-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OsPKmCp/H10BSuQW452tDcqP293jUOwueP543hSN1dyXYeFTsrofm2qN20KkZ0W7 gFA+zsYSATPOVByZ5TKtLA== 0000950123-99-007007.txt : 19990809 0000950123-99-007007.hdr.sgml : 19990809 ACCESSION NUMBER: 0000950123-99-007007 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19990730 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADSTAR COM INC CENTRAL INDEX KEY: 0001091599 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 223666899 STATE OF INCORPORATION: DE FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-84209 FILM NUMBER: 99675400 BUSINESS ADDRESS: STREET 1: 4553 GLENCO AVENUE STREET 2: SUITE 325 CITY: MARINA DEL RAY STATE: CA ZIP: 90292 MAIL ADDRESS: STREET 1: 4553 GLENCO AVENUE STREET 2: SUITE 325 CITY: MARINA DEL REY STATE: CA ZIP: 90292 SB-2 1 FORM SB-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ ADSTAR.COM,INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7319 22-3666899 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
4553 GLENCOE AVENUE SUITE 325 MARINA DEL REY, CALIFORNIA 90292 (310) 577-8255 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S EXECUTIVE OFFICES) ------------------ LESLIE BERNHARD CHIEF EXECUTIVE OFFICER ADSTAR.COM, INC. 4553 GLENCOE AVENUE SUITE 325 MARINA DEL REY, CALIFORNIA 90292 (310) 577-8255 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF AGENT FOR SERVICE) ------------------ Copies to: HOWARD L. WEINREICH, ESQ. JOHN HALLE, ESQ. MORSE, ZELNICK, ROSE & LANDER, LLP STOEL RIVES, LLP 450 PARK AVENUE 900 S.W. FIFTH AVENUE NEW YORK, NY 10022 PORTLAND, OREGON 97204 (212) 838-4312 (503)294-9233 (212) 838-9190 (FACSIMILE) (503)220-2480 (FACSIMILE)
------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE. ------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462 (b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act, please check the following box. [ ] ------------------ 2 CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SECURITY(1) PRICE(1) FEE - ----------------------------------------------------------------------------------------------------------------------------- Units, consisting of two shares of common stock, $.0001 par value, and one warrant to purchase one share of common stock (2)................................................. 1,150,000 $16.00 $18,400,000 $ 5,115.20 - ----------------------------------------------------------------------------------------------------------------------------- Shares of common stock included in the units................ 2,300,000 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Common stock purchase warrants included in the units........ 1,150,000 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Shares of common stock underlying the common stock purchase warrants included in the units (3)........................ 1,150,000 $12.00 $13,800,000 $ 3,836.40 - ----------------------------------------------------------------------------------------------------------------------------- Representative's warrants................................... 100,000 $ 0 $ 0 $ 0(4) - ----------------------------------------------------------------------------------------------------------------------------- Units issuable upon exercise of the representative's warrants.................................................. 100,000 $19.20 $ 1,920,000 $ 533.76 - ----------------------------------------------------------------------------------------------------------------------------- Shares of common stock included in the units underlying the representative's warrants (3)............................. 200,000 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Common stock purchase warrants issuable upon exercise of the representative's warrants................................. 100,000 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Shares of common stock underlying common stock purchase warrants issuable upon exercise of the representative's warrants (3).............................................. 100,000 $12.00 $ 1,200,000 $ 333.60 - ----------------------------------------------------------------------------------------------------------------------------- Total Registration Fee...................................... $ 9,818.96 - ----------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for purposes of determining the registration fee pursuant to Rule 457 under the Securities Act. (2) Includes 150,000 units issuable upon exercise of underwriters' over-allotment option. (3) Pursuant to Rule 416 under the Securities Act, there are also being registered hereby such additional indeterminate number of shares as may become issuable pursuant to the antidilution provisions of the warrants. (4) No registration fee required pursuant to Rule 457(g) under the Securities Act. ---------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION DATED JULY 30, 1999 [ADSTAR.COM LOGO] 1,000,000 UNITS EACH CONSISTING OF TWO SHARES OF COMMON STOCK AND ONE REDEEMABLE WARRANT TO PURCHASE ONE SHARE OF COMMON STOCK ADSTAR.COM, INC. We are offering units consisting of two shares of common stock and one warrant to purchase an additional share of common stock. The common stock and warrants will trade only as a unit for 30 days following this offering and thereafter will trade separately. For a description of the terms of the warrants, see "Prospectus Summary -- The Offering -- Warrants" on page 6. Our common stock is privately held and is not traded on any market. We have applied to list our units, common stock and warrants on the American Stock Exchange under the symbols "AADU," "AAD" and "AADWS," respectively. We expect that the units will be priced at between $14 and $16 per unit. INVESTING IN THE UNITS INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 10. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- PER UNIT TOTAL - --------------------------------------------------------------------------------------------------------- Initial public offering price.......................... - --------------------------------------------------------------------------------------------------------- Underwriting discounts and commissions................. - --------------------------------------------------------------------------------------------------------- Proceeds to AdStar..................................... - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
We expect total cash expenses in connection with the offering to be approximately $800,000, which will include a nonaccountable expense allowance of 2% of the gross proceeds of this offering that will be paid to Paulson Investment Company, Inc., the managing underwriter of this offering. We have granted to the underwriters a 45-day option to purchase up to 150,000 additional units to cover over-allotments. The selling stockholders identified in this Prospectus will provide the shares of common stock and we will provide the warrants included in these units. The proceeds from the sale of these units will be divided $[ ] to us and $[ ] to the selling stockholders. We will also grant to the underwriters a five-year warrant to purchase up to 100,000 additional units. Paulson Investment Company, Inc. expects to deliver the units on or about , 1999 if payment for the units is received by Paulson. PAULSON INVESTMENT COMPANY, INC. , 1999 4 [INSIDE FRONT COVER WILL FEATURE A CHART WHICH DISPLAYS THE FLOW OVER THE INTERNET OF A SERIES OF E-COMMERCE TRANSACTIONS BETWEEN ADVERTISERS PURCHASING CLASSIFIED ADS FOR PUBLICATION BOTH IN PRINT MEDIA AND ON-LINE FROM VARIOUS POINTS OF AD SUBMISSION: (1) OUR WEB SITE -- ADSTAR.COM; (2) THE WEB SITE OF A WEB PUBLISHER WHICH IS A DISTRIBUTION PARTNER OF OURS; AND (3) THE WEB SITE OF A NEWSPAPER AFFILIATE OF ONE OF OUR DISTRIBUTION PARTNERS.] This Prospectus contains forward-looking statements based on our current expectations about our company and our business. You can identify these forward-looking statements because they usually contain words such as "expect," "believe," "plan," "intend," "anticipate" and other similar expressions. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of the factors described in the "Risk Factors" section and elsewhere in this Prospectus. 2 5 SUMMARY You should read the following summary together with the more detailed information, financial statements and notes to financial statements appearing elsewhere in this Prospectus. OUR BUSINESS AdStar is developing a one-stop marketplace on the Web for advertisers to buy classified ads. We enable advertisers to plan, schedule, compose and purchase classified advertising from a large number of print and on-line publishers, using one simple interface. Our service will permit both professional and non-professional advertisers, including the general public, to create and submit to one or many publishers any number of ads, 24 hours a day, seven days a week, using any recognized Web browser. We currently have made this service available on a limited basis for the placement of ads with a small number of publishers. We are engaged in a program to build our capacity and to rapidly expand our coverage of significant publishers of classified ads in the United States, including both print and on-line media. Our new Web-based service is an outgrowth of our historical business that, since 1986, has offered professional advertisers the ability to place ads electronically with a growing number of the largest newspapers in the United States based on circulation. Our 43 current newspaper clients account for 25% of the total 1997 Sunday newspaper circulation in the United States. This historical business provides us with industry presence and experience, technical knowledge of the classified advertising process, and a relationship with both publishers and advertisers who are early candidates to use our Web service. Classified advertising consists of ads that are grouped by category. The principal categories for classified ads are employment, real estate and automotive. In 1998, approximately $18 billion was spent on classified advertising in newspapers in the United States and on-line classified advertising, though a smaller market, is growing rapidly. Classified ads are one of the largest single sources of revenues to newspaper publishers and the primary business of some advertising agencies. The vast majority of classified ads published today are submitted to the publisher by telephone, fax, email, mail or messenger. The publisher must provide personnel to receive the ad, enter the ad into its computer system, provide price information and collect payment from the advertiser through direct billing or, for certain classes of advertisers, by credit card charge. This ad placement process must be repeated by the advertiser for each ad purchased and, when ads are placed in multiple publications, for each publication. In addition to the considerable processing cost to both the advertiser and the publisher, publishers sometimes are required to refund or give credits for all or a portion of their fee as a result of errors in input. Our historical business enables the direct electronic input, formatting and pricing of single and multiple ads. It is based on a software system that we developed which is currently installed on computers used by 43 newspapers and more than 1,400 advertising agency and advertiser locations. Using this system, we have become the largest provider of remote entry for classified ads into newspapers in the United States. However, because of the high cost of installation, training and on-going support at advertiser sites, our system has been limited to use by large advertisers or ad agencies for placement of ads in the 3 6 largest newspapers in the United States. We estimate that, in 1998, more than $150 million of classified ads were placed using our system. This number, while large, represents a very small percentage of the total domestic classified ad market. In order to eliminate the cost impediments to the expansion of our historical remote ad entry business and broaden our market penetration, we have developed and recently implemented a Web-based service through our Web site, Advertise123.com. By accessing our Web site using any recognized Web browser, advertisers can: - Select publications for ad placement, including both print and on-line media; - Compose and format ads using formats supported by each publication; - Preview the ad as it will appear in each publication; - Specify editions and scheduled publication dates; and - Electronically transfer ads to the selected publications. Standard rate advertisers, who purchase ads at the publisher's standard published rates, can also price each ad and pay for it using a credit card or debit card. High volume contract advertisers, who purchase ads under special contract with the publisher, can price their ads if the publisher has installed our proprietary software at the publication. With our software, currently installed at 43 publishers, ads from advertisers are submitted directly into the publisher's ad processing system, eliminating the need for reentry by the publisher. Contract advertisers generally pay for their ads directly to the publisher as provided in their contracts. Our new Web-based service permits us to enhance our service to contract advertisers while at the same time allowing us to expand our market to include standard rate advertisers. For contract advertisers, our Web-based service will broaden substantially the range of publishers accessible through our system while continuing to support the direct access provided by our historical business. For standard rate advertisers, our Web-based system will offer a complete, interactive and easy to use method to plan, schedule, compose, price and pay for ads in a broad range of print and on-line publications. We are engaged in a process of adding publications that may be accessed through our Web site or from privately branded or co-branded Web sites that we will maintain for publishers requesting that service. In order to add a publication, we must include in our database pertinent information for that publication relating to format and pricing, which we can obtain from the publisher or from publicly available sources. We expect to expand the base of publishers accessible through our Web site to include our 43 current newspaper clients, together with additional newspapers in the top 100 newspaper markets in the United States, within six months from the closing of this offering. In contrast to our historical business, from which we have earned revenue from software licensing fees, our Advertise123.com revenues are transaction fee based. We collect transaction fees either by deducting them from the cost of the ad which we collect from the advertiser, or by charging the publisher a transaction fee for ads billed directly to the advertiser by the publisher. We expect that fees for ads placed by contract advertisers will generally be charged on a per-transaction basis while fees for ads placed by standard rate advertisers will be based on a percentage of the ad cost. 4 7 OUR STRATEGY Our goal is to capture a significant percentage of total classified advertising dollar volume by establishing Advertise123.com as the leading on-line marketplace linking classified advertisers with the broadest possible range of print and electronic media. In order to achieve this goal, we intend to: - Convert our revenue model from fixed software license fees to transaction based fees; - Leverage our experience, market share and reputation in the remote ad entry software business to achieve market penetration for our Web-based service; - Rapidly expand the number of publishers accessible through Advertise123.com; - Promote the advantages of remote ad entry over traditional methods for both advertisers and publishers; - Accelerate our market penetration through - affiliations with leading Web republishers of classified ads that have existing relationships with large numbers of print publishers; - affiliations with leading vertical market publishers of online classified postings; and - distribution agreements with leading horizontal market Web sites that have large numbers of subscribers; - Enter into agreements with leading classified ad publishers in both print and electronic media to support privately branded or co-branded Web sites based on our system; and - Capture and sell statistical and other data collected from our Web sites that provide information as to advertiser habits and preferences. 5 8 THE OFFERING Securities Offered.............. 1,000,000 units. Each unit consists of two shares of common stock and one warrant to purchase one additional share of common stock. The common stock and warrants will trade only as a unit for 30 days following the offering. For more information, see "Description of Securities." Warrants........................ The warrants will be exercisable at an exercise price of $ [75% of the offering price per unit] commencing 30 days after this offering until they expire on the fifth anniversary of the date of this Prospectus. We may not redeem the warrants for at least 180 days after the date of this Prospectus. After that date, if the closing bid price of our common stock on each of the 10 consecutive trading days preceding our notice of redemption is greater than or equal to $ , [the offering price of a unit] we may redeem some or all of the warrants if we provide the holders with 30 days' prior written notice. The redemption price will be $0.25 per warrant. If we give notice of redemption, holders of warrants will have 30 days during which they may elect to exercise the warrants, sell the warrants or allow the warrants to be redeemed for the redemption price. Please refer to "Description of Securities -- Warrants." Common Stock Outstanding........ 3,000,000 shares of common stock were outstanding on July 31, 1999. After the offering, there will be 5,000,000 shares outstanding. Both of these numbers exclude up to 441,780 shares of common stock issuable on exercise of outstanding options and warrants. Risk Factors.................... An investment in the units involves a high degree of risk. You should not consider this offer if you cannot afford to lose your entire investment. Please refer to "Risk Factors" for factors you should consider. Use of Proceeds................. The net proceeds from the offering, estimated to be approximately $13,100,000, will be used for implementing our plan for the development and marketing of Advertise123.com, debt retirement and for working capital. For more information regarding how we will use the proceeds, please refer to "Use of Proceeds." 6 9 SUMMARY FINANCIAL DATA The following table sets forth certain financial data for the Company. This information should be read in conjunction with the Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus.
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------- ----------------------- 1997 1998 1998 1999 ----------- ----------- ---------- ---------- STATEMENTS OF OPERATIONS DATA: Net revenues...................... $1,148,233 $1,559,361 $ 393,964 $ 406,602 Cost of revenues.................. 565,329 800,532 165,848 199,548 ---------- ---------- ---------- ---------- Gross profit.................... 582,904 758,829 228,116 207,054 Sales, general and administrative expenses........................ 634,029 820,574 159,135 234,836 ---------- ---------- ---------- ---------- Income (loss) from operations..... (51,125) (61,745) 68,981 (27,782) Interest expense.................. 7,873 4,518 1,525 2,884 ---------- ---------- ---------- ---------- Income (loss) before taxes........ (58,998) (66,263) 67,456 (30,666) Provision for taxes............... 823 2,760 690 690 ---------- ---------- ---------- ---------- Net income (loss)................. $ (59,821) $ (69,023) $ 66,766 $ (31,356) ========== ========== ========== ========== Earnings (loss) per share -- basic and diluted..................... $ (0.02) $ (0.03) $ 0.03 $ (0.01) Weighted average shares -- basic and diluted..................... 2,530,301 2,625,107 2,530,301 2,663,395 Pro forma earnings (loss) per share -- basic and diluted...... $ (0.03) $ (0.01) Pro forma weighted average shares -- basic and diluted..... 2,625,107 2,689,839
7 10 The following table shows actual, pro forma and pro forma as adjusted balance sheet data. BALANCE SHEET DATA: The following pro forma information gives effect to: - the receipt of $850,000 as a loan from a small business investment company in July 1999 and the debt issue costs of $137,536 on the related issuance of 40,561 redeemable common shares; - the sale in April 1999 of $350,000 principal amount of convertible notes and the conversion of $1,050,000 principal amount of convertible notes that were issued in March and April 1999 plus interest into 410,972 shares of our common stock on the closing of this offering; - the reclassification of the accumulated deficit to additional paid-in capital on the termination of the S-corporation election; and - the change in the number of shares of our common stock outstanding resulting from our reincorporation. The following pro forma as adjusted information gives effect to: - the foregoing pro forma adjustments; - the sale of 1,000,000 units offered by us in this prospectus at an assumed initial public offering price of $15.00 per unit; - payment of the underwriting discount and estimated offering expenses payable by us; - the repayment of notes payable of $1,601,710 and amortization of debt issue costs of $137,536 on repayment of $850,000 of these notes; and - reclassification of redeemable common stock to common stock and additional paid-in capital on the closing of this offering.
MARCH 31, 1999 -------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ---------- ------------ -------------- Cash and cash equivalents.............. $ 566,123 $1,766,123 $13,264,413 Working capital........................ 404,108 1,545,822 13,128,400 Total assets........................... 1,174,375 2,374,375 13,872,665 Notes payable, net of current portion.............................. 1,425,708 1,379,866 -- Total liabilities...................... 1,849,670 1,862,134 397,960 Redeemable common stock................ -- 137,536 -- Total stockholders' equity (deficit)... (675,295) 374,705 13,474,705
8 11 ------------------------ We were incorporated in New York in 1991 as the successor to a business that was started in 1986. Our principal executive office is located at 4553 Glencoe Avenue, Suite 325, Marina del Rey, California 90292. Our telephone number is (310) 577-8255 and our Web site addresses are www.AdStar.com and www.Advertise123.com. Information contained on our Web sites is not a part of this prospectus. Unless otherwise indicated, all information in this prospectus assumes that: - The underwriters will not exercise their over-allotment option; - Our outstanding convertible notes will be converted to common stock before this offering is completed; and - We will reincorporate in Delaware under the name AdStar.com, Inc. and issue 3,000,000 shares of common stock in exchange for all outstanding shares of our predecessor before the closing of this offering. 9 12 RISK FACTORS This offer involves a high degree of risk. Each prospective investor should carefully consider the risks described below and other information in this Prospectus before making an investment decision. OUR HISTORICAL ADSTAR BUSINESS HAS ALREADY MATURED Our historical AdStar remote ad entry business is limited both in current size and growth potential due principally to the high cost of installation, training and on-going support at advertiser sites and the requirement that advertisers separately dial-up each publication in which they intend to buy an ad. Our ability to achieve sufficient revenues to justify the expectations of our investors is dependent on the success of our new on-line business which we believe eliminates these barriers. Our belief that we can successfully expand our business by migrating to a delivery system over the Internet may not be correct. If we are incorrect, our financial position, results of operations and cash flows will be adversely affected. OUR NEW ON-LINE BUSINESS IS UNPROVEN AND MAY NOT BE SUCCESSFUL We did not begin to offer our remote ad entry services over the Internet until June 1999. Moreover, we know of no company that accepts classified ads on-line for publication both on-line and in print. Accordingly, we cannot guarantee that we will be able to generate the public interest necessary to sustain our business model. You must particularly consider the risks and difficulties frequently encountered by an early-stage business in a rapidly evolving market, which makes our ability to successfully implement our business plan uncertain. These risks include whether we will be able to: - convince a large number of print and on-line media publications to be accessible to our advertisers on our Web sites; - attract a large number of advertisers to our Web sites; - develop profitable pricing models for our transaction fees for ad placements over our Web sites; - increase awareness of our Advertise123.com brand; - maintain current and develop new distribution relationships with highly trafficked sites of Web publishers; - continue to utilize our current software and effectively develop new software and systems; - respond effectively to competitive pressures; and - attract, retain and motivate qualified personnel. We may not be able to successfully address these risks. Our failure to do so will adversely affect our financial position, results of operations and cash flows. 10 13 OUR UNPROVEN ON-LINE BUSINESS MODEL MAY NOT GENERATE EXPECTED REVENUES Because we have limited Internet experience, we cannot accurately forecast the source, magnitude or timing of our future revenues. Current expectations are that we will receive: - transaction-based fees for ads processed on our Web sites except where we agree to waive our fees in transactions between advertisers using our licensed software with newspapers paying us license fees; - fixed fees to be paid by on-line media clients; - banner advertising fees from media and advertising companies who advertise on our Web sites; and - fees from advertisers and newspapers for statistical reports generated by data assembled from ads processed on our Web sites. Our expectations with respect to future revenues are principally based on our ability to attract advertisers and publications to our Web sites and thus facilitate ad placements on these sites. In particular, our assumption that we will not encounter any significant resistance by publishers to accepting Web-based ads obtained by us may be wrong. Publishers might view such transactions in which we deduct a transaction fee as reducing the amounts they would receive if they obtained the ads directly. No standards exist for measuring the effectiveness of classified advertising. Many of our existing and potential classified advertising publishers have only limited experience with acquiring ads on-line and may not be willing to expend the time and expense to participate in Web-based ad programs. Such factors will adversely affect our financial position, results of operations and cash flows. WE HAVE A HISTORY OF LOSSES AND WE EXPECT INCREASED LOSSES For the years ended December 31, 1997 and 1998 we incurred net losses of approximately $60,000 and $69,000. For the three months ended March 31, 1999 we incurred a net loss of approximately $31,000. Our 1999 first quarter loss was principally attributable to expenses incurred in starting our new on-line business. We expect to continue to incur losses until we are able to significantly increase our Internet revenues from transaction fees based on the number of ad purchases transacted on our Web sites. Our operating expenses are expected to continue to increase significantly in connection with our proposed expanded activities. Our future profitability will depend on our ability to increase our on-line advertiser base and transaction revenues while controlling our costs. We may not be able to achieve profitability. OUR NEW ON-LINE SERVICE IS ONLY PARTIALLY IMPLEMENTED Our Advertise123.com Web-based service is currently available on a limited basis for the placement of ads with a limited number of publishers. Until our Web site can display a critical mass of publishers, we do not expect to attract a significant number of advertisers to our Web site and cannot guarantee its performance as a commercial sales channel. Failure to achieve a critical mass of publishers will materially and adversely affect our financial position, results of operations and cash flows. 