 *
- ----------------------------------------------------------------------------------------------------------------------------------
EcomPark Inc. (6) 512,500 2.9% 450,000 62,500 *
- ----------------------------------------------------------------------------------------------------------------------------------
Matthew R. Edelstein 24,390
(7) [CHECK MARK] 106,748(28) * 82,358 *
- ----------------------------------------------------------------------------------------------------------------------------------
Estate of Robert 87,108
Simons [CHECK MARK] 331,193 1.9% 244,085 1.4%
- ----------------------------------------------------------------------------------------------------------------------------------
Falling Brook
Investments Ltd. (8) 307,500 1.7% 270,000 37,500 *
- ----------------------------------------------------------------------------------------------------------------------------------
Anitra Feit [CHECK MARK] 90,890 * 20,767 70,123 *
- ----------------------------------------------------------------------------------------------------------------------------------
Elliot Feit [CHECK MARK] 90,887 * 20,766 70,121 *
- ----------------------------------------------------------------------------------------------------------------------------------
Jeffrey Feit [CHECK MARK] 25,968 * 5,933 20,035 *
- ----------------------------------------------------------------------------------------------------------------------------------
Neal Feit [CHECK MARK] 25,968 * 5,933 20,035 *
- ----------------------------------------------------------------------------------------------------------------------------------
Lynn Gettenberg [CHECK MARK] 207,812 1.2% 47,482 160,330 *
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Number of
Shares Offered
Beneficially Owned by for Sale for the Beneficially Owned by
Name of Selling Stockholder Before Account of Stockholder after
Stockholder this Offering Stockholder this Offering
- ----------------------------------------------------------------------------------------------------------------------------------
Number Percentage Number of Percentage
of Shares of Shares Shares of Shares
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John W. Gildea [CHECK MARK] 117,454 * 26,836 90,618 *
- ----------------------------------------------------------------------------------------------------------------------------------
Joel H. Golovensky [CHECK MARK] 91,624 * 20,935 70,689 *
- ----------------------------------------------------------------------------------------------------------------------------------
Mary Hamlin [CHECK MARK] 7,771 * 2,044 5,727 *
- ----------------------------------------------------------------------------------------------------------------------------------
Lucy Hansen [CHECK MARK] 68,160 * 15,951 52,209 *
- ----------------------------------------------------------------------------------------------------------------------------------
Ronald I. and Joyce
Heller [CHECK MARK] 779,234 4.4% 178,043 601,191 3.4%
- ----------------------------------------------------------------------------------------------------------------------------------
Hemery Nominees 2%
Limited (9) 205,000 1. 180,000 25,000 *
- ----------------------------------------------------------------------------------------------------------------------------------
Murray Horowitz [CHECK MARK] 127,389 * 29,106 98,283 *
- ----------------------------------------------------------------------------------------------------------------------------------
Hurlow Partners Inc. (10) 205,000 1.2% 180,000 25,000 *
- ----------------------------------------------------------------------------------------------------------------------------------
International Project
Finance Ltd. 102,500 * 90,000 12,500 *
- ----------------------------------------------------------------------------------------------------------------------------------
Jesurum (1994) Family
Limited Partnership,
Robert Jesurum and
Toby Jesurum,
Trustees (11) [CHECK MARK] 630,212 3.5% 147,484 482,728 2.7%
- ----------------------------------------------------------------------------------------------------------------------------------
Kenneth R. Johnsen [CHECK MARK] 246,709 1.4% 56,369 190,340 1.1%
- ----------------------------------------------------------------------------------------------------------------------------------
Gladys H. Karanfilian [CHECK MARK] 166,986 * 39,078 127,908 *
- ----------------------------------------------------------------------------------------------------------------------------------
James Karanfilian (12) [CHECK MARK] 1,154,798(29) 6.4% 288,269 866,529 4.8%
- ----------------------------------------------------------------------------------------------------------------------------------
Jordan Klineman [CHECK MARK] 996,924 5.6% 227,782 769,142 4.3%
- ----------------------------------------------------------------------------------------------------------------------------------
Justine Klineman [CHECK MARK] 996,924 5.6% 227,782 769,142 4.3%
- ----------------------------------------------------------------------------------------------------------------------------------
Kent M. Klineman (13) [CHECK MARK] 2,581,802 13.3% 249,050 2,332,752 12.0%
- ----------------------------------------------------------------------------------------------------------------------------------
Klondike Resources
Inc. (14) [CHECK MARK] 695,372 3.9% 158,882 536,490 3.0%
- ----------------------------------------------------------------------------------------------------------------------------------
Lake & Co. (15) 205,000 1.2% 180,000 25,000 *
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Number of
Shares Offered
Beneficially Owned by for Sale for the Beneficially Owned by
Name of Selling Stockholder Before Account of Stockholder after
Stockholder this Offering Stockholder this Offering
- ----------------------------------------------------------------------------------------------------------------------------------
Number Percentage Number of Percentage
of Shares of Shares Shares of Shares
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alan B. Miller [CHECK MARK] 119,279 * 27,914 91,365 *
- ----------------------------------------------------------------------------------------------------------------------------------
Srinivas Nagaraj (16) [CHECK MARK] 20,235 * 5,322 14,913 *
- ----------------------------------------------------------------------------------------------------------------------------------
David S. and Bette
Nagelberg (17) [CHECK MARK] 779,234 4.4% 178,043 601,191 3.4%
- ----------------------------------------------------------------------------------------------------------------------------------
Robert C. O'Mara [CHECK MARK] 93,843 * 24,682 69,161 *
- ----------------------------------------------------------------------------------------------------------------------------------
Omnitrade Investments
Limited 102,500 * 90,000 12,500 *
- ----------------------------------------------------------------------------------------------------------------------------------
Palmerston Investments
Limited 805,000 4.5% 180,000 625,000 3.5%
- ----------------------------------------------------------------------------------------------------------------------------------
Anthony and Emily
Pantaleoni (18) [CHECK MARK] 239,940 1.4% 56,151 183,789 1.0%
- ----------------------------------------------------------------------------------------------------------------------------------
Ppon Pictet & Cie 717,500 4.0% 630,000 87,500 *
- ----------------------------------------------------------------------------------------------------------------------------------
Brian Puckett (19) [CHECK MARK] 6,195 * 1,629 4,566 *
- ----------------------------------------------------------------------------------------------------------------------------------
Donald Puckett [CHECK MARK] 167 * 44 123 *
- ----------------------------------------------------------------------------------------------------------------------------------
Jerry H. Pyle [CHECK MARK] 119,279 * 27,914 91,365 *
- ----------------------------------------------------------------------------------------------------------------------------------
Joseph S. Reiss [CHECK MARK] 519,520 2.9% 118,702 400,818 2.2%
- ----------------------------------------------------------------------------------------------------------------------------------
Murray M. Rubin 29,673
(20) [CHECK MARK] 197,143 1.1% 167,470 *
- ----------------------------------------------------------------------------------------------------------------------------------
Nadine V. Rubin [CHECK MARK] 129,868 * 29,673 100,195 *
- ----------------------------------------------------------------------------------------------------------------------------------
Shlomo Segev (21) [CHECK MARK] 150,262 * 16,753 133,509 *
- ----------------------------------------------------------------------------------------------------------------------------------
Davinder Sethi [CHECK MARK] 49,648 * 13,058 36,590 *
- ----------------------------------------------------------------------------------------------------------------------------------
David Smith [CHECK MARK] 993 * 261 732 *
- ----------------------------------------------------------------------------------------------------------------------------------
Smith Vincent & Co.
Ltd. (22) 205,000 1.2% 180,000 25,000 *
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Number of
Shares Offered
Beneficially Owned by for Sale for the Beneficially Owned by
Name of Selling Stockholder Before Account of Stockholder after
Stockholder this Offering Stockholder this Offering
- ----------------------------------------------------------------------------------------------------------------------------------
Number Percentage Number of Percentage
of Shares of Shares Shares of Shares
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stilwell Holding LLC
(23) [CHECK MARK] 535,155 3.0% 122,275 412,880 2.3%
- ----------------------------------------------------------------------------------------------------------------------------------
Ike Suri [CHECK MARK] 17,893 * 4,706 13,187 *
- ----------------------------------------------------------------------------------------------------------------------------------
Dennis J. and Ann A.
Wilkinson [CHECK MARK] 108,352 * 28,498 79,854 *
- ----------------------------------------------------------------------------------------------------------------------------------
Batya Wise (24) [CHECK MARK] 1,849,288(30) 10.2% 422,534 1,426,754 7.9%
- ----------------------------------------------------------------------------------------------------------------------------------
Daniel Wise [CHECK MARK] 207,812 1.2% 47,482 160,330 *
- ----------------------------------------------------------------------------------------------------------------------------------
Gidon Wise (25) [CHECK MARK] 333,756 (31) 1.9% 47,482 286,274 1.6%
- ----------------------------------------------------------------------------------------------------------------------------------
Marshall M. Wise [CHECK MARK] 117,454 * 26,836 90,618 *
- ----------------------------------------------------------------------------------------------------------------------------------
John P. Young (26) [CHECK MARK] 4,011 * 938 3,073 *
- ----------------------------------------------------------------------------------------------------------------------------------
Richard D. and Ragna
B. Young (27) [CHECK MARK] 114,850 * 30,207 84,643 *
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Abrams served as Vice President, Marketing of Netword LLC from December
1996 to March 3, 1997.
(2) Joseph L. Rotman is the sole director and Amaranth Canadian Holdings Ltd.
is the controlling entity of Amaranth Resources Limited.
(3) Mr. Bono served as manager of Internet Information Research of Netword LLC
until August 1997.
(4) Mr. Bostin is presently the Chief Operating Officer of Netword Inc. From
August 1997 to February 1999 he served as the Chief Operating Officer of
Netword LLC. From April 1997 to August 1997, he served as Director of
Marketing of Netword LLC.
(5) Ernesto Crespo is the sole director and shareholder of Cheltenham Capital
Enterprises Limited. Craig G. Brown and Paul Lemmon are the respective
president and secretary.
(6) EcomPark Inc., formerly known as Storage One, Inc., is traded on the
Alberta stock exchange (symbol EKP.al).
(7) Mr. Edelstein founded Birdshell Corporation, L.L.C. in April 1995 and
served as President until its assets were acquired by Netword LLC in
December 1996.
(8) Philip Strathy and John Strathy are the respective President and Vice
President and each controls 50% of this entity.
(9) Kevin J. Gollop, Christopher Totty and Peter J. Band are the directors of
Hemery Nominees Limited.
(10) Gerald Hurlow, Terrence Smith and Philip Deck are the directors of Hurlow
Partners Inc.
(11) Robert Jesurum and Toby Jesurum and their immediate family are the
principals of this entity.
21
<PAGE>
(12) Mr. Karanfilian served as a Manager of Netword LLC from December 1996 to
February 1999 and thereafter as a director of Netword Inc. until April
1999. He served as Chairman of Birdshell until it was acquired by Netword
LLC in December 1996.
(13) Mr. Klineman served as a Manager of Netword LLC from December 1996 to
February 1999 and thereafter as a director and officer of Netword Inc.
(14) Sherry Mallin is the principal of this entity.
(15) Lake & Co. acts as bank nominee for Harmony North American Small Cap Fund.
Harmony North American Small Cap Fund is owned by AGF, a large mutual fund
group in Canada.
(16) Mr. Nagaraj was employed by Netword LLC from December 1996 to August 1997.
(17) Mr. and Mrs. Nagelberg hold our common stock and warrants to purchase
common stock as joint tenants.
(18) Mr. Pantaleoni served as counsel to Birdshell before its acquisition by
Netword LLC in December 1996.
(19) Mr. Puckett served as the registered agent for Birdshell before its
acquisition by Netword LLC in December 1996.
(20) Mr. Rubin has been Treasurer and Chief Financial and Accounting Officer of
Netword Inc. since September 1999. He has provided accounting and tax
preparation services to us since December 1996.
(21) Mr. Segev served as a software engineer for Netword LLC from December 1996
to February 1998 and for Birdshell before December 1996.
(22) M. Kitson Vincent and the Estate of Arthur J. Vincent are the shareholders
of this entity. The directors of the entity are M. Kitson Vincent, Gerald
R. Vincent and Esther Jarrett. M. Kitson Vincent is the President and
Gerald R. Vincent is the Vice President.
(23) Before February 1999, the Managing Partner of Stilwell Holding LLC, K.A.
Taipale was a Member of the Board of Managers of Netword LLC.
(24) Ms. Wise is the wife of Michael Wise, the President and Chief Executive
Officer of Netword Inc. Mr. Wise disclaims beneficial ownership of shares
beneficially owned by his wife and his sons, David Wise and Gidon Wise.
(25) Mr. Wise is employed as a system and software analyst for Netword Inc. He
also serves as a consultant for Netword Inc.
(26) Mr. Young served as Vice President and General Counsel of Netword LLC from
December 1996 to August 1997, and of Birdshell from May 1996 to December
1996.
(27) Mr. and Mrs. Young's common stock and warrants to purchase common stock are
held as community property.
22
<PAGE>
(28) Excludes (a) 85,473 shares of common stock currently outstanding and (b)
30,503 shares of common stock issuable upon exercise of outstanding
warrants held by James Karanfilian. An option to purchase such shares was
granted to Matthew R. Edelstein in September 1996 at Mr. Karanfilian's
original cost of $256,666 plus 10% annual interest until January 26, 2000.
(29) Includes (a) 85,473 shares of common stock currently outstanding and (b)
30,503 shares of common stock issuable upon exercise of outstanding
warrants held by James Karanfilian. An option to purchase such shares was
granted to Matthew R. Edelstein in September 1996 at Mr. Karanfilian's
original cost of $256,666 plus 10% annual interest until January 26, 2000.
(30) Includes (a) 89,639 shares of common stock held by Ms. Wise in a custodial
account in her name as custodian for her minor son, David Wise, and (b)
26,546 shares of common stock issuable upon the exercise of warrants also
held by Ms. Wise as custodian for David Wise. Excludes (a) 160,330 shares
of common stock, (b) 47,482 shares of common stock issuable upon the
exercise of warrants and (c) 125,944 options to purchase shares of common
stock held by Ms. Wise's son, Gidon Wise, as the record holder and
beneficial owner, and by Ms. Wise as beneficial owner.
(31) Includes (a) 160,330 shares of common stock, (b) 47,482 shares of common
stock issuable upon the exercise of warrants and (c) 125,944 options to
purchase shares of common stock held by Mr. Gidon Wise, as the record
holder and beneficial owner, and by his mother, Batya Wise, as beneficial
owner.
23
<PAGE>
PLAN OF DISTRIBUTION
Sales by selling stockholders may be made pursuant to this prospectus
from time to time as each selling stockholder determines. Sales may be made
directly to purchasers or through brokers, dealers or agents. Brokers, dealers
or agents who participate in sales of shares may receive discounts, concessions
or commissions from the sellers or purchasers.
Since the selling stockholders and any participating brokers, dealers
or agents may be deemed to be underwriters within the meaning of the Securities
Act, any profits they receive on the sale of the shares and any related
discounts, commissions or concessions may be deemed to be underwriting discounts
and commissions under the Securities Act.
The shares may be sold in one or more transactions:
o on any exchange on which the shares may be listed at the time
of the sale;
o in the over-the-counter markets;
o in negotiated transactions other than on such exchange or in
the over-the counter market; or
o through the writing of options.
The selling stockholders may sell the shares from time to time in one
or more transactions at:
o fixed prices;
o prevailing market prices at the time of sale;
o varying prices determined at the time of sale; or
o negotiated prices.
In addition, subject to applicable state and foreign laws, the shares
which qualify for sale under an applicable exemption from registration under the
Securities Act may be sold pursuant to the exemption rather than this
prospectus.
To the best of our knowledge, there are currently no plans,
arrangements or understandings regarding the sale of shares between any of the
selling stockholders and any broker, dealer, agent or underwriter. There is no
certainty that any selling stockholder will sell any or all of the shares
offered by it under this prospectus or that any selling stockholder will not
transfer, devise or donate such shares by means not described in this
prospectus.
The selling stockholders and any other person participating in the
offering will be subject to applicable provisions of the Securities Exchange Act
and the rules and regulations thereunder, which provisions may limit the timing
of purchases and sales of the shares by the selling stockholders. These
restrictions may affect the marketability of the shares and the ability of any
person to engage in market-making activities with respect to the shares.
We will pay substantially all of the expenses incidental to the
registration, offering and sale of the shares covered by this prospectus, except
expenses for discounts, commissions and concessions of brokers, dealers and
agents participating in sales.
24
<PAGE>
We have entered into an indemnification agreement with each of the
selling stockholders which provides that we and each selling stockholder will be
indemnified by the other against certain liabilities, including certain
liabilities under the Securities Act, or will be entitled to contribution in
connection with any such liabilities.
We will make copies of this prospectus available to the selling
stockholders. At or before the time of any sale of shares by a selling
stockholder pursuant to this prospectus, the selling stockholder must deliver a
copy of this prospectus to the purchaser.
USE OF PROCEEDS
We will receive no proceeds from the sale of shares by selling
stockholders.
We will receive $1.25 per share from any exercise of outstanding
warrants to purchase an aggregate of 4,784,733 shares which may be resold
pursuant to this prospectus. If all of these warrants were exercised, we would
receive gross proceeds of $5,980,916.25. There is no assurance that any of the
warrants will be exercised. Any proceeds from the exercise of the warrants will
be added to our working capital and used primarily for marketing, advertising
and promotional activities.
25
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
Our directors, officers and significant employees1 and biographical
information about them are provided below. Each director will hold office until
our first annual meeting and until his successor is duly elected and qualified,
or until his earlier resignation or removal.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Position
- ---- --- --------
Michael L. Wise 56 President, Chief Executive Officer, Director
Kent M. Klineman 67 Secretary, Director
W. Edward Scheetz 34 Expected to become a director *
Shepard C. Bostin 33 Chief Operating Officer, Vice President of
Marketing
Murray M. Rubin 56 Chief Financial and Accounting Officer, Treasurer
Thomas Sweeting 36 Senior Software Engineer
Simon Janes 28 Senior Software Engineer
</TABLE>
* Subject to our obtaining directors and officers liability insurance,
Mr. Scheetz has agreed to join our board of directors.
Michael Wise joined Netword LLC in December 1996 as chairman of the
Board of Managers and became its President and Chief Executive Officer in August
1997. Additionally, he is Vice-Chairman of nStor Technologies, Inc. (AMEX:
NSO), a manufacturer of RAID subsystems and information storage solutions for
PC-LAN and Unix. Since 1988, Mr. Wise has been a director (Chairman of the Board
from 1992-1997) and officer of nStor. He founded IMNET Systems, Inc. (NASDAQ:
IMNT), an imaging and information solutions systems provider, and served as a
director and officer of that company from 1986-1995. Mr. Wise has a Ph.D. in
Theoretical Physics from Brandeis University.
Kent M. Klineman joined Netword LLC in December 1996 and acts as our
in-house counsel. Since 1994, he has owned and operated Klineman Holding Corp.,
a New York venture capital firm. In 1999, he became the President and Chief
Executive Officer of Hudson Investment Corp. He is also a founder, director and
the secretary of EIS International, Inc. (NASDAQ: EISI), a manufacturer of
computerized telemarketing systems, and a director and a member of the executive
and audit committees of Concord Camera Corp. (NASDAQ:LENS). Mr. Klineman is a
graduate of Dartmouth College and Harvard Law School and holds a masters in
taxation from N.Y.U. Law School's graduate tax program.
- --------
1 "Significant employees" means such persons as production managers, sales
managers or research scientists, who are not executive officers, but who make or
are expected to make significant contributions to our business.
26
<PAGE>
W. Edward Scheetz is a founder and is currently Co-Chief Executive
Officer of NorthStar Capital Investment Corp. where he has overseen the
investment of more than $1 billion in real estate assets and operating
companies. Before joining NorthStar Capital in July 1997, Mr. Scheetz was a
partner of Apollo Real Estate Advisors from 1993 to 1997 and a principal of
Trammell Crow Ventures from 1989 to 1993. Mr. Scheetz has an A.B. in economics
from Princeton University.
Shepard C. Bostin joined Netword LLC in March 1997 as director of
marketing and became its Chief Operating Officer in August 1997. Before working
for us, from March 1995 to March 1997, he was Vice President of Product
Marketing for SelectStar, Inc. From June 1994 to March 1995 he was an employee
of Intersolv, Inc. Mr. Bostin holds a B.S., with honors, in Information and
Decision Systems from Carnegie Mellon University.
Murray M. Rubin is a certified public accountant and has served as the
Executive Vice President and Chief Financial Officer of Klineman Holding Corp.
and various related companies controlled by Mr. Klineman since 1982. He is a
member of the American Institute of Certified Public Accountants and
Pennsylvania Institute of Certified Public Accountants. Mr. Rubin holds a B.S.
in Business Administration from The Pennsylvania State University and a
Certificate of International Studies from the University of Heidelberg.
Thomas Sweeting joined Netword LLC in March 1997. He oversees the
development of our customer account management and billing software, and our
download agent software. From March 1994 to February 1997 he was an employee of
Highland Technologies, Inc. From 1992 to February 1994 he was an employee of
Intrafed Inc. He received a B.S. in Computer Science from the University of
Maryland.
Simon Janes was employed as a systems administrator by Netword LLC from
January 1997 to August 1997. After an eight month leave to attend George Mason
University, he returned to us in April 1998 as a systems administrator and
software engineer. He manages the development of our query, registration and Web
servers and is responsible for our hardware installation, configuration and
maintenance. From May 1994 to December 1996, he was employed as a systems
administrator for Network and Communications Management. He is a recognized
expert in the Linux operating system and related software, and, in addition to
developing the EQL device driver for Linux, is among fewer than 100 Certified
Linux Administrators in the world.
Directors do not receive a salary for their services as directors or a
fee for attendance in person at meetings of the board of directors. Directors
are reimbursed for travel expenses and other out-of-pocket expenses incurred in
connection with their attendance at meetings.
Executive officers serve at the discretion of our board of directors.
Significant employees serve at the discretion of our executive officers and
board of directors. None of our officers or significant employees have entered
into employment agreements. Accordingly, such employees may leave, and we may
terminate, their employment at any time, with or without cause.
27
<PAGE>
Limitations on liability and indemnification matters.