11 14 OUR INITIAL CO-MARKETING DISTRIBUTION AGREEMENTS ARE TERMINABLE ON SHORT NOTICE We expect to depend on distribution agreements with republishers of classified ads on the Web with whom we have co-marketing distribution agreements to facilitate the addition of new newspapers to our Web site. Our initial co-marketing distribution agreements have only recently been signed and their implementation has only recently begun. Even after these arrangements are in place they may be terminated by our partners on short notice. Early termination of any of these agreements could seriously affect our ability to achieve a critical mass of publishers and in turn our ability to attract advertisers, and will materially and adversely affect our financial position, results of operations and cash flows. WE ARE VULNERABLE TO BREAKDOWNS IN SERVICE As an early stage Internet business, we are particularly vulnerable to break downs and interruptions in our service which could disrupt our ability to provide continued and sustained support to advertisers and publishers. If our customers and prospective customers lose faith in our ability to service their needs, they may choose more traditional and dependable means for placing their classified ads. If this were to occur, we will not be successful in building an on-line business; this will materially and adversely affect our financial position, results of operations and cash flows. OUR HISTORICAL ADSTAR BUSINESS MAY SUFFER DUE TO OUR NEW ON-LINE BUSINESS Once our Web site is fully implemented, its versatility may encourage many of the more than 1,400 large advertisers currently using our AdStar software, to process their ad buys on Advertise123.com. This in turn may reduce the value of our licensed software to our newspaper customers which could discourage them from renewing their license agreements with us. This would result in reduced revenues from our historical business which were $1,559,000 in 1998. Our loss of any revenue source would need to be replaced with transaction fees from ad buys on our Web sites. The failure to replace license fees with transaction fees will materially and adversely affect our financial position, results of operations and cash flows. OUR ON-LINE BUSINESS WILL FACE COMPETITION FROM MANY SOURCES We are unaware of any company which provides a centralized on-line sales channel for the selection, transaction and processing of classified ads in multiple print and on-line publications. Those publishers which accept and process ads by traditional means such as telephone, facsimile transmission and printed copy submissions are potential competitors. Advertise123.com seeks to attract advertisers to its Web site to capture the transaction whereby they will select and process classified ads before they contact a publisher directly. Our ability to compete successfully will depend on the cost effectiveness of our services and whether the transaction fees charged to publishers for ads processed through Advertise123.com are economical. In addition, many companies not now in the business of providing on-line remote ad entry and possessing larger capital resources than we do may seek to develop their own technology and enter into the business of offering a similar broad based, centralized on-line classified ad placement services to ours. Many of these companies will have longer operating histories, greater name recognition, larger customer bases and significantly 12 15 greater technical and marketing resources than we have. As a result, they may be able to respond more quickly than us to new or emerging technologies and can devote greater resources than us to development, promotion and sale of their services. Faced with this type of competition, our ability to compete effectively cannot be assured. Our inability to compete effectively will have a material and adverse effect on our financial position, results of operations and cash flows. WE MAY BE UNABLE TO MANAGE OUR GROWTH Our business plan requires significant expansion of our operations to address potential market opportunities. We have recently hired key members of our management staff and expect we will need to increase personnel, including additional key management personnel, and other resources in the near future. We expect this growth to place a significant strain on our managerial, operational and financial resources and systems. To manage our growth, we must implement, improve and effectively use our operational, management, marketing and financial systems and train and manage our new and existing employees. In particular, we must install and operate new and more complex accounting and bookkeeping systems. We cannot guarantee that we will be able to manage effectively the expansion of our operations or that our personnel, systems, procedures and controls will be adequate to meet our anticipated future operations. If this were to occur, it would materially and adversely affect our financial position, results of operations and cash flows. WE DEPEND ON AND MAY LOSE KEY EMPLOYEES Our performance is substantially dependent on the performance of our senior management and key technical personnel. In particular, our success depends substantially on the continued efforts of our Chief Executive Officer, Leslie Bernhard, and on our Executive Vice President and Chief Technical Officer, Eli Rousso. The loss of the services of any of our executive officers or other key employees could have a material and adverse effect on our business. Our future success also depends on our continuing ability to attract and retain highly qualified technical, sales and marketing, customer support, financial and accounting, and managerial personnel. Competition for such personnel generally is intense, and in the Internet industry is extremely intense. We may be unable to retain our key employees and attract, assimilate and retain other highly qualified employees in the future. Our inability to attract, assimilate and retain highly qualified employees in the future will have a material and adverse affect on our financial position, results of operations and cash flows. INTERNET SECURITY RISKS COULD ADVERSELY AFFECT OUR BUSINESS We are potentially vulnerable to the penetration of our Web site by unauthorized users. If successful, these unauthorized users may misappropriate proprietary information and cause interruptions in our Web-based services. We may be required to expend significant capital to continuously protect against the threat of security breaches and to alleviate problems caused by any breaches. In addition, the transmission of computer viruses could expose us to risk of loss or litigation and possible liability. Continued concerns over the security of Internet transactions and the privacy of the users may also inhibit the growth of the Internet generally as a means of conducting commercial transactions which could have a material adverse impact on our financial position, results of operations and cash flows. 13 16 WE ARE VULNERABLE TO POTENTIAL LAWSUITS REGARDING AD CONTENT OR SYSTEM FAILURE Because we facilitate the placement of advertisements in print and on-line publications, potential claims may be asserted against us for negligence, defamation or personal injury, or based on other theories, due to the nature of the content of such advertisements. Our technology does not contemplate our reviewing classified advertisements processed on our Web sites for libelous or other statements that might give rise to possible liability. Although we carry general liability insurance, our coverage may not cover potential claims or may not be adequate to fully indemnify us. Any imposition of liability or legal defense expenses that are not covered by insurance or that are in excess of our insurance coverage could place a strain on our available cash resources, could seriously jeopardize the success of our business plan and could materially and adversely affect our financial position, results of operations and cash flows. WE MAY NOT BE ABLE TO DEAL EFFECTIVELY WITH TECHNOLOGICAL CHANGE Our new on-line business is characterized by: - rapidly changing technology; - evolving industry standards; - frequent new product and service announcements; - introductions and enhancements; and - changing customer demands. These market characteristics are heightened by the emerging nature of the Internet and Internet advertising. For these reasons, our future success depends on: - our ability to adapt to rapidly changing technologies to meet evolving industry standards; and - our ability to continually improve the performance, features and reliability of our on-line services. Our failure to successfully adapt to these types of changes in a timely manner could have a material adverse effect on our financial position, results of operations and cash flows. Furthermore, we do not know if we will have the experience and talent to overcome technical difficulties that may arise from time to time that could delay or prevent the successful design, development, testing, introduction or marketing of solutions, or that any new solutions or enhancements to existing solutions will adequately meet the requirements of our current and prospective customers and achieve any degree of significant market acceptance. If we are unable, for technological or any other reasons, to develop and introduce new solutions or enhancements to existing solutions in a timely manner or in response to changing market conditions or customer requirements, or if our solutions or enhancements contain errors or do not achieve a significant degree of market acceptance, our financial position, results of operations and cash flows could be materially and adversely affected. 14 17 WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS We believe that our future success will depend, in part, on our ability to develop proprietary rights with respect to our systems and services, such as domain names, trademarks, trade names, service marks and copyrights. This is particularly true with respect to our Web-based service technology. Although we are in the process of seeking patent protection for certain aspects of our technology, we do not currently own any patents on our technology and we have no assurance that our rights to that technology are patentable. Moreover there is no assurance that others might not develop alternate technologies that might be more effective than ours whether or not we have patent protection. We have recently begun to use the trademark and Internet domain name Advertise123.com but have not yet applied for registration. We cannot guarantee that our application for a registration of this trademark will be granted and, if granted, that it will not be successfully challenged by others or invalidated through administrative process or litigation. Further, if our Advertise123.com registration application is not granted due to the prior rights of a third party we may not be able to obtain a license on commercially reasonable terms to allow us to continue to use such trademark. Legal standards relating to the validity, enforceability and scope of protection of certain intellectual property rights in Internet-related industries are uncertain and still evolving, and no assurance can be given as to the future viability or value of any of our intellectual property rights. We cannot guarantee that the steps we have taken to protect any intellectual property rights will be adequate or that third parties will not infringe or misappropriate our proprietary rights. Any such infringement or misappropriation, should it occur, could have a material adverse effect on our financial position, results of operations and cash flows. Furthermore, we cannot guarantee that our business activities will not infringe upon the proprietary rights of others, or that other parties will not assert infringement claims against us. Such claims and any resultant litigation, should they occur, could subject us to significant liability for damages and could result in invalidation of our proprietary rights, could be time-consuming and expensive to defend, and could result in the diversion of management's time and attention. We have previously licensed, and expect to license in the future, certain elements of our distinctive trademarks, service marks, trade dress, trade secrets and similar proprietary rights to third parties. While we attempt to ensure that the quality of our name is maintained by our licensees, we cannot guarantee that such licensees will not take actions that could materially and adversely affect the value of our proprietary rights or our reputation, either of which could jeopardize the success of our business plan. OUR OPERATIONS AND SERVICES ARE VULNERABLE TO NATURAL DISASTERS. Our operations and services depend on the extent to which our computer equipment and the telecommunications infrastructure of our third-party network providers is protected against damage from fire, earthquakes, power loss, telecommunications failures, and similar events. A significant portion of our computer equipment, including critical equipment dedicated to our internet access is located in the Los Angeles area. Despite precautions taken by us and our third-party network providers, over which we have no control, a natural disaster or other unanticipated problems at our network hub, or a third-party 15 18 network provider point of presence could cause interruptions in the services that we provide. If disruptions occur, we may have no means of replacing these network elements on a timely basis or at all. We do not currently maintain fully redundant or back-up Internet services, backbone facilities or other fully redundant computing and telecommunications facilities. Extensive or multiple interruptions in providing users with Internet access are a reason for user decisions to stop using access services. Accordingly, any disruption of our services due to system failure could have a material and adverse effect on our business, results of operations and financial condition. Furthermore, we do not currently have any business disruption insurance. WE MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL REQUIRED TO GROW OUR BUSINESS. Our ability to grow depends significantly on our ability to expand our operations by expanding our internal network infrastructure. Expansion efforts will require significant advance capital equipment expenditures and commitments for telecommunications capacity. If the proceeds from this offering, and cash generated from operations are not sufficient to meet our cash requirements, we will need to seek additional capital from public or private equity or debt sources to fund our growth and operating plans and respond to other contingencies. We may not be able to raise needed cash on terms acceptable to us or at all. Financings may be on terms that are dilutive or potentially dilutive to our stockholders. If sources of financing are required, but are insufficient or unavailable, we will be required to modify our growth and operating plans to the extent of available funding, which would have a material adverse effect on our business, results of operations and financial condition. CONCENTRATION OF STOCK OWNERSHIP MAY PREVENT YOU FROM HAVING ANY VOICE IN CORPORATE AFFAIRS Upon the successful completion of this offering, Leslie Bernhard and Eli Rousso will each own 19% of our issued and outstanding shares of common stock. With these holdings, Ms. Bernhard and Mr. Rousso will be able to control all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying or preventing any change in how and by whom we are controlled. YOUR INVESTMENT IS SUBJECT TO SUBSTANTIAL DILUTION As an investor purchasing units in this offering you will incur an immediate $4.84 dilution in net tangible book value for each share of stock included in the units you purchase. To the extent outstanding options to purchase common stock are exercised, your stock interest will be further diluted. WE MAY EXPERIENCE VOLATILITY IN OUR STOCK PRICE Prior to this offering, there has been no public market for our securities. We cannot predict the extent to which investor interest in our securities will lead to the development of a trading market or how liquid that market might become. The initial public offering price for the units was determined by us and the underwriters and may not be indicative of market prices following the offering. The price at which our securities will trade after this offering may be highly volatile as has been the case with many new issues of Internet 16 19 companies and may fluctuate substantially due to factors unrelated or disproportionate to our operating performance. OUR CORPORATE DOCUMENTS MAY LIMIT RIGHTS OF STOCKHOLDERS Following the closing of the offering, our Board of Directors will have the authority to issue up to 5,000,000 shares of preferred stock without any further vote or action by our stockholders, and to determine the price, rights, preferences, privileges and restrictions, including voting rights of such shares. Since the preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights accompanying shares of our common stock, the rights of the holders of shares of common stock included in the units, will be subject to, and may be adversely affected by, the superior rights of the holders of preferred stock. The issuance of preferred stock could also make it more difficult for a third party to acquire a majority of our outstanding voting stock. Furthermore, certain provisions of our Certificate of Incorporation, and certain provisions of our Bylaws and of Delaware law, could have the effect of delaying or preventing a change in control of the company which you may deem to be in the best interests of the company. FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE MAY HAVE MATERIAL ADVERSE EFFECTS ON OUR BUSINESS A significant portion of the world's computer hardware and software has historically used only two digits to identify the year in a date, often meaning that the computer will fail to distinguish dates in the 21st century from dates in the 20th century. As a result, various problems may arise from the improper processing of dates and date-sensitive calculations by computers and other machinery as the Year 2000 is approached and reached. These problems include system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar business activities. Our failure, or the failure of third parties on which we rely, to adequately address Year 2000 readiness issues could result in an interruption, or a failure, of our normal business activities or operations. Presently, we believe that the primary risks that we face with regard to the Year 2000 are those arising from third-party services or products. In particular, if our publishing clients or our advertising users have Year 2000 problems, the proper operation of our computer programs and systems may be affected. This, in turn, could materially and adversely affect our financial position, results of operations and cash flows. 17 20 USE OF PROCEEDS The net proceeds to us from the sale of units being offered by this prospectus, assuming an initial public offering price of $15.00 per unit, are estimated to be $13,100,000 after deducting the underwriting discounts and estimated offering expenses. The following table sets forth the principal categories of expense for which the offering proceeds are to be used, based on our current budget. We expect that our actual allocation of proceeds will vary, possibly substantially, from our current budget as a result of unforeseen developments.
APPROXIMATE APPROXIMATE PERCENTAGE ALLOCATION OF NET PROCEEDS DOLLAR AMOUNT OF NET PROCEEDS - -------------------------- ------------- --------------- Development and expansion of Advertise123.com Web site............................................. $ 3,100,000 24% Sales and marketing................................ 3,450,000 26 Product development and site maintenance........... 2,000,000 15 Debt retirement.................................... 1,601,710 12 General corporate purposes including working capital.......................................... 2,948,290 23 ----------- --- Total.............................................. $13,100,000 100% =========== ===
Development and expansion of our Web site includes gathering necessary information regarding publishers for installation onto our Web site and providing software to additional newspapers allowing them to publish data received from our Web site without data reentry. Product development and site maintenance includes providing technical support and creating and updating editorial content. Sales and marketing includes marketing efforts directed at advertisers, publishers and prospective strategic partners. Debt retirement consists of (a) indebtedness of $751,710 for purchase of technology which we formerly licensed from the seller and (b) repaying a loan in the amount of $850,000 from a small business investment company, the proceeds of which were used as working capital. The loan is payable on or before July 12, 2004 and bears annual interest at the rate of 14% per annum. We intend to use the remaining net proceeds for general corporate purposes, including working capital and capital expenditures. The amounts we actually expend for general corporate purposes may vary significantly and will depend on a number of factors, including the amount of our future revenues and the other factors described under "Risk Factors." Our management will retain broad discretion in the allocation of the net proceeds of this offering. A portion of the net proceeds may also be used for strategic partnerships or to acquire or invest in complementary businesses, technologies or product lines. We have no current agreements or commitments and we are not currently engaged in any negotiations with respect to any acquisitions. Pending these uses, the net proceeds of this offering will be invested in short term, interest-bearing, investment grade securities. 18 21 DIVIDEND POLICY Prior to this offering we were a "Sub S" corporation for income tax purposes, owned by persons active in the business. From time to time we declared and paid cash dividends on our common stock. We intend to retain future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends on our common stock in the foreseeable future. 19 22 CAPITALIZATION The following table sets forth our capitalization as of March 31, 1999: - on an actual basis; - on a pro forma basis to give effect to: - the receipt of $850,000 as a loan from a small business investment company in July 1999; - the debt issue costs related to the issuance of 40,561 shares of redeemable common stock at a fair value of $137,536 under the $850,000 loan; - the sale in April 1999 of $350,000 principal amount of convertible notes and the conversion of $1,050,000 principal amount of convertible notes that were issued in March and April 1999 plus interest into 410,972 shares of common stock on the closing of this offering; - the reclassification of the accumulated deficit of $703,595 to additional paid-in capital on termination of the S-corporation election; and - the change in shares outstanding resulting from our reincorporation; - on a pro forma as adjusted basis to give effect to: - the pro forma changes described above; - the sale of the 1,000,000 units offered by us in this prospectus assuming an initial public offering price of $15.00 per unit; - payment of the underwriting discounts and estimated offering expenses that we will pay; - the repayment of notes payable of $1,601,710 and the amortization of debt issue costs of $137,536 on the repayment of $850,000 of these notes; and - reclassification of redeemable common stock to common stock and additional paid-in capital on the closing of this offering. 20 23
MARCH 31, 1999 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ---------- ---------- ----------- Notes payable, net of current portion... $1,425,708 $1,379,886 -- ---------- ---------- ----------- Redeemable Common Stock................. -- $ 137,536 -- ---------- ---------- ----------- Stockholders' equity (deficit): Preferred stock, par value $0.0001; authorized 5,000,000 shares; none issued and outstanding............. -- -- -- Common Stock, par value $0.0001; authorized 10,000,000 shares; shares issued and outstanding: 2,663,395 actual; 2,959,439 pro forma; 5,000,000 pro forma as adjusted (1)....................... 28,300 296 500 Additional paid-in capital............ -- 374,409 13,474,205 Accumulated deficit................... (703,595) -- -- ---------- ---------- ----------- Total stockholders' equity (deficit)........................ (675,295) 374,705 13,474,705 ---------- ---------- ----------- Total capitalization............. $ 750,413 $1,892,127 $13,474,705 ========== ========== ===========
- ------------------------- (1) Based on the number of shares of Common Stock outstanding as of March 31, 1999. Excludes (i) 381,780 shares of Common Stock issuable upon the exercise of stock options granted in April and July 1999 and (ii) 60,000 shares of Common Stock issuable upon the exercise of warrants granted in July 1999. 21 24 DILUTION Our pro forma tangible book value as of March 31, 1999 was $183,192, or $0.06 per share of common stock. Pro forma net tangible book value per share is determined by dividing total tangible assets less total liabilities by the number of outstanding shares of common stock as of March 31, 1999 after giving effect to the sale and conversion of $1,050,000 principal amount of our convertible notes which were issued in March and April 1999 and the exchange of 3,000,000 shares in connection with our reincorporation in Delaware. After giving effect to the sale of 1,000,000 units at an assumed initial public offering price of $15.00 per unit and after deducting estimated underwriting discounts and expenses of this offering, our pro forma net tangible book value at March 31, 1999 would have been $13,283,192 or $2.66 per share, representing an immediate increase in net tangible book value of $2.60 per share to the existing stockholders and an immediate dilution of $4.84 or 64.5% per share to new investors. For purposes of the dilution computation and the following tables, we have allocated the full purchase price of a unit to the shares of common stock included in the unit and nothing to the warrants included in the unit. The following table illustrates the above information with respect to dilution to new investors on a per share basis: Initial public offering price............................... $7.50 Pro forma net tangible book value at March 31, 1999....... $ 0.06 Increase in pro forma net tangible book value attributable to new investors....................................... $ 2.60 ------ Pro forma net tangible book value after offering............ 2.66 ----- Dilution to new investors................................... $4.84 =====
The following table sets forth, on a pro forma basis as of March 31, 1999, with respect to our existing stockholders and new investors, a comparison of the number of shares of common stock we issued, the percentage ownership of those shares, the total consideration paid, the percentage of total consideration paid and the average price per share.
SHARES PURCHASED TOTAL CONSIDERATION -------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- ------------- Existing stockholders....... 3,000,000 60% $ 1,078,300 6.71% $0.36 New investors........ 2,000,000 40% 15,000,000 93.29% 7.50 --------- --- ----------- ------ Total........... 5,000,000 100% $16,078,300 100.00% ========= === =========== ======
The above table assumes no exercise of the underwriters' over-allotment option. If the underwriters' over-allotment option is exercised, the selling stockholders identified in this Prospectus will provide the stock and we will provide the warrants included in the units covered by the over-allotment option. We will not receive any of the proceeds from the sale of the stock by the selling stockholders. In addition, the above table does not give effect to the shares issuable upon exercise of outstanding options and warrants. 22 25 SELECTED FINANCIAL DATA The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The statement for operations data for each of the years in the two-year period ended December 31, 1998, and the balance sheet data at December 31, 1998, are derived from financial statements of AdStar.com, Inc., which have been audited by PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere in this Prospectus. The statement of operations data for the three month periods ended March 31, 1998 and 1999 and the balance sheet data for March 31, 1999 are derived from unaudited financial statements of AdStar.com, Inc. The unaudited financial statements have been prepared on substantially the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of operations for such periods. Historical results are not necessarily indicative of the results to be expected in the future, and the results of interim periods are not necessarily indicative of results for the entire year.
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ------------------------ ---------------------------- 1997 1998 1998 1999 ---------- ---------- ----------- ----------- STATEMENTS OF OPERATIONS DATA: Net revenues.............. $1,148,233 $1,559,361 $ 393,964 $ 406,602 Cost of revenues.......... 565,329 800,532 165,848 199,548 ---------- ---------- ---------- ---------- Gross profit............ 582,904 758,829 228,116 207,054 Sales, general and administrative expenses................ 634,029 820,574 159,135 234,836 ---------- ---------- ---------- ---------- Income (loss) from operations.............. (51,125) (61,745) 68,981 (27,782) Interest expense.......... 7,873 4,518 1,525 2,884 ---------- ---------- ---------- ---------- Income (loss) before taxes................... (58,998) (66,263) 67,456 (30,666) Provision for taxes....... 823 2,760 690 690 ---------- ---------- ---------- ---------- Net income (loss)......... $ (59,821) $ (69,023) $ 66,766 $ (31,356) ========== ========== ========== ========== Net income (loss) per share -- basic and diluted................. $ (0.02) $ (0.03) $ 0.03 $ (0.01) Weighted average shares -- basic and diluted....... 2,530,301 2,625,107 2,530,301 2,663,395 Pro forma earnings (loss) per share -- basic and diluted (1)............. $ (0.03) $ (0.01) Pro forma earnings (loss) per share -- basic and diluted (1)............. 2,625,107 2,689,839
23 26
DECEMBER 31, 1998 MARCH 31, 1999 ----------------- -------------- BALANCE SHEET DATA: Cash and cash equivalents...................... $ 90,007 $ 566,123 Working capital................................ 271,794 404,108 Total assets................................... 339,147 1,174,375 Notes payable, net of current portion.......... -- 1,425,708 Total liabilities.............................. 535,151 1,849,670 Total stockholders' equity (deficit)........... (196,004) (675,295)
- ------------------------- (1) See Note 2 of Notes to financial statements for an explanation of the method used to determine the number of shares used in computation of the pro forma basic and diluted earnings (loss) per share. 24 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and related notes to the financial statements included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risk and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this prospectus. OVERVIEW Revenues from our traditional business, which account for substantially all of our historical revenues, consist of licensing fees and fees for advertiser service and support charged to publishers. We are in the process of implementing our Web-based service and intend to charge for that service based on a fixed transaction fee and/or a percentage of the advertising fee charged by the publisher. This change will result in material changes in our financial statements, including changes in revenue recognition, timing of cash flows and volume of accounts receivable as a percentage of revenues. Our level of revenues has been generally sufficient to support our historic business. In developing our Web-based system, we have begun to incur expenses that cannot be offset by the revenues generated by our historic business. We intend to continue to make significant financial investments to support publishers on our Web site, Advertise123.com, for content development, for technology and infrastructure development and for marketing and advertising expense. As a result, we believe that we will incur operating losses and negative cash flows from operations before the build-up in revenues from our Internet business offset anticipated increases in expense. Because we have limited Internet experience, we cannot accurately forecast the source, magnitude or timing of our future revenues and therefore cannot forecast if or when we will return to profitability. Prior to this offering, we had elected to be taxed under Subchapter S of the Internal Revenue Code of 1986. As a result of this offering, we will in the future be taxed as a Subchapter C corporation, and therefore will pay tax on our income, if any, at the corporate level. Any such tax will be recorded as an expense and will affect our operating results. Because we have historically been a Subchapter S corporation, we have no accumulated loss or credit carryforwards that would be usable to offset future income, if any. As a result of these changes, our historical financial statements are not necessarily reflective of future operating results. 25 28 RESULTS OF OPERATIONS The following table sets forth the results of operations expressed as a percentage of net revenues:
THREE MONTH YEAR ENDED PERIOD ENDED DECEMBER 31, MARCH 31, ------------ ------------ 1997 1998 1998 1999 ---- ---- ---- ---- Net revenues....................................... 100% 100% 100% 100% Cost of revenues................................... 49% 51% 42% 49% --- --- --- --- Gross profit....................................... 51% 49% 58% 51% Sales, general and administrative expenses......... 55% 53% 40% 58% --- --- --- --- Income (loss) from operations...................... (4)% (4)% 18% (7)% Interest expense................................... (1)% -- (1)% (1)% --- --- --- --- Income (loss) before taxes......................... (5)% (4)% 17% (8)% Provision for taxes................................ -- -- -- -- --- --- --- --- Net income (loss).................................. (5)% (4)% 17% (8)%
THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998 NET REVENUES. Net revenues increased by 3% to $406,602 for the three months ended March 31, 1999 from $393,964 for the three months ended March 31, 1998. The increase in net revenues resulted primarily from an increase in computer hardware sales to $36,313 in 1999 from $16,250 in 1998, offset in part by a decrease in license and end-user support revenues (referred to as "service revenues") to $370,289 in 1999 from $377,714 in 1998. While we expect to continue to recognize service revenues from existing and potential new software licensing contracts, we expect that transaction based revenues will increase at a faster rate than service revenues and will eventually become our principal source of revenues. COST OF REVENUES. Cost of revenues consists primarily of charges to configure and install the AdStar software into the publishing systems of newspapers, configure end-user software for the newspaper's advertiser clients, provide customer training and end-user support, cost of hardware sales and royalty fees. These costs increased by $33,700 in 1999, to $199,548, as compared to $165,848 in 1998. Personnel costs associated with cost of revenues increased to $104,561 in 1999 compared with $69,385 in 1998 as we added end user support staff. Hardware expense increased to $32,577 in 1999 from $14,346 in 1998. These increases were offset in part by a reduction in royalty expense to $17,916 in 1999 from $48,867 in 1998 due to the timing of royalties payable on installation of our fax product. Cost of revenues increased as a percentage of net revenues due to increases in staff in anticipation of support requirements for new customers and because of an increased level of hardware sales at a lower margin than our service revenues. We view sales of hardware as an accommodation to our clients coincident to the installation of our software in the front-end publishing systems of newspapers. SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative expense consists primarily of salaries of business development personnel, sales and marketing personnel and 26 29 other marketing, trade show and travel expense. These personnel costs increased to $112,045 in 1999 from $85,840 in 1998, primarily because of the addition of business development personnel for our Web-based service. We expect to incur additional sales, general and administrative expenses as we hire additional personnel and incur additional expenses related to the development of our Web-based service. YEARS ENDED DECEMBER 31, 1998 AND 1997 NET REVENUES. Net revenues increased by approximately 36% to $1,559,361 for 1998 from $1,148,233 for 1997. Service revenues from existing customers were essentially flat for 1998 ($817,822) when compared with 1997 ($809,045). The increase in 1998 over 1997 was due primarily to the large volume of installation work performed in 1998 (for new and existing customers). Three customers installed the AdStar fax system to complement their pre-existing basic systems and one additional existing customer upgraded its system. Two new customers were added in 1998. Hardware sales were $94,285 in 1998 compared with $8,687 in 1997. Excluding the revenues from hardware sales the increase in net revenues in 1998 over 1997 was 29%. COST OF REVENUES. Cost of revenues increased by 42% in 1998 to $800,532 from $565,329 in 1997. As a percentage of net revenues, cost of revenues increased by 2% from 1997 to 1998 as a result of an increase in lower margin hardware sales. SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative expense increased by approximately 29% to $820,574 in 1998 compared with $634,029 in 1997. The primary factors accounting for the increase were compensation and recruitment costs that increased to $415,220 in 1998 from $373,646 in 1997. This increase was primarily due to the addition of business development personnel in the second half of 1998 for our Web-based service. Additionally, travel expense increased by approximately $40,000, to $110,367 in 1998. LIQUIDITY AND CAPITAL RESOURCES We have financed our business primarily from cash generated by operations and, more recently, from debt financings. As of March 31, 1999, the Company had cash and cash equivalents of $566,123 up from $90,007 at December 31, 1998. Net cash provided by operations was $98,603 for 1998 compared to net cash used in operations of $12,826 in 1997, primarily because of an increase in accounts payable and accrued expenses offset by a reduction in deferred revenue in 1998. Net cash used in investment activities increased to $25,532 in 1998 from $12,902 in 1997. The difference is attributable to an increase in the purchase of equipment to support additional personnel. Net cash used in financing activities was $30,552 in 1998 compared with cash provided by financing activities in 1997 of $1,500. Principally, these activities involved proceeds from and repayments of capitalized leases or notes payable. Net cash used in operations was $139,109 for the three months ended March 31, 1999 compared with net cash provided by operations of $37,884 for the comparable 1998 period. The difference is due primarily to the net loss from operations in the three month period ended March 31, 1999 compared to net income in the comparable 1998 period. Net cash used in investing activities increased to $83,067 in the quarter ended March 31, 1999 compared with $8,168 in the comparable quarter of 1998 resulting from the purchase and development of computer equipment and related infrastructure. Net cash provided by 27 30 financing activities was $698,292 during the three month period ended March 31, 1999 compared to $10,000 used in financing in the comparable quarter of 1998. The activity in 1999 primarily reflects the issuance of $700,000 of our 12% convertible notes payable. In March 1999, we sold $700,000 of our 12% convertible notes in a private placement. In April 1999, we raised an additional $350,000 through sale of additional 12% convertible notes. These notes will automatically convert to common stock upon consummation of this offering. In July 1999, we borrowed $850,000 from a small business investment company. The loan bears interest at 14% per annum and is repayable in 54 equal installments commencing six months after the date of issuance. The holder of the note also received 40,561 shares of our common stock at the time of the financing. The holder is entitled to increases in the amount of stock issued to it if the note is not repaid starting nine months after issuance. We expect to repay this note from the offering proceeds. The proceeds of these financings have been used for working capital, primarily to support the development of our Web-based service. Also in March 1999, we purchased the technology, intellectual property and software rights related to the AdStar technology for $751,710 by the issuance of a 10% note. This note is payable in monthly installments of $8,333 comprising principal and interest. We expect to repay this note from the offering proceeds. We anticipate that our operating expenses will increase substantially as the number of our employees increases. Additionally we may evaluate from time to time possible investments in businesses, products and technologies to build our business. We expect that the net proceeds from this offering, will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months. We cannot guarantee, however, that the underlying assumed levels of revenues and expenses will prove to be accurate. We may need to seek additional funding through public or private financings or other arrangements prior to the expiration of the 12 month period. Adequate funds may not be available when needed or may not be available on terms favorable to us. If additional funds are raised through the issuance of equity securities, dilution to existing stockholders may result. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our financial position, results of operations and cash flows. YEAR 2000 READINESS Many existing computers and computer programs will malfunction or fail completely when processing dates past the year 1999 because they use only the last two digits, such as "98" or "99", to refer to a year. This means, for example, that they cannot distinguish between the year 2000 and the year 1900, both of which would be referred to as "00". Because our current systems and services and those being developed depend heavily on computers and computer programs, we have paid careful attention to this potentially disruptive problem. The computer programs that we use to provide our existing traditional AdStar services have all been reviewed for year 2000 compliance by our technology team, and suitable modifications have been made and tested and these programs appear to be functioning properly with no year 2000 problems. We are distributing these modified programs to both our advertiser users and our publishing clients. A large percentage of the update distribution has been completed. An initiative is in place to have the balance completed prior to December 1999. 28 31 In addition to installing our updated AdStar software, our users (advertisers and publishers) must use computers for AdStar programs that are free of year 2000 problems. Also, our publishing clients must have computer systems to which we connect that function properly. All of our publishing clients and many of our advertising users have their own company initiatives to correct year 2000 problems and we have been cooperating with them to assure proper operation of our computer programs and systems. To the extent that any such third-party product or technology is not year 2000 compliant prior to December 1999 our financial position, results of operations and cash flows may be adversely affected due to our association with such product or technology. The Web-based Advertise123.com service that we are building has been designed and implemented to be year 2000 ready: 1. The software programs and systems we have built and continue to build are designed to use coding and algorithms based on the four digit year representation for handling and processing date and date related information, and our database structures are designed to provide for the same standardized four digit representation; 2. Our Web-based technology utilizes newly purchased hardware and 1999 releases of third party software systems from industry leading suppliers that specify that the systems that we use are year 2000 ready; 3. We have assessed the year 2000 readiness of our Internet service providers, and have determined that they have taken steps to become year 2000 compliant; 4. We are conducting both unit and complete system testing for year 2000 readiness, and expect to be able to correct any potential problems that are uncovered before year 2000 dates are expected to be processed through our service. The internal administrative systems currently in use are scheduled to be replaced, before the end of 1999, in preparation for our expected growth. We are only considering systems that are specified by their suppliers to be year 2000 ready and we plan to conduct our own year 2000 readiness tests prior to using any of these systems. Our internal technology systems (data network, workstations, and telephone systems) have been assessed for year 2000 readiness. Most of these items are relatively new and do not exhibit year 2000 problems. Items that we have determined have problems have been replaced or are in the process of being updated. We do not anticipate any unexpected internal system year 2000 problems. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and hedging activities that requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management does not believe that the implementation of SFAS No. 133 will have any impact on its financial statements since we do not currently engage in derivative or hedging activities. 29 32 On September 28, 1998, the SEC issued a press release and stated the "SEC will formulate and augment existing accounting rules and interpretations covering revenue recognition, restructuring reserves, materiality and disclosure" for all publicly-traded companies. Until such time as the SEC staff issues such interpretative guidance, it is unclear what, if any, impact such interpretative guidance will have on our current accounting practices. 30 33 BUSINESS Since 1986 we have enabled advertisers to place classified advertisements in publications by electronic means. Our historic AdStar business, was confined to permitting some large advertisers to place classified ads in a limited number of newspapers through the use of our proprietary software. Our new Advertise123.com service, offers anyone with access to the Internet the opportunity to create, price, pay for and submit a classified ad for publication in print or on-line in one or more of an increasing number of publications. THE CLASSIFIED ADVERTISING MARKET Classified newspaper advertisements consist of small to full page print and combined print and graphic or pictorial advertisements that appear in designated sections and are organized by category. The principal categories of classified ads are employment, automotive and real estate. Classified ads generated approximately $18 billion in newspaper revenue in 1998 in the United States. Classified ads are placed by advertising agencies, large and small businesses and individuals. Some large volume advertisers enter into contractual relationships with publishers providing for discounted rates in return for volume commitments. Classified advertising in newspapers represents one of the highest margin revenue sources for newspapers. Although the market for classified advertising on-line is relatively new, it is growing rapidly. Most classified ads are placed by the advertiser or its agent directly with a newspaper either by telephone, fax, email, mail or messenger. The process can be cumbersome, time consuming and inefficient. Ads placed in this way are susceptible to error and misunderstanding in the voice or fax transmission or in re-keying print submissions; they may require multiple phone calls or faxes especially if ads are being placed in more than one newspaper; they require familiarization with each newspaper's separate printing and pricing practices; access both by phone and fax may be available only during limited business hours and even then access may be difficult in periods of heavy phone activity or facsimile transmission activity and there is much duplication of work between the advertiser and the newspaper. OUR HISTORICAL APPROACH -- THE ADSTAR REMOTE AD ENTRY SOLUTION Our AdStar business is based on technology we developed that simplifies the media buying process by providing professional advertisers with software to compose and submit advertising directly into a newspaper's computer systems. Our software automatically adapts the ad to the publisher's formatting specifications. This technology affords the advertiser greater control of the advertising process, including submission of ads directly into a newspaper's classified ad systems, ability to work closer to deadlines, fewer errors from copy re-keying, elimination of messengers and overnight delivery, simplified resubmission of ads, administrative and reporting functions and, in many cases, more favorable rates. One of the principal advantages of this system is that the advertiser using our software is able to view the computer screen and configure the ad exactly as it will run in the selected newspapers. Another important advantage is that with our system the user's interface for all publishers is the same, so users don't have to learn a different system for each publisher. In our AdStar business, we collect no fees from advertisers. Our clients are the newspapers to which we license our technology. These are primarily large metropolitan 31 34 newspapers. The benefits of our AdStar system to newspapers are significant. By automating the ad input process, we reduce the time required of a publisher's personnel, as well as the publisher's total processing time; we virtually eliminate credits and give backs associated with re-keying copy errors; and we enable newspapers to extend ad deadlines to maximize revenues and permit integration of the automatic remote entry of advertisements into their computer system with their order entry, advertising and pagination systems. Our license agreements with newspapers are for terms of three to ten years. We charge fixed license and maintenance fees and installation charges, all of which are unrelated to the amount of advertising revenue generated by our licensed technology. We also offer a fax management system. Under this system faxed ads are received, logged, stored and converted into text files at the newspaper. They are then routed to special workstations designed for split screen editing. This is a two way system allowing for manipulation of ads in various ways and interactive discourse between the newspaper and the advertiser for both interim and final fax-back acknowledgements of acceptance by the advertiser. Our 43 current newspaper customers account for approximately 25% of the total 1997 Sunday newspaper circulation in the United States. These newspapers include The Chicago Tribune, The Washington Post, The (Newark) Star Ledger, The Los Angeles Times, The Denver Post, The Miami Herald, The Philadelphia Inquirer, The (New York) Daily News and The (Atlanta) Journal-Constitution. In 1998, more than 1,400 advertiser locations, including advertising agencies such as Bernard Hodes Advertising, TMP Worldwide, Shaker Advertising, Nationwide Advertising, and Austin Knight Advertising and large direct advertisers such as Century 21, Coldwell Banker, PricewaterhouseCoopers LLP, Ford and General Cinema, placed, by our estimate, classified advertising valued at more than $150 million in newspaper revenue with our newspaper customers through our AdStar system. However, this volume represents less than 1% of the $18 billion in newspaper classified advertising sold in 1998. The use of our AdStar remote ad entry system has been limited to connecting large metropolitan newspapers with their highest volume commercial classified advertisers. Most classified advertisers are small and medium sized businesses which have been excluded from participating in the AdStar system, as has anyone seeking to place an ad with any of the approximately 1,700 daily and 18,000 weekly newspapers in the United States which are not among the 43 AdStar licensees. Additionally, the AdStar system does not provide for the placement of classified advertising in on-line publications. In order to overcome the limitations of our AdStar business and reach virtually the entire classified ad market, including the growing market for Internet publications, we commenced our Web-based classified ad service. OUR NEW WEB-BASED CLASSIFIED AD MARKETPLACE -- ADVERTISE123.COM THE CONCEPT. Our new Advertise123.com Web site that we are developing (and launched on a limited basis in June 1999) will permit any prospective advertiser, individual or commercial, with Internet access, to: - select print and on-line publications for ad placement; - compose and format ads; - preview ads; - schedule publication dates; 32 35 - price and pay for ads (at standard rates), or, alternatively, for high volume customers, enter a publisher authorized contract ID and obtain special contract rates and direct billing from the publisher; and - electronically submit ads to publications In order to use our Advertise123.com system, the advertiser accesses our Web site and composes and formats the ad for each selected publication. We also support proprietary Web sites maintained by us for our publisher customers. The system incorporates the particular style, format and data parameters unique to each publication's advertising or ad posting system. For print ads this feature enables the user to preview the ad as it will appear in the publication, allowing an accurate sizing (usually measured in lines or inches) of the ad which in turn usually determines the price of the print ad. On-line publications usually place a limit on ad size based upon text size and have a fixed price for a given publication schedule. All these variables can be obtained from the publication and entered into our system so as to give anyone that qualifies the published rate. Ads submitted under publisher authorized contracts can be sized but are not priced: they are priced by the publisher's computer system and billed directly to the advertiser. If the advertiser pays for the ad by credit card or debit card we access a separate third-party on-line service that processes credit card and debit card payments on the Web. In these cases, the total price of the ad less credit or debit card processing charges is remitted to us. We in turn deduct our transaction fee and remit the balance to the publisher. If the advertiser has a volume contract with the publisher and is billed directly by the publisher, we collect our transaction fee from the publisher by sending an invoice. Once the ad has been composed and formatted, the ad is transferred to the publication selected. If it is directed to a newspaper that is an AdStar licensee, the ad is transferred directly into that newspaper's computer publishing system. If the ad is directed to a publication which is not an AdStar licensee or which is an on-line publisher, then Advertise123.com transfers it by e-mail, fax or by means of an Internet file transfer protocol known as an FTP, as instructed by the publisher. We are encouraging more print publishers to acquire the necessary AdStar software to enable them to receive ads directly into their computer publishing systems from Advertise123.com; most online publishers that can accept FTP transfer of ads will be able to use their own software to accept Advertise123.com ad feeds. OUR EVOLUTION. We believe that our Web-based ad-taking services represents a major improvement, with benefits to the advertiser and the publisher, not only over the way most classified ads are being placed today but even over those placed by our own remote entry process. Most classified ads are still manually placed in a person-to-person exchange by an individual, advertising agency or commercial entity with each publication in which the advertiser seeks to place an ad. This process is time consuming and expensive both for the advertiser and the publisher, particularly for advertisers not familiar with the procedures and cost schedules of a particular publication. In such cases, the placing of an ad may involve long telephone or repeat phone calls or fax transmissions or other communications before an ad is actually placed. The likelihood for error resulting in costly refunds or credits is high. We believe our AdStar remote entry process expedites the process and reduces the likelihood of these problems. But, it is available only for large advertisers, and then only with respect 33 36 to their placing ads in print in any of our 43 newspaper customers. Our new Web-based ad taking process improves on this business model in the following respects: - It is accessible for use by any individual, small business or professional advertiser with access to a computer. - Classified ads may be placed by any of the above parties not only in our 43 remote entry newspaper customers but in many other print publications that we plan to enable on our site. - Ads may be placed for dissemination on-line on any one of several web sites engaged in the on-line distribution of classified ad postings. - Classified ads from non-contract advertisers can be priced and paid for in real time; ads from contract advertisers can be submitted directly to the publisher for invoicing to the advertiser. - A classified ad can be placed in multiple publications in one transaction. - While some of these features are available with various services currently being offered by others, we believe that we will be the only company offering all of these features in one service. MARKETING ADVERTISE123 Our first goal in building Advertise123.com into a marketplace for purchasing classified ads is to attract a critical mass of newspapers and Web publishers who agree to be accessible on our site as ad recipients. The more publishers accessible on Advertise123.com, the more attractive our service will be to prospective advertisers. We do not anticipate any significant resistance from publishers to their being listed on our Web site. It is necessary however to add to our data base certain information about each publisher before it can become a named participant on our Advertise123.com Web site. This information can be obtained either from the publisher or from public records. The input of this information into our Web site, however, is time consuming and restricts our ability to add new publishers to our Web site as fast as we would like. Once we have a critical mass of publishers, our marketing efforts can shift to bringing advertisers to our site. We expect that all of our 43 newspapers will agree to be accessible on Advertise123.com. These 43 newspaper customers have a readership of approximately 45 million and have a circulation which covers eight of the top 10 designated market areas in the United States. To add additional newspapers, as well as Web publishers, we will emphasize in our marketing the e-commerce opportunities of on-line ad placement in building advertising revenues. We will also market our service on the basis of the proven advantages of remote ad entry over traditional manual methods of classified ad placement. DISTRIBUTION AGREEMENTS. There are six major sites on the Web which aggregate and republish classified ads which appear in newspapers. None of these Web publishers originates ads on-line -- whether for publication on-line or in print. We are focusing our initial marketing efforts on promoting the e-commerce opportunity of Advertise123 to these Web publishers and through them to the participating newspapers whose classified ads are republished on-line by these publishers. We have entered into distribution agreements with two of these Web publishers: AdOne, LLC (AdOne.com) and PowerAdz, LLC (PowerAdz.com), which enable them to offer versions of Advertise123 to their participating newspapers so that these newspapers can obtain ads through Advertise123.com for publication either on-line or in print. AdOne.com and PowerAdz.com provide on-line 34 37 republication of the classified ads from approximately 1,200 newspapers. Under our distribution agreements, in order for anyone coming to one of our distribution partners' sites or the site of one of their participating newspapers added to our system -- to place an ad for publication in print or on-line -- the prospective advertiser will click-on a "place an ad" button which will link such party to a co-branded version of Advertise123.com hosted by us. As we implement this ad taking functionality for our distribution partners and their participating newspapers, each of these publications becomes accessible on Advertise123.com which enhances our value to advertisers. Each of our distribution agreements grants us the right to provide our distribution partners and their participating newspapers with the functionality of enabling advertisers to select, transact and process ads for print and on-line publication from their Web sites and from Advertise123.com. For any advertisement entered on a Web site of a distribution partner or one of its participating newspapers -- which we call partnered sites -- and for any ad entered on Advertise123.com for placement on a partnered site or in a participating newspaper of one of our distribution partners, a percentage of the publisher's charges for this advertisement is divided among us and the other party or parties in the distribution chain to the transaction. Our agreements with AdOne and PowerAdz are for three years but may be terminated on short notice by either party. Our Advertise123.com functionality is currently being installed for the AdOne and PowerAdz Web sites. We have begun installing our ad entry functionality on the Web sites of their participating newspapers -- and these newspapers will join our Advertise123.com marketplace as their publications are also accessible on our Web site. SERVICE AGREEMENT. We have also entered into a three year agreement with another Web publisher, CareerPath.com, which aggregates and republishes job recruitment advertisements on-line. This agreement grants us the exclusive right to provide our Advertise123.com ad entry functionality on its Web site and on the co-branded Web sites of their participating newspapers. This will enable prospective employers and employees to place job related ads on these sites. CareerPath.com advertises that its Web site contains the largest number of the most current job listings available on the Internet. CareerPath.com sources these listings from the help wanted ads of more than 90 of the leading daily newspapers and from the Web sites of leading employers. We have installed a "Post A Job On-line" button on CareerPath.com and on the sites of its more than 90 participating newspapers which takes a prospective advertiser to a private label version of Advertise123.com. Pursuant to our service agreement, we receive an installation fee and a percentage of the revenues generated by this service. Our service agreement with CareerPath.com is fully operational. In order to build critical mass for Advertise123.com on the advertisers' side, we intend to look to our publishers to help popularize our service among their advertisers. We also intend to actively advertise and promote our service by advertising in different media, including TV, billboard, direct mail and on-line. In addition, we expect to offer prospective high volume classified ad purchasers media planning and other services. OUR STRATEGY We have now expanded our business to make remote ad entry available to virtually all newspapers and advertisers by utilizing the Internet. We believe this expansion is a natural extension of our business. 