The Delaware General Corporation Law provides that a company may
indemnify its directors and officers against certain liabilities. Our
certificate of incorporation and bylaws provide for the indemnification of our
directors and officers to the fullest extent permitted by law. The effect of
such provisions is to indemnify our directors and officers against all costs,
expenses and liabilities incurred by them in connection with actions, suits or
proceedings in which they are involved because of their affiliation with us.
28
<PAGE>
REMUNERATION OF DIRECTORS AND OFFICERS
The table below provides the remuneration of our directors and officers
for fiscal year 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Name and Principal Position Fiscal Year Salary Other Compensation
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Michael L. Wise 1998 None None.
President, Chief Executive Officer,
Director
- -------------------------------------------------------------------------------------------------------------------
Kent M. Klineman 1998 None None.
Secretary, Director
- -------------------------------------------------------------------------------------------------------------------
W. Edward Scheetz 1998 None None.
Expected to become a director.*
- -------------------------------------------------------------------------------------------------------------------
Shepard C. Bostin 1998 $102,000 None.
Chief Operating Officer, Vice President of
Marketing
- -------------------------------------------------------------------------------------------------------------------
Murray M. Rubin 1998 None None.
Chief Financial and Accounting Officer,
Treasurer
- -------------------------------------------------------------------------------------------------------------------
Three highest paid officers and directors as 1998 $102,000 None.
a group.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Subject to our obtaining directors and officers liability insurance,
Mr. Scheetz has agreed to join our board of directors.
Additionally, for the current portion of fiscal year 1999, the
remuneration of our directors and officers was as follows:
o From May 1, 1999 through August 31, 1999, we paid Mr.
Wise a business consulting fee of $8,000 per month.
As of August 31, 1999, he began receiving a salary at
the same rate.
o As of May 1, 1999, we commenced payment to Mr.
Klineman of a retainer for legal services at the
monthly rate of $4,000. This retainer is applied
against charges for Mr. Klineman's services at the
rate of $250 per hour.
From September 1997 to date, our directors and officers received the
following options:
o Michael L. Wise was granted options to purchase
(a)1,000 units of Netword, LLC on September 30, 1997
and (b) 2,331.30 units of Netword, LLC on March 1,
1998. In connection with our merger with Netword LLC
in February, 1999, these options were canceled and
Mr. Wise was granted new options to purchase (a)
29
<PAGE>
824,557 shares of our common stock at an exercise
price of $0.1666 per share and (b) 294,265 shares of
our common stock at an exercise price of $1.25 per
share. Each option to purchase common stock at
$0.1666 per share will expire on February 17, 2002.
Each option to purchase common stock at $1.25 per
share will expire on February 17, 2004. Additionally,
on March 15, 1999, Mr. Wise was granted options to
purchase 825,000 shares of our common stock at an
exercise price of $1.25 per share. These options will
expire on February 17, 2004. He received all of these
options in his capacity as a manager, director or
officer.
o Kent M. Klineman was granted options to purchase
(a)1,000 units of Netword, LLC on September 30, 1997
and (b) 1,804.20 units of Netword, LLC on March 1,
1998. In connection with our merger with Netword LLC
in February, 1999, these options were canceled and
Mr. Klineman was granted new options to purchase (a)
694,090 shares of our common stock at an exercise
price of $0.1666 per share and (b) 247,705 shares of
our common stock at an exercise price of $1.25 per
share. Each option to purchase common stock at
$0.1666 per share will expire on February 17, 2002.
Each option to purchase common stock at $1.25 per
share will expire on February 17, 2004. Additionally,
on March 15, 1999, Mr. Klineman was granted options
to purchase 550,000 shares of our common stock at an
exercise price of $1.25 per share. These options will
expire on February 17, 2004. He received all of these
options in his capacity as a manager or director.
o Shepard C. Bostin was granted options to purchase (a)
520.76 units of Netword, LLC on September 30, 1997
and (b) 590.57 units of Netword, LLC on March 1,
1998. In connection with our merger with Netword LLC
in February, 1999, these options were canceled and
Mr. Bostin was granted new options to purchase (a)
275,074 shares of our common stock at an exercise
price of $0.1666 per share and (b) 98,167 shares of
our common stock at an exercise price of $1.25 per
share. Each option to purchase common stock at
$0.1666 per share will expire on February 17, 2002.
Each option to purchase common stock at $1.25 per
share will expire on February 17, 2004. He received
all of these options in his capacity as an employee.
o Murray M. Rubin was granted options to purchase 30
units of Netword, LLC on March 1, 1998. In connection
with our merger with Netword LLC in February, 1999,
these options were canceled and Mr. Rubin was granted
new options to purchase (a) 7,425 shares of our
common stock at an exercise price of $0.1666 per
share and (b) 2,650 shares of our common stock at an
exercise price of $1.25 per share. Each option to
purchase common stock at $0.1666 per share will
expire on February 17, 2002. Each option to purchase
common stock at $1.25 per share will expire on
February 17, 2004. Additionally, on September 7,
1999, Mr. Rubin was granted options to purchase
50,000 shares of our common stock at an exercise
price of $1.50 per share. These options will expire
on September 7, 2001. He received all of these
options in his capacity as a consultant or officer.
30
<PAGE>
o We agreed to issue immediately exercisable warrants,
expiring on June 30, 2004, to purchase 336,000 shares
of common stock at an exercise price of $1.50 per
share to NorthStar Capital Partners LLC upon Mr.
Scheetz's election to our board of directors. Mr.
Scheetz holds a 50% interest in NorthStar Capital and
disclaims beneficial ownership as to 50% of the
shares owned by NorthStar Capital.
31
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY HOLDERS
Voting Securities and Principal Holders Thereof .
The table below provides information as of November 5, 1999 with
respect to shares of our common stock held of record by:
o the three highest paid persons who are officers;
o all directors;
o all directors and officers as a group; and
o each person who is not an officer or director who is
known by us to own more than 10% of our outstanding
common stock.
The address for each stockholder, other than Net2Phone, is in our care at
our principal offices. All calculations in the table are based on 17,705,924
shares of common stock outstanding. The amounts shown for each stockholder
include shares underlying currently exercisable options, warrants and
convertible securities held by the stockholder.
Except as otherwise indicated in a footnote to this chart, each
stockholder has sole voting and dispositive power with respect to the shares of
common stock he holds. The shares of common stock of each stockholder other than
Batya Wise do not include shares held by that person's spouse or children. The
amount and percentage of shares owned after the offering assumes the exercise of
outstanding warrants at $1.25 per share and resale of all shares received upon
such exercise.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Percentage of
common stock Percentage of
Name and Amount owned owned before Amount owned common stock
address of before the the after the owned after
stockholder offering offering offering the offering
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shepard C. 402,236 2.2% 395,611 2.2%
Bostin (1)
- ------------------------------------------------------------------------------------------------------------------------------
Kent M.
Klineman (2) 2,581,802 13.3% 2,332,752 12.0%
- ------------------------------------------------------------------------------------------------------------------------------
W. Edward
Scheetz (3) 1,056,000 5.8% 1,056,000 5.8%
- ------------------------------------------------------------------------------------------------------------------------------
Michael Wise 1,943,822 9.9% 1,943,822 9.9%
(4)
- ------------------------------------------------------------------------------------------------------------------------------
Batya Wise (5) 1,849,288 10.2% 1,426,754 7.9%
- ------------------------------------------------------------------------------------------------------------------------------
Net2Phone,
Inc. (6)
171 Main St.
Hackensack, NJ 07601 4,197,573 19.16% 4,197,573 19.16%
- ------------------------------------------------------------------------------------------------------------------------------
All officers 6,181,003 27.4% 5,895,655 26.2%
and directors
as a group
(3)(7)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
(1) Shepard C. Bostin is an officer. His shares include 373,241 shares
underlying currently exercisable options and 6,625 shares underlying
currently exercisable warrants.
(2) Kent M. Klineman is both an officer and a director. His shares include
1,491,795 shares underlying currently exercisable options and 249,050
shares underlying currently exercisable warrants.
(3) W. Edward Scheetz is expected to become a director. His shares include
(a) 320,000 shares underlying currently exercisable warrants which are
held by NorthStar Capital Partners LLC, in which Mr. Scheetz has 50% of
the voting power and economic interest, and (b) 336,000 shares underlying
warrants which will be granted to NorthStar Capital upon his election to
our board of directors. Mr. Scheetz disclaims beneficial ownership as to
50% of the shares owned by NorthStar Capital.
(4) Michael Wise is both an officer and a director. His shares consist of
1,943,822 shares underlying currently exercisable options.
(5) Batya Wise owns more than 10% of the outstanding common stock. Her shares
include 89,639 shares which she holds as custodian for her son David
Wise, and an aggregate of 422,534 shares underlying currently exercisable
warrants which she holds either individually or as custodian for David
Wise. She does not hold any options. Ms. Wise is the wife of Michael
Wise, who disclaims beneficial ownership of shares held by his wife.
(6) Net2Phone holds currently exercisable warrants to purchase up to 15% of
our fully-diluted common stock. As of the date hereof, the warrants
entitle Net2Phone to purchase 4,197,573 shares of our common stock.
(7) Includes 3,868,933 shares underlying currently exercisable options and
944,548 shares underlying currently exercisable warrants.
Options, Warrants and Rights.
The table below provides information as of November 5, 1999 with respect
to options, warrants and rights to purchase shares of common stock which are
held of record by:
o the three highest paid persons who are officers;
o all directors;
33
<PAGE>
o all directors and officers as a group; and
o each person who is not an officer or director who is known by us
to own more than 10% of our outstanding common stock.
All of the options and warrants are currently exercisable. Shares
underlying warrants and options of each stockholder other than Batya Wise
exclude shares underlying warrants or options held by the named person's spouse
or children. Except for the warrants held by Mr. Scheetz and warrants for 3,200
shares held by Murray M. Rubin, our Chief Financial and Accounting Officer, all
of which may be transferred only pursuant to exemption from registration under
the securities laws, none of the other warrants or options are transferable,
except by will or the laws of descent and distribution.
The expiration dates for the warrants and options are as follows:
o warrants to purchase 320,000 shares of our common stock which are
beneficially held by W. Edward Scheetz and warrants to purchase
3,200 shares of our common stock which are beneficially held by
Mr. Rubin expire on June 30, 2004
o warrants to purchase 336,000 shares of our common stock which will
be issued to NorthStar Capital Partners LLC upon Mr. Scheetz's
election to our board of directors will expire on June 30, 2004
o warrants to purchase up to 15% of our fully-diluted common stock
which are beneficially held by Net2Phone, Inc. expire on September
29, 2003.
o all other warrants expire on February 17, 2002
o all options to purchase shares of common stock for $0.1666 per
share expire on February 17, 2002
o all options to purchase shares of common stock for $1.25 per share
expire on February 17, 2004
o all options to purchase shares of common stock for $1.50 per
share expire on September 7, 2001
All warrants, other than those granted to Net2Phone, are subject to our prior
redemption under certain circumstances. See "Description of Securities" on page
36 for the terms under which a redemption may occur.
34
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Common stock Common stock
underlying underlying
Name of stockholder warrants Exercise price options Exercise price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shepard C. Bostin 6,625 $1.25 275,074 $0.1666
98,167 $1.25
- ---------------------------------------------------------------------------------------------------------------------------
Kent M. Klineman 249,050 $1.25 694,090 $0.1666
797,705 $1.25
- ---------------------------------------------------------------------------------------------------------------------------
W. Edward Scheetz 656,000 $1.50 None ---
(1)
- ---------------------------------------------------------------------------------------------------------------------------
Michael Wise None 824,557 $0.1666
1,119,265 $1.25
- ---------------------------------------------------------------------------------------------------------------------------
Batya Wise (2) 422,534 $1.25 None --
- ---------------------------------------------------------------------------------------------------------------------------
Net2Phone, Inc. (3) 4,197,573 Approximately None --
$3,000,000
- ---------------------------------------------------------------------------------------------------------------------------
All executive officers 285,348 $1.25 1,801,146 $0.1666
and directors as a
group. (2) 659,200 $1.50 2,017,787 $1.25
50,000 $1.50
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Scheetz is expected to become a director. All warrants are held by
NorthStar Capital Partners LLC, in which Mr. Scheetz has 50% of the
voting power and economic interest. The number of warrants includes
warrants to purchase 336,000 shares of our common stock which will be
issued to NorthStar Capital Partners LLC upon Mr. Scheetz's election to
our board of directors. Mr. Scheetz disclaims beneficial ownership as to
50% of the shares owned by NorthStar Capital.
(2) Batya Wise is the wife of Michael Wise, who disclaims beneficial
ownership of all warrants and shares beneficially owned by his wife.
Shares underlying warrants held by Batya Wise include shares underlying
warrants which she holds as custodian for her son, David Wise.
(3) Net2Phone holds currently exercisable warrants to purchase up to 15% of
our fully-diluted common stock. As of the date hereof, the warrants
entitle Net2Phone to purchase 4,197,573 shares of our common stock.
There are no other classes of common stock and no shares of preferred
stock outstanding. We have no parents or subsidiaries.
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Certain of our officers and directors received options to purchase
shares of our common stock and are currently paid consulting fees. See
"Remuneration of Directors and Officers" on page 29.
35
<PAGE>
SECURITIES BEING OFFERED
Shares of our common stock are the only securities being offered by
this prospectus.
All shares of our common stock are identical in all respects. Each
shares entitles the holder to the same rights and privileges enjoyed by other
holders of shares of common stock and is subject to the same qualifications,
limitations and restrictions as all other shares of common stock.
Holders of our common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders.
Accordingly, subject to the voting rights that holders of preferred stock may
then possess, holders of a plurality of the shares of common stock present at a
meeting at which a quorum is present can elect all of the directors eligible for
election in a given year. The holders of a majority of the voting power of the
issued and outstanding capital stock constitutes a quorum. Our bylaws state that
any action which may be taken by our stockholders at a meeting may also be taken
without a meeting, without prior notice and without a vote, if such action is
set forth in a written consent signed by the minimum number of stockholders
required to approve that action. In most cases, a written consent will only
require the signatures of the holders of a majority of the voting power of our
issued and outstanding capital stock.
The holders of common stock are entitled to dividends when declared by
our board of directors from legally available funds. The holders of common stock
are also entitled to share pro rata in any distribution to stockholders upon our
liquidation or dissolution. We do not anticipate declaring or paying any cash
dividends in the foreseeable future.
The holders of our common stock:
o may not convert the common stock into another security;
o have no right to require us to redeem the common stock;
o have no right to subscribe in any new issuance of common stock
in order to maintain their percentage of ownership of our
common stock; and
o are not responsible to provide us with additional capital or
other funds.
DESCRIPTION OF SECURITIES
We are authorized to issue 40,000,000 shares of common stock, par value
$.01 per share, and 10,000 shares of preferred stock, par value $.01 per share.
If all of the warrant shares covered by this prospectus are issued, we will have
22,490,657 outstanding shares of common stock, including 1,600,000 shares
issuable upon exercise of all of the Regulation S warrants and 3,184,733 shares
issuable upon exercise of all of the merger warrants. In addition, we have
reserved 10,026,731 shares of our common stock for issuance upon the exercise of
other outstanding warrants (including those to be issued to NorthStar Capital
Partners LLC upon the election of W. Edward Scheetz's to our board of directors)
and options and the conversion of convertible notes. We have also reserved
2,910,235 shares of our common stock for issuance upon exercise of options that
may be granted in the future under our stock option plan. Assuming the purchase
of shares of common stock underlying all warrants, options and convertible notes
outstanding as of November 5, 1999 and the exercise of the warrants to be issued
to NorthStar Capital Partners LLC upon Mr. Scheetz's election to our board of
directors, 32,517,388 shares of common stock would be issued and outstanding.
36
<PAGE>
Common Stock
For a description of our common stock, see "Securities Being Offered"
directly preceding this section of the prospectus.
Preferred Stock
We may issue 10,000 shares of preferred stock in one or more series.
Our board of directors may determine the terms of our preferred stock at the
time of its issuance without action by the stockholders. The terms of any
issuance of preferred stock may include:
o voting rights, including the right to vote as a series on
particular matters, which could be superior to those of the
shares of common stock;
o preferences over the shares of common stock as to dividends
and distributions in liquidation;
o conversion and redemption rights, including the right to
convert into shares of common stock; and
o sinking fund provisions.
None of the preferred stock is currently outstanding.
Our board of directors has the authority to issue up to 10,000 shares
of preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any vote or
action by the stockholders. The rights of the holders of our common stock may be
adversely affected by the rights of the holders of any preferred stock that may
be issued in the future.
Stock Option Plan
On March 18, 1999, our board of directors and a majority of our
stockholders adopted a stock option plan. Under the stock option plan options to
acquire an aggregate of 7,500,000 shares of common stock may be granted to our
employees, officers, directors and consultants, as well as other persons, at the
discretion of our board of directors. The stock option plan authorizes our board
of directors to issue incentive stock options, as defined in Section 422A(b) of
the Internal Revenue Code, and stock options that do not conform to the
requirements of that code section which are referred to as non-incentive stock
options. Our board of directors has discretionary authority to determine the
types of stock options to be granted, the persons among those eligible to whom
options may be granted, the number of shares to be subject to such options and
the terms thereof. Officers, directors, consultants and other persons who are
not our employees may only be granted non-incentive stock options. The exercise
price of an incentive stock option will be equal to or greater than the fair
market value of the underlying shares of stock as of the date of the grant. The
exercise price of a non-incentive stock option will be determined by our board
of directors at the time the option is granted. The exercise price may be paid
in cash, certified or bank check or by promissory note on terms prescribed by
our board of directors.
37
<PAGE>
Outstanding Options
In connection with our merger with Netword LLC, options to purchase
9,229.14 units of Netword LLC previously issued to a total of 14 employees
(including former employees) and managers of Netword LLC, all of whom were
members of Netword LLC, were canceled, and each person who held such an option
was granted a new option under our newly adopted stock option plan to purchase
(a) 247.518331 shares of our common stock at an exercise price of $0.1666 per
share and (b) 88.333682 shares of our common stock at an exercise price of $1.25
per share for each canceled option to purchase one unit of Netword LLC. As a
result, we granted new options to purchase a total of up to 2,284,374 shares of
common stock at an exercise price of $0.1666 per share (of which options for
43,315 shares have since been terminated) and up to 815,239 shares of common
stock at an exercise price of $1.25 per share (of which options for 31,556
shares have since been terminated). Each option to purchase common stock at
$0.1666 per share will expire on February 17, 2002. Each option to purchase
common stock at $1.25 per share will expire on February 17, 2004. On March 15,
1999, additional options to purchase an aggregate of 1,456,250 shares of our
common at an exercise price of $1.25 per share were granted to two of our
directors and two consultants. In September, 1999, additional options to
purchase an aggregate of 108,773 shares of our common stock at exercise prices
ranging from $0.1666 to $1.50 per share were granted to one of our officers and
one consultant. As of November 5, 1999, none of these options had been
exercised.
Outstanding Warrants and Convertible Notes
Merger Warrants. In connection with our merger with Netword LLC, each
holder of units in Netword LLC received in exchange for each unit, (a)
247.518331 shares of our common stock and (b) warrants to purchase 88.333682
shares of our common stock at an exercise price of $1.25 per share. Accordingly,
on February 18, 1999, we issued warrants to acquire a total of 3,184,733 shares
of common stock. Each of those warrants is currently exercisable and expires on
February 17, 2004, subject to prior redemption as described below. As of
November 5, 1999, none of these warrants had been exercised. The warrants issued
in the merger are exercisable only by the original holder or a transferee who
received the warrant by will or the laws of descent and distribution.
The exercise price of these warrants and the number of warrant shares
issuable upon their exercise are subject to adjustment in certain circumstances.
These circumstances include a stock split of, stock dividend on, or a
subdivision, combination or recapitalization of, the common stock. The warrants
do not confer upon the holder any voting or any other rights of a stockholder.
We may redeem all or any of the merger warrants, at a price of $0.05
per underlying share, at any time after the first date on which the average of
the closing bid prices for our shares of common stock in any inter-dealer
quotation system on which the common stock has been the subject of both bid and
ask quotations shall have exceeded $2.50 per share on 10 consecutive trading
days. After the date
38
<PAGE>
fixed for redemption by written notice delivered to the warrant holders, the
right to exercise the redeemed portion of any warrant will cease, and the holder
will be entitled only to receive payment of the redemption price for the
redeemed portion of the warrant. Upon a holder's surrender of a warrant, we will
deliver to the holder a new warrant of like tenor and date with respect to any
unredeemed portion of the warrant.
Regulation S Warrants. In an offering in accordance with Rule 903 of
Regulation S under the Securities Act, on March 19, 1999, we sold warrants to
purchase 1,600,000 shares of our common stock at $1.25 per share. These warrants
are currently exercisable at $1.25 per share and will expire on February 8,
2000, subject to prior redemption as described below. As of November 5, 1999,
none of the warrants had been exercised.
The exercise price of these warrants and the number of shares issuable
upon their exercise are subject to adjustment in certain circumstances. These
circumstances include a stock split of, stock dividend on, or a subdivision,
combination or recapitalization of, our common stock. The warrants do not confer
upon the holder any voting or any other rights of a stockholder.
Regulation S warrants are exercisable only by the original holder or by
a transferee, provided, that we are satisfied that the transfer was made in any
of the following circumstances:
o The transfer was made to a non-U.S. person who purchased and
received the warrant outside the United States in compliance
with Rule 903 or Rule 904 of Regulation S under the Securities
Act; or
o The transfer was made under an exemption from registration
under the Securities Act and we have received an opinion to
that effect from counsel acceptable to us.
We may redeem all or any of the Regulation S warrants, at a price of
$0.05 per underlying share, at any time after the first date on which the
average of the closing bid prices for our shares of common stock in any
inter-dealer quotation system on which the common stock has been the subject of
both bid and ask quotations shall have exceeded $2.00 per share on 10
consecutive trading days. After the date fixed for redemption by written notice
delivered to the warrant holders, the right to exercise the redeemed portion of
any warrant will cease, and the holder will be entitled only to receive payment
of the redemption price for the redeemed portion of the warrant. Upon a holder's
surrender of a warrant, we will deliver to the holder a new warrant of like
tenor and date with respect to any unredeemed portion of the warrant.
We have filed this registration statement to fulfill our obligation
under the terms of the Reg S offering.
Additional Warrants. We have also privately issued or agreed to issue
warrants to purchase an aggregate of 5,416,966 shares of our common stock at
exercise prices ranging from $0.1666 to $1.50 per share (including the warrants
granted to Net2Phone described below). All of these warrants are outstanding and
exercisable on the date hereof, except that warrants to purchase 336,000 shares
at $1.50 per share which we have agreed to issue will be exercisable upon their
issuance.