35 38 In working to establish Advertise123.com as a leading on-line e-commerce marketplace for publishers and classified advertisers to transact business, we intend to: - leverage our knowledge and experience in classified advertisements to establish our credibility in the Web-based ad taking business; - quickly build an on-line business with our established newspaper customer base and commercial advertiser relationships; - expand the number of publications accessible on Advertise123.com and therefore its attractiveness to advertisers by emphasizing the e-commerce opportunities of our site for building ad revenues as well as the many proven advantages of remote ad entry over traditional manual methods of classified ad placement to both advertisers and publishers; - convert our revenue and pricing model from fixed software license fees to transaction fees for each ad purchased on Advertise123.com and the private label and co-branded sites which we host; - expand our ad placement distribution channels through private label and co-branded relationships with leading Web publishers which aggregate and republish print media classified ads but do not provide for ad entry; and - develop revenue sources for reporting trends and statistical information of interest to print and on-line publishers and advertisers assembled from data collected from our Web sites. OTHER STRATEGIC RELATIONSHIPS Our Web-based ad taking service is dependent on the following relationships which we have established: GSD SOFTWARE. GSD Software is our technology partner for Web enterprise development. It has for the last 10 years provided intellectual technology to Internet companies with innovative software products and integrated solutions of high quality and performance. GSD has worked closely with us in developing our Web-based ad taking technology. IMAGISTIC MEDIA STUDIOS. Imagistic is a leading Web design house that works with us on graphic user interface development. AUTOMATED TRANSACTION SERVICES (ATS). ATS processes credit card and ACH charges over the Internet enabling advertisers to prepay for classified ads. ATS is one of the leading e-commerce enablers on the Web, processing more third party billing transactions on the Internet than any other provider except CyberCash. SOFTAWARE, INC. We entered into an agreement in April 1999 with SoftAware, Inc. SoftAware is a provider of connectivity to the Internet for many companies. SoftAware provides high speed Internet access for computers located on SoftAware's premises, in a secure computer room. SoftAware monitors our data throughout and provides emergency services. REVENUE Our historical revenues have been derived principally from our license fees and installation charges billed to our newspaper customers for our AdStar remote ad entry 36 39 service. We expect this revenue to continue in accordance with our outstanding license agreements. Our revenue sources from Advertise123.com are expected to fall into the following categories: (1) TRANSACTION FEES. These fees will be charged for placing classified ads on our Web site or on a partnered site. The charge for each advertisement by the on-line or print publication will be prepaid by the advertiser by credit card payment through third party facilities accessible on-line or in cases involving large volume purchases, in separate arrangements which we may establish with the advertiser. We will receive the full payment from the credit card facility, less its processing charge, from which we will deduct our fee, as agreed to with the publisher, before forwarding the balance to the publisher. In our distribution and service arrangements, we share this fee with our partners. We expect our sharing arrangements to be separately negotiated for each distribution and service arrangement. (2) CARRIAGE FEES. In co-marketing or co-branding situations in which we carry or display the brand of another company on our Web site, we will in certain circumstances charge a fixed fee, known in the trade as a carriage fee. (3) MARKET RESEARCH REPORTS. We expect to be able to derive a separate revenue stream for providing market research and reporting services to both advertisers and newspapers based on data we are able to assemble from the operation of our Web-based market place. (4) BANNER ADVERTISING. Additional revenues should be provided by premium positioning and promotional banner style advertising sold to media companies and carried on our Web site. Initially we may provide an opportunity to prospective banner advertisers to advertise on our Web site without fee. As we develop activity on our site, we will adopt a rate schedule for banner advertisers based on the number of "hits" each banner advertiser receives from visitors to our site. COMPETITION We expect to provide a "marketplace" or "one-stop-shop" Internet location for publishers and advertisers. We will be competing with all traditional methods of ad origination and entry -- as conducted by newspapers and Web publishers. Our ability to compete will also depend upon the timing and market acceptance of our new Web-based ad taking service, the enhancements developed by us, the quality of our customer service, and the ease of use, performance, price and reliability of our services. We also have to expect that other companies may enter our market and compete with us for ad origination business. Many of these potential new competitors may have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than us. We cannot guarantee that we will be able to compete successfully against current or future competitors or that competitive pressures will not have a material and adverse effect on our financial position, results of operations and cash flows. INTELLECTUAL PROPERTY We regard our intellectual property as critical to our success, and we rely upon trademark, copyright and trade secret laws in the United States to protect our proprietary 37 40 rights. We do not currently own any patents. We hold a United States registration for the AdStar, trademark which, we also use as a domain name on the Internet. We have also recently begun to use the trademark and Internet domain name Advertise123.com but have not yet applied for registration. We cannot guarantee that our application for registration of this trademark will be granted and, if granted, that it will not be successfully challenged by others or invalidated through administrative process or litigation. Further, if our Advertise123 registration application is not granted due to the prior rights of a third party we may not be able to obtain a license on commercially reasonable terms to allow us to continue to use such trademark. In addition, we seek to protect our proprietary rights through the use of confidentiality agreements with employees, consultants, advisors and others. We cannot guarantee that such agreements will provide adequate protection for our proprietary rights in the event of any unauthorized use or disclosure, that our employees, consultants, advisors or others will maintain the confidentiality of such proprietary information, or that such proprietary information will not otherwise become known, or be independently developed, by competitors. We have licensed in the past, and expect that we may license in the future, elements of our trademarks, trade dress and similar proprietary rights to third parties. While we attempt to ensure that the quality of our name and brand are maintained by such business partners, we cannot guarantee that such partners will not take actions that could materially and adversely affect the value of our proprietary rights or the reputation of our solutions and technologies. Legal standards relating to the validity, enforceability and scope of protection of certain proprietary rights in Internet-related industries are uncertain and still evolving, and we cannot make any guarantees as to the future viability or value of any of our proprietary rights or those of other companies within the industry. We cannot guarantee that the steps taken by us to protect our proprietary rights will be adequate or that third parties will not infringe or misappropriate our proprietary rights. Any such infringement or misappropriation, should it occur, could have a material adverse effect on our business, our results of operations of our financial condition. Furthermore, we cannot guarantee that our business activities will not infringe upon the proprietary rights of others, or that other parties will not assert infringement claims against us. EMPLOYEES As of July 1, 1999, we had 16 full-time employees, including two in sales and marketing, one in business development, seven in research, development and programming, five in operations and customer support, and one in clerical and administration. We are not subject to any collective bargaining agreements and we believe that our relations with our employees are good. FACILITIES Our principal offices are currently located in two separate facilities. One in Marina del Rey, California consisting of an aggregate of approximately 3,000 square feet and one in Syosset, New York consisting of approximately 1,400 square feet. The leases for these premises expire on February 15, 2001 and March 31, 2002. The aggregate monthly rent is approximately $7,000. We believe that if these leases are not renewed, satisfactory alternative space will be available. 38 41 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Our executive officers and directors and their respective ages as of July 31, 1999 are as follows:
NAME AGE POSITION - ---- --- -------- Leslie Bernhard...................... 55 President, Chief Executive Officer and director Eli Rousso........................... 62 Executive Vice President, Chief Technology Officer and director Michael Kline........................ 33 Senior Vice President -- Strategy and Products Adam Leff............................ 33 Senior Vice President -- Business Development and Corporate Communications Benjamin J. Douek.................... 49 Senior Vice President, Chief Financial Officer and director Richard Bassler...................... 40 Vice President -- Operations Ronald S. Posner..................... 57 Director*
- --------------- * Mr. Posner will take office upon the effectiveness of this offering. We intend to add an additional outside director on or prior to the offering. Ms. Bernhard and Mr. Rousso have served as directors since the Company was formed in 1991. Mr. Douek was elected directors in July 1999. All directors hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified. Officers are elected to serve subject to the discretion of the Board of Directors. Set forth below is a brief description of the background and business experience of the executive officers and directors of AdStar for the past 5 years: LESLIE BERNHARD is one of our co-founders and has served as our President and Chief Executive Officer since the organization of our predecessor in 1986. ELI ROUSSO is our other co-founder and has served as our Executive Vice President and Chief Technology Officer since the organization of our predecessor in 1986. MICHAEL KLINE joined us in January 1999 first as a consultant and then in April as a Senior Vice President-Strategy and Products. Prior to joining us, Mr. Kline was associated with Recycler.com, a popular online classifieds publisher, as a consultant from July 1998 to January 1999 and General Manager from March 1996 through July 1998. From October 1995 to March 1996 Mr. Kline worked as a consultant for Recycler Classifieds, a newspaper company based in Los Angeles, California. From August 1994 to October 1995 Mr. Kline was Assistant Director-Strategic Development for the Times Mirror, Inc., a leading media company. ADAM LEFF joined us in August 1998 and is Senior Vice President-Business Development and Corporate Communications. Prior to joining us Mr. Leff served as Vice President-Product Development and Marketing and Vice President-Business Development of AdOne Classified Network since June 1996. From 1993 to May 1996 he held various positions within the classified and new media departments of the LA Times as well as positions with a joint venture in which the LA Times was a co-venturer with PacBell. 39 42 BENJAMIN J. DOUEK joined us in April 1999 as Senior Vice President and Chief Financial Officer. Mr. Douek has been a consultant and private investor for more than the last five years during which period he also served as Director of Investment Banking for Ladenberg Thalmann & Co., Inc. (1997-1998), Vice Chairman for Coleman & Company (1996-1997) and Managing Director for Bankers Trust Company (1992-1994). RONALD S. POSNER has been Co-Chief Executive Officer of GlobalNet Financial.Com, Inc., a provider of online financial news and information services since July 1999. For more than five years Mr. Posner has also served as Chairman of the Board of P S Capital, a venture capital firm which he founded that focuses on the Internet, software and technology markets. Mr. Posner is a director of Beyond.com, a software superstore, Asymetrix Learning Systems, Inc., a provider of Internet-based learning solutions and Smallworld, a seller of new-era GIS applications to the energy industry. RICHARD BASSLER joined us in April 1999 as Vice President/Operations. Prior to his joining us he was Vice President-General Manager of AdOne Classified Network from June 1998 to March 1999, and Vice President-Affiliate Relations from May 1997 to June 1998. Previously he served as Director of New Media with Packet Publications and News Director of Princeton Packet from May 1994 to May 1997. COMMITTEES OF THE BOARD OF DIRECTORS Our Board of Directors has established Compensation and Audit committees, whose initial members will be Messrs. Posner and our other outside director. The Compensation Committee reviews and recommends to the Board of Directors the compensation and benefits of all our officers, reviews general policy matters relating to compensation and benefits of our employees and administers the issuance of stock options and discretionary cash bonuses to our officers, employees, directors and consultants. The Audit Committee meets with management and our independent public accountants to determine the adequacy of internal controls and other financial reporting matters. It is our intention to appoint only independent directors to the Audit and Compensation Committees. EXECUTIVE COMPENSATION The following table sets forth all compensation awarded to, earned by or paid to our Chief Executive Officer and our other two most highly compensated executive officers whose annual compensation exceeded $100,000 in 1998 for all services rendered in all capacities to us during 1998, 1997 and 1996. 40 43 SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ---------------- NAME AND PRINCIPAL POSITION YEAR SALARY - --------------------------- ---- -------- Leslie Bernhard............................................. 1998 $150,131 President and Chief Executive Officer 1997 $150,131 1996 $150,131 Eli Rousso.................................................. 1998 $145,662 Executive Vice President and Chief Technical Officer 1997 $145,357 1996 $145,357 Jeffrey Diamond............................................. 1998 $100,626 Vice President-Technical Services 1997 $100,626 1996 $100,626
Mr. Diamond resigned as an officer and director of the Company in July 1999. There was no other compensation including stock options granted to any of the officers mentioned above for the periods indicated. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements dated as of July 1, 1999 with Leslie Bernhard and with Eli Rousso. These agreements provide for terms of employment which expire on June 30, 2002 and annual salaries of $200,000 commencing the first day of the month following the closing of the offering. Each agreement provides, among other things, for participation in an equitable manner in any profit-sharing or retirement, separation and disability plans for employees or executives and for participation in other employee benefits applicable to employees and executives of our company. Each agreement further provides for the use of an automobile and other fringe benefits commensurate with the executive's duties and responsibilities. Under each agreement, employment may be terminated by us with cause or by the executive with good reason. Termination by the Company without cause, or by the executive for good reason, would subject us to liability for liquidated damages in an amount equal to the terminated executive's base salary for the remaining term of his or her employment agreement or 12 months, whichever is higher. STOCK OPTION PLANS In July 1999, the board of directors and stockholders adopted our 1999 Stock Option Plan. We have reserved 500,000 shares of common stock for issuance upon exercise of options granted from time to time under the option plan. The stock option plan is intended to assist us in securing and retaining key employees, directors and consultants by allowing them to participate in our ownership and growth through the grant of incentive and non-qualified options. Under our stock option plan, we may grant incentive and non-qualified options to our officers, employees, directors, consultants, agents and independent contractors. The stock option plan is to be administered by a committee, appointed by our board of directors, consisting of from one to three directors. 41 44 Subject to the provisions of the stock option plan, the committee will determine who shall receive options, the number of shares of common stock that may be purchased under the options, the time, manner of exercise and exercise price of options. The term of options granted under the stock option plan may not exceed ten years or five years for an incentive stock option granted to an optionee owning more than 10% of our voting stock. The exercise price for incentive stock options shall be equal to or greater than 100% of the fair market value of the shares of the common stock at the date of grant; provided that incentive stock options granted to a 10% holder of our voting stock shall be exercisable at a price equal to or greater than 110% of the fair market value of the common stock on the date of the grant. The exercise price for non-qualified options will be set by the committee, in its discretion, but in no event shall the exercise price be less than the fair market value of shares of common stock on the date of grant. Shares of common stock received upon exercise of options granted under the plan will be subject to restrictions on sale or transfer. As of the date of this prospectus, we have granted stock options to purchase 381,780 shares of common stock under our option plan at a weighted average price of $3.21. Of these options, options to purchase 308,128 shares have been granted to our officers and directors. All of the options granted to such officers and directors terminate five years from the date of grant. LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS As authorized by the Delaware General Corporation Law, our certificate of incorporation provides that none of our directors shall be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for: - Any breach of the director's duty of loyalty to us or our stockholders; - Acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - Unlawful payments of dividends or unlawful stock redemptions or repurchases; or - Any transaction from which the director derived an improper personal benefit. This provision limits our rights and the rights of our stockholders to recover monetary damages against a director for breach of the fiduciary duty of care except in the situations described above. This provision does not limit our rights or the rights of any stockholder to seek injunctive relief or rescission if a director breaches his duty of care. Our certificate of incorporation further provides for the indemnification of any and all persons who serve as our director, officer, employee or agent, to the fullest extent permitted under the Delaware General Corporation Law. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. We intend to obtain a policy of insurance under which our directors and officers will be insured, subject to the limits of the policy, against certain losses arising from claims made against our directors and officers by reason of any acts or omissions covered under this policy in their capacities as directors or officers, including liabilities under the Securities Act. 42 45 CERTAIN TRANSACTIONS In July 1999 Jeffrey Diamond, an employee and former director and officer, sold 506,060 shares of our common stock to some of the holders of our convertible notes for $500,000 pursuant to an agreement among Jeffrey Diamond, a representative of the purchasers and us under which Diamond agreed to provide technical services for us for a year at his current compensation of $100,000 a year. In connection with this transaction the purchasers transferred 114,926 shares of our common stock to us. On July 15, 1999, we entered into an agreement with Adam Leff, our Senior Vice President -- Business Development and Corporate Communications, under which we agreed that if the underwriter's over-allotment option in this offering were exercised we would purchase from Mr. Leff 22,069 shares of Common Stock owned by him at the public offering price calculated on the same basis utilized in allocating the portion of the proceeds payable to the selling stockholders, upon exercise of the over-allotment option. This price may not reflect the value of the common stock as reflected by the relative market prices of the common stock and warrants once they trade separately. 43 46 PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to beneficial ownership of our common stock, as of July 15, 1999 and as adjusted to reflect the sale by us of our common stock in this offering, for each person known by us to beneficially own more than 5% of our common stock; each of our directors; and all our directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the securities. Except as indicated by footnote, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The number of shares of common stock outstanding used in calculating the percentage for each listed person includes the shares of common stock underlying options or warrants held by such person that are exercisable within 60 days of July 15, 1999 but excludes shares of common stock underlying options or warrants held by any other person. Percentage of Shares Beneficially Owned is based on (i) 3,000,000 shares of common stock outstanding as of July 15, 1999 after giving effect to the issuance of 40,561 shares of stock to a small business investment company in connection with a $850,000 loan, issuance of convertible notes in the amount of $350,000 subsequent to March 31, 1999 and the conversion of all convertible notes into 410,972 shares of stock and the issuance of shares in connection with our reincorporation in Delaware and (ii) 5,000,000 shares of common stock outstanding after completion of the offering. The address of each person named in the table is Ms. Bernhard and Mr. Rousso, c/o AdStar, 4553 Glencoe Avenue, Suite 325, Marina del Rey, California 90292; Mr. Douek, 450 Park Avenue, New York, New York 10022 and Mr. Posner, 32 Lower Crescent, Sausalito, California 94965.
PERCENTAGE OF SHARES BENEFICIALLY OWNED SHARES ------------------- BENEFICIALLY PRIOR TO AFTER NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING - ------------------------ ------------ -------- -------- Leslie Bernhard................................. 950,106(1)(2) 37% 19% Eli Rousso...................................... 950,106(1)(2) 37% 19% Benjamin J. Douek............................... 31,007(1)(3) 1% 1% Ronald S. Posner................................ 30,000(1)(4) 1% 1% ........................... All directors and officers as a group (seven persons)...................................... 2,186,687(2)(5) 69% 42%
- ------------------------- (1) Denotes a director of the Company. (2) Does not reflect sale of up to 300,000 shares owned in the aggregate by Leslie Bernhard and Eli Rousso to the underwriters upon exercise of the underwriter's over-allotment option. 44 47 (3) Consists of shares of common stock that could be purchased by exercise of options currently exercisable. (4) Consists of 30,000 shares of common stock that could be purchased by exercise of warrants currently exercisable. (5) Includes shares of common stock that could be purchased by exercise of options and warrants as of July 15, 1999 or within 60 days after such date. 45 48 DESCRIPTION OF SECURITIES Upon the closing of our offering, our authorized capital stock will consist of 10,000,000 shares of common stock, $.0001 par value per share, and 5,000,000 shares of preferred stock, $.0001 par value per share, whose rights and designation have not yet been established. We will not have any shares of our preferred stock outstanding immediately after the closing of our offering. COMMON STOCK Holders of our common stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders of common stock do not have cumulative voting rights. Therefore, holders of a majority of the shares of common stock voting for the election of directors can elect all of the directors. Holders of common stock are entitled to share in all dividends that the board of directors, in its discretion, declares from legally available funds. In the event of our liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over our common stock. Holders of our common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to our common stock. The rights of the holders of common stock are subject to any rights that may be fixed for holders of preferred stock, when and if any preferred stock is issued. All outstanding shares of common stock are, and the shares underlying all options and warrants will be, duly authorized, validly issued, fully paid and non-assessable upon our issuance of these shares. PREFERRED STOCK Under our certificate of incorporation, our board of directors is authorized, subject to certain limitations prescribed by law, without further stockholder approval, from time to time to issue up to an aggregate of 5,000,000 shares of our preferred stock. The preferred stock may be issued in one or more series. Each series may have different rights, preferences and designations and qualifications, limitations and restrictions that may be established by our board of directors without approval from the stockholders. These rights, designations and preferences include: - number of shares to be issued; - dividend rights; - dividend rates; - right to convert the preferred stock into a different type of security; - voting rights attributable to the preferred stock; - right to set aside a certain amount of assets for payments relating to the preferred stock; and - prices to be paid upon redemption of the preferred stock or a bankruptcy type event. 46 49 If our board of directors decides to issue any preferred stock, it could have the effect of delaying or preventing another party from taking control of AdStar. This is because the terms of the preferred stock could be designed to make it prohibitively expensive for any unwanted third party to make a bid for our shares of common stock. We have no present plans to issue any shares of preferred stock. WARRANTS GENERAL. Each warrant entitles the holder to purchase one share of our common stock at an exercise price of $ [75% of the offering price per unit] per share, subject to adjustment upon the occurrence of certain events as provided in the warrant certificate and summarized below. Our warrants may be exercised at any time during the period commencing 30 days after this offering and ending on the fifth anniversary date of the date of this prospectus, the expiration date. Those of our warrants which have not previously been exercised will expire on the expiration date. A warrant holder will not be deemed to be a holder of the underlying common stock for any purpose whatsoever until the warrant has been properly exercised. SEPARATE TRANSFERABILITY. Our warrants are detachable and separately transferable commencing on the date of this prospectus. REDEMPTION. We have the right, commencing six months after the date of this Prospectus, to redeem the warrants issued in the offering at a redemption price of $.25 per warrant after providing 30 days' prior written notice to the warrant holders, if the average closing bid price of the common stock equals or exceeds the unit price for ten consecutive trading days ending within 15 days prior to the date of the notice of redemption. We will send the written notice of redemption by first class mail to warrant holders at their last known addresses appearing on the registration records maintained by the transfer agent for our warrants. No other form of notice or publication or otherwise will be required. If we call the warrants for redemption, they will be exercisable until the close of business on the business day next preceding the specified redemption date or the right to exercise will lapse. EXERCISE. A warrant holder may exercise our warrants only if an appropriate registration statement is then in effect with the Securities and Exchange Commission and if the shares of common stock underlying our warrants are qualified for sale under the securities laws of the state in which the holder resides. Our warrants may be exercised by delivering to our transfer agent the applicable warrant certificate on or prior to the expiration date or the redemption date, as applicable, with the form on the reverse side of the certificate executed as indicated, accompanied by payment of the full exercise price for the number of warrants being exercised. Fractional shares of common stock will not be issued upon exercise of our redeemable warrants. ADJUSTMENTS OF EXERCISE PRICE. The exercise price is subject to adjustment if we (i) declare any stock dividend to stockholders, or (ii) effect any split or share combination with respect to our common stock. Therefore, if we effect any stock split or stock combination with respect to our common stock, the exercise price in effect immediately prior to such stock split or combination will be proportionately reduced or increased, as the case may be. Any adjustment of the exercise price will also result in an adjustment of the number of shares purchasable upon exercise of a warrant or, if we elect, an adjustment of the number of warrants outstanding. 47 50 ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AND BY-LAWS We are subject to the provisions of Section 203 of the Delaware General Corporation Law. That section provides, with exceptions, that a Delaware corporation may not engage in any of a broad range of business combinations with a person or his affiliate or associate who is an owner of 15% or more of the outstanding voting stock of the corporation for a period of three years from the date that this person became an interested stockholder. TRANSFER AGENT AND WARRANT AGENT The transfer agent for our common stock and warrants is American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005. 48 51 SHARES ELIGIBLE FOR FUTURE SALE Before this offering, there was no public market for our common stock. We cannot predict the effect, if any, that sales of, or the availability for sale of, our common stock will have on the market price of our common stock prevailing from time to time. Future sales of substantial amounts of common stock in the public market, including shares issuable upon the exercise of warrants being issued in this offering or options granted or to be granted under our stock option plans, could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital in the future through the sale of securities. Upon completion of this offering, we will have outstanding an aggregate of 5,000,000 shares of our common stock assuming no exercise of outstanding options or warrants. Of these shares, all of the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless such shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act. The remaining 3,000,000 shares of common stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or 701 under the Securities Act, which rules are summarized below. LOCK-UP AGREEMENTS All of our officers, directors and stockholders have signed lock-up agreements under which they agreed, except for the possible sale by the selling stockholders of stock to the underwriter if the overallotment option is exercised, not to transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock, for a period of one year after the date of this prospectus. Transfer or dispositions can be made sooner: - with the prior written consent of Paulson Investment Company, Inc.; - in the case of certain transfers to affiliates; - as a bona fide gift; or - to any trust. Upon expiration of the lock-up period, one year after the date of this prospectus, 3,000,000 shares will be available for resale to the public in accordance with the volume and trading limitations of Rule 144. RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - 1% of the number of shares of common stock then outstanding which will equal approximately 50,000 shares immediately after this offering; or - the average weekly trading volume of the common stock on the American Stock Exchange during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. 49 52 Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. RULE 144(k) Under Rule 144(k), a person who is not one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. RULE 701 In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchases shares from us in connection with a compensatory stock plan or other written agreement is eligible to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144. REGISTRATION RIGHTS We have granted registration rights to Paulson Investment Company, Inc. and its transferees with respect to an aggregate of 300,000 restricted shares issuable upon exercise of Paulson's warrants to purchase units and upon exercise of warrants included in the units. We have also granted certain limited registration rights to the holders of $1,050,000 of convertible notes with respect to an aggregate of 410,972 shares into which these notes are convertible. These rights are exercisable only after the expiration of the lock-up agreements which these holders have entered into with Paulson, and only with respect to shares not otherwise saleable under rule 144. In addition, two of our consultants have been granted piggy-back registration rights, subject to certain limitations, with respect to an aggregate of 60,000 shares subject to warrants held by them. 50 53 UNDERWRITING We and the underwriters named below have entered into an underwriting agreement with respect to the units being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of units indicated in the following table. Paulson Investment Company, Inc. is the representative of the Underwriters.
UNDERWRITERS NUMBER OF UNITS ------------ --------------- Paulson Investment Company, Inc ................ Total...................................... 1,000,000 =========
The underwriting agreement provides that the underwriters are committed to purchase all the units offered by this prospectus if any units are purchased. This commitment does not apply to 300,000 units subject to the over-allotment option granted to the underwriters to purchase additional units in this offering. Together with the selling stockholders named below, we have granted the underwriters an option, expiring 45 days after the date of this prospectus, to purchase up to 300,000 additional units on the same terms as set forth in this prospectus. The underwriters may exercise this option, in whole or in part, only to cover over-allotments, if any, incurred in the sale of the units offered by this prospectus. Leslie Bernhard and Eli Rousso, our President and Executive Vice President, respectively will each provide 150,000 shares of our common stock owned by them and we will provide the warrants included in the underwriters' over-allotment option. Ms. Bernhard and Mr. Rousso have granted Rolling Oaks Enterprises LLC and William Harris and Co. Employee Profit Sharing Trust tag along rights which enable them to participate pro rata in the sale of any shares by Ms. Bernhard and Mr. Rousso. Consequently if the Underwriters exercise their overallotment option and Rolling Oaks Enterprises LLC and William Harris and Co. Employee Profit Sharing Trust both exercise their tag-along rights they may sell up to 24,904 and 8,218 shares respectively to the underwriter and the number of shares sold by Ms. Bernhard and Mr. Rousso shall each be reduced by up to 16,561 shares. Ms. Bernhard and Mr. Rousso and, if they participate in the sale of shares to the Underwriter, Rolling Oaks Enterprises LLC and William Harris and Co. Employee Profit Sharing Trust are collectively referred to as the selling stockholders. Adstar will receive gross proceeds of $ and the selling stockholders will receive gross proceeds of $ from the sale of each unit subject to the over-allotment option. [Assuming a unit offering price of $15, Adstar will receive gross proceeds of $.40 and the selling stockholders gross proceeds of $14.60 from the sale of each unit.] This allocation has been determined from an analysis based on the Black-Scholes option pricing model and may not reflect the relative values of the common stock and the warrants as reflected by market prices once the common stock and warrants trade separately. To the extent the actual market price of the warrant, once the warrants trade, exceeds the value determined as described in the preceding sentence, Adstar may be viewed to have been undercompensated for its warrants. The underwriting discount and representative's non-accountable expense allowance will be charged to the sale of these securities on the basis of this allocation. We will not receive any of the proceeds from the sale of stock by the selling stockholders. The underwriters have advised us that they propose to offer our units offered by this prospectus to the public at the initial public offering price set forth on the cover page of this prospectus, and to selected dealers at that price less a concession within their discretion and that the underwriters and selected dealers may reallow a concession to other 51 54 dealers, including the underwriters, within the discretion of the underwriters. After completion of the initial public distribution of the units offered by this prospectus, the public offering price, the concessions to selected dealers and the reallowance to their dealers may be changed by the underwriters. The underwriters have informed us that they do not expect to confirm sales of our units offered by this prospectus on a discretionary basis. Until the distribution of the units offered by this prospectus is completed, rules of the Securities and Exchange Commission may limit the ability of the underwriters to bid for and purchase units. As an exception to these rules, the underwriters may engage in transactions that stabilize the price of the units. These transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the units. If the underwriters create a short position in connection with the offering, that is, if they sell more units than are set forth on the cover page of this prospectus, the underwriters may reduce that short position by purchasing units in the open market. The underwriters may also elect to reduce any short position by exercising all or part of the over-allotment option to purchase additional units described above. In general, the purchase of a security to stabilize or to reduce a short position could cause the price of the security to be higher than it might be otherwise. Neither we nor the underwriters can predict the direction or magnitude of any effect that the transactions described above may have on the price of the units. In addition, neither we nor the underwriters can represent that the underwriters will engage in these types of transactions or that these types of transactions, once commenced, will not be discontinued without notice. The underwriting agreement provides for indemnification between us and the underwriters against specified liabilities, including liabilities under the Securities Act, and for contribution by us and the underwriters to payments that may be required to be made with respect to those liabilities. We have been advised that, in the opinion of the SEC, indemnification for liabilities under the Securities Act is against public policy as expressed in the Securities Act and is therefore unenforceable. We have agreed to pay the underwriters' representative a nonaccountable expense allowance equal to two percent of the gross proceeds from the sale of the units offered by this prospectus, of which $35,000 has already been paid. We have agreed to issue warrants to the underwriters to purchase from us up to 100,000 units at an exercise price per unit equal to $ [120% of the offering price per unit] per unit. These warrants are exercisable during the four-year period beginning one year from the date this registration statement becomes effective. These warrants are not transferable for one year from the date of issuance, except to an individual who is either a partner or an officer of an underwriter, by will or by the laws of descent and distribution and are not redeemable. These warrants will have registration rights. Our officers, directors and the stockholders also have agreed that, for a period of one year from the date this registration statement becomes effective, they will not except for sale by the selling stockholders of stock to the Underwriters if they should exercise their overallotment option, sell, contract to sell, grant any option for the sale or otherwise dispose of any of our equity securities (other than intra-family transfers or transfers to trusts for estate planning purposes) without the consent of Paulson, as representative of the Underwriters, which consent will not be unreasonably withheld. They have also agreed that for the two-year period beginning on the date this registration statement becomes effective 52 55 that they will notify the representative before they sell any of our equity securities under Rule 144. Before this offering, there has been no public market for the units and our common stock and warrants contained in the units. Accordingly, the initial public offering price of the units offered by this prospectus was determined by negotiations between us and the underwriters. Among the factors considered in determining the initial public offering price of the units offered by this prospectus were: - our history and our prospects, - the industry in which we operate, - the status and development prospects for our proposed products and services, - our past and present operating results, - the previous experience of our executive officers, and - the general condition of the securities markets at the time of this offering. The offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the units. That price is subject to change as a result of market conditions and other factors, and we cannot assure you that the units, or our common stock and warrants contained in the units, can be resold at or above the initial public offering price. LEGAL MATTERS The validity of the securities being offered hereby will be passed upon on our behalf by Morse Zelnick Rose & Lander, LLP, 450 Park Avenue, New York, New York 10022-2605. Partners of Morse Zelnick Rose & Lander LLP own, in the aggregate, 150,000 shares of our common stock. Certain legal matters will be passed upon for the Underwriters by Stoel Rives LLP, Portland, Oregon 97204. EXPERTS The financial statements as of December 31, 1998 and for the years ended December 31, 1997 and 1998, included in this prospectus have been included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. AVAILABLE INFORMATION We have filed a registration statement on Form SB-2 under the Securities Act with the Securities and Exchange Commission with respect to the units offered hereby. This prospectus filed as a part of the registration statement does not contain all of the information contained in the registration statements and exhibits thereto and reference is hereby made to such omitted information. Statements made in this registration statement are summaries of the terms of such referenced contracts, agreements or documents and are not necessarily complete. Reference is made to each such exhibit for a more complete description of the matters involved and such statements shall be deemed qualified in their entirety by such reference. The registration statement and the exhibits and schedules thereto filed with the Securities and Exchange Commission may be inspected by you at 53 56 the Securities and Exchange Commission's principal office in Washington, D.C. Copies of all or any part of the registration statement may be obtained from the Public Reference Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the commission's regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 11400, Chicago, Illinois 60661. The commission also maintains a website (http://www.sec.gov) that contains reports, proxy statements and information statements and other information regarding registrants that file electronically with the Commission. For further information pertaining to us and the units offered by this prospectus, reference is made to the registration statement. We intend to furnish our stockholders with annual reports containing financial statements audited by its independent accountants. 54 57 INDEX TO FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
PAGE ---- Report of Independent Accountants........................... F-2 Financial Statements: Balance Sheets as of December 31, 1998 and March 31, 1999................................................... F-3 Statements of Operations for each of the two years in the period ended December 31, 1998 and the three-month periods ended March 31, 1998 and 1999.................. F-4 Statements of Stockholders' Deficit for each of the two years in the period ended December 31, 1998 and the three-month period ended March 31, 1999................ F-5 Statements of Cash Flows for each of the two years in the period ended December 31, 1998 and the three-month periods ended March 31, 1998 and 1999.................. F-6 Notes to Financial Statements............................. F-7
F-1 58 THE FOLLOWING REPORT IS IN THE FORM THAT WILL BE SIGNED UPON THE COMPLETION OF THE COMPANY'S PROPOSED REINCORPORATION IN DELAWARE AND EXCHANGE OF 25,303 SHARES OF THE DELAWARE CORPORATION FOR EACH ISSUED AND OUTSTANDING SHARE OF THE NEW YORK CORPORATION AS DESCRIBED IN NOTE 1 OF NOTES TO THE FINANCIAL STATEMENTS PRICEWATERHOUSECOOPERS LLP Woodland Hills, California July 27, 1999 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of AdStar.com, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, stockholders' equity (deficit) and cash flows present fairly, in all material respects, the financial position of AdStar.com, Inc. (the "Company") as of December 31, 1998, and the results of its operations and its cash flows for the years ended December 31, 1998 and 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. Woodland Hills, California July 21, 1999 except for the effects of the reincorporation in Delaware described in Note 1, as to which the date is , 1999 F-2 59 ADSTAR.COM, INC. BALANCE SHEETS (INFORMATION WITH RESPECT TO MARCH 31, 1999 IS UNAUDITED)
MARCH 31, DECEMBER 31, MARCH 31, 1999 1998 1999 (PRO FORMA) ------------ ---------- ----------- ASSETS Current assets: Cash and cash equivalents.......................... $ 90,007 $ 566,123 Accounts receivable................................ 125,313 154,130 Receivable from the sale of stock.................. 26,300 26,300 Other current assets............................... 16,763 78,261 --------- ---------- Total current assets............................ 258,383 824,814 Property and equipment, net.......................... 77,561 153,570 Intangible assets, net............................... -- 191,513 Other assets......................................... 3,203 4,478 --------- ---------- Total assets.................................... $ 339,147 $1,174,375 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable................................... $ 177,929 $ 167,371 Accrued expenses................................... 275,019 171,029 Deferred revenue................................... 34,656 13,721 Dividends payable.................................. 20,750 20,750 Notes payable...................................... 15,000 41,002 Capital lease obligations.......................... 6,833 6,833 --------- ---------- Total current liabilities....................... 530,187 420,706 Notes payable........................................ -- 1,425,708 Capital lease obligations............................ 4,964 3,256 --------- ---------- Total liabilities............................... 535,151 1,849,670 --------- ---------- Commitments and contingencies (note 8) Stockholders' equity (deficit) Preferred stock, par value $0.0001; authorized 5,000,000 shares; none issued and outstanding... -- -- -- Common stock, par value $0.0001; authorized 10,000,000 shares; Issued and outstanding 2,663,395 at December 31, 1998 and March 31, 1999 and 2,927,846 at March 31, 1999 on a pro forma basis..................................... 28,300 28,300 293 Additional paid-in capital......................... -- -- 24,412 Accumulated deficit................................ (224,304) (703,595) -- --------- ---------- ------ Total stockholders' deficit..................... (196,004) (675,295) 24,705 --------- ---------- ------ Total liabilities and stockholders' deficit..... $ 339,147 $1,174,375 ========= ==========
The accompanying notes are an integral part of these financial statements. F-3 60 ADSTAR.COM, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 (INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
THREE-MONTH PERIODS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ------------------------ ------------------------ 1997 1998 1998 1999 ---------- ---------- ---------- ---------- Net revenues......................... $1,148,233 $1,559,361 $ 393,964 $ 406,602 Cost of revenues..................... 565,329 800,532 165,848 199,548 ---------- ---------- ---------- ---------- Gross profit....................... 582,904 758,829 228,116 207,054 Sales, general and administrative expenses........................... 634,029 820,574 159,135 234,836 ---------- ---------- ---------- ---------- Income (loss) from operations...... (51,125) (61,745) 68,981 (27,782) Interest expense..................... (7,873) (4,518) (1,525) (2,884) ---------- ---------- ---------- ---------- Income (loss) before taxes......... (58,998) (66,263) 67,456 (30,666) Provision for taxes.................. 823 2,760 690 690 ---------- ---------- ---------- ---------- Net income (loss).................. $ (59,821) $ (69,023) $ 66,766 $ (31,356) ========== ========== ========== ========== Earnings (loss) per share -- basic and diluted........................ $ (0.02) $ (0.03) $ 0.03 $ (0.01) Weighted-average number of shares -- basic and diluted.................. 2,550,301 2,625,107 2,530,301 2,663,395 Pro forma earnings (loss) per share -- basic and diluted......... $ (0.03) $ (0.01) Pro forma weighted average number of shares -- basic and diluted........ 2,625,107 2,689,839
The accompanying notes are an integral part of these financial statements. F-4 61 ADSTAR.COM, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE THREE-MONTH PERIOD ENDED MARCH 31, 1999 (INFORMATION WITH RESPECT TO MARCH 31, 1999 IS UNAUDITED)
TOTAL COMMON STOCK ADDITIONAL STOCKHOLDERS' --------------------- PAID-IN ACCUMULATED EQUITY SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT) --------- --------- ---------- ----------- ------------- Balance, December 31, 1996....... 2,530,301 $ 2,000 $ -- $ (68,861) $ (66,861) Net loss......................... -- -- -- (59,821) (59,821) Dividends........................ -- -- -- (1,000) (1,000) --------- --------- --------- --------- --------- Balance, December 31, 1997....... 2,530,301 2,000 -- (129,682) (127,682) Net loss......................... -- -- -- (69,023) (69,023) Sale of common stock............. 133,094 26,300 -- 26,300 Dividends........................ -- -- -- (25,599) (25,599) --------- --------- --------- --------- --------- Balance, December 31, 1998....... 2,663,395 28,300 -- (224,304) (196,004) Repurchase of option............. -- -- -- (447,935) (447,935) Net loss......................... -- -- -- (31,356) (31,356) --------- --------- --------- --------- --------- Balance, March 31, 1999.......... 2,663,395 28,300 -- $(703,595) $(675,295) Conversion of convertible note... 264,451 700,000 -- -- 700,000 Reincorporation in Delaware and change in par value............ -- (728,007) 728,007 -- -- Reclassification of deficit due to termination of S corporation election....................... -- -- (703,595) 703,595 -- --------- --------- --------- --------- --------- Balance, March 31, 1999 pro forma (unaudited).................... 2,927,846 $ 293 $ 24,412 $ -- $ 24,705 ========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements F-5 62 ADSTAR.COM, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 (INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
YEAR ENDED THREE-MONTH PERIOD DECEMBER 31, ENDED MARCH 31, ------------------- -------------------- 1997 1998 1998 1999 -------- -------- -------- --------- Cash flows from operating activities Net income (loss)......................................... $(59,821) $(69,023) $ 66,766 $ (31,356) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization........................... 23,523 21,032 3,982 10,888 Changes in assets and liabilities Accounts receivable................................... (25,567) (20,913) (66,256) (28,817) Other assets.......................................... 612 1,522 (15,887) (62,773) Accounts payable...................................... 20,505 104,371 (1,063) (10,558) Accrued expenses...................................... (21,578) 78,248 (20,158) 4,442 Deferred revenue...................................... 49,500 (16,634) 70,500 (20,935) -------- -------- -------- --------- Net cash provided by (used in) operating activities....... (12,826) 98,603 37,884 (139,109) -------- -------- -------- --------- Cash flows from investing activities Purchase of property and equipment...................... (12,902) (25,532) (8,168) (83,067) -------- -------- -------- --------- Net cash used in investing activities..................... (12,902) (25,532) (8,168) (83,067) -------- -------- -------- --------- Cash flows from financing activities Proceeds from issuance from convertible notes payable... -- -- -- 700,000 Proceeds from issuance of note payable.................. 2,500 -- -- -- Repayment of note payable............................... -- (22,500) (10,000) -- Principal repayments on capital leases.................. -- (3,203) -- (1,708) Dividends paid.......................................... (1,000) (4,849) -- -- -------- -------- -------- --------- Net cash from (used in) financing activities.............. 1,500 (30,552) (10,000) 698,292 -------- -------- -------- --------- Net increase (decrease) in cash and cash equivalents...... (24,228) 42,519 19,716 476,116 Cash and cash equivalents at beginning of the period...... 71,716 47,488 47,488 90,007 -------- -------- -------- --------- Cash and cash equivalents at end of period................ $ 47,488 $ 90,007 $ 67,204 $ 566,123 ======== ======== ======== ========= Supplemental cash flow disclosure: Taxes paid.............................................. $ 9,138 $ 6,052 $ 5,815 $ 2,260 Interest paid........................................... $ 7,873 $ 4,518 $ 1,525 $ 723 Non-cash investing and financing activities: Purchase of intangible assets, cancellation of an option and repayment of accrued liability by issuance of note payable............................................... -- -- -- $ 751,710 Issuance of common stock for note receivable............ -- $ 26,300 -- -- Property and equipment leases........................... -- 15,000 -- -- Dividends declared...................................... -- 20,750 -- --
The accompanying notes are an integral part of these financial statements F-6 63 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED) 1. ORGANIZATION AND BUSINESS: AdStar.com, Inc. (the "Company") (formerly Ad-Star Services Inc.) was incorporated in the State of New York on June 29, 1991 as an S-Corporation under the Internal Revenue Code. On July 12, 1999 the Company authorized the reincorporation of the Company in Delaware by merging the New York predecessor corporation into the Delaware corporation and issuing to each stockholder of the New York corporation, 25,303 shares of the Delaware corporation with a par value of $0.0001 per share for each issued and outstanding share, no par value, of the New York corporation. The Company will convert from an S-Corporation to a C-Corporation upon its reincorporation in Delaware. The Company's principal business is the provision of software services which allow for the direct entry of classified advertisements by large commercial advertisers, on a dial up basis through modems directly into the publishing systems of the Company's customers. The Company's customers are principally located in the United States. The Company is now offering a one-stop market place on the World Wide Web for advertisers to buy classified ads. This service enables advertisers to plan, schedule, compose and purchase classified advertising from many print and on-line publishers, using one interface. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: INITIAL PUBLIC OFFERING AND UNAUDITED PRO FORMA BALANCE SHEET In July 1999, the Company authorized the filing of a registration statement with the Securities and Exchange Commission ("SEC") that would permit the Company to sell shares of the Company's common stock in connection with its proposed initial public offering ("IPO"). The conversion of $700,000 of convertible notes outstanding at March 31, 1999 upon the completion of the Company's IPO, the reincorporation in Delaware and change in par value of the Company's common stock and the termination of the Company's S-Corporation election have been reflected in the accompanying pro forma balance sheet at March 31, 1999. UNAUDITED INTERIM FINANCIAL STATEMENTS The interim financial statements of the Company for the three months ended March 31, 1999 and 1998 included herein, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. In the opinion of management, the accompanying unaudited interim financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of March 31, 1999 and the results of its operations and its cash flows for the three-month periods ended March 31, 1998 and 1999. F-7 64 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all investments purchased with an initial maturity of three months or less to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value. At times, cash balances held at financial institutions are in excess of FDIC insurance limits. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS Financial instruments that potentially subject the Company to significant concentrations of credit risk are principally comprised of trade accounts receivable. For the year ended December 31, 1997 one customer accounted for 13% of the Company's revenues and for the year ended December 31, 1998, two customers accounted for 21% of the Company's revenues in the aggregate. As of December 31, 1998 three customers accounted for 53% of the Company's accounts receivable. The majority of the Company's customers consist of newspapers and publishers of classified advertisements. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. When such items are retired or otherwise disposed, the cost and related accumulated depreciation and amortization are relieved from the accounts and the resulting gain or loss is reflected in operations. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. The depreciation and amortization periods by asset category are as follows: Furniture and fixtures................. 7 years Computer equipment..................... 5 years Leasehold improvements................. Shorter of useful life or lease term
Maintenance and minor replacements are charged to expense as incurred while renewals and improvements are capitalized. INTANGIBLE ASSETS Intangible assets comprise trademarks, license agreements and proprietary technology and are carried at cost less accumulated amortization. Amortization is calculated on a straight-line basis over the estimated useful lives of the intangible assets of 5 years. F-8 65 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED) LONG-LIVED ASSETS The carrying value of long-lived assets is periodically reviewed by management and impairment losses, if any are recognized when the expected nondiscounted future operating cash flows derived from such assets are less than their carrying value. To date no such impairment has been recorded. FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and cash equivalents, accounts receivable, other assets, accounts payable, deferred revenue, notes payable and accrued expenses are carried at cost which approximates their fair value because of the short term maturity of these instruments. SOFTWARE COSTS Costs incurred to establish technological feasibility of software developed by the Company are charged to expense as incurred. Costs incurred subsequent to the achievement of technological feasibility are capitalized and amortized over the estimated useful life of the software. Amortization of such costs commences when the software is available for general release to customers. Through December 31, 1998, no such costs have been capitalized, as costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant. REVENUE RECOGNITION The Company recognizes revenue from its products upon delivery and customer acceptance and when collection of the resulting receivable is probable. Maintenance, license fees and user support fees are recognized ratably over the period to which they relate. The Company also sells hardware to certain customers to support the installation of its Ad-Star technology. The Company charges the customer a small mark-up on the cost of the hardware and recognizes revenue on delivery to the customer. For the years ended December 31, 1997 and 1998 sales of hardware totaled approximately $8,700 and $94,300, respectively, and for the three-month periods ended March 31, 1998 and 1999 totaled approximately $16,300 and $36,300, respectively. The Company also recognizes revenue from banner advertising as the impressions are displayed; transaction revenues are recognized as the services are provided; carriage revenues are recognized as the services are performed. To date, these sources of revenues have been immaterial. RESEARCH AND DEVELOPMENT COSTS Costs incurred in the research and development of products are expensed as incurred. F-9 66 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED) INCOME TAXES The Company had elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. As such, the Company was not subject to income taxes at the corporate level and was subject to reduced franchise tax; either based on a percentage of income or gross payroll costs, which is provided for in the financial statements. The Company's income is included in the tax return of its stockholders and any resultant liability thereon is the individual responsibility of the stockholder. ADVERTISING COSTS The Company expenses the costs of advertising in the periods in which those costs are incurred. Advertising expense was approximately $24,400 and $58,800 for the years ended December 31, 1997 and 1998, respectively. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive. For the three-month periods ended March 31, 1998 and 1999, diluted earnings (loss) per share does not include 0 and 264,451 shares issuable upon conversion of the convertible debt on an "as-if-converted" basis, as their inclusion is antidilutive. Pro forma earnings (loss) per share for the year ended December 31, 1998 and the three-month period March 31, 1999, assumes that the common stock issuable on the conversion of the outstanding convertible note payable had been outstanding during the period or from the date of issuance. COMPREHENSIVE INCOME In January 1998, the Company adopted the provisions of Statement Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and disclosure of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income generally represents all changes in stockholders' equity (deficit) during the period except those resulting from investments by, or distributions to, stockholders. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997, and requires restatement of earlier periods presented. SFAS No. 130 defines comprehensive income as net income plus all other changes in equity from non-owner sources. The Company has no other comprehensive income items and accordingly net income equals comprehensive income for all periods presented. F-10 67 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED) SEGMENT REPORTING The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" for the year ended December 31, 1998. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise", replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of a company's reportable segments. SFAS No. 131 also requires disclosures about products or services, geographic areas and major customers. The Company's management reporting structure provides for only one reportable segment and accordingly, no separate segment information is presented. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and has elected the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of the Company's stock and the exercise price of the option. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") 96-18. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and hedging activities that requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management does not believe that the implementation of SFAS No. 133 will have any impact on its financial statements since the Company does not currently engage in derivative or hedging activities. On September 28, 1998, the SEC issued a press release and stated the "SEC will formulate and augment existing accounting rules and interpretations covering revenue recognition, restructuring reserves, materiality and disclosure" for all publicly-traded companies. Until such time as the SEC staff issues such interpretative guidance, it is unclear what, if any, impact such interpretative guidance will have on the Company's current accounting practices. 3. RECEIVABLE ON THE SALE OF STOCK In April 1998, the Company sold 133,094 shares of common stock for aggregate consideration of $26,300 by issuance of a note receivable bearing interest at 5.6% per F-11 68 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED) annum. In April 1999, the Company received the proceeds in full on the note receivable plus the then outstanding interest. 4. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following at December 31, 1998 and March 31, 1999:
DECEMBER 31, MARCH 31, 1998 1999 ------------ --------- Computer equipment and software....................... $ 26,752 $ 102,732 Furniture and fixtures................................ 164,752 171,839 Leasehold improvements................................ 2,854 2,854 --------- --------- 194,358 277,425 Less: Accumulated depreciation and amortization....... (116,797) (123,855) --------- --------- Net property and equipment.......................... $ 77,561 $ 153,570 ========= =========
Computer equipment includes $15,000 of equipment held under capital leases. Depreciation and amortization expense for the year ended December 31, 1998 was $21,032. Accumulated depreciation and amortization, includes amortization of computer equipment held under capital leases of $3,203. 5. INTANGIBLE ASSETS At March 31, 1999, intangible assets are comprised of:
MARCH 31, 1999 --------- Cost........................................................ $195,343 Less: Accumulated amortization.............................. (3,830) -------- $191,513 ========
In March 1999, the Company purchased the technology, related intellectual property and software rights related to the AdStar technology for $751,710 which includes amounts owed to the seller of $108,432. The Company formerly licensed these assets from the seller. As part of the transaction, the seller also sold its option to purchase 15% of the Company's common stock back to the Company. The net purchase price of $643,278 has been allocated to the technology, related intellectual property and software rights and the option based on their relative fair values. The amount ascribed to the option of $447,935 has been recorded as an increase to stockholders' deficit. The amount ascribed to the technology, related intellectual property and software rights of $195,343 is being amortized over the estimated useful economic life of 5 years. The purchase was financed through the issuance of a 10% note payable repayable in equal monthly installments of $8,333. F-12 69 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED) 6. NOTES PAYABLE: At December 31, 1998 and March 31, 1999, notes payable consisted of the following:
DECEMBER 31, MARCH 31, 1998 1999 ------------ ---------- Notes payable to two individuals bearing interest at 10% per annum, payable semi-annually............... $ 15,000 $ 15,000 Note payable to an individual bearing interest at 10% per annum, repayable in monthly installments of $8,333 comprising principal and interest........... -- 751,710 Convertible unsecured notes payable to certain individuals and corporations, bearing interest at 12% per annum payable annually in arrears. If on or before March 31, 2000, the Company receives net proceeds of $2,000,000 in aggregate from one or more public or private offerings of the Company's debt or equity securities (a "Qualified Financing"), then the holder, may elect on written notice any time after March 31, 2000 but before May 15, 2000 to receive the outstanding principal and interest on the notes payable in 47 equal monthly installments commencing June 1, 2000. If on or before March 31, 2001, the Company completes a Qualified Financing, the holder may elect to receive the outstanding principal and interest on the notes payable in 35 equal monthly installments commencing June 1, 2001. The unpaid balance on the convertible notes payable is repayable in full on April 1, 2004. The convertible note will automatically convert on the closing of a qualified public offering, as defined, of not less than $5,000,000 or at the option of the holder, at any time into shares of common stock at a conversion price of $2.65 per share. The convertible unsecured notes payable agreement also requires certain non-financial covenants including restriction on principal payments of other debt, delivery of financial statements and maintenance of insurance coverage........................................... -- 700,000 -------- ---------- 15,000 1,466,710 Less: short term portion............................. (15,000) (41,002) -------- ---------- Notes payable, net of current portion................ $ -- $1,425,708 ======== ==========