39
<PAGE>
In connection with our agreement with Net2Phone, we granted Net2Phone
four-year warrants (expiring September 29, 2003) to purchase up to 15% of our
fully-diluted common stock for approximately $3,000,000. Under these warrants,
Net2Phone currently has the right to purchase 4,197,573 shares of our common
stock.
Convertible Notes. We have issued convertible notes totaling $20,000,
due March 31, 2002, which are convertible into common stock at $1.00 per share.
Transfer Agent and Registrar
Our transfer agent and registrar is Continental Stock Transfer & Trust
Company, located at Two Broadway, New York, New York 10004. Its telephone number
is (212) 509-4000.
Listing
Shares of our common stock are currently quoted in the NQB Pink Sheets
under the trading symbol "NTWD."
SIGNIFICANT PARTIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Name Address Relationship to Netword, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
Shepard C. Bostin c/o Netword, Inc. Chief Operating Officer, Vice
702 Russell Avenue, Third Floor President of Marketing
Gaithersburg, MD 20877
- --------------------------------------------------------------------------------------------------------------------------------
Kent M. Klineman 1270 Avenue of the Americas Secretary, Director, beneficial owner
Suite 1800 of more than 5% of our common
New York, NY 10020 stock.
- --------------------------------------------------------------------------------------------------------------------------------
Murray M. Rubin 1270 Avenue of the Americas Chief Financial and Accounting
Suite 1800 Officer, Treasurer
New York, NY 10020
- --------------------------------------------------------------------------------------------------------------------------------
W. Edward Scheetz c/o NorthStar Capital Investment Expected to become a director. Upon
Group his election to our board of directors,
527 Madison Avenue he will become a beneficial owner of
16th Floor more than 5% of our common stock.
New York, New York 10022
Mr. Scheetz has 50% of the voting
power and economic interest in and
shares control of NorthStar Capital.
Accordingly, Mr. Scheetz disclaims
beneficial ownership of 50% of the
shares held by NorthStar Capital.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Michael Wise c/o Netword, Inc. President, Chief Executive Officer,
702 Russell Avenue, Third Floor Director, beneficial owner of more
Gaithersburg, MD 20877 than 5% of our common stock.
- --------------------------------------------------------------------------------------------------------------------------------
Batya Wise c/o Netword, Inc. Beneficial owner of more than 5% of
702 Russell Avenue, Third Floor our common stock.
Gaithersburg, MD 20877
- --------------------------------------------------------------------------------------------------------------------------------
Alize Limited P.O. Box 175 Beneficial owner of more than 5% of
Frances House our common stock.
Sir William Place
St. Peter Port
Guernsey, Channel Islands
GY1 4HQ
- --------------------------------------------------------------------------------------------------------------------------------
James Karanfilian 235 South Dwight Place Beneficial owner of more than 5% of
Englewood, NJ 07631 our common stock.
- --------------------------------------------------------------------------------------------------------------------------------
Jordan Klineman 1270 Avenue of the Americas , Beneficial owner of more than 5% of
Suite 1800 our common stock.
New York, NY 10020
- --------------------------------------------------------------------------------------------------------------------------------
Justine Klineman 1270 Avenue of the Americas , Beneficial owner of more than 5% of
Suite 1800 our common stock.
New York, NY 10020
- --------------------------------------------------------------------------------------------------------------------------------
Net2Phone, Inc. 171 Main Street Beneficial owner of more than 5% of
Hackensack, NJ 07601 our common stock.
- --------------------------------------------------------------------------------------------------------------------------------
NorthStar Capital Partners LLC 527 Madison Avenue Upon the election of W. Edward
16th Floor Scheetz to our board of directors,
New York, New York 10022 NorthStar Capital Partners LLC
will become a beneficial owner of
more than 5% of our common
stock.
- --------------------------------------------------------------------------------------------------------------------------------
Kronish Lieb Weiner & Hellman 1114 Avenue of the Americas Counsel to Netword, Inc. in
LLP New York, New York 10036 connection with this registration
statement.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
LEGAL PROCEEDINGS
In July, 1998, we filed a patent infringement suit against Centraal
Corporation (now known as RealNames Corporation) in the U.S. District Court for
the Eastern District of Virginia. We sought an injunction and damages in an
amount to be determined by the court.
The substance of our claim is that our patent covers the methodology
used by the RealNames system. The patent claims a universal electronic resource
denotation, request and delivery computer system that allows a computer or
Internet user to locate a URL by entering an alias without knowing the
41
<PAGE>
related URL. The alias must be registered in a database in order to reach the
URL through a computer system or network. The claimed system generally operates
by having a local server computer that is linked to a central registry computer,
maintains aliases and is linked to one or more client computers.
The Real Names system allows an Internet user, for a fee, to obtain an
alias which is associated with a particular URL so that the user can locate the
URL without having to remember a complex address. The RealNames systems operates
like the system claimed in our patent, and therefore, we believe, infringes our
patent, since it has a Resolver (a local server computer) which is linked to a
central registry computer, maintains aliases and is linked to a customer/user
computer (i.e., a client computer).
After discovery in our patent infringement case, each party moved for
summary judgement. On January 8, 1999, the court granted RealNames' motion for
summary judgment, holding that the RealNames system did not infringe our patent,
without ruling on the validity of our patent. On February 11, 1999, we filed
notice of appeal of the decision, and on April 30, 1999, we filed our appellate
brief with the United States Court of Appeals for the Federal Circuit. The
appeal was argued on November 2, 1999. If the decision of the District Court is
upheld on appeal, the protective scope of our patent would be impaired.
In August 1997, eight of our former employees, including the former
chief executive officer, resigned and made claims against Netword LLC. Claims by
four of those former employees have since been settled. In June, 1998, one of
the former employees instituted an action against Netword LLC and its managers
in the Circuit Court of Arlington, Virginia seeking to recover $69,281 for,
among other things, the dilution of his interest in Netword LLC and the
repayment of the funded portion of his subscription to a loan made by members to
Netword LLC. We are defending that action, which is currently inactive. We do
not believe that our financial exposure with respect to the pending action or
claims of these former employees is material.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
LEGAL MATTERS
The legality of the securities offered hereby has been passed upon for
us by Kronish Lieb Weiner & Hellman LLP, 1114 Avenue of the Americas, New York,
New York 10036-7798. Kronish Lieb Weiner & Hellman LLP holds our $20,000
promissory note due March 31, 2002, convertible into shares of our common stock
at $1.00 per share.
42
<PAGE>
EXPERTS
Our financial statements at December 31, 1998 and for the years ended
December 31, 1997 and 1998, appearing in this prospectus and the registration
statement, have been audited by Mahoney Cohen & Company, CPA, P.C., independent
auditors, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing in giving said report.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
This prospectus is part of a registration statement on Form SB-1 under
the Securities Act that we filed with the Securities and Exchange Commission
with respect to the securities offered by this prospectus. This prospectus does
not contain all of the information the registration statement and the exhibits
and schedule filed with it. For further information about us and the securities
offered by this prospectus, reference is made to the registration statement and
the exhibits and schedule filed with it. Statements contained in this prospectus
regarding the contents of any contract or any other document to which reference
is made are not necessarily complete, and, in each instance, reference is made
to the copy of such contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. A copy of the registration statement and the exhibits and
schedule filed therewith may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the registration statement may be
obtained from such offices upon the payment of the fees prescribed by the
Commission. Please call the Commission at 1-800-SEC-0330 for further
information about its public reference room. The Commission maintains a World
Wide Web site that contains reports, proxy and information statements and other
information regarding registrants, including us, that file electronically with
the Commission. The address of the site is http://www.sec.gov. Our registration
statement and the exhibits and schedules we filed electronically with the
Commission are available on this site.
----------------------------------------
The information on our Web site, www.netword.com, is not part of this
prospectus.
Netword is a registered trademark. This prospectus also contains
trademarks and trade names of other companies.
43
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Financial Statements
December 31, 1998
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
<TABLE>
<CAPTION>
Index
Page
----
<S> <C>
Independent Auditor's Report F-1
Balance Sheets as of December 31, 1998 and September 30, 1999
(Unaudited) F-2
Statements of Operations for the Years Ended December 31, 1998 and 1997; for the
Nine Months Ended September 30, 1999 and 1998 (Unaudited); and for the
Period from December 2, 1996 (Inception) to September 30, 1999 (Unaudited) F-3
Statements of Members' Deficit/Stockholders' Equity for the Years Ended December
31, 1998 and 1997; for the Nine Months Ended September 30, 1999 (Unaudited);
and for the Period from December 2, 1996 (Inception) to September 30,
1999 (Unaudited) F-4
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997; for the
Nine Months Ended September 30, 1999 and 1998 (Unaudited); and for the
Period from December 2, 1996 (Inception) to September 30, 1999 (Unaudited) F-6
Notes to Financial Statements F-8
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Netword, Inc.
We have audited the accompanying balance sheet of Netword, Inc.
(formerly Netword, LLC) (A Development Stage Company) as of December 31, 1998,
and the related statements of operations, members' deficit/stockholders' equity
and cash flows for the years ended December 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Netword,
Inc. (formerly Netword, LLC) as of December 31, 1998 and the results of its
operations and its cash flows for the years ended December 31, 1998 and 1997, in
conformity with generally accepted accounting principles.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
August 9, 1999, except for Note 11,
paragraph 4, as to which the date
is September 29, 1999
F-1
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
ASSETS
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 59,110 $ 3,152,049
Other current assets 877 --
----------- -----------
Total current assets 59,987 3,152,049
Property and equipment, net (Note 3) 92,331 84,307
Intangible assets:
Trademark, net 30,267 27,400
Intellectual property, net (Note 4) 15,000 11,250
Deferred offering costs (Note 11) -- 70,000
----------- -----------
Total intangible assets 45,267 108,650
----------- -----------
$ 197,585 $ 3,345,006
=========== ===========
LIABILITIES AND MEMBERS' DEFICIT/STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term liability (Note 6) $ 4,800 $ 9,600
Accounts payable 493,330 387,164
Loans payable (Note 5) 33,027 53,630
----------- -----------
Total current liabilities 531,157 450,394
Long-term liability, net of current portion (Note 6) 19,200 12,000
Commitments and contingencies (Note 10)
Members' deficit/stockholders' equity (Note 8):
Common stock, $.01 par value;
Authorized - 40,000,000 shares
Issued and outstanding - 17,705,924 shares at
September 30, 1999 -- 177,059
Additional paid-in capital -- 6,571,920
Deficit accumulated in the development stage (311,794) (3,855,068)
Less: Subscriptions receivable (40,978) (11,299)
----------- -----------
Total members' deficit/stockholders' equity (352,772) 2,882,612
----------- -----------
$ 197,585 $ 3,345,006
=========== ===========
</TABLE>
See accompanying notes.
F-2
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
Period from
December
2, 1996
Year Ended Nine Months Ended (Inception)
December 31, September 30, to
---------------------------- ------------------------- September 30,
1998 1997 1999 1998 1999
------------- ------------ ------------ ----------- -------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Sales $ 27,650 $ 23,100 $ 7,677 $ 24,415 $ 58,427
General and administrative expenses 1,096,402 1,532,067 862,066 658,559 3,551,995
------------ ------------ ------------ ------------ ------------
Operating loss (1,068,752) (1,508,967) (854,389) (634,144) (3,493,568)
Other income (expense):
Interest income -- -- 64,714 -- 64,714
Loss on disposition of property
and equipment (43,639) -- -- -- (43,639)
Loss on impairment of assets
(Note 4) -- (382,575) -- -- (382,575)
------------ ------------ ------------ ------------ ------------
Net other income
(expense) (43,639) (382,575) 64,714 -- (361,500)
------------ ------------ ------------ ------------ ------------
Net loss $ (1,112,391) $ (1,891,542) $ (789,675) $ (634,144) $ (3,855,068)
============ ============ ============ ============ ============
Pro forma basic and diluted loss per
common share attributable to
common stockholders $ (.13) $ (.54) $ (.05) $ (.08)
============ ============ ============ ============
Pro forma weighted average number
of shares outstanding 8,443,359 3,507,964 14,842,512 8,293,059
============ ============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Statements of Members' Deficit/Stockholders' Equity
<TABLE>
<CAPTION>
Deficit
Accumu- Total
lated Members'
Number of in the Deficit/
------------------ Common Stock Additional Develop Subscrip- Stock-
Class A Class C -------------- Paid-In -ment tions Re- holders'
Units Units Shares Amount Capital Stage ceivable Equity
-------- ------- ------ ------ ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 2, 1996 (inception) -- -- -- $-- $ -- $ -- $ -- $ --
Cash contribution by Netword Partners
in December 1996 (Note 1) 5,100.00 -- -- -- -- 250,000 -- 250,000
Assets acquired from Birdshell Corp-
oration LLC in exchange for
equity units (Note 1) 2,125.59 54.21 -- -- -- 428,571 -- 428,571
Net loss -- -- -- -- -- (61,460) -- (61,460)
--------- ----- ----- ---- ---- ----------- -------- -----------
Balance, December 31, 1996 7,225.59 54.21 -- -- -- 617,111 -- 617,111
Cash contributions by Netword
Partners from January
through April 1997 -- -- -- -- -- 750,000 -- 750,000
Class A Units issued in May 1997 8,560.50 -- -- -- -- 428,027 -- 428,027
Class A Units issued in September
1997 4,806.94 -- -- -- -- 300,001 -- 300,001
Subscriptions receivable -- -- -- -- -- -- (16,251) (16,251)
Net loss -- -- -- -- -- (1,891,542) -- (1,891,542)
--------- ----- ----- ---- ---- ----------- -------- -----------
Balance, December 31, 1997 20,593.03 54.21 -- -- -- 203,597 (16,251) 187,346
Class A Units issued from February
through December 1998 15,406.45 -- -- -- -- 597,000 -- 597,000
Subscriptions receivable -- -- -- -- -- -- (24,727) (24,727)
Net loss -- -- -- -- -- (1,112,391) -- (1,112,391)
--------- ----- ----- ---- ---- ----------- -------- -----------
Balance, December 31, 1998
(carried forward) 35,999.48 54.21 -- $-- $ -- $ (311,794) $(40,978) $ (352,772)
--------- ----- ----- ---- ---- ----------- -------- -----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Statements of Members' Deficit/Stockholders' Equity(Concluded)
<TABLE>
<CAPTION>
Deficit
Accumu- Total
lated Members'
Number of in the Deficit/
------------------ Common Stock Additional Develop Subscrip- Stock-
Class A Class C ------------------ Paid-In -ment tions Re- holders'
Units Units Shares Amount Capital Stage ceivable Equity
-------- ------- ------ ------ ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998
(brought forward) 35,999.48 54.21 -- $ -- $ -- $ (311,794) $(40,978) $ (352,772)
Exchange of Class A and Class C
Units for common stock in
February 1999 (35,999.48) (54.21) 8,923,924 89,239 2,664,360 (2,753,599) -- --
Conversion of accounts payable to
warrants in March 1999 -- -- -- -- 114,000 -- -- 114,000
Issuance of common stock in March
1999 -- -- 6,000,000 60,000 940,000 -- -- 1,000,000
Issuance of common stock and warrants
in March 1999 -- -- 2,000,000 20,000 1,980,000 -- -- 2,000,000
Offering costs -- -- -- -- (75,000) -- -- (75,000)
Issuance of warrants for legal services -- -- -- -- 14,000 -- -- 14,000
Subscriptions receivable -- -- -- -- -- -- 29,679 29,679
Issuance of common stock in
July and August 1999 -- -- 782,000 7,820 969,680 -- -- 977,500
Offering costs -- -- -- -- (50,000) -- -- (50,000)
Issuance of stock options for
consulting services -- -- -- -- 14,880 -- -- 14,880
Net loss -- -- -- -- -- (789,675) -- (789,675)
--------- ------- ---------- --------- ----------- ----------- -------- ----------
Balance, September 30, 1999
(Unaudited) -- -- 17,705,924 $ 177,059 $ 6,571,920 $(3,855,068) $(11,299) $2,882,612
========= ======= ========== ========= =========== =========== ======== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
December
2, 1996
Year Ended Nine Months Ended (Inception)
December 31, September 30, to
------------------------------ ----------------------------- September 30,
1998 1997 1999 1998 1999
------------- ------------ ------------ ----------- --------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net loss $(1,112,391) $(1,891,542) $ (789,675) $ (634,144) $(3,855,068)
Adjustments to reconcile net loss to
cash used in operating activities:
Issuance of stock options and
warrants for consulting and
legal services -- -- 28,880 -- 28,880
Depreciation and amortization 104,951 103,549 48,484 81,564 261,853
Loss on disposition of property
and equipment 43,639 -- -- -- 43,639
Loss on impairment of assets -- 382,575 -- -- 382,575
Change in assets and liabilities:
Other current assets (877) -- 877 (1,232) --
Deposits 4,214 -- -- -- --
Accounts payable 390,697 94,904 7,834 221,214 501,164
----------- ----------- ----------- ----------- -----------
Net cash used in
operating activities (569,767) (1,310,514) (703,600) (332,598) (2,636,957)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of property
and equipment 10,000 -- -- -- 10,000
Acquisition of property and
equipment -- (199,774) (33,843) -- (354,540)
Acquisition of trademark -- -- -- -- (37,913)
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) investing
activities 10,000 (199,774) (33,843) -- (382,453)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt -- -- -- -- 33,600
Principal payments of long-term
debt (4,800) (4,800) (2,400) -- (12,000)
Proceeds from loans -- 461,054 20,603 -- 481,657
Deferred offering costs -- -- (70,000) -- (70,000)
Contributions from members
and stockholders 572,273 1,033,750 3,882,179 300,220 5,738,202
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities 567,473 1,490,004 3,830,382 300,220 6,171,459
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash
(carried forward) $ 7,706 $ (20,284) $ 3,092,939 $ (32,378) $ 3,152,049
----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Statements of Cash Flows (Concluded)
<TABLE>
<CAPTION>
Period from
December
2, 1996
Year Ended Nine Months Ended (Inception)
December 31, September 30, to
------------------------------ ----------------------------- September 30,
1998 1997 1999 1998 1999
------------- ------------ ------------ ----------- --------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net increase (decrease) in cash
(brought forward) $ 7,706 $ (20,284) $3,092,939 $ (32,378) $3,152,049
Cash, beginning of period 51,404 71,688 59,110 51,404 --
------------- -------------- ---------- ----------- ----------
Cash, end of period $ 59,110 $ 51,404 $3,152,049 $ 19,026 $3,152,049
============= ============== ========== =========== ==========
Supplemental Schedules of Non-Cash Investing and Financing Activities
Subscriptions receivable $ 24,727 $ 16,251 $ -- $ 12,393 $ 11,299
============= ============== ========== =========== ==========
Issuance of Class A Units and Class C
Units in exchange for:
Intellectual property $ -- $ -- $ -- $ -- $ 407,575
Net assets acquired -- -- -- -- 20,996
------------- -------------- ---------- ----------- ----------
$ -- $ -- $ -- $ -- $ 428,571
============= ============== ========== =========== ==========
Conversion of loans to Class A Units $ -- $ 428,027 $ -- $ -- $ 428,027
============= ============== ========== =========== ==========
Conversion of accounts payable to
warrants $ -- $ -- $ 114,000 $ -- $ 114,000
============= ============== ========== =========== ==========
Issuance of stock options and
warrants for consulting and
legal services $ -- $ -- $ 28,880 $ -- $ 28,880
============= ============== ========== =========== ==========
</TABLE>
See accompanying notes.
F-7
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Notes to Financial Statements
(unaudited with respect to the nine months ended September
30, 1999 and 1998 and for the period from December 2, 1996
(inception) to September 30, 1999)
Note 1 - The Company
-----------
Netword, LLC (the "Company") owns and operates an Internet utility
known as the Netword System which the Company believes offers a comprehensive
solution to problems created by a lack of consumer-friendly addresses for
Internet resources. The Company was formed as a limited liability company under
the laws of the State of Delaware, to acquire the business and assets of
Birdshell Corporation, L.L.C. ("Birdshell"). The Company has been in the
development stage since its organization on December 2, 1996.
The Company was organized by Netword Partners and acquired certain
assets and assumed certain liabilities of Birdshell as provided for in a Limited
Liability Company Agreement dated as of December 2, 1996 (the "Agreement").
Birdshell was formed in April 1995 to develop the Netword System. The Birdshell
acquisition was accounted for using the purchase method of accounting. The
acquired assets primarily consisted of proprietary rights to intellectual
property, including U.S. and foreign patent applications, trademarks and
Internet domain registrations, and certain other property and equipment having
an aggregate original estimated value of $960,000. The liabilities assumed
consisted of various computer and telephone leases, obligations under a
trademark purchase agreement and certain accrued expenses. In exchange for the
acquired assets, the Birdshell investors received membership interests in the
Company ("Units") consisting of 4,900 Class A Units, representing 49% of the
Company's equity, subject to reduction to 268.42 Class C Units if the Company
did not achieve various milestones at various dates. As a result of the
Company's failure to achieve these milestones, in July 1997, the 4,900 Class A
Units were converted into 268.42 Class C Units. In September 1997, the Company
proposed an amendment to the Agreement that was accepted by 214.21 of the Class
C Unit holders which resulted in the conversion of their Class C Units into
2,125.59 Class A Units, representing 29.42% of the Company's equity; the holders
of the remaining 54.21 Class C Units did not convert their Class C Units into
Class A Units. The reduction in the equity interests of the Birdshell investors
required a $532,213 reduction in the intellectual property and members' equity.
Pursuant to the Agreement, Netword Partners loaned the Company
$1,000,000 (the "Loan") and also received 5,100 Class B-2 Units. In 1997,
pursuant to the Agreement, the Loan was converted into 5,100 Class A Units and
the 5,100 Class B-2 Units were cancelled. The above transactions are reflected
in the statements of members' deficit/stockholders' equity as if the
transactions occurred in December 1996.
F-8
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Notes to Financial Statements
(unaudited with respect to the nine months ended September
30, 1999 and 1998 and for the period from December 2, 1996
(inception) to September 30, 1999)
Note 1 - The Company (Continued)
----------------------
On February 18, 1999, the Company was merged into Netword, Inc., a
Delaware corporation (the "Merger"). The Merger was accounted for as a reverse
acquisition on the pooling of interest method and gave effect to the issuance by
Netword, Inc. to members of the Company of 8,923,924 shares of common stock and
3,184,733 warrants to purchase common stock at $1.25 per share, in exchange for
35,999.48 Class A Units and 54.21 Class C Units. Options on 2,284,374 shares of
common stock at $.167 per share and 815,239 shares of common stock at $1.25 per
share were issued by Netword, Inc. to replace outstanding options to purchase
units previously granted by the Company. In addition, options on 1,456,250
shares of common stock at $1.25 were issued by Netword, Inc. to certain Company
directors and employees.
Note 2 - Summary of Significant Accounting Policies
------------------------------------------
Interim Financial Statements
----------------------------
The interim financial statements at September 30, 1999 and for the
nine months ended September 30, 1999 and 1998 and for the period from December
2, 1996 (inception) to September 30, 1999 are unaudited; however, in the opinion
of management, all adjustments, consisting only of normal recurring accruals,
necessary for a fair presentation have been included. Results of interim periods
are not necessarily indicative of results to be expected for the entire year.
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Property and Equipment
----------------------
Property and equipment is recorded at cost. Furniture and fixtures
and computer equipment are depreciated using an accelerated method over the
estimated useful lives of the related assets, ranging from three to five years.
Amortization of the computer software is computed using the straight-line method
over three years. Major additions and betterments are capitalized and repairs
and maintenance are charged to operations in the period incurred.
F-9
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Notes to Financial Statements
(unaudited with respect to the nine months ended September
30, 1999 and 1998 and for the period from December 2, 1996
(inception) to September 30, 1999)
Note 2 - Summary of Significant Accounting Policies (Continued)
-----------------------------------------------------
Trademark
---------
The trademark is stated at cost and is amortized using the
straight-line method over ten years. The trademark is reported net of
accumulated amortization of $7,965 at December 31, 1998.
Intellectual Property
---------------------
The intellectual property consists of the Netword System which is
stated at appraised value, which is below cost, net of accumulated amortization.
The intellectual property is amortized using the straight-line method over five
years.
Income Taxes
------------
The Company is organized as a limited liability company and has
elected not to be a tax paying entity. The members are individually responsible
for their shares of the Company's income or loss for income tax reporting
purposes. Accordingly, there is no provision for federal and state income taxes.
Pro Forma Basic and Diluted Loss Per Share (Unaudited)
-----------------------------------------------------
The Company has elected to disclose pro forma loss per share, as if
it had adopted Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS 128") giving effect to the merger discussed in Note 1. Under
SFAS 128, companies that are publicly held or have complex capital structures
are required to present basic and diluted earnings per share ("EPS") on the face
of the income statement. SFAS 128 replaces the presentation of primary EPS with
a presentation of basic EPS and, if applicable, diluted EPS. Basic EPS excludes
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted and the resulting
additional shares are dilutive because their inclusion decreases the amount of
EPS. The effects on pro forma loss per share of the Company's outstanding
options are antidultive and therefore not included in the calculation of the pro
forma weighted average number of common shares outstanding.
F-10
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Notes to Financial Statements
(unaudited with respect to the nine months ended September
30, 1999 and 1998 and for the period from December 2, 1996
(inception) to September 30, 1999)
Note 2 - Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Fair Value of Financial Instruments
-----------------------------------
The Company applies the provisions of Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments" ("SFAS 107"). SFAS 107 requires all entities to disclose the fair
value of financial instruments, both assets and liabilities recognized and not
recognized on the balance sheet, for which it is practicable to estimate fair
value. SFAS 107 defines fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between willing
parties. At December 31, 1998, management believes the fair value of all
financial instruments approximated carrying value.
Stock-Based Compensation
------------------------
The Company applies the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("SFAS
No. 123") which requires entities to recognize as expense over the vesting
period the fair value as of the date of grant of all stock awards.
Alternatively, SFAS No. 123 allows entities to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations, and to provide pro forma net income
and pro forma net income per share disclosures for employee stock option grants
as if the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to apply the provisions of APB Opinion No. 25, under which
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price, and provide
the pro forma disclosure provisions of SFAS No. 123 in its annual financial
statements (see Note 7).
Impairment of Long-Lived Assets
-------------------------------
In accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," (SFAS No. 121"), long-lived assets are evaluated for
possible impairment through a review of undiscounted expected future cash flows.
The carrying value of a long-lived asset is considered impaired if the sum of
the undiscounted expected future cash flows is less than the carrying amount of
that asset. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair market value of the long-lived assets.
F-11
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Notes to Financial Statements
(unaudited with respect to the nine months ended September
30, 1999 and 1998 and for the period from December 2, 1996
(inception) to September 30, 1999)
Note 2 - Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Advertising and Marketing Expenses
----------------------------------
Advertising expenses are charged to operations in the period in
which they are incurred. Advertising expenses for the years ended December 31,
1998 and 1997 were approximately $63,200 and $117,300, respectively.
Research and Development
------------------------
Research and development costs amounted to approximately $210,00
and $536,000 for the years ended December 31, 1998 and 1997, respectively.
Note 3 - Property and Equipment
----------------------
Property and equipment consists of:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------- ----------------
(Unaudited)
<S> <C> <C>
Furniture and fixtures $ 29,556 $ 29,556
Computer equipment 95,352 129,195
Computer software 92,523 92,523
------------- ---------------
217,431 251,274
Less: Accumulated depreciation
and amortization 125,100 166,967
------------- ---------------
$ 92,331 $ 84,307
============= ===============
</TABLE>
Note 4 - Intellectual Property
---------------------
In connection with the acquisition of the Birdshell assets, the
Company acquired proprietary rights to intellectual property relating to the
Netword System having an initial value of $939,788. Subsequently, in September
1997, as discussed in Note 1, the holdings of the former Birdshell investors
were reduced from 49% to 29.42%, resulting in a reduction of the intellectual
property and members' equity by $532,213.
F-12
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Notes to Financial Statements
(unaudited with respect to the nine months ended September
30, 1999 and 1998 and for the period from December 2, 1996
(inception) to September 30, 1999)
Note 4 - Intellectual Property (Continued)
---------------------------------
In connection with the adoption of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed Of", based upon an appraisal, the intellectual property
was considered to be impaired. Accordingly, a loss of $382,575 was recognized
during the year ended December 31, 1997.
Note 5 - Loans Payable
-------------
In May 1997, the Company offered its members rights to subscribe to
their pro rata share of a $500,000 loan (the "97 loan"), together with five year
warrants to purchase 10,000 Class A Units at $50 per unit. The exercise price of
a warrant was payable in cash or by the forgiveness of all or a portion of the
97 loan. The 97 loan was fully subscribed; however, certain subscribers did not
fully fund their subscriptions to that loan and, accordingly, did not qualify
for conversion of their shares of the 97 loan into Class A Units. The members
who funded all installments of their subscriptions to the 97 loan subsequently
converted their interests in that loan into Class A Units. At December 31, 1998,
the Company had $33,027 of loans payable to subscribers to the 97 loan who did
not fully fund their subscriptions.
Note 6 - Long-Term Liability
-------------------
In connection with the acquisition of the Birdshell assets, the
Company assumed a long-term liability related to the purchase of the Netword
trademark. This liability is payable in equal installments of $4,800 per year
concluding on April 30, 2003.
Note 7 - Options
-------
The Company has granted options to purchase the Company's Class A
Units to managers and key employees responsible for the direction and management
of the Company. At December 31, 1998, after giving effect to the
recapitalization described in Note 1, there were 3,099,613 shares of common
stock reserved for issuance pursuant to such options.
Pro forma information regarding net loss and net loss per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its applicable options under the fair value method of the statement.
F-13
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Notes to Financial Statements
(unaudited with respect to the nine months ended September
30, 1999 and 1998 and for the period from December 2, 1996
(inception) to September 30, 1999)
Note 7 - Options (Continued)
-------------------
The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the weighted-average assumptions
for 1998, including a risk free interest rate of 5%, a volatility factor of the
expected market price of the Company's common stock of .84 and a
weighted-average remaining contractual life of the option of 60 months.
This model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. Because the
Company's options have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee options.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the option vesting period. The effects
of applying SFAS No. 123 for pro forma disclosures are not likely to be
representative of the effects on reported net income or losses for future years.
The Company's pro forma information follows:
Years Ended
December 31,
-------------------------------
1998 1997
----------- --------------
Pro forma net loss $(1,161,528) $(1,893,184)
Pro forma net loss per share (.14) (.54)
F-14
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Notes to Financial Statements
(unaudited with respect to the nine months ended September
30, 1999 and 1998 and for the period from December 2, 1996
(inception) to September 30, 1999)
Note 7 - Options (Continued)
------------------
A summary of applicable option activity and related information for
the years ended December 31, 1998 and 1997, after giving effect to the
recapitalization described in Note 1, is as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
--------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 1,036,187 $ .45 - $ -
Granted 2,077,429 .45 1,036,187 .45
Exercised - - - -
Forfeited 14,003 .45 - -
--------------- --------------
Outstanding, end of year 3,099,613 .45 1,036,187 .45
=============== ==============
Exercisable, end of year 1,417,907 $ .45 129,323 $ .45
=============== ==============
</TABLE>
The weighted-average fair value of options granted during 1998 and
1997 was $.26 and $.31, respectively. Exercise prices for options outstanding
ranged as of December 31, 1998 from $.17 to $1.25. These options expire at
various times through February 2004.
Note 8 - Equity Transactions
-------------------
Pursuant to the Agreement, during 1997 the Loan was converted into
5,100 Class A Units and the Class B-2 Units were cancelled. $250,000 of the Loan
was funded in December 1996; the $750,000 balance was funded during the period
from January 1, 1997 through April 15, 1997.
In May 1997, the Company sold 8,560.50 Class A Units at $50.00 per
Unit resulting in proceeds of $428,027. In September 1997, the Company sold
4,806.94 Class A Units at $62.41 per Unit, resulting in proceeds of $300,001.
F-15
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Notes to Financial Statements
(unaudited with respect to the nine months ended September
30, 1999 and 1998 and for the period from December 2, 1996
(inception) to September 30, 1999)
Note 8 - Equity Transactions (Continued)
------------------------------
In February 1998, the Company offered its members rights to
subscribe to their pro rata share of a $600,000 offering, consisting of
15,483.87 Class A Units at $38.75 per Unit. In addition, to protect option
holders from dilution resulting from the $600,000 offering, the Company also
granted option holders their pro rata share of 2,313.93 new options to purchase
Class A Units at an exercise price of $38.75. The members subscribed to
15,406.45 Class A Units for total proceeds of $597,000.
Note 9 - Related Party Transaction
-------------------------
During the year ended December 31, 1997, the Company incurred
$10,000 for consulting services to an entity owned by the Company's president.
Note 10 - Commitments and Contingencies
-----------------------------
Operating Lease
---------------
The Company leases an office under a non-cancellable operating
lease expiring in 2003. Future minimum lease payments are as follows:
Year Ending
December 31,
1999 $ 40,000
2000 40,000
2001 42,000
2002 43,000
2003 29,000
-------------
$ 194,000
=============
Total rent charged to operations for the years ended December 31,
1998 and 1997 was approximately $66,000 and $84,000, respectively.
F-16
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Notes to Financial Statements
(unaudited with respect to the nine months ended September
30, 1999 and 1998 and for the period from December 2, 1996
(inception) to September 30, 1999)
Note 10 - Commitments and Contingencies (Continued)
----------------------------------------
Litigation
----------
In August 1997, eight employees, including the former chief
executive officer, resigned and made claims against the Company. Claims by four
of those former employees have since been settled. One of the former employees
instituted an action against the Company and its managers in June 1998, in the
Circuit Court of Arlington, Virginia, seeking to recover approximately $70,000
for, among other things, the dilution of his interest in the Company and the
repayment of the funded portion of his subscription to the 97 loan (see Note 5).
The Company is defending that action which is currently inactive. The Company
does not believe that its financial exposures with respect to the pending action
or unsettled claims of the other former employees is material.
Note 11 - Subsequent Events
-----------------
In February 1999, the Company settled fees of $655,000 for legal
services by payment of $200,000 and an agreement to deliver warrants to purchase
150,000 shares of Netword, Inc. common stock at $.1667 per share (subsequently
delivered by Netword, Inc.). The fair value for the warrants was estimated to be
$.76 per warrant at the date of the agreement, using the Black- Scholes option
pricing model.
On March 19, 1999, Netword, Inc. privately placed 6,000,000 shares
of common stock at $.1666 per share or a total of $1,000,000. On the same date,
in an offering to foreign investors, Netword, Inc. sold units consisting of
2,000,000 shares of common stock and warrants to purchase an additional
1,600,000 shares of common stock (at $1.25 per share) for total consideration of
$2,000,000. Offering costs for the two offerings aggregated $75,000.
On July 28, 1999 and August 5, 1999, Netword, Inc. privately placed
units consisting of 782,000 shares of common stock and warrants to purchase an
additional 625,600 shares of common stock (at $1.50 per share) for total
consideration of $977,500. Offering costs were approximately $50,000. In
connection with this placement, Netword, Inc. issued warrants to purchase an
additional 85,293 shares of common stock at $1.50 per share as a finder's fee.
On September 29, 1999, the Company entered into an agreement with
Net2Phone, Inc. ("Net2Phone") under which a newly developed version of the
Company's software agent will be shipped with Net2Phone's software, together
with the Company's logo and slot and a direct link to the Company's web site.
F-17
<PAGE>
NETWORD, INC.
(Formerly Netword, LLC)
(A Development Stage Company)
Notes to Financial Statements
(unaudited with respect to the nine months ended September
30, 1999 and 1998 and for the period from December 2, 1996
(inception) to September 30, 1999)
Note 11 - Subsequent Events (Continued)
----------------------------
The agreement has an initial one-year term (expiring September 29, 2000),
subject to renewal for successive additional one-year terms and to early
termination by Net2Phone. In connection with the agreement, the Company granted
Net2Phone four-year warrants (expiring September 29, 2003) to acquire up to 15%
of the Company's fully diluted common stock for approximately $3,000,000.
F-18
<PAGE>
================================================================================
NETWORD, INC.
Common Stock
6,784,733 shares
---------------------
PROSPECTUS
---------------------
November 5, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 1. Indemnification of Directors and Officers.
Under our Certificate of Incorporation (the "Charter") and our Bylaws
(the "Bylaws"), our directors and officers are entitled to be indemnified by us
to the fullest extent permitted by Section 102(b)(7) of the Delaware General
Corporation Law (the "DGCL"). Additionally, under the Charter and the Bylaws,
our directors are not subject to personal liability for monetary damages
resulting from a breach of fiduciary -duty or failure to exercise any applicable
standard of care, except that our directors may be subject to personal liability
for monetary damages in circumstances involving:
o a breach of the duty of loyalty;
o acts or omissions not in good faith which involve intentional
misconduct or a knowing violation of law;
o unlawful payments of dividends, stock purchases or redemptions
under the DGCL; or
o transactions from which the director derives an improper
personal benefit.
ITEM 2. Other Expenses of Issuance and Distribution.
The following statement sets forth the estimated expenses payable in
connection with this Registration Statement, all of which will be paid by us:
Registration Fee.....................................................$1,650.40
Legal Fees and Expenses.............................................$75,000.00
Accountant's Fees and Expenses......................................$20,000.00
Printing Costs......................................................$15,000.00
-----------
Total..............................................................$111,650.40
Item 3. Undertakings.
(1) We hereby undertake to file, during any period in which securities
included in this Registration Statement may be sold, a post-effective amendment
to this Registration Statement to:
(a) include any prospectus required by Section 10(a)(3) of the
Securities Act;
(b) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the Registration Statement, and
II-1
<PAGE>
(c) include any additional or changed material information on
the plan of distribution.
(2) We also undertake to treat each post-effective amendment as a new
registration statement of the securities offered, and the offering of the
securities at that time to be the initial bona fide offering, for the purposes
of determining liability under the Securities Act.
(3) We also undertake to file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the provisions described above, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than our payment of expenses incurred or paid by any of our directors,
officers or controlling persons in the successful defense of any action, suit or
proceeding) is asserted by any of our directors, officers or controlling persons
in connection with the securities being registered, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of competent jurisdiction the question of whether our
indemnification is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
Item 4. Unregistered Securities Issued or Sold Within One Year.
All of the persons who acquired our securities in the transactions
described below (other than certain of them who are specifically named in this
Item) are named in the table under Selling Stockholders in Part I of this
Registration Statement.
(a) On February 18, 1999, Netword LLC merged into Netword, Inc. The
sole purpose of the merger was to reorganize Netword LLC as a corporation. Prior
to the merger, Netword, Inc. had no assets or business and no outstanding
shares. Upon the merger, all of the outstanding units of membership interest in
Netword LLC were cancelled and the holders of such units received, in exchange
for each unit, (1) 247.518331 shares of common stock of Netword, Inc. and (2)
warrants to purchase 88.333682 shares of common stock of Netword, Inc. at an
exercise price of $1.25 per share. In sum, in exchange for all of the interests
in Netword LLC, Netword, Inc. issued a total of 8,923,924 shares of its common
stock and warrants to purchase up to an aggregate of 3,184,733 additional shares
of its common stock. The exchange ratio was determined arbitrarily by the
managers of Netword LLC and the Board of Directors of Netword, Inc. The issuance
of the shares and warrants in connection with the merger was made exclusively to
unit holders in Netword LLC on a pro rata basis and did not involve the receipt
or
II-2
<PAGE>
payment of any new consideration. No vote of unit holders in Netword LLC was
solicited or required to effect the merger, since the managers of Netword LLC
(who were also the Board of Directors of Netword, Inc.) had sufficient votes and
authority to conclude the merger without the consent of other members of Netword
LLC. It is our position that the merger did not involve a sale of securities
within the meaning of the Securities Act, since it entailed no investment
decision by securityholders of Netword LLC (other than those who were also
managers and controlled Netword LLC). Furthermore, although Section 3(a)(9) of
the Securities Act is not directly applicable to the transaction, it is
analogous, since Netword, Inc. is substantively the same entity as Netword LLC
except for the change in form from limited liability company to corporation.
Nevertheless, to the extent the transaction may be deemed to constitute a sale
within the meaning of the Securities Act, the unitholders in Netword LLC were a
relatively small group of individuals all of whom were either accredited
investors or present or former employees, managers and consultants of Netword
LLC and its predecessor. In the circumstances of the transaction, these persons
did not require the protection that would have been afforded by registration
under the Securities Act. Accordingly, the transaction did not involve a public
offering and was therefore exempt from registration under the Securities Act
pursuant to Section 4(2) of the Securities Act.
Each of the persons who received our securities in the merger are named
in the table under Selling Stockholders in Part I of this Registration Statement
and have a checkmark next to his, her or its name.
(b) As a result of the merger, options to purchase 9,229.14 units of
Netword LLC previously issued to a total of 14 employees (including former
employees) and managers of Netword LLC, all of whom were members of Netword LLC,
were cancelled, and each person who held such an option was granted a new option
under a newly adopted stock option plan of Netword, Inc. to purchase (1)
247.518331 shares of common stock of Netword, Inc. at an exercise price of
$0.1666 per share and (2) 88.333682 shares of common stock of Netword, Inc. at
an exercise price of $1.25 per share for each cancelled option to purchase one
unit of Netword LLC. In sum, Netword, Inc. granted to these persons options to
acquire a total of up to 2,284,374 shares of its common stock at an exercise
price of $0.1666 per share (of which options for 43,315 shares have since been
terminated) and up to 815,239 shares of its common stock at an exercise price of
$1.25 per share (of which options for 31,556 shares have since been terminated).
The ratio of new options to cancelled options was determined arbitrarily by the
Board of Directors of Netword, Inc., but the new options were granted only to
holders of cancelled options on a pro rata basis without payment or receipt of
any additional consideration. Further, on March 15, 1999, additional options to
purchase an aggregate of 1,456,250 shares of common stock of Netword, Inc. at an
exercise price of $1.25 per share were granted to two of our directors and two
consultants. These options expire on February 17, 2004. In September, 1999,
additional options to purchase an aggregate of 108,773 shares of common stock of
Netword, Inc. at exercise prices ranging from $0.1666 to $1.50 per share were
granted to one of our officers and one consultant. None of the outstanding
options is exercisable except pursuant to registration under the Securities Act
or the availability of an applicable exemption from registration. Recipients of
options who were not directors, employees of or consultants to Netword Inc. were
all former directors or employees of or consultants to Netword LLC who had
received options to acquire
II-3
<PAGE>
units in Netword LLC in accordance with the exemption from registration
available pursuant to Rule 701 under the Securities Act. No consideration was
paid by any of these persons for their receipt of new options in Netword Inc.
and they made no investment decision with respect to such receipt, since they
had no rights to vote on the Merger pursuant to which their prior options in
Netword LLC were cancelled. It is our position that the grant of the new options
to these persons was not a sale within the meaning of the Securities Act. To the
extent the grant of the new options to these persons may be deemed to constitute
a sale within the meaning of the Securities Act, these persons had historically
participated directly in our activities, had direct access to all information
available to our stockholders and did not require the protection that would have
been afforded by registration under the Securities Act; accordingly, the grant
did not involve a public offering and was therefore exempt from registration
under the Securities Act pursuant to Section 4(2) of the Securities Act. To the
extent the persons to whom new options were granted were directors or employees
of or consultants to Netword, Inc. at the time of their receipt of new options
and the grants of these new options constituted sales within the meaning of the
Securities Act, such grants were exempt from registration pursuant to Rule 701
under the Securities Act.
The following option holders (each of whom was an employee of or
consultant to Netword Inc. at the time he or she was granted options) are not
named in Part I of this Registration Statement: Amanda Howlett, Debbie Bostin,
Erik Dove, Simon Janes, Stephen Williams, Thomas Sweeting, R.B. Rattey and Louis
Libin.
(c) On March 19, 1999, Netword, Inc. sold 6,000,000 shares of its
common stock to 35 of its stockholders, 28 foreign investors and two other U.S.
investors at a price of $.01666 per share for total consideration of $1,000,000
(the maximum amount of the offering). All stockholders of Netword, Inc. were
offered the opportunity to subscribe for shares in the offering on a pro rata
basis. To the extent any of these stockholders declined to purchase the share
offered to him, the shares were purchased by other stockholders. The sale price
of the shares was determined arbitrarily by the Board of Directors of Netword,
Inc. The sale of the shares was exempt from registration under the Securities
Act pursuant to Rule 504 under the Securities Act.