In April 1999, the Company raised an additional $350,000 under the convertible unsecured note payable, with terms and conditions as above. F-13 70 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED) In July 1999, the Company entered into an $850,000 Loan Agreement with a small business investment company. The note issued under the Loan Agreement bears interest at 14% per annum, and is repayable in 54 equal monthly installments commencing six months after the date of issuance. Pursuant to the Loan Agreement, the small business investment company received 40,561 shares of common stock for an aggregate consideration of $1,000. In accordance with APB Opinion No. 14 "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants" the amount ascribed to the relative value of the stock of $137,536 has been recorded as a discount to the note payable and is amortized over the expected term of the note. The Loan Agreement also provides for additional grants of common stock to the note holder if the note is not repaid within nine months, 12 months, 18 months and each six month interval thereafter. The agreement also contains certain financial covenants relating to minimum revenues, profitability, interest coverage, cash flow coverage and minimum net worth. The note is collateralized by the patents and trademarks of the Company. If at the maturity date of the note, or at any time thereafter, the Company has not completed a qualified public offering raising gross proceeds of at least $8,000,000, the small business investment company may sell its shares to the Company for a purchase price equal to the value of such shares pro rata to the total value of the Company as determined based on the higher of (i) ten times EBITDA as calculated based on most recent year end financial statements or (ii) an independent valuation. Accordingly, these shares will be recorded as redeemable common stock on the balance sheet. 7. CAPITALIZATION: PREFERRED STOCK Under the Company's certificate of incorporation, the Board of Directors is authorized, subject to certain limitations, to issue up to an aggregate of 5,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, with each series having different rights, preferences and designations relating to dividends, conversion, voting, redemption and other features. No shares of preferred stock have been issued at December 31, 1998 and March 31, 1999. STOCK OPTIONS In 1999, the Board of Directors adopted the 1999 Stock Option Plan (the "Plan") in order to attract and retain officers, other key employees, consultants and non-employee directors of the Company. An aggregate of 500,000 shares of common stock has been authorized for issuance under the Plan. The Plan provides for issuance of nonqualified and incentive stock options to officers, key employees, consultants and non-employee directors to the Company. Each nonqualified stock option shall have an exercise price not less than 100% of the fair value of the common stock on the date of grant, unless as otherwise determined by the committee that administers the Plan. Incentive stock options shall have an exercise price equal to or greater than the fair value of the common stock on the date of grant provided that incentive stock options granted to a 10% holder of the Company's voting stock shall have F-14 71 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED) an exercise price equal to or greater than 110% of the fair market value of the common stock on the date of grant. Each option has a term of ten years from the date of grant unless otherwise determined by the committee that administers the Plan. The Plan also provides that no option may be exercised prior to the consummation of an underwritten public offering where the gross proceeds from such an offering are in excess of $5,000,000. Upon the occurrence of a change in control, as defined, each option granted under the Plan shall thereupon become fully vested and exercisable. As of December 31, 1998 and March 31, 1999 no stock options to purchase shares of the Company's common stock have been granted. In April 1999, the Company granted 224,128 options to purchase common stock to officers and key employees at an exercise price of $2.65 per share. These options have a term of 5 years and generally vest one-third on date of grant and one-third on each anniversary thereafter. In July 1999, the Company granted 157,652 options to purchase common stock to employees at an exercise price of $4.00 per share. These options have a term of 5 years and generally vest one-third on the first anniversary of the date of grant and one-third on each anniversary thereafter. WARRANTS In July 1999, the Company granted to two individuals warrants to purchase an aggregate of 60,000 shares of common stock at an exercise price equivalent to the IPO price for a consideration of $3,000. The warrants expire on June 30, 2002 and are exercisable from the date of grant. The Company intends to record a non-cash charge representing the deemed value of the warrants using the Black-Scholes option pricing model. One of the individuals became a director of the Company in July 1999. 8. COMMITMENTS AND CONTINGENCIES: OPERATING AND CAPITAL LEASE COMMITMENTS The Company has certain non-cancelable operating lease obligations for office space and capital lease obligations for computer equipment. The operating leases are for office space located in New York and in California and expire through March 2002. The leases contain certain escalation clauses based on certain charges that the landlord of the properties may incur over the base year, as defined in the lease agreements. Future F-15 72 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED) minimum lease payments under the non-cancelable operating and capital leases as of December 31, 1998 are as follows:
OPERATING CAPITAL YEARS ENDING DECEMBER 31, LEASE LEASE - ------------------------- --------- ------- 1999...................................................... $ 71,805 $ 8,229 2000...................................................... 71,202 5,354 2001...................................................... 37,831 712 2002...................................................... 10,611 -- -------- ------- Total minimum obligations............................ $191,449 14,295 ======== Less amounts representing interest........................ (2,498) ------- Present value of minimum obligations...................... 11,797 Less current portion...................................... 6,833 ------- Non-current portion....................................... $ 4,964 =======
Rent expense for the years ended December 31, 1997 and 1998 was approximately $49,700 and $50,600, respectively, including month-to month rentals. Through June 1999, the Company subleased a portion of its office space to a third party on a month-to-month basis. For the years ended December 31, 1998 and 1997, the Company received $15,880 and $17,466, respectively, of sub-lease income. EMPLOYMENT AGREEMENTS: In July 1999, the Company entered into two employment agreements with two officers of the Company. The agreements provide for base salaries of $200,000 per annum effective upon the closing of a qualified initial public offering and certain fringe benefits and are effective through June 30, 2002. The agreements provided that on termination of employment by the Company without cause, or by the employee for good reason, the Company is obligated to pay severance costs based on the higher of the remaining term of the agreement or 12 months. LICENSE AGREEMENT In April 1996, the Company entered into an exclusive license agreement with a software company that developed the facsimile technology. This agreement provides that the Company pays royalties of up to 50% of net revenues generated by the Company on license fees, implementation fees and maintenance fees. This agreement is for an initial term of 20 years, though it can be terminated by the Company upon six months notice or by the software Company in certain circumstances. DISTRIBUTION AND SERVICE AGREEMENTS In November 1998 and February 1999, the Company entered into two distribution and service agreements whereby the Company has agreed to pay the other parties a royalty F-16 73 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED) based on the transaction revenues generated from the other parties' Web site. These agreements expire after three years and will automatically be renewed for successive one-year periods unless terminated by either party. 9. SUBSEQUENT EVENTS: In July 1999, a stockholder of the Company sold his entire stockholding of 506,060 shares of common stock to a third party for $500,000. The third party contributed 114,926 of the 506,060 shares of common stock to the company's capitalization. F-17 74 - --------------------------------------------------- - --------------------------------------------------- YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF THE UNITS MEANS THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY THE UNITS IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER OR SOLICITATION IS UNLAWFUL. ------------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................. 3 Risk Factors........................ 10 Use of Proceeds..................... 18 Dividend Policy..................... 19 Capitalization...................... 20 Dilution............................ 22 Selected Financial Data............. 23 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 25 Business............................ 31 Management.......................... 39 Certain Transactions................ 43 Principal Stockholders.............. 44 Description of Securities........... 46 Shares Eligible for Future Sale..... 49 Underwriting........................ 51 Legal Matters....................... 53 Experts............................. 53 Available Information............... 53 Index to Financial Statements....... F-1
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL BROKER-DEALERS THAT EFFECT THE TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - --------------------------------------------------- - --------------------------------------------------- - --------------------------------------------------- - --------------------------------------------------- 1,000,000 UNITS ADSTAR.COM, INC. ------------------------- PROSPECTUS ------------------------- PAULSON INVESTMENT COMPANY, INC. , 1999 - --------------------------------------------------- - --------------------------------------------------- 75 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the General Corporation Law of the State of Delaware provides for the indemnification of officers and directors under certain circumstances against expenses incurred in successfully defending against a claim and authorizes a Delaware corporation to indemnify its officers and directors under certain circumstances against expenses and liabilities incurred in legal proceedings involving such persons because of their being or having been an officer or director. Section 102(b) of the Delaware General corporation Law permits a corporation, by so providing in its certificate of incorporation, to eliminate or limit a director's liability to the corporation and its stockholders for monetary damages arising out of certain alleged breaches of their fiduciary duty. Section 102(b)(7) provides that no such limitation of liability may affect a director's liability with respect to any of the following: (i) breaches of the director's duty of loyalty to the corporation or its stockholders; (ii) acts or omissions not made in good faith or which involve intentional misconduct of knowing violations of law; (iii) liability for dividends paid or stock repurchased or redeemed in violation of the Delaware General Corporation law; or (iv) any transaction from which the director derived an improper personal benefit. Section 102(b)(7) does not authorize any limitation on the ability of the company or its stockholders to obtain injunctive relief, specific performance or other equitable relief against directors. Article [EIGHTH] of the Registrant's Certificate of Incorporation provides that the personal liability of the directors of the Registrant be eliminated to the fullest extent permitted under Section 102(b) of the Delaware General Corporation law. Article [NINTH] of the Registrant's Certificate of Incorporation and the Registrant's By-laws provides that all persons whom the Registrant is empowered to indemnify pursuant to the provisions of Section 145 of the Delaware General Corporation law (or any similar provision or provisions of applicable law at the time in effect), shall be indemnified by the Registrant to the full extent permitted thereby. The foregoing right of indemnification shall not be deemed to be exclusive of any other rights to which those seeking indemnification may be entitled under any by-law, agreement, vote of stockholders or disinterested directors, or otherwise. Insofar as indemnification for liabilities under the Securities Act of 1933, as amended (the "Securities Act") may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is therefor unenforceable. Reference is made to the Underwriting Agreement, the proposed form of which is filed as Exhibit 1.1, pursuant to which the underwriter agrees to indemnify the directors and certain officers of the Registrant and certain other persons against certain civil liabilities. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the expenses (other than the underwriting discounts and commissions and the representative's non-accountable expense allowance) expected to be incurred in connection with the issuance and distribution of the securities being registered. All II-1 76 of such expenses are estimates, other than the filing fees payable to the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. Securities and Exchange Commission Filing Fee..... $ 9,818.96 National Association of Securities Dealers, Inc. Filing Fee...................................... $ 3,811.25 American Stock Exchange Listing Fee............... $ 22,500.00 Accounting Fees................................... $145,500.00 Legal Fees........................................ $250,000.00 Printing and Engraving Expenses................... $ 50,000.00 Blue Sky Fees and Expenses........................ $ 10,000.00 Transfer and Warrant Agent fees................... $ 3,000.00 Miscellaneous Expenses............................ $ 17,869.79 ----------- Total........................................ $512,500.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES Since May 1996, the Registrant has issued securities without registration under the Securities Act in the following transactions: 1. During the period from March 1998 through April 30, 1999 the Registrant issued convertible notes in the aggregate principal amount of $1,050,000 to seven investors entitling the holders thereof to purchase an aggregate of 410,792 shares of Common Stock. The notes will convert on the effective date of the offering. 2. On April 15, 1998 Registrant issued 133,094 shares to Adam Leff, an officer of the Company, for a purchase price of $26,300. 3. In July, 1999 the Registrant issued 40,561 shares to a small business investment company in connection with an $850,000 loan by it to the Registrant. 4. In July 1999 the Registrant issued three year warrants to Jonathan Cohen and Ronald Posner to purchase an aggregate of 60,000 shares of Common Stock at the initial public offering price per share. The sales and issuances of the Common Stock, warrants and convertible notes described above were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2), Regulation 506 and/or Regulation 701 thereof as transactions not involving a public offering. The Registrant made a determination that each of the purchasers was a sophisticated investor. The purchasers in such private offerings represented their intention to acquire the securities for investment only and not with a view to the distribution thereof. Appropriate legends were affixed to the stock certificates and warrants issued in such transactions. All purchasers had adequate access, through their employment or other relationships, to sufficient information about the Registrant to make an informed investment decision. None of the securities was sold through an underwriter and, accordingly, there were no underwriting discounts or commissions involved. II-2 77 ITEM 27. EXHIBITS
EXHIBIT NO. DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement 3.1 Certificate of Incorporation of the Company 3.2 By-Laws of the Company 3.3 Agreement and Plan of Merger 4.1 Specimen Stock Certificate 4.2 Form of Public Warrant 4.3 Form of Underwriter's Warrant 5.1 Form of Opinion of Morse, Zelnick, Rose & Lander, LLP* 10.1 1999 Stock Option Plan 10.4 Employment Agreement between the Company and Leslie Bernhard 10.5 Employment Agreement between the Company and Eli Rousso 10.6 Memorandum of Agreement between the Company and CareerPath.com LLC dated March 11, 1999 10.7 Distribution and Service Agreement dated February 9, 1999 by and between the Company and PowerAdz 10.8 Distribution and Service Agreement dated November 19, 1998 by and between the Company and AdOne Classified Network, Inc. 10.9 Agreement dated March 16, 1999 by and between James E. Mann and the Company 10.10 Warrant to purchase 30,000 shares of Common Stock issued to Jonathan Cohen 10.11 Warrant to purchase 30,000 shares of Common Stock issued to Ronald Posner 10.12 Loan and Subscription Agreement dated July 13, 1999 by and between the Company and Interequity Capital Partners L.P. 10.13 Form of Subscription Agreement for 12% Convertible Subordinated Unsecured Promissory Note 10.14 Form of 12% Convertible Subordinated Unsecured Promissory Note 10.15 Form of Shareholders' Agreement by and among the Company, its principal stockholders and certain investors 23.1 Consent of PricewaterhouseCoopers LLP* 23.2 Consent of Morse, Zelnick, Rose & Lander, LLP (included in Exhibit 5.1). 24. Power of Attorney (included in signature page).
- ------------------------- * To be filed by amendment. ITEM 28. UNDERTAKINGS. The undersigned Registrant hereby undertakes to: (1) file, during any period in which it offers or sells securities, a post effective amendment to this Registration Statement to: (i) include any prospectus required by Section 10(a)(3) of the Securities Act; II-3 78 (ii) reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; and (iii) include any additional or changed material information on the plan of distribution; (2) for determining liability under the Securities Act, treat each post-effective amendment as a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. The undersigned Registrant hereby undertakes (1) to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser; (2) that for the purpose of determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this Registration Statement as of the time the Securities and Exchange Commission declares it effective; and (3) that for the purpose of determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement herein, and treat the offering of the securities at that time as the initial bona fide offering of those securities. II-4 79 SIGNATURES In accordance with the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this Registration Statement to be signed on its behalf by the undersigned, in the City of New York, State of New York on July 30, 1999. ADSTAR.COM, INC. By: /s/ LESLIE BERNHARD ----------------------------------- Leslie Bernhard, President ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Leslie Bernhard and Howard L. Weinreich, or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all pre- or post-effective amendments to this Registration Statement, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities indicated on July 30, 1999.
SIGNATURE TITLE --------- ----- /s/ LESLIE BERNHARD President, Chief Executive Officer - --------------------------------------------------- and Director Leslie Bernhard /s/ ELI ROUSSO Executive Vice President and - --------------------------------------------------- Director Eli Rousso /s/ BENJAMIN J. DOUEK Senior Vice President, Chief - --------------------------------------------------- Financial Officer and Director Benjamin J. Douek
II-5 80
EXHIBIT NO. DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement 3.1 Certificate of Incorporation of the Company 3.2 By-Laws of the Company 3.3 Agreement and Plan of Merger 4.1 Specimen Stock Certificate* 4.2 Form of Public Warrant 4.3 Form of Underwriter's Warrant 5.1 Form of Opinion of Morse, Zelnick, Rose & Lander, LLP* 10.1 1999 Stock Option Plan 10.4 Employment Agreement between the Company and Leslie Bernhard 10.5 Employment Agreement between the Company and Eli Rousso 10.6 Memorandum of Agreement between the Company and CareerPath.com LLC dated March 11, 1999 10.7 Distribution and Service Agreement dated February 9, 1999 by and between the Company and PowerAdz 10.8 Distribution and Service Agreement dated November 19, 1998 by and between the Company and AdOne Classified Network, Inc. 10.9 Agreement dated March 16, 1999 by and between James E. Mann and the Company 10.10 Warrant to purchase 30,000 shares of Common Stock issued to Jonathan Cohen 10.11 Warrant to purchase 30,000 shares of Common Stock issued to Ronald Posner 10.12 Loan and Subscription Agreement dated July 13, 1999 by and between the Company and Interequity Capital Partners L.P. 10.13 Form of Subscription Agreement for 12% Convertible Subordinated Unsecured Promissory Note 10.14 Form of 12% Convertible Subordinated Unsecured Promissory Note 10.15 Form of Shareholders' Agreement by and among the Company, its principal stockholders and certain investors 23.1 Consent of PricewaterhouseCoopers LLP* 23.2 Consent of Morse, Zelnick, Rose & Lander, LLP (included in Exhibit 5.1). 24 Power of Attorney (included in signature page).
- ------------------------- * To be filed by amendment. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 1,000,000 UNITS ADSTAR.COM, INC. UNDERWRITING AGREEMENT __________, 1999 Paulson Investment Company, Inc. As Representative of the Several Underwriters 811 SW Naito Parkway, Suite 200 Portland, Oregon 97204 Gentlemen: AdStar.com, Inc., a Delaware corporation (the "Company"), proposes to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as Representative (the "Representative") an aggregate of 1,000,000 Units (the "Firm Units"). Each Unit will consist of two shares of the Company's Common Stock ("Common Stock") and one Purchase Warrant substantially in the form filed as an exhibit to the Registration Statement (hereinafter defined) ("Warrants"). The respective number of the Firm Units to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto. The Company also proposes to grant to the Representative an option to purchase in aggregate up to 150,000 additional Units, identical to the Firm Units (the "Option Units"), as set forth below. As the Representative, you have advised the Company (a) that you are authorized to enter into this Agreement for yourself as Representative and on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Units set forth opposite their respective names in Schedule I. The Firm Units and the Option Units (to the extent the aforementioned option is exercised) are herein collectively called the "Units." In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1 2 1. Representations and Warranties of the Company. The Company represents and warrants to each of the Underwriters as follows: (a) A registration statement on Form SB-2 (File No. ___-_____) with respect to the Units has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462 (b) of the Act, herein referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means (a) the form of prospectus first filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary prospectus included in the Registration Statement filed prior to the time it becomes effective or filed pursuant to Rule 424(a) under the Act that is delivered by the Company to the Underwriters for delivery to purchasers of the Units, together with the term sheet or abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." (b) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. The Company does not own and never has owned a controlling interest in any other corporation or other business entity that has or ever has had any material assets, liabilities or operations. The Company is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification. (c) The outstanding shares of each class or series of capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable and, except as disclosed in the Registration Statement, have been issued and sold by the Company in compliance in all material respects with applicable securities laws; the issuance and sale of the Units have been duly authorized by all necessary corporate action and, when issued and paid for as contemplated herein, the Units will be validly issued, fully paid and non-assessable; and no preemptive rights of shareholders exist with respect to any security of the Company or the issue and sale thereof. Except as set forth in the Registration Statement, neither the filing of the Registration Statement nor the offering or sale of the Units as contemplated by this Agreement gives rise to any rights, other than 2 3 those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock or other securities of the Company. (d) The information set forth under the caption "Capitalization" in the Prospectus is true and correct. The Common Stock conforms and the Warrants and the Representative's Warrant will conform to the description thereof contained in the Registration Statement. The forms of certificates for the securities comprising the Units conform to the requirements of the corporate law of Delaware. (e) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Units nor instituted proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by, and will conform to, the requirements of the Act and the Rules and Regulations. The Registration Statement and any amendment thereto do not contain, and will not contain, any untrue statement of a material fact and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendments and supplements thereto do not contain, and will not contain, any untrue statement of material fact; and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representative, specifically for use in the preparation thereof. (f) The financial statements of the Company, together with related notes and schedules as set forth in the Registration Statement, present fairly the financial position and the results of operations and cash flows of the Company at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with generally accepted principles of accounting, consistently applied throughout the periods involved, except as disclosed herein and in the Registration Statement, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary financial and statistical data of the Company included in the Registration Statement presents fairly the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the Company. (g) Pricewaterhouse Coopers LLP, who have certified certain of the financial statements filed with the Commission as part of the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations. (h) There is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against the Company before any court or administrative agency or otherwise 3 4 which if determined adversely to the Company might result in any material adverse change in the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company or prevent the consummation of the transactions contemplated hereby, except as set forth in the Registration Statement. (i) The Company has good and marketable title to all properties and assets, tangible and intangible, reflected in the financial statements (or as described in the Registration Statement) hereinabove described, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material. The Company's ownership rights in its patents, patent licenses and other material technology is consistent with (i) the description thereof in the Registration Statement, and (ii) the business needs of the Company. All of the leases and subleases under which the Company holds properties are in full force and effect (with only such exceptions as are commonly accepted by prudent companies engaged in the Company's business) and the Company has not received notice of any claim that is materially adverse to the rights of the Company under any of such leases or subleases. (j) The Company has filed all federal, state, local and foreign income tax returns which have been required to be filed and has paid all taxes indicated by said returns and all assessments received by it to the extent that such taxes have become due and are not being contested in good faith. All tax liabilities have been adequately provided for in the financial statements of the Company. (k) Since the respective dates as of which information is given in the Registration Statement, as it may have been amended or supplemented, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise), or prospects of the Company, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into or any material transaction that is probable of being entered into by the Company, other than transactions in the ordinary course of business and changes and transactions described in the Registration Statement, as it may be amended or supplemented. The Company has no material contingent obligations which are not disclosed in the Company's financial statements or elsewhere in the Prospectus which are included in the Registration Statement. (l) The Company is not, nor, with the giving of notice or lapse of time or both, will it be, in violation of or in default under its Articles of Incorporation or Bylaws or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and which default is of material significance in respect of the condition, financial or otherwise of the Company or the business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of 4 5 any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which any member of the Company is a party, or of the Articles of Incorporation or Bylaws of the Company or any order, rule or regulation applicable to the Company of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (m) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission, the National Association of Securities Dealers, Inc. (the "NASD") or such additional steps as may be necessary to qualify the Units for public offering by the Underwriters under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. (n) The Company holds all material patents, patent rights trademarks, trade names, copyrights, trade secrets and licenses of any of the foregoing (collectively, "Intellectual Property Rights") that are necessary to the conduct of its businesses; there is no claim pending or, to the best knowledge of the Company, threatened against the Company or any of its officers, directors or employees, in their capacities as such, alleging any infringement of Intellectual Property Rights, or any violation of the terms of any license relating to Intellectual Property Rights, nor does the Company know of any basis for any such claim. The Company knows of no material infringement by others of Intellectual Property Rights owned by or licensed to the Company. The Company has obtained, is in compliance in all material respect with and maintains in full force and effect all material licenses, certificates, permits, orders or other, similar authorizations granted or issued by any governmental agency (collectively "Government Permits") required to conduct its business as it is presently conducted. No proceeding to revoke, limit or otherwise materially change any Government Permit has been commenced or, to the Company's best knowledge, is threatened against the Company, and the Company has no reason to anticipate that any such proceeding will be commenced against the Company. Except as disclosed or contemplated in the Prospectus, the Company has no reason to believe that any pending application for a Government Permit will be denied or limited in a manner inconsistent with the Company's business plan as described in the Prospectus. (o) The Company is in all material respects in compliance with all applicable Environmental Laws. The Company has no knowledge of any past, present or, as anticipated by the Company, future events, conditions, activities, investigation, studies, plans or proposals that (i) would interfere with or prevent compliance with any Environmental Law by the Company or (ii) could reasonably be expected to give rise to any common law or other liability, or otherwise form the basis of a claim, action, suit, proceeding, hearing or investigation, involving the Company and related to Hazardous Substances or Environmental Laws. Except for the prudent and safe use and management of Hazardous Substances in the ordinary course of the Company's business, (i) no Hazardous Substance is or has been used, treated, stored, generated, manufactured or otherwise handled on or at any Facility and (ii) to the Company's best knowledge, no Hazardous Substance 5 6 has otherwise come to be located in, on or under any Facility. No Hazardous Substances are stored at any Facility except in quantities necessary to satisfy the reasonably anticipated use or consumption by the Company. No litigation, claim, proceeding or governmental investigation is pending regarding any environmental matter for which the Company has been served or otherwise notified or, to the knowledge of the Company, threatened or asserted against the Company, or the officers or directors of the Company in their capacities as such, or any Facility or the Company's business. There are no orders, judgments or decrees of any court or of any governmental agency or instrumentality under any Environmental Law which specifically apply to the Company, any Facility or any of the Company's operations. The Company has not received from a governmental authority or other person (i) any notice that it is a potentially responsible person for any Contaminated site or (ii) any request for information about a site alleged to be Contaminated or regarding the disposal of Hazardous Substances. There is no litigation or proceeding against any other person by the Company regarding any environmental matter. The Company has disclosed in the Prospectus or made available to the Underwriters and their counsel true, complete and correct copies of any reports, studies, investigations, audits, analyses, tests or monitoring in the possession of or initiated by the Company pertaining to any environmental matter relating to the Company, its past or present operations or any Facility. For the purposes of the foregoing paragraph, "Environmental Laws" means any applicable federal, state or local statute, regulation, code, rule, ordinance, order, judgment, decree, injunction or common law pertaining in any way to the protection of human health or the environment, including without limitation, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Toxic Substances Control Act, the Clean Air Act, the Federal Water Pollution Control Act and any similar or comparable state or local law; "Hazardous Substance" means any hazardous, toxic, radioactive or infectious substance, material or waste as defined, listed or regulated under any Environmental Law; "Contaminated" means the actual existence on or under any real property of Hazardous Substances, if the existence of such Hazardous Substances triggers a requirement to perform any investigatory, remedial, removal or other response action under any Environmental Laws or if such response action legally could be required by any governmental authority; "Facility" means any property currently owned, leased or occupied by the Company. (p) Neither the Company, nor to the Company's best knowledge, any of its affiliates, has taken or intends to take, directly or indirectly, any action which is designed to cause or result in, or which constitutes or might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Units. (q) The Company is not an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder. (r) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's 6 7 general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (s) The Company carries, or is covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar industries. (t) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (u) The Company confirms as of the date hereof that it is in compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act Relating to Disclosure of Doing Business with Cuba, and the Company further agrees that if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date the Registration Statement becomes or has become effective with the Commission or with the Florida Department of Banking and Finance (the "Department"), whichever date is later, or if the information reported or incorporated by reference in the Prospectus, if any, concerning the Company's business with Cuba or with any person or affiliate located in Cuba changes in any material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department. (v) The Company is in material compliance with all laws, rules, regulations, orders of any court or administrative agency, operating licenses or other requirements imposed by any governmental body applicable to it, including, without limitation, all applicable laws, rules, regulations, licenses or other governmental standards applicable to the its business; and the conduct of the business of the Company, as described in the Prospectus, will not cause the Company to be in violation of any such requirements. (w) Each of the Warrants and the Representative's Warrants (as defined in Paragraph (d) of Section 2 hereof) have been authorized for issuance to the purchasers thereof or to the Representative or its designees, as the case may be, and will, when issued, possess rights, privileges, 7 8 and characteristics as represented in the most recent form of Warrants or Representative's Warrants, as the case may be, filed as an exhibit to the Registration Statement; the securities to be issued upon exercise of the Warrants and the Representative's Warrants, when issued and delivered against payment therefor in accordance with the terms thereof, will be duly and validly issued, fully paid, nonassessable and free of preemptive rights, and all corporate action required to be taken for the authorization and issuance of the Warrants and the Representative's Warrants, and the securities to be issued upon their exercise, have been validly and sufficiently taken. (x) Except as disclosed in the Prospectus, neither the Company nor any of its officers, directors or affiliates have caused any person, other than the Underwriters, to be entitled to reimbursement of any kind, including, without limitation, any compensation that would be includable as underwriter compensation under the NASD's Corporate Financing Rule with respect to the offering of the Units, as a result of the consummation of such offering based on any activity of such person as a finder, agent, broker, investment adviser or other financial service provider. (y) Except as described in the Prospectus, the Company does not directly or indirectly control or have a material interest in any other business entity. (z) The Common Stock and the Warrants have been approved for listing on the American Stock Exchange ("AMEX") upon the effectiveness of the Registration Statement and the Company has satisfied all of the requirements of AMEX for such listing and for the trading of its Common Stock and Warrants on AMEX. 2. Purchase, Sale and Delivery of the Units. (a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of $____ per Unit, the number of Firm Units set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. (b) Payment for the Firm Units to be sold hereunder is to be made in New York Clearing House funds and, at the option of the Representative, by bank wire to an account specified by the Company, certified or bank cashier's checks drawn to the order of the Company, against either uncertificated delivery of Firm Units or of certificates therefor (which delivery, if certificated, shall take place in such location in New York, New York as may be specified by the Representative) to the Representative for the several accounts of the Underwriters. Such payment is to be made at the offices of the Representative at the address set forth on the first page of this agreement, at 7:00 a.m., Pacific time, on the third business day after the date of this Agreement or at such other time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York 8 9 are open for business and not permitted by law or executive order to be closed.) Except to the extent uncertificated Firm Units are delivered at closing, the certificates for the Firm Units will be delivered in such denominations and in such registrations as the Representative requests in writing not later than the second full business day prior to the Closing Date, and will be made available for inspection by the Representative at least one business day prior to the Closing Date. (c) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the Representative to purchase the Option Units at the price per Unit as set forth in the first paragraph of this Section 2. The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) only once thereafter within 45 days after the date of this Agreement, by the Representative to the Company setting forth the number of Option Units as to which the Representative is exercising the option, the names and denominations in which the Option Units are to be registered and the time and date at which certificates representing such Units are to be delivered. The time and date at which certificates for Option Units are to be delivered shall be determined by the Representative but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The option with respect to the Option Units granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Units by the Underwriters. The Representative may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Units shall be made on the Option Closing Date in New York Clearing House funds and, at the option of the Representative, by bank wire to an account specified by the Company, or certified or bank cashier's check drawn to the order of the Company for the Option Units to be sold by the Company in consideration either of uncertificated delivery of Option Units or delivery of certificates therefor (which delivery, if certificated, shall take place in such location in New York, New York as may be specified by the Representative) to the Representative for the several accounts of the Underwriters. Except to the extent uncertificated Option Units are delivered at closing, the certificates for the Option Units will be delivered in such denominations and in such registrations as the Representative requests in writing not later than the second full business day prior to the Option Closing Date, and will be made available for inspection by the Representative at least one business day prior to the Option Closing Date. (d) In addition to the sums payable to the Representative as provided elsewhere herein, the Representative shall be entitled to receive at the Closing, for itself alone and not as Representative of the Underwriters, as additional compensation for its services, purchase warrants (the "Representative's Warrants") for the purchase of up to 100,000 Units at a price of $___ per Unit, upon the terms and subject to adjustment and conversion as described in the form of Representative's Warrants filed as an exhibit to the Registration Statement. 3. Offering by the Underwriters. 9 10 It is understood that the several Underwriters are to make a public offering of the Firm Units as soon as the Representative deems it advisable to do so. The Firm Units are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representative may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Units are purchased pursuant to Section 2 hereof, the Representative will offer them to the public on the foregoing terms. It is further understood that you will act as the Representative for the Underwriters in the offering and sale of the Units in accordance with an Agreement Among Underwriters entered into by you and the several other Underwriters. 4. Covenants of the Company. The Company covenants and agrees with the several Underwriters that: (a) The Company will (A) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Rules and Regulations is followed, to prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the Representative containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, and (B) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representative shall not previously have been advised and furnished with a copy or to which the Representative shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations. (b) The Company will advise the Representative promptly (A) when the Registration Statement or any post-effective amendment thereto shall have become effective, (B) of receipt of any comments from the Commission, (C) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, and (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (c) The Company will cooperate with the Representative in endeavoring to qualify the Units for sale under the securities laws of such jurisdictions as the Representative may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The 10 11 Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representative may reasonably request for distribution of the Units. (d) The Company will deliver to, or upon the order of, the Representative, from time to time, as many copies of any Preliminary Prospectus as the Representative may reasonably request. The Company will deliver to, or upon the order of, the Representative during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representative may reasonably request. The Company will deliver to the Representative at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representative such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested), and of all amendments thereto, as the Representative may reasonably request. (e) The Company will comply with the Act and the Rules and Regulations, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Units as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances existing at the time the Prospectus is so delivered, be misleading, or so that the Prospectus will comply with the law. (f) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earning statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. (g) The Company will, for a period of five years from the Closing Date, deliver to the Representative copies of annual reports and copies of all other documents, reports and information furnished by the Company to its stockholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Exchange Act. The Company will deliver to the Representative similar reports with respect to significant 11 12 subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. (h) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company or other securities convertible into or exchangeable or exercisable for shares of Common Stock or derivatives of Common Stock (or agreement therefor) will be made for a period of one year after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder, or pursuant to contractual obligations existing on the date hereof or pursuant to employee benefit plans in effect on the date hereof, or with the prior written consent of the Representative, which consent will not be unreasonably withheld. (i) The Company will use its best efforts to list, subject to notice of issuance, the Common Stock and Warrants on AMEX. (j) The Company has caused each officer and director and each person who owns, beneficially or of record, 5% or more of the shares of the Common Stock outstanding immediately prior to the date hereof to furnish to you, on or prior to the date of this agreement, a letter or letters, in form and substance satisfactory to the Underwriters ("Lockup Agreements"), pursuant to which each such person shall agree (A) not to offer, sell, sell short or otherwise dispose of any shares of Common Stock or other capital stock of the Company, or any other securities convertible, exchangeable or exercisable for Common Stock or derivatives of Common Stock owned by such person or request the registration for the offer or sale of any of the foregoing (or as to which such person has the right to direct the disposition) for a period of one year after the date of this Agreement, directly or indirectly, except with the prior written consent of the Representative; and (B) to give prior written notice to the Representative for a period of five years from the effective date of the Registration Statement, with respect to any sales of Common Stock of the Company pursuant to Rule 144 under the Securities Act or any similar rule. (k) The Company shall apply the net proceeds of its sale of the Units as set forth in the Prospectus and shall file such reports with the Commission with respect to the sale of the Units and the application of the proceeds therefrom as may be required in accordance with Rule 463 under the Act. (l) The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Units in such a manner as would require the Company to register as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). (m) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock and a Warrant Agent for the Warrants. 12 13 (n) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. 5. Costs and Expenses. (a) The Representative shall be entitled to reimbursement from the Company, for itself alone and not as Representative of the Underwriters, to a non-accountable expense allowance equal to 2% of the aggregate initial public offering price of the Firm Units and any Option Units purchased by the Underwriters. The Representative shall be entitled to withhold this allowance on the Closing Date related to the purchase of the Firm Units or the Option Units, as the case may be. (b) In addition to the payment described in Paragraph (a) of this Section 5, the Company will pay all costs, expenses and fees incident to the performance of the obligations of the Company under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the AMEX listing application, the costs of due diligence investigation of the principals of the Company, the Blue Sky Survey and any supplements or amendments thereto; the filing fees of the Commission; the filing fees and expenses (including any fees and disbursements) incident to securing the required review by the NASD Regulation, Inc.) of the underwriting terms and arrangements; the AMEX listing fee; and the expenses, including the fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Units under state securities or Blue Sky laws. Any transfer taxes imposed on the sale of the Units to the several Underwriters will be paid by the Company. The Company agrees to pay all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, incident to the offer and sale of directed Units by the Underwriters to employees and persons having business relationships with the Company. The Company shall not, however, be required to pay for any of the Underwriters' expenses (other than those related to qualification under NASD regulation and state securities or Blue Sky laws) except that, if this Agreement shall not be consummated, then the Company shall reimburse the several Underwriters for accountable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Units or in contemplation of performing their obligations hereunder; but the Company shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Units. 6. Conditions of Obligations of the Underwriters. 13 14 The several obligations of the Underwriters to purchase the Firm Units on the Closing Date and the Option Units, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company contained herein, and to the performance by the Company of their covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representative and complied with to their reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission and no injunction, restraining order, or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Units. (b) The Representative shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Morse, Zelnick, Rose & Lander LLP, counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification, or in which the failure to qualify would have a material adverse effect upon the business of the Company. (ii) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and non-assessable; all of the securities of the Company conform to the description thereof contained in the Prospectus; the certificates for the Common Stock and Warrants are in due and proper form; the shares of Common Stock to be sold by the Company pursuant to this Agreement, including shares of Common Stock to be sold as a part of the Option Units, have been duly authorized and, upon issuance and delivery thereof as contemplated in this Agreement and the Registration Statement, will be validly issued, fully paid and non-assessable; no preemptive rights of shareholders exist with respect to any of the Common Stock or the issuance or sale thereof pursuant to any applicable statute or the provisions of the Company's Articles of Incorporation or Bylaws or, to such counsel's best knowledge, pursuant to any contractual obligation. The Warrants and the Representative's Warrants have been authorized for issuance to the purchasers of Units or the Representative, as the case may be, and will, when issued, possess rights, privileges, and characteristics as represented in the most recent form of Warrants or 14 15 Representative's Warrants, as the case may be, filed as an exhibit to the Registration Statement; the securities to be issued upon exercise of the Warrants and the Representative's Warrants, as the case may be, when issued and delivered against payment therefor in accordance with the terms of the Representative's Warrants, will be duly and validly issued, fully paid, nonassessable and free of preemptive rights, and all corporate action required to be taken for the authorization and issuance of the Warrants, the Representative's Warrants, and the securities to be issued upon their exercise, has been validly and sufficiently taken. (iii) Except as described in or contemplated by the Prospectus, to the knowledge of such counsel, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the knowledge of such counsel, no holder of any securities of the Company or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Units or the right to have any Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company. (iv) The Registration Statement has become effective under the Act and, to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. (v) The Registration Statement, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules therein). (vi) The statements under the captions "Shares Eligible for Future Sale" and "Description of Securities" in the Prospectus and in Items 24 and 26 of the Registration Statement, insofar as such statements constitute a summary of documents referred to therein or matters of law, fairly summarize in all material respects the information called for with respect to such documents and matters. (vii) Such counsel does not know of any contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. 15 16 (viii) Such counsel knows of no material legal or governmental proceedings pending or threatened against the Company. (ix) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Articles of Incorporation or Bylaws of the Company, or any agreement or instrument known to such counsel to which the Company is a party or by which the Company may be bound. (x) Each of this Agreement and the Warrant Agreement by and among the Company, the Warrantholders (defined therein) and Interwest Transfer Company, as Warrant Agent, has been duly authorized, executed and delivered by the Company. (xi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD, as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. (xii) The Company is not, and will not become, as a result of the consummation of the transactions contemplated by this Agreement, and application of the net proceeds therefrom as described in the Prospectus, required to register as an investment company under the 1940 Act. In rendering such opinion, such counsel may rely as to matters governed by the laws of states other than California, the Delaware General Corporation Law or Federal laws on local counsel in such jurisdictions, provided that in each case such counsel shall state that they believe that they and the Underwriters are justified in relying on such other counsel. In addition to the matters set forth above, the opinion of Morse, Zelnick, Rose and Lander LLP shall also include a statement to the effect that nothing has come to the attention of such counsel that has caused them to believe that (i) the Registration Statement, at the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). (c) The Representative shall have received from Stoel Rives LLP, counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, 16 17 substantially to the effect specified in subparagraphs (i), (iv) and (v) of Paragraph (b) of this Section 6. In rendering such opinion Stoel Rives LLP may rely as to all matters governed other than by the laws of the State of California, the Delaware General Corporation Law or Federal laws on the opinion of counsel referred to in Paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel that has caused them to believe that (i) the Registration Statement, or any amendment thereto, as of the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Stoel Rives LLP may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (d) The Representative shall have received at or prior to the Closing Date from Stoel Rives LLP a memorandum or summary, in form and substance satisfactory to the Representative, with respect to the qualification for offering and sale by the Underwriters of the Units under the state securities or Blue Sky laws of such jurisdictions as the Representative may reasonably have designated to the Company. (e) The Representative, on behalf of the several Underwriters, shall have received, on each of the dates hereof, the Closing Date and the Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to the Representative, of PricewaterhouseCoopers LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and Prospectus. (f) The Representative shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: 17 18 (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission; (ii) The representations and warranties of the Company contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be; (iii) All filings required to have been made pursuant to Rules 424 or 430A under the Act have been made; (iv) He has carefully examined the Registration Statement and the Prospectus and, in his or her opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct, and such Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment; and (v) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company, whether or not arising in the ordinary course of business. (g) The Company shall have furnished to the Representative such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Representative may reasonably have requested. (h) The Common Stock and Warrants have been approved for listing upon notice of issuance on AMEX. (i) The Lockup Agreements described in Section 4(j) are in full force and effect. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representative and to Stoel Rives LLP, counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representative by notifying the Company of such 18 19 termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. Conditions of the Obligations of the Company. The obligations of the Company to sell and deliver the portion of the Units required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each Underwriter and each such controlling person upon demand for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Units, whether or not such Underwriter or controlling person is a party to any action or proceeding; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representative specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter severally and not jointly will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer or controlling 19 20 person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representative specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or within 30 days of presentation) the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party shall have failed to assume the defense and employ counsel acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by you in the case of parties 20 21 indemnified pursuant to Section 8(a) and by the Company in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Units. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bears to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions 21 22 of this subsection (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Units purchased by such Underwriter, and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. (f) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Units and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. 9. Default by Underwriters. If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Units which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company), you, as Representative of the Underwriters, shall use reasonable efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company such amounts as may be agreed upon and upon the terms set forth herein, the Firm Units or Option Units, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as such Representative, shall not have procured such other Underwriters, or any others, to purchase the Firm Units or Option Units, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of Units with respect to which such default shall occur does not exceed 10% of the Firm Units or Option Units, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Units or Option Units, as the case may 22 23 be, which they are obligated to purchase hereunder, to purchase the Firm Units or Option Units, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of Firm Units or Option Units, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Units or Option Units, as the case may be, covered hereby, the Company or you as the Representative of the Underwriters will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Company except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representative, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. Notices. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied or telegraphed and confirmed as follows: if to the Underwriters, to Paulson Investment Company, Inc., 811 SW Naito Parkway, Portland, Oregon 97204, Attention: Chester L.F. Paulson; with a copy to Stoel Rives LLP, 900 SW Fifth Avenue, Suite 2300, Portland, Oregon 97204, Attention: John J. Halle; if to the Company, to AdStar.com., Inc., at 4553 Glencoe Avenue, Suite 325, Marina del Rey, California 90292, Attention: Benjamin J. Douek; with copy to Morse Zelnick Rose & Lander, LLP, 450 Park Avenue, New York, New York 10022-2605, Attention: Stephen A. Zelnick. 11. Termination. This Agreement may be terminated by you by notice to the Company as follows: (a) at any time prior to the earlier of (i) the time the Units are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on the first business day following the date of this Agreement; (b) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company, the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or 23 24 prospects of the Company, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make it impracticable to market the Units or to enforce contracts for the sale of the Units, (iii) the Dow Jones Industrial Average shall have fallen by 15 percent or more from its closing price on the day immediately preceding the date that the Registration Statement is declared effective by the Commission, (iv) suspension of trading in securities generally on the New York Stock Exchange or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (v) the enactment, publication, decree or other promulgation of any statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects or may materially and adversely affect the business or operations of the Company, (vi) declaration of a banking moratorium by United States or New York State authorities, (vii) any downgrading in the rating of the Company's debt securities by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Exchange Act); (viii) the suspension of trading of the Common Stock or the Warrants by the Commission on AMEX, or (ix) the taking of any action by any governmental body or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or (c) as provided in Sections 6 and 9 of this Agreement. 12. Successors. This Agreement has been and is made solely for the benefit of the Underwriters, the Company and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Units from any Underwriter shall be deemed a successor or assign merely because of such purchase. 13. Information Provided by Underwriters. The Company and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in the Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), legends required by Item 502(b) of Regulation S-K under the Act and the information under the caption "Underwriting" in the Prospectus. 24 25 14. Miscellaneous. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Units under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Oregon. All disputes relating to this Underwriting Agreement shall be adjudicated before a court located in Multnomah County, Oregon to the exclusion of all other courts that might have jurisdiction. If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters in accordance with its terms. Very truly yours, AdStar.com, Inc. By: -------------------------------------- Leslie Bernhard, President The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. PAULSON INVESTMENT COMPANY, INC. As Representative of the several Underwriters listed on Schedule I By: ------------------------------- Authorized Officer 25 26 SCHEDULE I Schedule of Underwriters
Number of Firm Units Underwriter to be Purchased ----------- --------------- Paulson Investment Company, Inc. Total 1,000,000 =========
26 EX-3.1 3 CERTIFICATE OF INCOPORATION 1 CERTIFICATE OF INCORPORATION OF ADSTAR.COM, INC. The undersigned, being a natural person for the purpose of organizing a corporation for conducting the business and promoting the purposes hereinafter stated, under the provisions and subject to the requirements of the laws of the State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the acts amendatory thereof and supplemental thereto, and known, identified and referred to as the "General Corporation Law of the State of Delaware"), hereby certifies that: FIRST: The name of the corporation is Ad-Star.com. Inc. (hereinafter called the "corporation"). SECOND: The address, including street, number, city and county of the registered office of the corporation in the State of Delaware is 9 East Loockerman Street, Dover, Delaware 19901; and the name of the registered agent of the corporation in the State of Delaware at such address is National Registered Agents, Inc. THIRD: The nature of the business and the purposes to be conducted and promoted by the corporation are to conduct any lawful business, to promote any lawful purpose, and to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of all classes of stock which this corporation shall have authority to issue is 15,000,000 shares, consisting of (i) 10,000,000 shares of common stock, $.0001 par value per share ("Common Stock"), and (ii) 5,000,000 shares of preferred stock, $.0001 par value per share ("Preferred Stock"). (a) Common Stock. No holder of any of the shares of the stock of the corporation, whether now or hereafter authorized and issued, shall be entitled as of right to purchase or subscribe for (1) any unissued stock of any class, or (2) any additional shares of any class to be issued by reason of any increase of the authorized capital stock of the corporation of any class, or (3) bonds, certificates of indebtedness, debentures or other securities convertible into stock of the corporation, or carrying any right to purchase stock of any class, but any such unissued stock or such additional authorized issue of any stock or of other securities convertible into stock, or carrying any right to purchase stock, may be issued and disposed of pursuant to resolution of the Board of Directors to such persons, firms, corporations or associations and upon such terms as may be deemed advisable by the Board of Directors in the exercise of its discretion. (b) Preferred Stock. The Board of Directors, in the exercise of its discretion, is authorized to issue the undesignated Preferred Stock in one or more series, to determine the powers, preferences and rights, and qualifications, limitations or restrictions, granted to or imposed upon any wholly unissued series of undesignated Preferred Stock, and to fix the number of shares constituting any series and the designation of 2 such series, without any further vote or action by the stockholders. No holder of any of the shares of any series of Preferred Stock of the corporation, whether now or hereafter authorized and issued, shall be entitled as of right to purchase or subscribe for (1) any unissued stock of any class, or (2) any additional shares of any class to be issued by reason of any increase of the authorized capital stock of the corporation of any class, or (3) bonds, certificates of indebtedness, debentures or other securities convertible into stock of the corporation, or carrying any right to purchase stock of any class; but any such unissued stock or such additional authorized issue of such stock or of other securities convertible into such stock, or carrying any right to purchase such stock, may be issued and disposed of pursuant to resolution of the Board of Directors to such persons, firms, partnerships, corporations, associations or other entities and upon such terms as may be deemed advisable by the Board of Directors in the exercise of its discretion. FIFTH: The name and the mailing address of the incorporator are as follows:
Name Mailing Address ---- --------------- Howard Weinreich Morse, Zelnick, Rose & Lander, LLP 450 Park Avenue New York, New York 10022