The investors in this offering who are not named in Part I of this
Registration Statement were: 679212 Albert Ltd., Christopher Morris, E. Ann
Curry, Geoff Whitlam, International Pursuit Corporation, Irwin Singer, Jayvee &
Co. Account 0002002, John McMahon, Joshua Rizack, Librion Group Inc., Marilia
Costa, Melbourne Investments Ltd., Patstar Inc., Peter C. Halsall, Pullen Family
Holdings Inc. and Ross McMaster. Other than Mr. Rizack and Librion Group, Inc.,
all of these investors have represented to us that they are non-U.S. persons.
Other than Mr. Rizack, who is a consultant to us, none of the investors is
related to us other than as a securityholder.
(d) Also on March 19, 1999, Netword, Inc. sold 2,000,000 units
comprising 2,000,000 shares of its common stock and warrants to purchase
1,600,000 shares of its common stock at an exercise price of $1.25 per share for
total consideration of $2,000,000. The sale price of the units ($1 per unit) was
arbitrarily determined by the Board of Directors. The units were sold to
non-U.S. persons (most of whom also purchased shares in the Rule 504 offering)
in an offshore
II-4
<PAGE>
transaction that was exempt from registration under the Securities Act pursuant
to Rule 903 of Regulation S under the Securities Act.
(e) On March 19, 1999, pursuant to an agreement negotiated by Netword
LLC, Netword, Inc. issued warrants to purchase 150,000 shares of its common
stock at an exercise price of $0.1666 per share to Fulbright & Jaworski LLP in
partial payment for legal services provided to Netword LLC. We believe that
Fulbright & Jaworski LLP is an accredited investor. The issuance of the warrants
did not involve a public offering and was therefore exempt from registration
under the Securities Act pursuant to Section 4(2) of the Securities Act.
(f) On April 1, 1999, in a negotiated transaction, Netword, Inc. issued
its $20,000 convertible note due March 31, 2001 to Kronish Lieb Weiner & Hellman
LLP in partial payment for legal services provided to Netword, Inc. and Netword
LLC. The note is convertible into common stock at $1.00 per share. We believe
that Kronish Lieb Weiner & Hellman LLP is an accredited investor. The issuance
of the note did not involve a public offering and was therefore exempt from
registration under the Securities Act pursuant to Section 4(2) of the Securities
Act.
(g) On May 1, 1999, in a negotiated transaction, Netword, Inc. issued
warrants to purchase 22,500 shares of its common stock at an exercise price of
$0.1666 per share to Pryor Cashman Sherman & Flynn LLP in partial payment for
legal services provided to Netword, Inc. We believe that Pryor Cashman Sherman &
Flynn LLP is an accredited investor. The issuance of the warrants did not
involve a public offering and was therefore exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act.
(h) In separate closings on July 28, 1999 and August 5, 1999, Netword,
Inc. privately sold a total of 782,000 units comprising 782,000 shares of its
common stock and warrants to purchase 625,600 shares of its common stock at an
exercise price of $1.50 per share for total consideration of $977,500. The sale
price of the units ($1.25 per unit) was arbitrarily determined by the Board of
Directors. The units were sold to a total of 14 persons, all of whom we believe
are accredited investors within the meaning of Rule 501 under the Securities
Act, and the sale was therefore exempt from registration under the Securities
Act pursuant to Rule 506 under the Securities Act. In connection with this
transaction, we issued warrants to acquire 85,293 shares of common stock at
$1.50 per share to David Segal as a finders fee. We believe that Mr. Segal is an
accredited investor. The issuance of warrants to Mr. Segal did not involve a
public offering and was therefore exempt from registration under the Securities
Act pursuant to Section 4(2) of the Securities Act.
The investors in this offering were: NorthStar Capital Partners LLC,
Barington Capital Group, Charlie Humber, Martin Lamb, Gregory Peck, Meister
Brother Investments LP, G2 Investments, Andrew Davidoff, Double A. Ventures
Ltd., Mr. E. Das, Richard J. McCready, David G. King, Jr., Murray M. Rubin and
Francisco J. Gonzalez-Paez. Other than (i) NorthStar Capital Partners LLC, of
which W. Edward Scheetz, who has agreed to become a director subject to our
obtaining directors and officers liability insurance, is a 50% owner, and (ii)
Mr. Rubin, who is our Chief Financial and Accounting Officer and Treasurer, none
of these investors is related to us other than as a securityholder.
II-5
<PAGE>
(i) In July, 1999, we agreed to issue warrants to purchase 336,000
shares of our common stock at an exercise price of $1.50 per share to NorthStar
Capital Partners LLC, of which W. Edward Scheetz is a 50% partner, upon Mr.
Scheetz's election to our Board of Directors. Mr. Scheetz has agreed to become a
director subject to our obtaining directors and officers liability insurance. We
believe that Mr. Scheetz is an accredited investor. To the extent the issuance
of the warrants may be deemed to constitute a sale within the meaning of the
Securities Act, such sale will be exempt from registration under the Securities
Act pursuant to Section 4(2) of the Securities Act.
(j) In a negotiated transaction involving an agreement by Netword, Inc.
and Net2Phone, Inc. for the inclusion of our software in Net2Phone's software
package, we issued to Net2Phone warrants to purchase up to 15% of our
fully-diluted common stock for approximately $3,000,000. We believe that
Net2Phone is an accredited investor. The issuance of the warrants did not
involve a public offering and was therefore exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act.
Item 5. Index to Exhibits.
- --------------------------------------------------------------------------------
Number Exhibit Page
- ------ ------- ----
- --------------------------------------------------------------------------------
2.1 (1) Certificate of Incorporation of Netword, Inc.
- --------------------------------------------------------------------------------
2.2 (1) Bylaws of Netword, Inc.
- --------------------------------------------------------------------------------
2.3 (1) Certificate of Merger between Netword LLC and Netword,
Inc. dated February 18, 1999.
- --------------------------------------------------------------------------------
2.4 (1) Agreement and Plan of Merger between Netword, LLC and
Netword, Inc. dated February 18, 1999.
- --------------------------------------------------------------------------------
3.1 (1) Form of Warrant issued to members of Netword LLC in
connection with the merger of Netword, LLC and Netword,
Inc.
- --------------------------------------------------------------------------------
3.2 (1) Form of Subscription Agreements executed in connection with
the Rule 504 sale of 6,000,000 shares of common stock
consummated on March 19, 1999.
- --------------------------------------------------------------------------------
II-6
<PAGE>
- --------------------------------------------------------------------------------
3.3 (1) Form of Subscription Agreement executed in connection
with the Regulation S sale of 2,000,000 units
consummated on March 19, 1999.
- --------------------------------------------------------------------------------
3.4 (1) Form of Warrant issued to purchasers in the Regulation S
offering.
- --------------------------------------------------------------------------------
3.5 (1) Warrant dated March 19, 1999 issued to Fulbright & Jaworski
LLP.
- --------------------------------------------------------------------------------
3.6 (1) Convertible note dated April 1, 1999 issued to Kronish Lieb
Weiner & Hellman LLP.
- --------------------------------------------------------------------------------
3.7 (1) Warrant dated May 1, 1999 issued to Pryor, Cashman,
Sherman & Flynn LLP.
- --------------------------------------------------------------------------------
3.8 (1) Form of Subscription Agreement executed in connection
with the Rule 506 sale of 782,000 units consummated on
July 28, 1999 and August 5, 1999.
- --------------------------------------------------------------------------------
3.9 (1) Form of warrant issued to purchasers in the Rule 506
offering, to David Segal and to be issued to NorthStar
Capital Partners LLC upon the election of W. Edward
Scheetz to the board of directors of Netword, Inc.
- --------------------------------------------------------------------------------
3.10 Warrant dated September 29, 1999 issued to Net2Phone, Inc.
- --------------------------------------------------------------------------------
3.11 (1) Stock option plan of Netword, Inc.
- --------------------------------------------------------------------------------
3.12 (1) Form of award letter for optionees.
- --------------------------------------------------------------------------------
6.1 (1) Contract regarding assignment of trademarks and trade names
"Netword" and "Netword, Inc."
- --------------------------------------------------------------------------------
6.2 Internet Data Center Services Agreement between Netword,
Inc. and Exodus Communications, Inc.
- --------------------------------------------------------------------------------
6.3 Agreement dated September 29, 1999 between Netword, Inc.
and Net2Phone, Inc.
- --------------------------------------------------------------------------------
10.1 Consent of Mahoney Cohen & Company, CPA, P.C.
- --------------------------------------------------------------------------------
10.2 Consent of Kronish Lieb Weiner & Hellman LLP is contained
in their opinion filed as Exhibit 11.1
- --------------------------------------------------------------------------------
11.1 (1) Opinion of Kronish Lieb Weiner & Hellman LLP.
- --------------------------------------------------------------------------------
12.1 Consent of W. Edward Scheetz to be filed supplementally or by
amendment to this Registration Statement.
- --------------------------------------------------------------------------------
(1) Previously filed with Netword, Inc.'s Form SB-1 Registration Statement No.
333-86873 filed with the Securities and Exchange Commission on September
10, 1999.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, 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 November 5, 1999.
NETWORD, INC.
(Registrant)
By: /s/ MICHAEL L. WISE
-------------------------------------------
Name: Michael L. Wise
Title: President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to The Registration Statement has been signed below by the
following persons in the capacities indicated on November 5, 1999.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
President and Chief November 5, 1999
/s/ MICHAEL L. WISE Executive Officer, Director
- --------------------
Michael L. Wise
Chief Financial and November 5, 1999
/s/ MURRAY M. RUBIN Accounting Officer,
- -------------------- Treasurer
Murray M. Rubin
/s/ KENT M. KLINEMAN Secretary, Director November 5, 1999
- --------------------
Kent M. Klineman
</TABLE>
II-8
<PAGE>
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND THE
RULES AND REGULATIONS THEREUNDER. BY ITS ACCEPTANCE HEREOF, THE HOLDER OF THIS
WARRANT REPRESENTS THAT IT IS ACQUIRING THE WARRANT FOR INVESTMENT AND AGREES TO
COMPLY IN ALL RESPECTS WITH SECTION 4 OF THIS WARRANT.
WARRANT TO PURCHASE COMMON STOCK
OF
NETWORD, INC.
September 29, 1999
1. General. THIS CERTIFIES that, for value received, Net2Phone, Inc. or
its registered assigns ("Net2Phone") is entitled to subscribe for and purchase
from Netword, Inc., a Delaware corporation (the "Corporation"), once at any time
during the period commencing with the date hereof and ending on the fourth (4th)
anniversary of the date hereof (the "Exercise Period"), on the terms and subject
to the provisions hereinafter set forth, up to a maximum of that number of
shares (the "Warrant Shares") of fully paid and non-assessable shares of Common
Stock, $.0l par value, of the Corporation (the "Common Stock") that shall
constitute fifteen percent (15%) of the total number of shares of voting capital
stock of the Corporation outstanding on the date of exercise of this Warrant
after giving effect to the exercise, exchange or conversion of all outstanding
securities, rights, options, warrants (including this Warrant), calls,
commitments or agreements of any nature or character (whether debt or equity)
that are, directly or indirectly, exercisable or exchangeable for, or
convertible into or otherwise represent the right to purchase or otherwise
receive, directly or indirectly, any capital stock or other arrangement to
acquire at any time or under any circumstance, voting capital stock of the
Corporation or any such other securities and assuming that all stock options
and/or shares of capital stock reserved for grant or issuance to officers,
directors, employees and consultants under all agreements, plans or arrangements
theretofore approved by the Board of Directors of the Corporation have been so
granted or issued (as the case may be) (collectively, the "Fully Diluted
Shares"), at a price per share to be determined on the Designated Date (as
hereinafter defined) calculated by dividing $20,000,000 by the number of Fully
Diluted Shares on the Designated Date (the "Warrant Price"). As used herein, the
ten-n "Designated Date" shall mean the earlier of either (i) the date on which
the holder of this Warrant shall deliver a Notice of Exercise in the form
annexed hereto or (ii) the day before the date of the closing of a private or
public offering of the Corporation's equity securities in which the valuation of
the Fully Diluted Shares, calculated on a per share offering price, is equal to
or greater than $100 million and the net cash proceeds to the Corporation from
such public or private offering of equity securities is equal to or greater than
$20 million (a "Qualified Offering"). Notwithstanding the foregoing, if the
Designated Date is set as provided in section (ii) of the prior sentence, the
number of Fully Diluted Shares on the Designated Date shall include all Fully
Diluted Shares issued up to but not including the closing of the Qualified
Offering, with the only shares excluded from the calculation being those issued
in the Qualified Offering.
<PAGE>
2. Exercise of Warrant. The rights represented by this Warrant may be
exercised by the holder hereof by the surrender of this Warrant (properly
endorsed) at the office of the Corporation at 702 Russell Avenue, 3rd Floor,
Gaithersburg, Maryland 20877-2606, or at such other agency or office of the
Corporation in the United States of America as it may designate by notice in
writing to the holder hereof at the address of such holder appearing on the
books of the Corporation, and by payment (either in cash, by check and/or by
cancellation of indebtedness) to the Corporation of the Warrant Price for each
Warrant Share being purchased. In the event of the exercise of the rights
represented by this Warrant, a certificate or certificates for the Warrant
Shares so purchased, registered in the name of the holder, shall be delivered to
the holder hereof within a reasonable time after the rights represented by this
Warrant shall have been so exercised. The person in whose name a certificate for
Warrant Shares is issued upon exercise of this Warrant shall for all purposes be
deemed to have become the holder of record of such shares on the date on which
the Warrant was surrendered and payment of the Warrant Price and any applicable
taxes was made, irrespective of the date of delivery of such certificate, except
that, if the date of such surrender and payment is a date when the stock
transfer books of the Corporation are closed, such person shall be deemed to
have become the holder of such shares at the opening of business on the next
succeeding date on which the stock transfer books are open. If requested, the
holder shall provide evidence that it is an accredited investor.
3. Covenants as to Common Stock. The Corporation covenants and agrees
that all shares of Common Stock that may be issued upon the exercise of the
rights represented by this Warrant will, upon issuance, be validly issued, fully
paid and non-assessable and free from all taxes, liens and charges with respect
to the issuance thereof. The Corporation further covenants and agrees that the
Corporation will from time to time take all such action as may be required to
assure that, subject to applicable to law, the stated or par value per share of
Common Stock is at all times equal to or less than the then effective Warrant
Price per share of Common Stock issuable upon exercise of this Warrant. The
Corporation further covenants and agrees that, subject to applicable law, the
Corporation will at all times have authorized and reserved, free from preemptive
rights, a sufficient number of shares of Common Stock to provide for the
exercise of the rights represented by this Warrant. If and so long as the Common
Stock issuable upon the exercise of the rights represented by this Warrant is
listed or quoted on any national securities exchange or inter-dealer quotation
system, the Corporation will, if permitted by the rules of such exchange or
inter-dealer quotation system, list and keep listed on such exchange or
inter-dealer quotation system, upon official notice of issuance, all shares of
such capital stock.
4. Restrictions on Transfer. Net2Phone acknowledges that neither this
Warrant nor the Warrant Shares have been registered under the Securities Act of
1933, as amended (the "Securities Act"), and agrees that no sale, transfer,
assignment, hypothecation or other disposition of this Warrant or the Warrant
Shares shall be made in the absence of a current registration statement under
the Securities Act as to this Warrant or the Warrant Shares or an opinion of
counsel reasonably satisfactory to the Corporation to the effect that such
registration or qualification is not required. Each certificate or other
instrument for Warrant Shares issued upon exercise of this Warrant shall, if
required under the Securities Act or the rules and regulations promulgated
thereunder, be imprinted with a legend substantially to the foregoing effect.
2
<PAGE>
5. Attached Rights. The Corporation hereby grants to the holder of this
Warrant those rights set forth on Exhibit A attached hereto, the provisions of
which are incorporated herein by reference and made a part hereof as if set
forth herein in their entirety.
6. Reorganizations, Etc. In case, at any time during the Exercise
Period, of any (i) capital reorganization, (ii) distribution to holders of the
Common Stock of capital stock other than Common Stock, (iii) reclassification of
the stock of the Corporation (other than a change in par value or from par value
to no par value or from no par value to par value or as a result of a stock
dividend or subdivision, split-up or combination of shares), (iv) consolidation
or merger of the Corporation with or into another corporation (other than a
consolidation or merger in which the Corporation is the continuing operation and
which does not result in any change in the Common Stock) or (v) sale of all or
substantially all the properties and assets of the Corporation in its entirety
to any other corporation, this Warrant shall, after such reorganization,
distribution, reclassification, consolidation, merger or sale, be exercisable on
the same ten-ns for the kind and number of shares of stock or other securities
or property of the Corporation or of the corporation resulting from such
consolidation or surviving such merger or to which such properties and assets
shall have been sold to which such holder would have been entitled if he had
held the Common Stock issuable upon the exercise hereof immediately prior to
such reorganization, distribution, reclassification, consolidation, merger or
sale. In any such reorganization or other action or transaction described above,
appropriate provision shall be made with respect to the rights and interests of
the holder of this Warrant to the end that the provisions hereof shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise hereof.
7. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is
lost, stolen, mutilated or destroyed, the Corporation may, on such terms as to
indemnity or otherwise as it may in its discretion impose (which shall, in the
case of a mutilated Warrant, include the surrender thereof), issue a new Warrant
of like denomination and tenor as the Warrant so lost, stolen, mutilated or
destroyed. Any such new Warrant shall constitute an original contractual
obligation of the Corporation, whether or not the allegedly lost, stolen,
mutilated or destroyed Warrant shall be at any time enforceable by anyone.
8. Modification and Waiver. This Warrant and any provision hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
9. Notices. All notices and communications to be given or otherwise
made to any party to this Warrant shall be deemed to be sufficient if contained
in a written instrument delivered in person or by telecopier or duly sent by
first class registered or certified mail, return receipt requested, postage
prepaid, or by overnight courier, or by electronic mail, with a copy thereof to
be sent by mail (as aforesaid) within 24 hours of such electronic mail,
addressed to such party at the address set forth below or at such other address
as may hereafter be designated in writing by the addressee to the addressee
listing all parties:
3
<PAGE>
If to the Corporation, to:
Netword, Inc.
702 Russell Avenue, 3rd Floor
Gaithersburg, Maryland 20877-2606
Attention: Michael L. Wise
Telecopier: (703) 995-0581
e-mail address: [email protected]
with a copy to:
Russell S. Berman, Esq.
Kronish Lieb Weiner & Hellman LLP
1114 Avenue of the Americas
New York, New York 10036-7798
Telecopier: (212) 479-6275
e-mail address: [email protected]
and
If to Net2Phone, to:
Net2Phone, Inc.
171 Main Street
Hackensack, New Jersey 07601
Attention: Clifford Sobel and Howard Balter
Telecopier: (201) 907-5351
e-mail addresses: [email protected]; [email protected]
with a copy to:
Ira Greenstein, Esq.
Morrison & Foerster
1290 Avenue of the Americas
New York, New York 10104
Telecopier: (212) 468-7900
e-mail address: [email protected]
or to such other address as the party to whom notice is to be given may have
furnished to the other parties hereto in writing in accordance herewith. Any
such notice or communication shall be deemed to have been delivered and received
(i) in the case of personal delivery or delivery by telecopier, on the date of
such deliver, (ii) in the case of nationally-recognized overnight courier, on
the next business day after the date when sent and (iii) in the case of mailing,
on the second business day following that on which the piece of mail containing
such communication is posted. As used in this Section, "business day" shall mean
any day other than a day on which banking institutions in the State of New
Jersey are legally closed for business.
10. Binding Effect on Successors; Survival. This Warrant shall be
binding upon any corporation succeeding the Corporation by merger, consolidation
or acquisition of all or substantially all
4
<PAGE>
of the Corporation's assets. All of the obligations of the Corporation relating
to the Common Stock issuable upon the exercise of this Warrant shall survive the
exercise and termination of this Warrant. All of the covenants and agreements of
the Corporation shall inure to the benefit of the successors and assigns of
Net2Phone, but this Warrant may be assigned only in whole and not in part.
11. Descriptive Headings. The description headings of the several
sections and paragraphs of this Warrant are inserted for convenience only and do
not constitute a part of this Warrant.
12. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to contracts made
and to be performed entirely within such State. Each of the parties hereto
hereby submits to the nonexclusive jurisdiction of the United States District
Court for the Southern District of New York and of any New York State court
sitting in the City of New York, Borough of Manhattan, for purposes of all legal
proceedings arising out of or relating to this Agreement and the transactions
contemplated hereby. Each of the parties hereto irrevocably waives, to the
fullest extent permitted by law, any objection which it may now or hereafter
have to the laying of the venue of any such proceeding brought in such a court
and any claim that any such proceeding brought in such a court has been brought
in an inconvenient forum.
13. Waiver of Jury Trial. Each party hereto hereby waives its rights to
a jury trial of any claim or cause of action based upon or arising out of this
Warrant. The scope of this waiver is intended to be all-encompassing of any and
all disputes that may be filed in any court and that relate to the subject
matter of this transaction, including, without limitation, contract claims, tort
claims, breach of duty claims, and all other common law and statutory claims.
Each party hereto hereby further warrants and represents that such party has
reviewed this waiver with its legal counsel, and that such party knowingly and
voluntarily waives its jury trial rights following consultation with legal
counsel. This waiver is irrevocable, meaning that it may not be modified either
orally or in writing, and this waiver shall apply to any subsequent amendments,
supplements or modifications to (or assignments of) this Warrant. In the event
of litigation, this provision of the Warrant may be filed as a written consent
to a trial (without a jury) by the court.
14. Fractional Shares. No fractional shares shall be issued upon
exercise of this Warrant. The Corporation shall, in lieu of issuing any
fractional share, round up to the nearest whole number of shares of Common
Stock.
15. Severability. If one or more provisions of this Warrant are held to
be unenforceable under applicable law, such provisions shall be excluded from
this Warrant and the balance of this Warrant shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
16. Payment of Taxes. The Company shall pay all taxes and other
governmental charges that may be imposed in respect of the issuance and delivery
of the Warrant Shares.
5
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Warrant to be
executed by a duly authorized officer on the date first above written.
NETWORD, INC.
By:_______________________________
Name:
Title:
ATTEST:____________________
Secretary
NET2PHONE, INC.
By:_______________________________
Name:
Title:
6
<PAGE>
Notice of Exercise
[To be signed upon exercise of Warrant]
The undersigned, the holder of the Warrant, hereby irrevocably
elects to exercise the purchase rights represented by such Warrant for, and to
purchase thereunder, either (i)_____________ shares of Common Stock or
(ii)_______ percent (__%) of the Fully Diluted Shares (as defined in the
Warrant) of Netword, Inc. and herewith makes payment of $_____________ therefor,
and requests that the certificates for such shares be issued in the name of and
delivered to, ________________ whose address is _______________________________.
Dated: ________________
_________________________________
(Signature)
_________________________________
(Address)
7
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED, ________________hereby sells, assigns and
transfers unto
Name ________________________
(Please typewrite or print in block letters)
Address_______________________
this Warrant, together with all right, title and interest therein, and does so
hereby irrevocably constitute and appoint _____________ as attorney, to transfer
the within Warrant on the books of the within-named Corporation, with full power
of substitution in the premises.
Dated:_________________, 19___
Name:_____________________________________
Signature:__________________________________
8
<PAGE>
EXHIBIT A
Additional Rights
1. Information Rights.
(a) Until such time as the Corporation becomes subject to the
periodic reporting provisions of Securities Exchange Act of 1934, as amended
(the "Exchange Act") or during such time as the Corporation ceases to be subject
to the periodic reporting provisions of the Exchange Act, the Corporation shall
afford to Net2Phone and its authorized employees, counsel, accountants and other
representatives, upon reasonable notice and during ordinary business hours, (i)
reasonable access to all books, records, and properties of the Corporation and
(ii) the opportunity to interview any officer of the Corporation regarding its
affairs; provided, however, that any individual seeking to exercise the rights
granted hereunder will only be permitted to review confidential and/or sensitive
information if such person executes a confidentiality agreement in form and
substance acceptable to the Corporation.
(b) Until such time as the Corporation becomes subject to the
periodic reporting provisions of the Exchange Act or during such time as the
Corporation ceases to be subject to the periodic reporting provisions of the
Exchange Act, the Corporation shall furnish to the holder hereof:
(i) within 30 days after the end of each month in each fiscal year
(other than the last month in each fiscal year), a balance sheet of the
Corporation and the related consolidated statement of income, unaudited
but certified by the principal financial officer of the Corporation,
such balance sheets to be as of the end of such month and such
statements of income to be for such month and for the period from the
beginning of the fiscal year to the end of such month, in each case
subject to normal year-end adjustments and without supporting notes;
(ii) within 45 days after the end of each quarter in each fiscal
year, a balance sheet of the Corporation and the related consolidated
statement of income, unaudited but certified by the principal financial
officer of the Corporation, such balance sheets to be as of the end of
each quarter and such statements of income to be for such quarter and
for the period from the beginning of the fiscal year to the end of such
quarter, in each case subject to normal year-end adjustments and
without supporting notes;
(iii) within 90 days after the end of each fiscal year of the
Corporation, a balance sheet of the Corporation as of the end of such
fiscal year and the related statements of income, changes in
stockholders' equity and cash flows of the Corporation for the fiscal
year then ended, together with supporting notes thereto, certified in
accordance with generally accepted accounting principles, without
qualification as to scope of audit, by a firm of independent public
accountants of recognized national standing selected by the
Corporation;
(iv) within 45 days prior to the beginning of each fiscal year of
the Corporation (and with respect to any revision thereof, promptly
after such revision has been prepared), a proposed operating budget for
the Corporation, including projected monthly income statements, cash
flow statements during such fiscal year and a projected consolidated
balance sheet as of the end of such fiscal year, and each monthly
financial statement furnished pursuant to clause (ii) above shall
reflect variances from such operating budget, as the same may from time
to time be revised; and
<PAGE>
(v) prompt notice of (A) any event of default under any agreement
with respect to material indebtedness for borrowed money or a material
purchase money obligation which would permit the holder of such
indebtedness or obligation to accelerate the maturity thereof, and any
event which, upon notice or lapse of time or both, would constitute
such an event of default, and (B) any action, suit or proceeding at law
or in equity or by or before any governmental instrumentality or agency
which, if adversely determined, would materially impair the right of
the Corporation to carry on its business substantially as now or then
conducted, or materially adversely affect the business, operations,
properties, assets or financial condition of the Corporation.
(c) At such time as the Corporation becomes subject to the periodic
reporting provisions of the Exchange Act, the Corporation shall provide the
holder hereof promptly upon filing, copies of all registration statements,
prospectuses, periodic reports and other documents filed by the Corporation with
the Securities and Exchange Commission (the "Commission"), or provide notice of
such filings.
(d) At any time during the Exercise Period, Net2Phone shall be
entitled to receive from the Corporation within two days of the receipt of
written notice as provided in Section 9 of the Warrant, a certificate from an
officer of the Corporation certifying the number of Fully Diluted Shares.
2. Registration Rights.
(a) Required Registration. If the Corporation shall be requested by
Net2Phone to effect the registration under the Securities Act of the Warrant
Shares in accordance with this Section, and if the Corporation has effected an
initial public offering, the Corporation shall promptly use its reasonable best
efforts to effect such registration under the Securities Act which the
Corporation has been so requested to register; provided, however, that the
Corporation shall not be obligated to effect any registration under the
Securities Act except in accordance with the following provisions:
(i) the Corporation shall not be obligated to file more than one (1)
registration statement initiated pursuant to this Section which become
effective;
(ii) if Net2Phone fails to complete and/or execute all
questionnaires, powers of attorney, indemnities, agreements and other
documents as may be required by the Corporation and/or the
underwriters, such holder will not be permitted to participate in such
registration;
(iii) with respect to any registration pursuant to this Section, the
Corporation may include in such registration any other shares;
provided, however, that if the managing underwriter advises the
Corporation that the inclusion of all of the shares proposed to be
included in such registration would interfere with the successful
marketing (including pricing) of all such securities, then the number
of shares to be included in such registration shall be included in the
following order:
first, the Warrant Shares;
second, authorized but unissued shares of Common Stock held by the
Corporation (the "Primary Shares"); and
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third, the other shares.
A requested registration under this Section may be rescinded or withdrawn by
written notice to the Corporation by Net2Phone; provided, however, that such
rescinded registration shall not count as a registration statement initiated
pursuant to this Section (a) if such recession or withdrawal is based upon
material adverse information relating to the Corporation or its condition,
business or prospectus that is different from that generally known to Net2Phone
at the time of its request. In connection with a registration under this Section
(a), the underwriters shall be a nationally recognized independent investment
banking firm selected by the Corporation and consented to by the holder of this
Warrant, which consent shall not be unreasonably withheld; provided, further,
that if the board of directors of the Corporation determines in good faith that
the registration and distribution of Warrant Shares pursuant to this section
would be materially detrimental to the Corporation or its shareholders and
therefore the board of directors determines that it is in the Corporation's best
interest to defer the filing, and promptly gives Net2Phone written notice of
such determination in the form of a certificate signed by an executive officer
of the Corporation, the Corporation shall be entitled to postpone the filing of
the registration statement otherwise required to be prepared and filed by the
Corporation pursuant to this section once for a reasonable period of time, but
not to exceed 30 days from the date of Net2Phone's request for such registration
(or any greater period necessary to complete an offering of securities of the
Corporation pursuant to any registration statement then pending).
(b) Piggyback Registration. If the Corporation at any time proposes
for any reason to register any of its shares under the Securities Act (other
than on Form S-4 or Form S-8 promulgated under the Securities Act or any
successor forms thereto or other than in connection with an exchange offer or
offering solely to, the Corporation's stockholders), it shall promptly give
written notice to Net2Phone of its intention so to register such shares and,
upon the written request, given within IO days after delivery of any such notice
by the Corporation, of Net2Phone to include in such registration Warrant Shares
(which request shall specify the number of Warrant Shares proposed to be
included in such registration), the Corporation shall use its best efforts to
cause all such Warrant Shares to be included in such registration on the same
terms and conditions as the securities otherwise being sold in such
registration; provided, however, that if the managing underwriter advises the
Corporation that the inclusion of all Warrant Shares proposed to be included in
such registration would interfere with the successful marketing (including
pricing) of the shares of stock proposed to be registered by the Corporation,
then the number of shares to be included in such registration shall be included
in the following order:
first, the Primary Shares;
second, the Warrant Shares, shares subject to other piggyback
registration rights outstanding on the date of issuance of this
Warrant and shares issued in a Qualified Offering; and
third, other shares.
If Net2Phone decides not to include all of its Warrant Shares in any
registration statement thereafter filed by the Corporation, Net2Phone shall
nevertheless continue to have the right to include any Warrant Shares in any
subsequent registration statement or registration statements as may be filed by
the Corporation with respect to offerings of its Common Stock and any other
securities, all upon the terms and conditions set forth herein; provided,
however, that the piggy
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back registration rights provided for in the section shall not apply (i) with
respect to an initial public offering by the Corporation, or (ii) with respect
to any Warrant Shares that have become eligible for resale pursuant to Rule
144(k) of the Act (or any similar provision then in force) or another provision
of Rule 144 of the Act pursuant to which all of Net2Phone's Warrant Shares are
immediately eligible for resale. If a piggyback registration effects the
registration of greater than fifty percent (50 %) of the Warrant Shares, such
registration shall be counted as a required registration for purposes of the
limits on required registrations in subsection (a). If the registration
statement is filed in connection with an underwritten offering, at the request
of the managing underwriters and provided that all officers and directors of the
Corporation enter into similar agreements, Net2Phone shall agree not to sell or
otherwise transfer or dispose of any of the Warrant Shares for a period of time
that Net2Phone shall agree to with the lead managing underwriter of the
transaction.
(c) Registrations on Form S-3. Anything contained in Section 3 to
the contrary notwithstanding, at such time as the Corporation shall have
qualified for the use of Form S-3 promulgated under the Securities Act or any
successor form thereto, Net2Phone shall have the right to request in writing two
registrations on Form S-3 or such successor form of Warrant Shares, which
request or requests shall (i) specify the number of Warrant Shares intended to
be sold or disposed of and (ii) state the intended method of disposition of such
Warrant Shares; provided, however, Net2Phone may only make one such request in
any 6-month period. A requested registration on Form S-3 or any such successor
form in compliance with this Section shall not count as a registration statement
demanded pursuant to Section 2(a), but shall otherwise be treated as a
registration initiated pursuant to and shall, except as otherwise expressly
provided in this Section, be subject to Section 2(a).
(d) Preparation and Filing. If and whenever the Corporation is under
an obligation pursuant to the provisions of this Warrant to use its reasonable
best efforts to effect the registration of any Warrant Shares, the Corporation
shall, as expeditiously as practicable:
(i) use its reasonable best efforts to cause a registration
statement that registers such Warrant Shares to become and remain
effective for a period of 180 days or until all of such Warrant Shares
have been disposed of (if earlier);
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for at least a period of 180 days or until all of
such Warrant Shares, have been disposed of (if earlier) and to comply
with the provisions of the Securities Act with respect to the sale or
other disposition of such Warrant Shares;
(iii) notify in writing Net2Phone's counsel promptly (i) of the
receipt by the Corporation of any notification with respect to any
comments by the Commission with respect to such registration statement
or prospectus or any amendment or supplement thereto or any request by
the Commission for the amending or supplementing thereof or for
additional information with respect thereto, (ii) of the receipt by the
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Corporation of any notification with respect to the issuance by the
Commission of any stop order suspending the effectiveness of such
registration statement or prospectus or any amendment or supplement
thereto or the initiation or threatening of any proceeding for that
purpose and (iii) of the receipt by the Corporation of any notification
with respect to the suspension of the qualification of such Warrant
Shares, for sale in any jurisdiction or the initiation or threatening
of any proceeding for such purposes;
(iv) use its reasonable best efforts to register or qualify the
Warrant Shares, under such other securities or blue sky laws of such
jurisdictions as Net2Phone reasonably requests and do any and all other
acts and things which may be reasonably necessary or advisable to
enable Net2Phone to consummate the disposition in such jurisdictions of
its Warrant Shares; provided, however, that the Corporation will not be
required to qualify generally to do business, subject itself to general
taxation or consent to general service of process in any jurisdiction
where it would not otherwise be required so to do but for this
paragraph (iv);
(v) furnish to Net2Phone such number of copies of a summary
prospectus or other prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and such other
documents as Net2Phone may reasonably request in order to facilitate
the public sale or other disposition of its Warrant Shares;
(vi) use its reasonable best efforts to cause the Warrant Shares to
be registered with or approved by such other governmental agencies or
authorities as may be necessary by virtue of the business and
operations of the Corporation to enable Net2Phone to consummate the
disposition of its Warrant Shares;
(vii) notify Net2Phone on a timely basis any time a prospectus
relating to the Warrant Shares is required to be delivered under the
Securities Act within the appropriate period mentioned in paragraph (a)
of this Section, of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then
existing and, at the request of Net2Phone, prepare and furnish a
reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
offerees of such shares, such prospectus shall not include an 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 not
misleading in light of the circumstances then existing;
(viii) make available for inspection by Net2Phone, any underwriter
participating in any disposition pursuant to such registration
statement and any attorney, accountant or other agent retained by
Net2Phone or underwriter (collectively, the "Inspectors"), all
pertinent financial and other records, pertinent corporate documents
and properties of the Corporation (collectively, the "Records"), as
shall be reasonably
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necessary to enable them to exercise their due diligence
responsibility, and cause the Corporation's officers, directors and
employees to supply all information (together with the Records, the
"Information") reasonably requested by any such Inspector in connection
with such registration statement. Any of the Information which the
Corporation determines in good faith to be confidential, and of which
determination the Inspectors are so notified, shall not be disclosed by
the Inspectors unless (i) the disclosure of such Information is
necessary to avoid or correct a misstatement or omission in the
registration statement, (ii) the release of such Information is
required by law or (iii) such Information has been made generally
available to the public;
(ix) in connection with underwritten offerings, use its reasonable
best efforts to obtain from its independent certified public
accountants "comfort" letters in customary form and at customary times
and covering matters of the type customarily covered by comfort
letters;
(x) use its reasonable best efforts to obtain from its counsel an
opinion or opinions in customary form;
(xi) provide a transfer agent and registrar (which may be the same
entity and which may be the Corporation) for the Warrant Shares;
(xii) issue to any underwriter to which Net2Phone may sell shares in
such offering certificates evidencing such Warrant Shares;
(xiii) list such Warrant Shares on any national securities exchange
on which any shares of the Common Stock are listed or, if the Common
Stock is not listed on a national securities exchange, use its best
efforts to qualify such Warrant Shares for inclusion on the automated
quotation system of the National Association of Securities Dealers,
Inc. (the "NASD");
(xiv) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission and make available
to its security holders, as soon as reasonably practicable, earnings
statements (which need not be audited) covering a period of 12 months
beginning within three months after the effective date of the
registration statement, which earnings statements shall satisfy the
provisions of Section II(a) of the Securities Act; and
(xv) use its best efforts to take all other steps necessary to
effect the registration of such Warrant Shares contemplated hereby.
(e) Expenses. The Corporation shall bear all costs in complying with
Section 2, including, without limitation, all registration and filing fees
(including all expenses incident to filing with the NASD), fees and expenses of
complying with securities and blue sky laws, printing expenses, fees and
expenses of the Corporation's counsel and accountants and reasonable fees and
expenses of Net2Phone's counsel; provided, however, that all underwriting
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discounts and selling commissions, and all transfer taxes, if any, applicable to
the Warrant Shares and all fees and expenses of any special or interim audit for
any registration initiated by Net2Phone pursuant to Section 2 that is not
otherwise required under the Securities Act in connection with such
registration, shall be borne by Net2Phone; provided, further, that with respect
to the piggy back registration rights of section (b), the Corporation shall be
required to bear the reasonable fees and expenses of Net2Phone's counsel in
connection with one piggy back registration if all of the Warrant Shares that
Net2Phone requested to be included in such registration are included in the
registration.
(f) Information. Net2Phone agrees, as a condition to the
registration obligations set forth herein, to furnish to the Corporation such
information regarding Net2Phone and the distribution of the Warrant Shares as
the Corporation may, from time to time, reasonably request in writing to comply
with the Securities Act and other applicable law. The Corporation may exclude
from such registration the Warrant Shares for so long as Net2Phone fails to
furnish such information after receiving such request.
(g) Indemnification.
(i) In connection with any registration of any
Warrant Shares under the Securities Act pursuant to this Warrant, the
Corporation shall indemnify and hold harmless Net2Phone, its officers,
directors, employees and affiliates and each other person, if any, who
controls any of the foregoing persons within the meaning of the
Securities Act and the underwriter in an underwritten offering, against
any losses, claims, damages or liabilities, joint or several, (or
actions in respect thereof) to which any of the foregoing persons may
become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in the registration statement
under which such Warrant Shares were registered under the Securities
Act, any preliminary prospectus or final prospectus contained therein
or otherwise filed with the Commission, any amendment or supplement it
thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading or, with
respect to any prospectus, necessary to make the statements therein in
light of the circumstances under which they were made not misleading,
or any violation by the Corporation of the Securities Act or state
securities or blue sky laws applicable to the Corporation and relating
to action or inaction required of the Corporation in connection with
such registration or qualification under such state securities or blue
sky laws; and shall reimburse Net2Phone, its officers, directors,
employees and affiliates and each other person, if any, who controls
any of the foregoing persons within the meaning of the Securities Act
for any legal or other expenses reasonably incurred by any of them in
connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Corporation
shall not be liable in any such case to the extent that any such loss,
claim, damage, liability or action arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged
omission made in said registration statement, preliminary prospectus,
final prospectus, amendment,
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supplement or document in reliance upon and in conformity with written
information furnished to the Corporation by Net2Phone that states that
it is specifically for use in the preparation thereof. The Corporation
shall not be liable for any misstatement or omission in any preliminary
prospectus if such misstatement or omission is corrected in the final
prospectus.
(ii) In connection with any registration of Warrant
Shares under the Securities Act pursuant to this Warrant, Net2Phone
shall indemnify and hold harmless (in the same manner and to the same
extent as set forth in the preceding paragraph of this Section) the
Corporation, each director of the Corporation, each officer of the
Corporation who shall sign such registration statement, employees and
affiliates, each person who controls any of the foregoing persons
within the meaning of the Securities Act and the underwriter in an
underwritten offering with respect to any statement or omission from
such registration statement, any preliminary prospectus or final
prospectus contained therein or otherwise filed with the Commission,
any amendment or supplement thereto or any document incident to
registration or qualification of any Warrant Shares, if such statement
or omission was made in reliance upon and in conformity with written
information furnished to the Corporation or such underwriter through an
instrument duly executed by Net2Phone that states that it is
specifically for use in connection with the preparation of such
registration statement, preliminary prospectus, final prospectus,
amendment, supplement or document; provided, however, that the maximum
amount of liability in respect of such indemnification shall be limited
to an amount equal to the proceeds received by Net2Phone from the sale
of Warrant Shares effected pursuant to such registration.
(iii) The indemnification required by this Section
(g) will be made by periodic payments during the course of the
investigation or defense, as and when bills are received or expenses
incurred, subject to prompt refund in the event any such payments are
determined not to have been due and owing hereunder.
(iv) Promptly after receipt by an indemnified party
of notice of the commencement of any action involving a claim referred
to in the preceding paragraphs of this Section, such indemnified party
will, if a claim in respect thereof is made against an indemnifying
party, give written notice to the latter of the commencement of such
action. In case any such action is brought against an indemnified
party, the indemnifying party will be entitled to participate in and to
assume the defense thereof, jointly with any other indemnifying party
similarly notified to the extent that it may wish, with counsel
reasonably satisfactory to such indemnified party, and after notice
from the indemnifying party to such indemnified party of its election
so to assume the defense thereof, the indemnifying party shall not be
responsible for any legal or other expenses subsequently incurred by
the latter in connection with the defense thereof, provided, however,
that if any indemnified party shall have reasonably concluded that
there may be one or more legal or equitable defenses available to such
indemnified party which are additional to or conflict with those
available to the indemnifying party, or that such claim or litigation
involves or could have an effect upon matters beyond the scope of the
indemnity
8
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agreement provided in this Section, the indemnifying party shall not
have the right to assume the defense of such action on behalf of such
indemnified party and such indemnifying party shall reimburse such
indemnified party and any person controlling such indemnified party for
that portion of the reasonable fees and expenses of any counsel
retained by the indemnified party which is reasonably related to the
matters covered by the indemnity agreement provided in this Section;
provided, further, that the indemnifying party shall not be liable for
fees and expenses of more than one law firm for all indemnified parties
(together with appropriate local counsel). An indemnifying party shall
not be liable for any settlement or compromise of, or consent to entry
of any judgment with respect to, any action, suit, claim or proceeding
effected without its prior written consent (which consent in the case
of an action, suit, claim or proceeding exclusively seeking monetary
relief shall not be unreasonably withheld).
(h) Exchange Act Compliance. From and after the date upon which the
registration statement pursuant to which the Corporation shall have initially
registered shares of Common Stock under the Securities Act for sale to the
public shall have been declared effective or such earlier date as a registration
statement filed by the Corporation pursuant to the Exchange Act relating to any
class of the Corporation's securities shall have become effective, the
Corporation shall use its reasonable best efforts to comply with all of the
reporting requirements of the Exchange Act and with all other public information
reporting requirements of the Commission which are conditions to the
availability of Rule 144 for the sale of the Common Stock. Until such date, the
Corporation shall cooperate with Net2Phone in supplying such information as may
be necessary for Net2Phone to complete and file any information reporting forms
presently or hereafter required by the Commission as a condition to the
availability of Rule 144.
(i) No Conflict of Rights. The Corporation represents and warrants
to Net2Phone that the registration rights granted to Net2Phone hereby do not
conflict with any other registration rights granted by the Corporation. The
Corporation shall not, after the date hereof, grant any registration rights
which conflict with or impair the registration rights granted hereby.
9
EXODUS COMMUNICATIONS, INC.
INTERNET DATA CENTER SERVICES AGREEMENT
<TABLE>
<S> <C>
2.4 Taxes. All payments required by this Agreement are
THIS INTERNET DATA CENTER SERVICES AGREEMENT (this "Agreement") exclusive of all national, state, municipal or other
is made effective as of the Submission Date April 21, 1999 governmental excise, sales, value-added, use, personal property,
indicated in the initial internet Data Center Services Order Form and occupational taxes, excise, withholding taxes and
accepted by Exodus, by and between Exodus Communications, Inc. obligations andother levies now in force or enacted in the
("Exodus") and the customers identified below ("Customer"). future, all of which Customer will be responsible for and will
pay in full, except for taxes based on Exodus' net income.
PARTIES:
3. CUSTOMER'S OBLIGATIONS.
3.1 Compliance with Law and Rules and Regulations. Customer
CUSTOMER NAME: NETWORD, INC. agrees that Customer will comply at all times with all applicable
laws and regulations and Exodus' general rules and regulations
ADDRESS: 702 RUSSELL AVENUE, 3RD FLOOR relating to its provision of Internet Data Center Services, as
updated by Exodus from time to time ("Rules and Regulations").
GAITHERSBURG, MARYLAND 20877-2606 Customer acknowledges that Exodus exercises no control whatsoever
over the content of the information passing through its sites
PHONE: 240-633-2100 containing the Customer Area and equipment and facilities used by
Exodus to provide Internet Data Center Services ("Internet Data
FAX: 240-631-9583 Centers"), and that it is the sole responsibility of Customer to
ensure that the information it transmits and receives complies
EXODUS COMMUNICATIONS, INC. with all applicable law and regulations.
2650 San Tomas Expressway
Santa Clara, CA 95051 3.2 Customer's Costs. Customer agrees that it will be solely
Phone: (408) 346-2200 responsible, and at Exodus' s request will reimburse Exodus, for
Fax: (408) 346-2420 all costs and expenses (other than those included as part of the
Internet Data Services and except as otherwise expressly provided
1. INTERNET DATA CENTER SERVICES. herein) it incurs in connection with this Agreement.
Subject to the terms and conditions of this Agreement, during 3.3 Access and Security. Customer will be fully responsible
the term of this Agreement, Exodus will provide to Customer the for any charges, costs, expenses (other than those included in
services described in the Internet Data Center Services Order the Internet Data Center Services), and third party claims that
Form(s) ("IDC Services Order Form(s)") accepted by Exodus, or may result from its use of, or access to, the Internet Data
substantially similar services if such substantially similar Centers and/or the Customer Area including but not limited to any
services would provide Customer with substantially similar unauthorized use of any access devices provided by Exodus
benefits ("Internet Data Center Services"). All IDC Services hereunder. Except with the advance written consent of Exodus,
Order Forms, accepted by Exodus are incorporated herein by this Customer's access to the Internet Data Centers will be limited
reference, each as of the Submission Date indicated in such solely to the individuals identified and authorized by Customer
forms. to have access to the Internet Data Centers and the Customer Area
in accordance with this Agreement, as identified in the Customer
2. FEES AND BILLING. Registration Form, as amended from time to time, which is hereby
incorporated by this reference ("Representatives").
2.1 Fees. Customer will pay all fees due according to the
IDC Services Order Form(s). 3.4 No Competitive Services. Customer may not at any time
permit any Internet Data Center Services to be utilized for the
2.2 Billing Commencement. Billing for Internet Data Center provision for any services that compte with any Exodus services,
Services, other than Stamp Fees, indicated in the initial IDC without Exodus' prior written consent.
Services Order Form shall commence on the earlier to occur of (i)
the "Installation Date" indicated in the initial IDC Services 3.5 Insurance.
Order Form, regardless of whether Customer has commenced use of
the Internet Data Center Services. Unless Customer is unable to (a) Minimum Levels. Customer will keep in full force and
install the Customer Equipment and/or use the Internet Data effect during the terms of this Agreement (i) correspondence
Center Services by the Installation Date due to the fault of general liability insurance in an amount not less than $5 million
Exodus, then billing will not begin until the date Exodus has per occurrence for bodily injury and property damage; (ii)
remedied such fault and (ii) the date the "Customer Equipment" employer's liability insurance in an amount not less than $1
(Customer's computer hardware and other tangible equipment, as million per occurrence; and (iii) workers' compensation insurance
identified in the Customer Equipment List, which is incorporated in an amount not less than that required by applicable law.
herein by this reference) is placed by Customer in the "Customer Customer also agrees that it will, and will be solely responsible
Area" (the portion(s) of the Internet Data Centers, as defined in for ensuring that its agents (including contractors and
Section 3.1 below, made available to Customer hereunder for the subcontractors) maintain, other insurance at levels no less than
placement of Customer Equipment) and is operational. All Setup those required by applicable law and customary in Customer's and
Fees will be billed upon receipt of a Customer signed IDC its agents' industries.
Services Order Form. In the event that Customer orders additional
Internet Data Center Services, billing for such services shall (b) Certificate of Insurance. Prior to installation of any
commence on due date Exodus first provides such additional Customer Equipment in the Customer Area, Customer will furnish
Internet Data Center Services to Customer or as otherwise agreed Exodus with certificates of insurance which evidence the minimum
to by Customer and Exodus. levels of insurance set forth above.
2.3 Billing and Payment Terms. Customer will be billed (c) Naming Exodus as an Additional Insured. Customer agrees
monthly in advance of the provision of Internet Data Center that prior to the installation of any Customer Equipment,
Services, and payment of such fees will be due within thirty (30) Customer will cause its insurance provider(s) to name Exodus as
days of the data of each Exodus invoice. All payments will be an additional insured and notify Exodus in writing of the
made in U.S. dollars. Late payments hereunder will accrue effective date thereof.
interest at a rate of one and one-half percent (1 1/2%) per
month, or the highest rate allowed by applicable law, whichever 4. CONFIDENTIAL INFORMATION.
is lower. If in its judgment Exodus determines that Customer is
not creditworthy or is otherwise not financially secure, Exodus 4.1 Confidential Information. Each party acknowledges that it
may, upon written notice to Customer, modify the payment terms to will have access to certain confidential information of the other
require full payment before the provision of Internet Data Center party concerning the other party's business, plans, customers,
Services or other assurance to accrue Customer's payment technology, and products, including the terms and conditions of
obligations hereunder. this Agreement ("Confidential Information"). Confidential
EXODUS COMMUNICATIONS, INC., CONFIDENTIAL AND PROPRIETARY (rev 6/98) Page 1
<PAGE>
Information will include, but not be limited to, each party's customers. Exodus does, however, proactively monitor the
proprietary software and customer information. Each party agrees aggregate packet loss and transmission latency within its LAN and
that it will not use in any way, for its own account or the WAN. In the event that Exodus discovers (either from its own
account of any third party, except as expressly permitted by this efforts or after being notified by Customer) that Customer is
Agreement, nor disclose to any third party (except as required by experiencing packet loss in excess of one percent (1%) ("Excess
law or to that party's attorneys, accountants and other advisors Packet Loss") or transmission latency in excess of 120
as reasonably necessary), any of the other party's Confidential milliseconds round trip time (based on Exodus' measurements)
Information and will take reasonable precautions to protect the between any two Internet Data Centers within Exodus' U.S. network
confidentiality of such information. (collectively, "Excess Latency", and with Express Packet Loss
"Excess Packet Loss/Latency"), and Customer notifies Exodus (or
4.2 Exceptions. Information will not be deemed Confidential confirms that Exodus has notified Customer), Exodus will take all
Information hereunder if such information: (i) is known to the actions necessary to determine the source of the Excess Packet
receiving party prior to receipt from the disclosing party Loss/Latency.
directly or indirectly from a source other than one having an
obligation of confidentiality to the disclosing party; (ii)
becomes known (independently of disclosure by the disclosing (A) Time to Discover Source of Excess Packet
party) to the receiving party directly or indirectly from a Loss/Latency: Notification of Customer. Within two (2) hours of
source other than one having an obligation of confidentiality to discovering the existence of Excess Packet Loss/Latency, Exodus
the disclosing party; (iii) becomes publicly known or otherwise will determine whether the source of the Excess Packet
ceases to be secret or confidential, except through a breach of Loss/Latency is limited to the Customer Equipment and the Exodus
this Agreement by the receiving party: or (iv) is independently equipment concerning the Customer Equipment to Exodus' LAN
developed by the receiving party. ("Customer Specific Packet Loss/Latency"). If the Excess Packet
Loss/Latency is not a Customer Specific Packet Loss/Latency,
5. REPRESENTATIONS AND WARRANTIES. Exodus will determine the source of the Excess Packet
Loss/Latency within (2) hours after determining that it is not a
5.1 Warranties by Customer. Customer Specific Packet Loss/Latency. In any event, Exodus will
notify Customer of the source of the Excess Packet Loss/Latency
(a) Customer Equipment. Customer represents and warrants that within sixty (60) minutes after identifying the source.
it owns or has the legal right and authority and will continue to
own or maintain the legal right and authority during the term of
this Agreement, to place and use the Customer Equipment as (B) Remedy of Excess Packet Loss/Latency. If the
contemplated by this Agreement. Customer further represents and Excess Packet Loss/Latency remedy is within the sole control of
warrants that its placement, arrangements, and use of the Exodus, Exodus will remedy the Excess Packet Loss/Latency within
Customer Equipment in the Internet Data Centers complies with the two (2) hours of determining the source of the Excess Packet
Customer Equipment Manufacturer's environmental and other Loss/Latency. If the Excess Packet Loss/Latency is caused from
specifications. outside of the Exodus LAN or WAN, Exodus will notify Customer and
will use commercially reasonable efforts to notify the party(ies)
(b) Customer's Business. Customer represents and warrants responsible for the source and cooperate with it (them) to
that Customer's services, products materials, data information resolve the problem as soon as possible.
and Customer Equipment used by Customer in connection with this
Agreement as well as Customer's and its permitted customers' and
users' use of the Internet Data Center Services (collectively (C) Failure to Determine Source and/or Resolve
"Customer's Business") does not as of the Installation Date, and Problems. In the event that Exodus is unable to determine the
will not during the term of this Agreement operate in any manner source of and remedy the Excess Packet Loss/Latency within the
that would violate any applicable law or regulation. time periods described above (where Exodus was solely in control
of the source), Exodus will credit Customer's account the
(c) Rules and Regulations. Customer has read the Rules and pro-rata connectively charges for one (1) day of service for
Registrations and represents and warrants that Customer's every two (2) hours after the time periods described above that
Business are currently in full compliance with the Rules and it takes Exodus to resolve the problem, up to an aggregate
Regulations, and will remain so at all times during the term of maximum credit of connectivity charges for seven (7) days of
this Agreement. service in any one (1) month.
(d) Breach of Warranties. In the event of any breach, or (iii) Customer Must Request Credit: To receive any of the
reasonably anticipated breach, of any of the foregoing credits described in this section 5.2(a), Customer must notify
warranties, in addition to any other remedies available at law or Exodus within three (3) business days from the time Customer
in equity, Exodus will have the right immediately, in Exodus' becomes eligible to receive a credit. Failure to comply with this
sole discretion, to suspend any related Interest Data Center requirement will forfeit Customer's right to receive credit.
Services if deemed reasonably necessary by Exodus to prevent any
harm to Exodus and its business. (iv) Remedies Shall Not be Cumulative; Maximum Credit: In
the event that Customer is entitled to multiple credits hereunder
5.2 Warranties and Disclaimers by Exodus. arising from the same event, such credits shall not be cumulative
and Customer shall be entitled only the maximum single credit
5.2 (a) Service Level Warranty. In the event Customer available for such event. In no event will Exodus be required to
experiences any of the following and Exodus determines in its credit Customer in any one (1) calendar month connectivity
reasonable judgment that such inability was caused by Exodus' charges in excess of seven (7) days of service. A credit shall be
failure to provide Internet Data Center Services for reasons applied only to the month in which there was the incident that
within Exodus' reasonable control and not as a result of any resulted in the credit. Customer shall not be eligible to receive
actions or inactions of Customer or any third parties (including any credits for periods in which Customer received any Internet
Customer Equipment and third party equipment), Exodus will, upon Data Center Services free of charges.
Customer's request in accordance with paragraph (iii) below,
credit Customer's account as described below: (v) Termination Option for Chronic Problems: If, in any
single calendar month, Customer would be able to receive credits
(i) Inability to Access the Internet (Downtime). If totaling fifteen (15) or more days (but for the limitation in
Customer is unable to transmit and receive information from paragraph (iv) above) resulting from three (3) or more events
Exodus' Internet Data Centers (i.e., Exodus' LAN and WAN) to during such calendar month or, if any single event entitling
other portions of the Internet because Exodus failed to provide customer to credits under paragraph 5.2(a)(i) exists for a period
the Internet Data Center Services for more than fifteen (15) of eight (8) consecutive hours, then, Customer may terminate this
consecutive minutes, Exodus will credit Customer's accountant the Agreement for cause and without penalty by notifying Exodus
pro-rata connectivity charges (i.e., all bandwidth related within five (5) days following the end of such calendar month.
changes) for one (1) day of service, up to an aggregate maximum Such termination will be effective thirty (30) days after receipt
credit of connectivity charges for seven (7) days of service in of such notice by Exodus.
any one calendar (1) month. Exodus' scheduled maintenance of the
Internet Data Centers and Internet Data Services, as described in THIS WARRANTY DOES NOT APPLY TO ANY INTERNET DATA CENTER SERVICES
the Rules and Regulations, shall not be deemed to be a failure of THAT EXPRESSLY EXCLUDE THIS WARRANTY (AS DESCRIBED IN THE
Exodus to provide Internet Data Center Services. For purposes of SPECIFICATION SHEETS FOR SUCH PRODUCT. THIS SECTION 5.2(a) STATES
the foregoing, "unable to transmit and receive" shall mean CUSTOMER'S SOLE AND EXCLUSIVE REMEDY FOR ANY FAILURE BY EXODUS TO
sustained packet loss in excess of 50% based on Exodus' PROVIDE INTERNET DATA CENTER SERVICES.
measurements.
(b) No Other Warranty. EXCEPT FOR THE EXPRESS WARRANTY SET
(ii) Packet Loss and Latency. Exodus does not proactively OUT IN SUBSECTION (a) ABOVE, THE INTERNET DATA CENTER,
monitor the packet loss or transmission latency of specific SERVICE ARE PROVIDED ON AN "AS IS" BASIS, AND CUSTOMER'S USE
EXODUS COMMUNICATIONS, INC., CONFIDENTIAL AND PROPRIETARY (rev 6/98) Page 2
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OF THE INTERNET DATA CENTER SERVICES IS AT ITS OWN RISK. EXODUS any and all costs, liabilities, losses, and expenses (including,
DOES NOT MAKE AND HEREBY DISCLAIMS, ANY AND ALL OTHER EXPRESS but not limited to, reasonable attorneys' fees) (collectively,
AND/OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, "Losses") resulting from any claim, suit, action, or proceeding
WARRANTIES OR MERCHANTABILITY. WITNESS FOR A PARTICULAR PURPOSE. (each, on "Action") brought against Customer alleging (i) the
NONINFRINGEMENT AND TITLE, AND ANY WARRANTIES ARISING FROM A infringement of any third party registered U.S. copyright or
COURSE OF DEALING, USAGE, OR TRADE PRACTICE. EXODUS DOES NOT issued U.S. patent resulting from the provision of Internet Data
WARRANT THAT THE INTERNET DATA CENTER SERVICES WILL BE Center Services pursuant to this Agreement (out excluding any
UNINTERRUPTED, ERROR-FREE, OR COMPLETELY SECURE. infringement contributorily caused by Customer's Business or
Customer Equipment) and (ii) personal injury in Customer's
(c) Disclaimer of Actions Caused by and/or Under the Control Representatives from Exodus's gross negligence or willful
of Third Parties. EXODUS DOES NOT AND CANNOT CONTROL THE FLOW OF misconduct.
DATA TO OR FROM EXODUS' INTERNET DATA CENTERS AND OTHER PORTIONS
OF THE INTERNET. SUCH FLOW DEPENDS IN LARGE PART ON THE 7.2 Customer's Indemnification of Exodus. Customer will
PERFORMANCE OF INTERNET SERVICES PROVIDED OR CONTROLLED BY THIRD indemnify, defend and hold Exodus, its affiliates and customers
PARTIES. AS TIMES, ACTIONS, OR INACTIONS CAUSED BY THESE THIRD harmless from and against any and all Losses resulting from or
PARTIES CAN PRODUCE SITUATIONS IN WHICH EXODUS' CUSTOMERS' arising out of any Action brought by or against Exodus, its
CONNECTIONS TO THE INTERNET (OR PORTIONS THEREOF) MAY BE IMPAIRED affiliates or customers alleging: (a) with respect to the
OR DISRUPTED. ALTHOUGH EXODUS WILL USE COMMERCIALLY REASONABLE Customer's Business: (i) infringement or misappropriation of any
EFFORTS TO TAKE ACTIONS IT DEEMS APPROPRIATE TO REMEDY AND AVOID intellectual property rights; (ii) defamation, libel, slander,
SUCH EVENTS. EXODUS CANNOT GUARANTEE THAT THEY WILL NOT OCCUR. obscenity, pornography, or violation of the rights of privacy or
ACCORDINGLY, EXODUS DISCLAIMS ANY AND ALL LIABILITY RESULTING publicity; or (iii) spanning, or any other offensive. harassing
FROM OR RELATED TO SUCH EVENTS. or illegal conduct or violation of the Rules and Regulations: (b)
any damage or destruction to the customer area, the Internet Data
6. LIMITATIONS OF LIABILITY. Centers or the equipment of Exodus or any other customer by
Customer or Representative(s) or Customer's designees; or (c) any
6.1 Personal Injury. EACH REPRESENTATIVE AND ANY OTHER other damage arising from the Customer Equipment or Customer's
PERSONS VISITING THE INTERNET DATA CENTERS DOES SO AT ITS OWN Business.
RISK AND EXODUS ASSUMES NO LIABILITY WHATSOEVER FOR ANY HARM TO
SUCH PERSONS RESULTING FROM ANY CAUSE OTHER THAN EXODUS' 7.3 Notice. Each party will provide the other party prompt
NEGLIGENCE OR WILLFUL MISCONDUCT RESULTING IN PERSONAL INJURY TO written notice upon of the existence of any event of which it
SUCH PERSONS DURING SUCH A VISIT. becomes aware, and an opportunity to participate in the defense
thereof.
6.2 Damages in Customer Equipment or Business. EXODUS ASSUMES
NO LIABILITY FOR ANY DAMAGE TO, OR LOSS RELATING TO, CUSTOMER'S 8. TERM AND TERMINATION.
BUSINESS RESULTING FROM ANY CAUSE WHATSOEVER. CERTAIN CUSTOMER
EQUIPMENT, INCLUDING BUT NOT LIMITED TO CUSTOMER EQUIPMENT 8.1 Term. This Agreement will be effective for a period of
LOCATED ON CYBER RACKS, MAY BE DIRECTLY ACCESSIBLE BY OTHER the one(1) year from the Installation Date, unless earlier
CUSTOMERS. EXODUS ASSUMES NO LIABILITY FOR ANY DAMAGE TO, OR LOSS terminated according to the provisions of this Section 8. The
OF, ANY CUSTOMER EQUIPMENT RESULTING FROM ANY CAUSE OTHER THAN Agreement will automatically renew for additional terms of one
EXODUS' GROSS NEGLIGENCE OR WILFUL MISCONDUCT. TO THE EXTENT (1) year each.
EXODUS IS LIABLE FOR ANY DAMAGE TO, OR LOSS OF, THE CUSTOMER
EQUIPMENT FOR ANY REASON, SUCH LIABILITY WILL BE LIMITED SOLELY
TO THE THEN-CURRENT VALUE OF THE CUSTOMER EQUIPMENT. 8.2 Termination.
6.3 Exclusion. EXCEPT AS SPECIFIED IN SECTIONS 6.1 AND 6.2, (a) For Convenience.
IN NO EVENT WILL EXODUS BE LIABLE TO CUSTOMER, ANY
REPRESENTATIVE, OR ANY THIRD PARTY FOR ANY CLAIMS ARISING OUT OF (i) By Customer During First Thirty Days. Customer may
OR RELATED TO THIS AGREEMENT, CUSTOMER EQUIPMENT, CUSTOMER'S terminate this Agreement fro convenience by providing written
BUSINESS OR OTHERWISE, AND ANY LOST REVENUE, LOST PROFITS, notice to Exodus at any time during thirty (30) day period
REPLACEMENTS GOODS, LOSS OF TECHNOLOGY, RIGHT OF SERVICES, beginning on the Installation Date.
INCIDENTAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES, LOSS OF
DATA, OR INTERRUPTION OR LOSS OF USE OF SERVICE OR OF ANY (ii) By Either Party. Either party may terminate this
CUSTOMER EQUIPMENT OR CUSTOMER'S BUSINESS, EVEN IF ADVISED OF THE Agreement for convenience at any time effective after the first
POSSIBILITY OF SUCH DAMAGES, WHETHER UNDER THEORY OF CONTRACT, (1st) anniversary of the Installation Date by providing ninety
TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR OTHERWISE. (90) days' prior written notice to the other party at any time
thereafter.
6.4 Maximum Liability. NOTWITHSTANDING ANYTHING TO THE
CONTRARY IN THIS AGREEMENT, EXODUS'S MAXIMUM AGGREGATE LIABILITY
TO CUSTOMER RELATED TO OR IN CONNECTION WITH THIS AGREEMENT WILL (b) For Cause. Either party may terminate this Agreement if:
BE LIMITED TO THE TOTAL AMOUNT PAID BY CUSTOMER TO EXODUS (i) the other party breaches any material term or condition of
HEREUNDER FOR THE PRIOR TWELVE (12) MONTH PERIOD. this Agreement and fails to cure such breach within thirty (30)
days after receipt of written notice of the same, expect in the
6.5 Customer's Insurance. Customer agrees that it will not case of failure to pay fees, which must be cured within five (5)
pursue any claims against Exodus for any liability Exodus may days after receipt of written notice from Exodus; (ii) the other
have under or relating to this Agreement until Customer first party becomes the subject of a voluntary petition in bankruptcy
makes claims against Customer's insurance provider(s) and such or any voluntary proceeding relating to insolvency, receivership,
insurance provider(s) finally resolve(s) such claims. liquidation, or composition for the benefit of creditors; or
(iii) the other party becomes the subject of any involuntary
6.6 Basis of the Bargain; Failure of Essential Purpose. petition in bankruptcy or any involuntary proceeding relating to
Customer acknowledges that Exodus has set its prices and entered insolvency, receivership, liquidation, or composition for the
into this Agreement in reliance upon the limitations of liability benefit of creditors, if such petition or proceeding is not
and the disclaimers of warranties and damages set forth herein, dismissed within sixty (60) days of filing.
and that the same form an essential basis of the bargain between
the parties. The parties agree that the limitations and 8.3 No Liability for Termination. Neither party will be
exclusions of liability and disclaimers specified in this liable to the other party for any termination or expiration of
Agreement will survive and apply even if found to have failed of this Agreement in accordance with its terms.
their essential purpose.
8.4 Effective of Termination. Upon the effective date of
7. INDEMNIFICATION. expiration of termination of this Agreement: (a) Exodus will
immediately cease providing the Internet Data Center Services;
7.1 Exodus' Indemnification of Customer. Exodus will (b) any and all payment obligations of Customer under this
indemnify, defend and hold Customer harmless from and against any Agreement will become due immediately; (c) within thirty (30)
EXODUS COMMUNICATIONS, INC., CONFIDENTIAL AND PROPRIETARY (rev 6/98) Page 3
<PAGE>
days after such expiration or termination, each party will return its terms, Customer agrees that it will not, and will ensure that
all Confidential Information of the other party in its possession its affiliates do not directly or indirectly, solicit for
at the time or expiration or termination and will not make or employment any persons Exodus during such period.
retain any copies of such Confidential Information except as
required to comply with any applicable legal or accounting record 9.6 Governing Law; Dispute Resolution, Severability Waiver.
keeping requirement; and (d) Customer will remove from the This Agreement is made under and will be governed by and
Internet Data Centers all Customer Equipment and any of its other construed in accordance with the laws of the State of California
property within such five-day period. Exodus will have the (except that body of law controlling conflicts of law) and
opinion to (i) move any and all such property to accrue charges specifically excluding from application to this Agreement that
and charge Customer for the cost of such removal and storage, law known as the United Nations Convention on the International
and/or (ii) liquidate the property in any reasonable manner. Sale of Goods. Any dispute relating to the terms, interpretations
or performance of this Agreement (other than claims for
8.5 Customer Equipment as Security. In the event that preliminary injunctive relief or other pre-judgment remedies)
Customer fails to pay Exodus all amounts owed Exodus under this will be resolved at the request in either party through binding
Agreement when due, Customer Agrees that upon notice, Exodus will arbitration. Arbitration will be conducted in Santa Clara County,
take possession of any Customer Equipment and store it, at California, under the rules and procedures of the Judicial
Customer's expense, until taken in full or partial satisfaction Arbitration and Mediation Society ("JAMS"). The parties will
of any lien or judgment, all without being liable to prosecution request that JAMS appoint a single arbitrator possessing
or for damages. knowledge of online services agreements; however the arbitration
will proceed even if such a person is unavailable. In the event
8.6 Survival. The following provisions will survive any any provisions of this Agreement is held by a tribunal of
expiration or termination of the Agreement: Section 2, 3, 4, 5, competent jurisdiction to be contrary to the law, the remaining
6, 7, 8 and 9. provisions of this Agreement will remain in full force and
effect. The waiver of any breach or default of this Agreement
9. MISCELLANEOUS PROVISIONS. will not constitute a waiver of any subsequent breach or default,
and will not act to amend or negate the rights of the waiving
9.1 Force Majeure. Expect for the obligation to pay money, parties.
neither party will be liable for any failure or delay in its
performance under this Agreement due to any cause beyond its 9.7 Assignment; Notices. Customer may not assign its rights
reasonable control, including act of war, acts of God, or delegate its duties under this Agreement either in whole or in
earthquake, flood, embargo, riot, sabotage, labor shortage or part without the prior written consent of Exodus, except that
dispute, governmental act or failure to the internet, provided Customer may assign this Agreement in whole as part of a
that the delayed party: (a) given the other party prompt notice corporation reorganization, consolidation, merger, or sale of
of such cause, and (b) uses its reasonable commercial efforts to substantially all of its assets. Any attempted assignment or
correct promptly such failure or delay in performance. delegation without such consent will be void. Exodus may assign
this Agreement in whole or part. This Agreement will bind and
9.2 No Lease. This Agreement is a services agreement and is inure to the benefit of each party's successors and permitted
not intended to and will not constitute a lease of any real or assigns. Any notice or communication required or permitted to be
personal property. Customer acknowledges and agrees that (i) it given hereunder may be delivered by hand, deposited with an
has been granted only a license to occupy the Customer Space and overnight courier, sent by confirmed facsimile, or mailed by
use the Internet Data Centers and any equipment provided by registered or certified mail, return receipt requested, postage
Exodus in accordance with this Agreement; (ii) Customer has not prepaid, in such case to the address of the receiving party
been granted any real property interest in the Customer Space or indicated on the signature page hereof, or at such other address
Internet Data Centers, and (iii) Customer has no right as a as may hereafter be furnished in writing by either party hereto
tenant or otherwise under any real property or landlord/tenant to the other. Such notice will be deemed to have been given as of
laws, regulations, or ordinances. For good cause including the the date its is delivered, mailed or sent, whichever is earlier.
exercise of any rights under Section 8.3 above, Exodus may
suspend the right of any Representative or other person using the 9.8 Relationship of Parties. Exodus and Customer are
Internet Data Centers. independent contractors and this Agreement will not establish any
relationship of partnership, joint venture, employment, franchise
9.3 Marketing. Customer agrees that Exodus may refer to or agency between Exodus and Customer. Neither Exodus nor
Customer by trade name and trademark, and may briefly describe Customer will have the power to bind the other or incur
Customer's Business , in Exodus' marketing materials and web obligations on the other's behalf without the other's prior
site. Customer hereby grants Exodus a license to use any Customer written consent, except as otherwise expressly provided herein.
trade name and trademarks solely in connection with the rights
granted to Exodus pursuant to this Section 9.3. 9.9 Entire Agreement; Counterparts. This Agreement,
including all documents incorporated herein by reference,
9.4 Government Regulations. Customer will not export, constitutes the complete and exclusive agreement between the
re-export, transfer, or make available, whether directly or parties with respect to the subject matter hereof, and supersedes
indirectly, any regulated item or information to anyone outside and replaces any and all prior contemporaneous discussions,
the U.S. in connection with this Agreement without first negotiations, understandings and agreements, written and oral,
complying with all export control laws and regulations which may regarding such subject matter. This Agreement may be executed in
be imposed by the U.S. Government and any country or organization two counterparts, each of which will be deemed an original, but
of nations within whose jurisdiction Customer operates or does all of which together shall constitute one and the same
business. instrument.
9.5 Non-Solicitation. During the period beginning on the
Installation Date and ending on the first anniversary of the
termination or expiration of this Agreement in accordance with
Customer's and Exodus' authorized representatives have read the foregoing and all documents incorporated therein and agree and
accept such terms effective as of the date first above written.
NETWORD, INC. EXODUS COMMUNICATIONS, INC.
Signature: Signature:
------------------------------------ -------------------------------------
Print Name: Print Name:
------------------------------------ -----------------------------------
Title: Title:
---------------------------------------- ----------------------------------------
EXODUS COMMUNICATIONS, INC., CONFIDENTIAL AND PROPRIETARY (rev 6/98) Page 4
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<PAGE>
EXODUS COMMUNICATIONS, INC.
INTERNET DATA CENTER SERVICES
ORDER FORM
COMPLETE THE FOLLOWING PAGE BEFORE SUBMITTING
Customer Name: Netword, Inc.
Form Date: March 25, 1999
Form No.: 032599-MS
IMPORTANT INFORMATION:
(1) By submitting this Internet Data Center Services Order Form (Form) to
Exodus Communications Inc. (Exodus), Customer hereby places an order for
the Internet Data Center Services described herein pursuant to the terms
and conditions of the Internet Data Center Services Agreement between
Customer and Exodus (IDC Agreement).
(2) Billing, with the exception of Setup Fees, will commence on the earlier of
the Installation Date indicated below or the date Customer actually
installs its equipment or Exodus begins providing Internet Data Center
Services. All Setup Fees will be billed upon receipt of a Customer signed
IDC Services Order Form.
(3) Exodus will provide the Internet Data Center Services pursuant to the terms
and conditions of the IDC Agreement, which incorporates this Form. The
terms of this Form supersede, and by accepting this Form Exodus hereby
rejects, any conflicting or additional terms provided by Customer in
connection with Exodus' provision of Internet Data Center Services. If
there is a conflict between this Form and any other form provided by
Customer and accepted by Exodus, the Form with the latest date will
control.
(4) Exodus will not be bound by or required to provide Internet Data Center
Services pursuant to this Form or the IDC Agreement until each is signed by
an authorized representative of Exodus.
Customer to complete:
CUSTOMER HAS READ, UNDERSTANDS AND HEREBY SUBMITS THIS ORDER.
Installation Date: May 1, 1999 or as soon as possible thereafter.
----------------------------------------------
<TABLE>
<S> <C>
Submitted by: /s/ Shepard C. Bostin Submission Date: 4/21/99
---------------------- ---------------------------------
(Authorized Signature) (Effective Date of IDC Agreement)
Print Name: Shep Bostin
-----------------------------
Title: Chief Operating Officer
-----------------------------
Exodus Communications, Inc. Acceptance
- --------------------------------------
/s/ Sue Irvine Date: 5/9/99
------------------ -----------
(Authorized Signature)
CUSTOMER'S INITIALS
---------------
EXODUS COMMUNICATIONS, INC., CONFIDENTIAL AND PROPRIETARY (rev 6/98) Page 5
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<PAGE>
AGREEMENT made this 31st day of August, 1999 between Netword, Inc.
("Company"), a Delaware corporation with an office at 702 Russell Avenue,
Gaithersburg, Maryland 20877 and Net2Phone, Inc. and its affiliates and/or
subsidiaries (collectively "N2P"), a Delaware corporation with an office at 171
Main Street, Hackensack, New Jersey 07601.
R E C I T A L S
A. Company maintains a Web site at netword.com (the "Company Site");
B. Company's Netword System is an Internet navigation tool that allows Internet
users ("Users") to reach Internet addresses ("URLs") by entering easily
remembered names, phrases, numbers or other characters (each a "Netword") in
command lines, or slots (collectively a "Slot") of the leading Web browsers,
instead of using often complex URLs. The Netword System includes proprietary
software, (the "Client") that may be downloaded from the Company Site, and sites
of Company affiliates to monitor the leading Web browsers, intercept data
entered in those browsers, and act, upon that data to facilitate virtually
Instantaneous resolution of Networds;
C. N2P maintains a Web site at net2phone.com (the "N2P Site");
D. N2P provides software and services (collectively "N2P Products") that allow
Users to place Internet telephone calls: and
E. The parties wish to enter into the arrangement described herein.
NOW, THEREFORE, in consideration of the Recitals; and other good and valuable
consideration, the parties agree as follows:
I. Company Responsibilities:
1.1 Produce the special version (the "N2P Agent") of the Client in accordance
with N2P's standards, criteria and specifications as are more fully described in
Company's Technical Proposal to N2P (the "Proposal") attached as Exhibit A, and
made a part hereof. Company shall remedy any deviations from the standards,
criteria and specifications set forth by N2P regarding the N2P Agent upon
receipt of notice by N2P of such deviations.
1.2 Allow N2P to create and register Networds to enhance the ability of Users to
utilize N2P Products including, but not limited to 'Dial", "Call", "Phone",
"Net2Phone", "N2P" and others requested by N2P (collectively "N2P Networds")
provided that such Networds are (i) available for registration and (ii) subject
to the Company's published terms and conditions which shall be maintained on
Company's Site. N2P Networds shall be furnished by Company to N2P without
charge.
1
<PAGE>
1.3 Allow N2P to register additional N2P Networds to aid Users in navigating the
N2P Site provided that such Networds are (i) available for registration and (ii)
subject to the Company's published terms and conditions which shall be
maintained on Company's Site.
1.4 Allow Referral Customers, as defined in Section 4.2 below, to create and
register Networds as agreed to by the parties in accordance with N2P's criteria
provided that such Networds are (i.) available for registration and (ii) subject
to the Company's published terms and conditions which shall be maintained on
Company's Site.
1.5 Implement procedures and technologies that make it possible to (i) employ
the N2P Agent; (ii) track Networds registered by Referral Customers and (iii)
resolve Netword requests ("Hits") on Referral Customers. The Netword System/N2P
Agent must operate in a reasonably accurate manner and in accordance with the
standards set forth in the Technical Proposal and those set forth herein.
Company shall provide N2P all updated versions of the Netword System or any
components thereof relating to the use of the N2P Agent.
1.6 Furnish the following documented HTML code to N2P:
(i) Links ("Links") from the Company Site to the N2P Site, including
information describing Company and the Netword System;
(ii) Company's Logo and Slot.
1.7 Provide customer and technical support for the Netword System/N2P Agent and
provide proper and adequate training to designated N2P personnel as requested by
N2P to enable N2P to provide front-end customer and technical support to end
users. Company shall also provide all documentation and materials related to the
Netword System/N2P Agent to enable N2P to provide further training to other
personnel if necessary. This obligation shall be a continuing obligation on the
part of Company and shall apply to any and all updated versions of the Netword
System/N2P Agent as well as updated versions of the N2P Products provided
hereunder.
1.8 Any failure by Company to comply with any of the provisions of this section
shall constitute a material breach of this Agreement and shall entitle N2P to
terminate this Agreement as set forth below. In addition, N2P reserves the right
to terminate this Agreement upon any failure of the Netword System to operate
properly and in accordance with N2Ps standards and criteria, in its sole
discretion, for a period of forty-eight (48) hours and Company's failure to
properly cure such problem within such period.
2
<PAGE>
II. N2P Responsibilities:
2.1 Maintain a database of URLs and associated phone numbers necessary to
accomplish the objectives of this Agreement.
2.2 Display the Links, and Company's Logo and Slot within the N2P Site.
2.3 After the N2P Agent is delivered to N2P, include the N2P Agent in N2P
Products distributed to third parties only if the N2P Agent functions in
accordance with the Technical Proposal as set forth herein and in N2P's sole
discretion as set forth in 2.4 below.
2.4 It is expressly understood by the parties hereto that any and all
responsibilities of N2P set forth above in paragraphs 2.2 and 2.3 are subject to
all existing agreements between N2P and other third parties and it is in N2P's
sole discretion to what extent it may perform such actions so that it may
conform with such other agreements. In N2P's sole discretion, N2P shall use its
reasonable efforts to include the N2P Agent in its Products that it distributes
pursuant to its agreements with other third parties.
III. The Term
3.1 The initial term ("Initial Term") of this Agreement shall commence upon its
execution date and terminate one. (1) year thereafter unless terminated by N2P
upon thirty (30) days prior written notice during the Initial or any Additional
Term (as defined below) or as otherwise set forth herein.
3.2 The Initial Term shall be automatically extended for additional one year
periods (each an "Additional Term"), unless either party notifies the other at
least thirty (30) days prior to the end of the Initial Term or any Additional
Term that it does not wish to renew this Agreement.
3.3 In addition to its other rights contained herein, N2P reserves the right to
terminate this Agreement upon an occurrence of any one of the following:
(a) if Company files for bankruptcy or there is a material adverse change to
Company's financial status;
(b) if a petition is filed in any court and not dismissed in thirty (30) days to
declare Company bankrupt or for a reorganization under the Bankruptcy Law or any
similar statute;
(c) if a Trustee in Bankruptcy or a Receiver or similar entity is appointed for
Company and such appointee is not dismissed within thirty (30) days; or
(d) if Company fails to make any payment when due upon five (5) days notice.
3
<PAGE>
IV. Consideration to N2P
4.1 N2P shall receive fifty (50%) percent of Referral Revenues and Referral Hit
Charges and fifty (50%) percent of Other Referral Charges, as those terms are
defined in Section 4.2 below. In that regard, Company will give N2P access to
its books, records and database relating to this Agreement.
4.2 As used herein, the following capitalized terms shall have the following
meanings:
(i) Referral Customers are persons using Links, or other means agreed to by the
parties, to register Networds with Company.
(ii) Referral Revenues are amounts paid to Company by Referral Customers under
Company's schedule of charges, as amended from time to time.
(iii) Referral Hit Charges are amounts paid to Company by Referral Customers for
Hits on Networds registered by Referral Customers under Company's schedule of
charges, as amended from time to time.
(iv) Other Referral Charges are amounts paid to Company by Referral Customers
under Company's schedule of charges, as amended from time to time, except
amounts paid by such Customers for Networds registered by them from sources
other than the N2P Agent.
4.3 Amounts due Net2Phone under this Section IV shall be paid monthly to N2P by
Company within thirty (30) days after the close of each month.
V. Indemnification and Confidentiality
5.1 Company shall indemnify, defend, release and hold harmless N2P and all of
its officers, agents, directors, shareholders, subcontractors, subsidiaries,
employees and other affiliates (collectively "Affiliates") from and against any
action, claim, court cost, damage, demand, expense, liability, loss, penalty,
proceeding, suit, cost or attorney's fees arising out of any act or omission by
Company relating to this Agreement or any claims by end users and subscribers of
Company's services except and only in the event a claim relates solely to N2P's
material breach of this Agreement due to its gross negligence or willful
misconduct.
5.2 The parties acknowledge that during the course of this Agreement, either
party may acquire information regarding the other or its affiliates, its
business activities and operations or those of its customers and suppliers, and
its trade secrets and, other confidential and proprietary information. Such
information as well as the terms and conditions of this Agreement (hereinafter
"Confidential Information") shall be held in strict confidence and each Party
shall not reveal the same, except for any information which is: (a) generally
available to or known to the public; (b)
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known to such party prior to the negotiations leading to this Agreement; (c)
independently developed by such party outside the scope of this Agreement; (d)
lawfully disclosed by or to a third party or tribunal; or (e) the disclosing
party reasonably consents to disclosure in writing provided the receiving party
limits disclosure to the extent required by the disclosing party and requests
the confidential treatment of such information. The recipient of the
Confidential Information may disclose the Confidential Information pursuant to
any judicial or governmental request requirement or order or as required by law
provided, however, the recipient takes all reasonable steps to provide prompt
and sufficient notice to the disclosing party so that the disclosing party may
contest such request, requirement or order and the recipient limits disclosure
to the extent required by law or regulation and requests the confidential
treatment of such Confidential Information. The Confidential Information of each
party shall be safeguarded by the other to the same extent that it safeguards
its own confidential materials or data relating to its own business. Each party
agrees to limit access to such Confidential Information to employees, agents or
representatives who have a need to know such information in order to perform the
obligations set forth in this Agreement and further the matter of mutual
interest described herein. Such employees, agents or representatives will be
notified by the party providing access to the Confidential Information that the
information is confidential in nature and it to be used only for the purposes of
performing each party's obligations hereunder. Neither party may disclose any of
the Confidential Information, including any parts or derivations thereof, to any
third party without the other party's express written consent to such
disclosure. The rights and obligations of the parties hereto therefore also will
inure to such affiliates, employees, agents and representatives of each party
and may be directly enforced by or against same. Upon request, the recipient of
the Confidential Information will promptly return all Confidential Information
(or any designated portion thereof), including all copies thereof, to the
disclosing party or, if so directed by the disclosing party, destroy such
Confidential Information. The recipient will also, within ten (10) days of
written request by the disclosing party, certify in writing that it has
satisfied its obligations under this section. The parties agree that an
impending or existing violation of these confidentiality provisions would cause
the disclosing party irreparable injury for which it would have no adequate
remedy at law, and agree that the disclosing party may be entitled to obtain
immediate injunctive relief prohibiting such violation, in addition to any other
rights and remedies available to it.
VI. The Option
Concurrently herewith, Company has delivered to N2P a warrant, in the form of
Exhibit B attached hereto.
VII. Miscellaneous
7.1 This Agreement incorporates the entire understanding of the parties with
respect to its subject matter and may not be amended or terminated, except by an
instrument in writing signed by the parties.
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7.2 All notices, demands, requests, consents or other communications regarding
this Agreement shall be effective only if in writing and they shall be deemed
received two (2) business days after deposited in the United States mail,
certified or registered, return receipt requested, postage prepaid, or delivered
to a nationally recognized express delivery service, addressed to a party at its
address listed above.
7.3 This Agreement may be executed in fax counterpart copies, all of which taken
together shall be deemed one original.
7.4 This Agreement shall be governed by and construed in accordance with the
laws of the State of New Jersey applicable to contracts made and to be performed
in that state and both parties consent to jurisdiction in the courts of New
Jersey.
7.5 Each party agrees that, without the other party's prior written consent, it
will not use the name, service marks or trademarks of the other party or of any
of its affiliated companies.
7.6 It is expressly understood that the parties hereto are acting hereunder as
independent contractors and under no circumstances shall any of the employees of
one party be deemed to be employees of the other for any purpose. This Agreement
shall not be construed as authority for either party to act on behalf of the
other in any agency or other capacity or to make commitments of any kind for the
account of or on behalf of the other party except to the extent and for the
purposes expressly provided for and set forth herein.
7.7 The failure of either party to give notice of default or to enforce
compliance with any of the terms or conditions of this Agreement.
7.8 The waiver of any term or condition of this Agreement, or the granting of an
extension of time for performance, will not constitute a permanent waiver of any
term or condition of this Agreement, and this Agreement and each of its
provisions will remain at all times in full force and effect until modified by
both parties in writing.
7.9 This Agreement shall not be valid until signed and accepted by a signatory
duly authorized to legally bind the parties hereto. No change, amendment,
modification, termination or attempted. waiver of any of the provisions set
forth herein shall be binding unless made in writing and signed by a duly
authorized representative of both parties hereto, and no representation,
promise, inducement or statement of intention has been made by either party
which is not embodied herein.
7.10 Neither party will assign this Agreement or any rights under this Agreement
without the prior written consent of the other; which consent will not be
unreasonably denied or withheld. Notwithstanding anything to the contrary,
Net2Phone reserves the right to assign this Agreement to any affiliate or
subsidiary without Company's consent. Subject to the foregoing, this
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Agreement will be binding upon and inure to the benefit of the parties hereto
and their respective successors or assigns.
7.11 In the event a court of competent jurisdiction determines that any part or
provision, of this Agreement is invalid or unenforceable, such determination
shall not affect the validity or enforceability of any other part or provision
of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by a
duly authorized officer as of the date and year first above written.
Net2Phone, Inc. Netword, Inc.
____________________________ ______________________________________
By: ________________________ By: Michael L. Wise, President and CEO
Title:______________________
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INDEPENDENT AUDITORS' CONSENT
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated August 9, 1999, except for Note 11, paragraph 4
as to which the date is September 29, 1999, in the Registration Statement and
related Prospectus of Netword, Inc. (formerly Netword, LLC).
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
November 16, 1999