SIXTH: The corporation is to have perpetual existence. SEVENTH: Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholder or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation. EIGHTH: For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided: 2 3 1. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the By-Laws. The phrase "whole Board" and the phrase "total number of directors" shall be deemed to have the same meaning, to wit, the total number of directors which the corporation would have if there were no vacancies. No election of directors need be by written ballot. 2. After the original or other By-Laws of the corporation have been adopted, amended, or repealed, as the case may be, in accordance with the provisions of Section 109 of the General Corporation Law of the State of Delaware, and after the corporation has received any payment for any of its stock, the power to adopt, amend, or repeal the By-Laws of the corporation may be exercised by the Board of Directors of the corporation; provided, however, that any provision for the classification of directors of the corporation for staggered terms pursuant to the provisions of subsection (d) of Section 141 of the General Corporation Law of the State of Delaware shall be set forth in an initial By-Law or in a By-Law adopted by the stockholders entitled to vote of the corporation unless provisions for such classification shall be set forth in this certificate of incorporation. 3. Whenever the corporation shall be authorized to issue only one class of stock each outstanding share shall entitle the holder thereof to notice of, and the right to vote at, any meeting of stockholders. Whenever the corporation shall be authorized to issue more than one class of stock no outstanding share of any class of stock which is denied voting power under the provisions of the certificate of incorporation shall entitle the holder thereof to the right to vote at any meeting of stockholders except as the provisions of paragraph (c)(2) of Section 242 of the General Corporation Law of the State of Delaware shall otherwise require; provided, that no share of any such class which is otherwise denied voting power shall entitle the holder thereof to vote upon the increase or decrease in the number of authorized shares of said class. NINTH: A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. TENTH: (a) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer, of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than 3 4 said law permitted the corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators: provided, however, that, except as provided in paragraph (b) hereof, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the board of directors of the corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition: provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer (in his or her capacity as a director or officer and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. The corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the corporation with the same scope and effect as the foregoing indemnification of directors and officers. (b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of this Section is not paid in full by the corporation within thirty days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard or conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (c) Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. 4 5 (d) Insurance. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. ELEVENTH: From time to time any of the provisions of this certificate or incorporation may be amended, altered or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the corporation by this certificate of incorporation are granted subject to the provisions of this Article ELEVENTH. Dated: July 14, 1999 /s/ Howard Weinreich, Incorporator ---------------------------------- HOWARD WEINREICH, INCORPORATOR 5 EX-3.2 4 BY-LAWS OF THE COMPANY 1 BY-LAWS OF ADSTAR.COM, INC. ARTICLE I OFFICES Section 1. PRINCIPAL OFFICE - The principal office of the corporation shall be located at 4553 Glencoe Avenue, Suite 325, Marina del Rey, California 90292. Section 2. ADDITIONAL OFFICES - The corporation may have such additional offices at such other place within or without the State of Delaware as the Board of Directors may from time to time determine or as the business of the corporation may require. ARTICLE II SHAREHOLDERS' MEETING Section 1. ANNUAL MEETING - An annual meeting of shareholders shall be held on the second Thursday in June in each year (or if said day shall be a legal holiday, then the next business day) at the time and place (either within or without the State of Delaware) as shall be fixed by the Board of Directors and specified in the notice of meeting for the purpose of electing directors and transacting such other business as may properly be brought before the meeting. Section 2. SPECIAL MEETING - A special meeting of shareholders may be called at any time by the President and shall be called by the President at the request in writing of a majority of the Board of Directors then in office or at the request in writing filed with the Secretary by the holders of a majority of the issued and outstanding shares of the capital stock of the corporation entitled to vote at such meeting. Any such request shall state the purpose or purposes of the proposed meeting. Special meetings shall be held at such time and place (either within or without the State of Delaware) as shall be specified in the notice thereof. Business transacted at any special meeting of shareholders shall be confined to the purposes set forth in the notice thereof. Section 3. NOTICE OF MEETINGS - Written notice of the time, and place and purpose of every meeting of shareholders (and, if other than an annual meeting, indicating the person or persons at whose discretion the meeting is being convoked), shall be given by the President, a Vice-President or by the Secretary to each shareholder of record entitled to vote at such meeting and to each shareholder who, by reason of any action proposed at such meeting, would be entitled to have his stock appraised if such action were taken, not less than ten nor more than fifty days prior to the date set for the meeting, either personally or by mailing said notice by first class mail to each shareholder at his address appearing on the stock book of the corporation or at such other address supplied by him in writing to the Secretary of the corporation for the purpose of receiving notice. Notice by mail shall be deemed to be given when deposited, postage prepaid, in a post office or official depository under the exclusive care and custody of the United States Post Office Department. The record date for determining the shareholders entitled to such notice shall be determined by the Board of Directors in accordance with Section 6 of ARTICLE SIXTH of these By-Laws. 2 If the directors shall adopt, amend or repeal a by-law regulating an impending election of directors, the notice of the next meeting of shareholders for the election of directors shall set forth the by-law so adopted, amended or repealed together with a concise statement of the changes made as required by the General Corporation Law. If any action is proposed to be taken which would, if taken, entitle shareholders to receive payment for their shares, the notice of meeting shall include a statement to such effect. A written waiver of notice setting forth the purposes of the meeting for which notice is waived, signed by the person or persons entitled to such notice, whether given before or after the time of the meeting stated therein, shall be deemed equivalent to the giving of such notice. The attendance by a shareholder at a meeting either in person or by proxy without protesting the lack of notice thereof shall constitute a waiver of notice of such shareholder. All notice given with respect to an original meeting shall extend to any and all adjournments thereof and such business as might have been transacted at the original meeting may be transacted at any adjournment thereof; no notice of any adjourned meeting need be given if an announcement of the time and place of the adjourned meeting is made at the original meeting. Section 4. QUORUM - The holders of a majority of the shares of stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be requisite and shall constitute a quorum at all meetings of shareholders for the transaction of business except as otherwise provided by statute or the Certificate of Incorporation. If, however, a quorum shall not be present or represented at any meeting of shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. Once a quorum is present to organize a meeting, such quorum is not deemed broken by the subsequent withdrawal of any shareholders. Section 5. VOTING - Every shareholder entitled to vote at any meeting shall be entitled to one vote for each share of stock entitled to vote and held by him of record on the date fixed as the record date for said meeting and may so vote in person or by proxy. At all elections of directors when a quorum is present, a plurality of the votes cast by the holders of shares entitled to vote shall elect and any other corporate action, when a quorum is present, shall be authorized by a majority of the votes cast by the holders of shares entitled to vote thereon except as may otherwise be provided by statute or the Certificate of Incorporation. Section 6. PROXIES - Every proxy must be signed by the shareholder entitled to vote or by his duly authorized attorney-in-fact and shall be valid only if filed with the Secretary of the corporation or with the Secretary of the meeting prior to the commencement of voting on the matter in regard to which said proxy is to be voted. No proxy shall be valid after the expiration of eleven months from the date of its execution unless otherwise expressly provided in the proxy. Every proxy shall be revocable at the pleasure of the person executing it except as otherwise provided by the General Corporation Law. Unless the proxy by its terms provides for a specific revocation date and except as otherwise provided by statute, revocation of a proxy shall not be effective unless and until such revocation is executed in writing by the shareholder who executed such proxy and the revocation is filed with the Secretary of the corporation or with the Secretary of the Meeting prior to the voting of the proxy. Section 7. SHAREHOLDERS' LIST - A list of shareholders as of the record date, certified by the Secretary of the corporation or by a transfer agent appointed by the Board of Directors shall be prepared for every meeting of shareholders and shall be produced by the Secretary or some other officer of the corporation thereat. 3 Section 8. INSPECTORS AT MEETINGS - In advance of any shareholders' meeting, the Board of Directors may appoint one or more inspectors to act at the meeting or at any adjournment thereof and if not so appointed the person presiding at any such meeting may, and at the request of any shareholder entitled to vote thereat shall, appoint one or more inspectors. Each inspector, before entering upon the discharge of his duties as set forth in the General Corporation Law, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. Section 9. CONDUCT OF MEETING - All meetings of shareholders shall be presided over by the President, or if he is not present, by a Vice-President, or if neither the President nor any Vice-President is present, by a chairman thereby chosen by the shareholders at the meeting. The Secretary of the corporation, or in his absence, an Assistant Secretary, shall act as secretary of every meeting but if neither the Secretary nor the Assistant Secretary is present, the chairman of the meeting shall appoint any person present to act as secretary of the meeting. ARTICLE III BOARD OF DIRECTORS Section 1. FUNCTION AND DEFINITION - The business and property of the corporation shall be managed by its Board of Directors who may exercise all the powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the shareholders. Section 2. NUMBER AND QUALIFICATION - The number of directors constituting the entire Board shall be not less than three nor more than seven, as may be fixed by resolution of the Board of Directors or by the shareholders entitled to vote for the election of directors, provided that any such action of the Board shall require the vote of a majority of the entire Board and, provided further, that the number of directors constituting the entire Board shall not be less than three unless all the shares of capital stock of the corporation are owned beneficially and of record by less than three shareholders, in which event the number of directors may be less than three but not less than the number of such shareholders. The phrase "entire Board" as used herein means the total number of directors which the corporation would have if there were no vacancies. Unless and until a different number shall be so fixed within the limits above specified, the Board shall consist of three directors. The term of any incumbent director shall not be shortened by any such action by the Board of Directors or by the shareholders. Each director shall be at least twenty-one years of age. A director need not be a shareholder, a citizen of the United States or a resident of the State of Delaware. Section 3. ELECTION TERM AND VACANCIES - Except as otherwise provided in this Section, all directors shall be elected at the annual meeting of shareholders and all directors who are so elected or who are elected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of shareholders and until their respective successors have been elected and qualified. In the interim between annual meetings of shareholders, newly-created directorships resulting from an increase in the number of directors or from vacancies occurring in the Board, but not, except as hereinafter provided, in the case of a vacancy occurring by reason of removal of a director by the shareholders, may be filled by the vote of a majority of the directors, then remaining in office, although less than a quorum may exist. In the case of a vacancy occurring in the Board of Directors by reason of the removal of one or more directors by action of the shareholders, such vacancy may be filled by the shareholders at a special meeting duly called for such purpose. 4 In the event a vacancy is not filled by such election by shareholders, whether or not the vacancy resulted from the removal of a director with or without cause, a majority of the directors then remaining in office, although less than a quorum, may fill any such vacancy. Section 4. REMOVAL - The Board of Directors may, at any time, with cause, remove any director. The shareholders entitled to vote for the election of directors may, at any time, remove any or all of the directors with or without cause. Section 5. MEETINGS - The annual meeting of the Board of Directors for the election of officers and the transaction of such other business as may come before the meeting, shall be held, without notice, immediately following the annual meeting of shareholders, at the same place at which such shareholders' meeting is held. Regular meetings of the Board of Directors shall be held at such time and place, within or outside the State of Delaware, as may be fixed by resolution of the Board, and when so fixed, no further notice thereof need be given. Regular meetings not fixed by resolution of the Board may be held on notice at such time and place as shall be determined by the Board. Special meetings of the Board of Directors may be called on notice at any time by the President, and shall be called by the President at the written request of a majority of the directors then in office. Section 6. NOTICE OF MEETINGS - No notice shall be required for regular meetings for which the time and place have been fixed. Written, oral, or any other mode of notice of the time and place shall be given for special meetings in sufficient time for the convenient assembly of the directors thereat. Notice need not be given to any director or to any member of a committee of directors who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of any such person at a meeting shall constitute a waiver of notice of such meeting, except when he attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors need be specified in any written waiver of notice. Section 7. CONDUCT OF MEETINGS - The President, if present, shall preside at all meetings of directors. At all meetings at which the President is not present any other director chosen by the Board shall preside. Section 8. QUORUM, ADJOURNMENT, VOTING - Except as otherwise provided by the Certificate of Incorporation, a majority of the entire Board shall be requisite and shall constitute a quorum at all meetings of the Board of Directors for the transaction of business. Where a vacancy or vacancies prevents such majority, a majority of the directors then in office shall constitute a quorum. A majority of the directors present at any meeting, whether or not a quorum is present, may adjourn the meeting to another time and place without further notice other than an announcement at the meeting. Except as otherwise provided by the Certificate of Incorporation, when a quorum is present at any meeting, a majority of the directors present shall decide any questions brought before such meeting and the act of such majority shall be the act of the Board. 5 Section 9. ACTION WITHOUT MEETING - Any action required or permitted to be taken by the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board of Directors or of any committee thereof consent in writing to the adoption of a resolution authorizing the action. Any one or more members of the Board of Directors or of any committee thereof may participate in a meeting of said Board or of any such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time, and participation by such means shall constitute presence in person at the meeting. Section 10. COMPENSATION OF DIRECTORS - Directors, as such, shall not receive any stated salary for their services, but, by resolution of the Board, a fixed sum and expenses of attendance, if any, may be allowed for attendance at any meeting of the Board of Directors or of any committee thereof. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving reasonable compensation therefor. Section 11. COMMITTEES - The Board of Directors, by resolution of a majority of the entire Board, may designate from among its members one or more committees, each consisting of three or more directors, and each of which, to the extent provided in such resolution, shall have all the authority of the Board except that no such committee shall have authority as to any of the following matters: (a) the submission to stockholders of any action as to which stockholders' authorization or approval is required by statute, the Certificate of Incorporation or by these By-Laws; (b) the filing of vacancies in the Board of Directors or in any committee thereof; (c) the fixing of compensation of the directors for serving on the Board or on any committee thereof; (d) the amendment or repeal of these By-Laws or the adoption of new By-Laws; and (e) the amendment or repeal of any resolution of the Board of Directors which by its terms shall not be so amendable or repealable. The Board may designate one or more directors as alternate members of any such committee who may replace any absent member or members at any meeting of such committee. Each such committee shall serve at the pleasure of the Board. The Board of Directors shall have the power at any time to fill vacancies in, to change the membership of, or to discharge any such committee. Committees shall keep minutes of their proceedings and shall report the same to the Board of Directors at the meeting of the Board next succeeding, and any action by the committee shall be subject to revision and alteration by the Board of Directors, provided that no rights of a third party shall be affected in any such revision or alteration. ARTICLE IV OFFICES Section 1. EXECUTIVE OFFICERS - The Officers of the corporation shall be a Chairman, a Vice Chairman, a President, one or more Vice-Presidents, a Treasurer and a Secretary and such Assistant Treasurers and Assistant Secretaries and other officers as the Board of Directors may determine. Any two or more offices may be held by the same person, except the offices 6 of President and Secretary, unless all of the issued and outstanding shares of capital stock of the corporation are owned by one person, in which event such person may hold all or any combination of offices. Section 2. ELECTION - The Chairman and Vice Chairman shall be chosen from among the directors and together with the President, one or more Vice-Presidents, the Treasurer and Secretary shall be elected by the Board of Directors to hold office until the meeting of the Board held immediately following the next annual meeting of shareholders and shall hold office for the term for which elected and until their successors have been elected and qualified. The Board of Directors may from time to time appoint all such other officers as it may determine and such officers shall hold office from the time of their appointment and qualifications until the time at which their successors are appointed and qualified. A vacancy in any office arising from any cause may be filled for the unexpired portion of the term by the Board of Directors. Section 3. REMOVAL - Any officer may be removed from office by the Board at any time with or without cause. Section 4. DELEGATION OF POWERS - The Board of Directors may from time to time delegate the power or duties of any officer of the corporation, in the event of his absence or failure to act otherwise, to any other officer or director or person whom they may select. Section 5. COMPENSATION - The compensation of each officer shall be such as the Board of Directors may from time to time determine. Section 6. CHIEF EXECUTIVE OFFICER - The Board of Directors shall designate either the Chairman or the President as the chief executive officer of the corporation who shall have general charge of the business and affairs of the corporation, subject, however, to the right of the Board of Directors to confer specified powers on officers and subject generally to the direction of the Board. Unless otherwise ordered by the Board of Directors, the Chief Executive Officer, or in the event of his inability to act, any other officer designated by the Board, shall have full power and authority on behalf of the corporation to attend and to act and to vote at any meetings of security holders of corporations in which the corporation may hold securities, and at such meetings shall possess and may exercise any and all rights and powers incident to the ownership of such securities, and which, as the owner thereof, the corporation might have possessed and exercised, if present. The Board of Directors by resolution from time to time may confer like powers upon any other person or persons. Section 7. CHAIRMAN AND VICE CHAIRMAN - The Chairman and, in his absence, the Vice Chairman shall preside over meetings of the Board of Directors and shall have such other duties the Board of Directors may, from time to time, prescribe. Section 8. PRESIDENT The President, if not designated as Chief Executive Officer, shall have such duties as the Board may prescribe. 7 Section 9. VICE-PRESIDENT - The Vice-President shall have such powers and perform such duties as the Board of Directors may from time to time prescribe. In the absence or inability of the Chief Executive Officer to perform his duties or exercise his powers, the Vice-President or, if there be more than one, a Vice-President designated by the Board, shall exercise the powers and perform the duties of the President subject to the direction of the Board of Directors. Section 10. SECRETARY - The Secretary shall keep the minutes of all meetings and record all votes of shareholders, the Board of Directors and committees in a book to be kept for that purpose. He shall give or cause to be given any required notice of meetings of shareholders, the Board of Directors or any committee, and shall be responsible for preparing or obtaining from a transfer agent appointed by the Board, the list of shareholders required by Article II, Section 7 thereof. He shall be the custodian of the seal of the corporation and shall affix or cause to be affixed the seal to any instrument requiring it and attest the same and exercise the powers and perform the duties incident to the office of Secretary subject to the direction of the Board of Directors. Section 11. TREASURER - Subject to the direction of the Board of Directors, the Treasurer shall have charge of the general supervision of the funds and securities of the corporation and the books of account of the corporation and shall exercise the powers and perform the duties incident to the office of the Treasurer. If required by the Board of Directors, he shall give to the corporation a bond in such sum and with such sureties as may be satisfactory to the Board of Directors for the faithful discharge of his duties. Section 12. OTHER OFFICERS - All other officers, if any, shall have such authority and shall perform such duties as may be specified from time to time by the Board of Directors. ARTICLE V RESIGNATIONS Any director or officer of the corporation or any member of any committee of the Board of Directors of the corporation, may resign at any time by giving written notice to the Board of Directors, the President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time is not specified therein, upon the receipt thereof, irrespective of whether any such resignation shall have been accepted. ARTICLE VI CERTIFICATES REPRESENTING SHARES Section 1. FORM OF CERTIFICATES - Each shareholder shall be entitled to a certificate or certificates in such form as prescribed by the General Corporation Law and by any other applicable statutes, which Certificate shall represent and certify the number, kind and class of shares owned by him in the corporation. The Certificates shall be numbered and registered in the order in which they are issued and upon issuance the name in which each Certificate has been issued together with the number of shares represented thereby and the date of issuance shall be entered in the stock book of the corporation by the Secretary or by the transfer agent of the corporation. Each certificate shall be signed by the President or a Vice-President and countersigned by the Secretary or Assistant Secretary and shall be sealed with the Corporate Seal or a facsimile thereof. The signature of the officers upon a certificate may also be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the corporation itself or an employee of the corporation. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before the certificate is issued, such certificate may be issued by the corporation with the same effect as if the officer had not ceased to be such at the time of its issue. 8 Section 2. CONSIDERATION - A certificate representing shares shall not be issued until the full amount of consideration therefor has been paid to the corporation, except if otherwise permitted by the General Corporation Law. Section 3. LOST CERTIFICATES - The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation, alleged to have been lost, mutilated, stolen or destroyed, upon the making of an affidavit of that fact by the person so claiming and upon delivery to the corporation, if the Board of Directors shall so require, of a bond in such form and with such surety or sureties as the Board may direct, sufficient in amount to indemnify the corporation and its transfer agent against any claim which may be made against it or them on account of the alleged loss, destruction, theft or mutilation of any such certificate or the issuance of any such new certificate. Section 4. FRACTIONAL SHARE INTERESTS - The corporation may issue certificates for fractions of a share where necessary to effect transactions authorized by the General Corporation Law; or it may pay in cash the fair market value of fractions of a share as of the time when those entitled to receive such fractions are determined; or it may issue scrip in registered or bearer form over the manual or facsimile signature of an officer of the corporation or of its agent, exchangeable as therein provided for full shares, but such scrip shall not entitle the holder to any rights of a shareholder except as therein provided. Section 5. SHARE TRANSFERS - Upon compliance with provisions restricting the transferability of shares, if any, transfers of shares of the corporation shall be made only on the share record of the corporation by the registered holder thereof, or by his duly authorized attorney, upon the surrender of the certificate or certificates for such shares properly endorsed with payment of all taxes thereon. Section 6. RECORD DATE FOR SHAREHOLDERS - For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof or to express consent or dissent from any proposal without a meeting, or for the purpose of determining the shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board of Directors may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than fifty nor less than ten days before the date of any meeting nor more than fifty days prior to any action taken without a meeting, the payment of any dividend or the allotment of any rights, or any other action. When a determination of shareholders of record entitled to notice of or to vote at any meeting of shareholders has been made as provided in this Section, such determination shall apply to any adjournment thereof, unless the Board fixes a new record date under this Section for the adjourned meeting. Section 7. SHAREHOLDERS OF RECORD - The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware. ARTICLE VII STATUTORY NOTICES The Board of Directors may appoint the Treasurer or any other officer of the corporation to cause to be prepared and furnished to shareholders entitled thereto any special financial notice and/or statement which may be required by the General Corporation Law or by any other applicable statute. 9 ARTICLE VIII FISCAL YEAR The fiscal year of the corporation shall be for an annual period ending on the day of 31st of each year. By resolution duly adopted, the Board of Directors may alter such fiscal year. ARTICLE IX CORPORATE SEAL The Corporate seal shall have inscribed thereon the name of the corporation, the year of its incorporation and the words "Corporate Seal" and "Delaware" and shall be in such form and contain such other words and/or figures as the Board of Directors shall determine. The Corporate seal may be used by printing, engraving, lithographing, stamping or otherwise making, placing or affixing, or causing to be printed, engraved, lithographed, stamped or otherwise made, placed or affixed, upon any paper or document, by any process whatsoever, an impression, facsimile or other reproduction of said Corporate seal. ARTICLE X BOOKS AND RECORDS There shall be maintained at the principal office of the corporation books of account of all the corporation's business and transactions. There shall be maintained at the principal office of the corporation or at the office of the corporation's transfer agent a record containing the names and addresses of all shareholders, the number and class of shares held by such and the dates when they respectively became the owners of record thereof. ARTICLE XI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS Any person made or threatened to be made a party to an action or proceeding, whether civil or criminal, by reason of the fact that he, his testator or intestate, then is or was a director, officer, employee or agent of the corporation, or then serves or has served any other corporation in any capacity at the request of the corporation, shall be indemnified by the corporation against reasonable expenses, judgments, fines and amounts actually and necessarily incurred in connection with the defense of such action or proceeding or in connection with an appeal therein, to the fullest extent permissible by the laws of the State of Delaware. Such right of indemnification shall not be deemed exclusive of any other rights to which such person may be entitled. ARTICLE XII AMENDMENTS The shareholders entitled at the time to vote in the election of directors and the Board of Directors by vote of a majority of the entire Board, shall have the power to amend or repeal these By-Laws and to adopt new By-Laws, provided, however, that any by-law adopted, amended or repealed by the Board of Directors may be amended or repealed by the shareholders entitled to vote thereon as herein provided. EX-3.3 5 AGREEMENT AND PLAN OF MERGER 1 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER dated July __, 1999 by and between AD-STAR SERVICES, INCORPORATED.("Ad-Star Services"), a New York corporation and ADSTAR.COM, INC., a Delaware corporation ("AdStar.com"). W I T N E S S E T H: WHEREAS, Ad-Star Services has an authorized Capital Stock consisting of 200 shares of Common Stock with no par value of which 105.26 shares have been duly issued and are now outstanding; and WHEREAS, AdStar.com has an authorized Capital Stock of 15,000,000 shares, consisting of 10,000,000 shares of Common Stock, par value $.0001 per share and 5,000,000 shares of Preferred Stock, par value $.0001 per share, of which 10 shares have been duly issued and are now outstanding; and WHEREAS, the Board of Directors and Stockholders of Ad-Star Services and the Board of Directors and Stockholders of AdStar.com deem it advisable and generally to the advantage and welfare of the two corporate parties that Ad-Star Services merge with and into AdStar.com under and pursuant to the provisions of the Business Corporation Law of the State of New York and the General Corporation Law of the State of Delaware. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Ad-Star Services and AdStar.com hereby agree as follows: 1. THE MERGER. Effective immediately upon compliance with the laws of Delaware and New York (the "Effective Date"): (a) Ad-Star Services shall be merged with and into AdStar.com, (b) the separate existence of Ad-Star Services shall cease, and (c) AdStar.com shall continue as the surviving corporation (in such capacity AdStar.com is hereinafter sometimes referred to as the "Surviving Corporation") to be governed by the laws of the State of Delaware. 2. PURPOSES OF SURVIVING CORPORATION. The purposes of the Surviving Corporation shall be the purposes set forth in the Certificate of Incorporation of AdStar.com in effect immediately prior to the Effective Date. 3. CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of AdStar.com, in effect on the Effective Date, shall be the Certificate of Incorporation of the Surviving Corporation. 2 4. BYLAWS. The Bylaws of AdStar.com in effect on the Effective Date shall be the Bylaws of the Surviving Corporation. 5. DIRECTORS AND OFFICERS. The directors and officers in office of the Surviving Corporation upon the Effective Date shall retain such positions in the Surviving Corporation. 6. EFFECT OF THE MERGER. At and after the Effective Date, AdStar.com shall succeed to and possess, without further act or deed, all of the estate, rights, privileges, powers, and franchises, both public and private, and all of the property, real, personal, and mixed, of each of the parties hereto; all debts due to Ad-Star Services on whatever account shall be vested in AdStar.com; all claims, demands, property, rights, privileges, powers and franchises and every other interest of either of the parties hereto shall be as effectively the property of AdStar.com as they were of the respective parties hereto; the title to any real estate vested by deed or otherwise in Ad-Star Services shall not revert or be in any way impaired by reason of the merger, but shall be vested in AdStar.com; all rights of creditors and all liens upon any property of either of the parties hereto shall be preserved unimpaired, limited in lien to the property affected by such lien at the Effective Date; all debts, liabilities, and duties of the respective parties hereto shall thenceforth attach to AdStar.com and may be enforced against it to the same extent as if such debts, liabilities, and duties had been incurred or contracted by it; all options, warrants and any other rights to purchase shares or other securities of the respective parties shall thenceforth attach to AdStar.com and may be enforced against it to the same extent as if such options, warrants and any other rights to purchase shares or other securities had been issued or contracted by it; and AdStar.com shall indemnify and hold harmless the Officers and Directors of each of the parties hereto against all such debts, liabilities and duties and against all claims and demands arising out of the merger. 7. CONVERSION OF SHARES. On the Effective Date each of the issued shares of Common Stock of Ad-Star Services and all rights and obligations in respect thereof shall be converted into that number of fully paid and nonassessable shares of Common Stock of AdStar.com that bears the same relationship to 3,000,000 that each share of Ad-Star Services bears to the total number of outstanding shares of Ad-Star Services on the Effective Date; In addition, each share of Common Stock of AdStar.com then owned by Ad-Star Services (and each certificate representing such shares) shall be cancelled. Each certificate representing shares of stock of Ad-Star Services shall for all purposes be deemed to evidence the ownership of the converted shares of AdStar.com. The holders of such certificates shall not be required immediately to surrender the same in exchange for certificates of common stock of AdStar.com; but, as certificates nominally representing shares of common stock of Ad-Star Services are surrendered for transfer, AdStar.com shall cause to be issued certificates representing the converted shares of AdStar.com. Following the surrender of shares of Common Stock of Ad-Star 2 3 Services for transfer, AdStar.com will cause to be issued certificates representing shares of its Common Stock. 8. TERMINATION. This Agreement and Plan of Merger may be terminated and abandoned by action of the Board of Directors of the constituent corporations at any time prior to the Effective Date, notwithstanding stockholder authorization. IN WITNESS WHEREOF, the undersigned have been duly authorized to execute this instrument as a sealed instrument as of the date first above written. AD-STAR SERVICES, INCORPORATED ADSTAR.COM, INC. by: _________________________ by:__________________________ Leslie Bernhard Leslie Bernhard Chief Executive Officer Chief Executive Officer 3 EX-4.2 6 FORM OF PUBLIC WARRANT 1 Exhibit 4.2 WARRANT AGREEMENT between ADSTAR.COM, INC. and ---------------------- Dated as of , 1999 2 This Agreement, dated as of __________, 1999, is between AdStar.com, Inc., a Delaware corporation (the "Company") and _________________, a ____________ corporation, (the "Warrant Agent"). The Company, at or about the time that it is entering into this Agreement, proposes to issue and sell to public investors up to 1,150,000 Units ("Units"). Each Unit consists of two shares of Common Stock of the Company ("Common Stock") and one Warrant (collectively, the "Warrants"), each Warrant exercisable to purchase one share of Common Stock for $_____, upon the terms and conditions and subject to adjustment in certain circumstances, all as set forth in this Agreement. The Company proposes to issue to the Representative of the Underwriters in the public offering of Units referred to above warrants to purchase up to 100,000 additional Units. The Company wishes to retain the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing so to act, in connection with the issuance, transfer, exchange and replacement of the certificates evidencing the Warrants to be issued under this Agreement (the "Warrant Certificates") and the exercise of the Warrants; The Company and the Warrant Agent wish to enter into this Agreement to set forth the terms and conditions of the Warrants and the rights of the holders thereof ("Warrantholders") and to set forth the respective rights and obligations of the Company and the Warrant Agent. Each Warrantholder is an intended beneficiary of this Agreement with respect to the rights of Warrantholders herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: Section 1. Appointment of Warrant Agent The Company appoints the Warrant Agent to act as agent for the Company in accordance with the instructions in this Agreement and the Warrant Agent accepts such appointment. Section 2. Date, Denomination and Execution of Warrant Certificates The Warrant Certificates (and the Form of Election to Purchase and the Form of Assignment to be printed on the reverse thereof) shall be in registered form only and shall be substantially of the tenor and purport recited in Exhibit A hereto, and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law, or with any rule or regulation made pursuant thereto, or with any rule or regulation of any stock exchange on which the Common Stock or the Warrants may be listed or any automated quotation system, or to conform to usage. Each Warrant Certificate shall entitle the registered holder thereof, subject to the provisions of this Agreement and of the Warrant Certificate, to purchase, during the period commencing 30 days after the offering of these warrants and expiring on or before the close of business on __________, 2004 (the "Expiration Date"), one fully paid and non-assessable share of Common Stock for each Warrant evidenced by such Warrant Certificate, subject to adjustments as provided in Sections 6 hereof, for $_____ (the "Exercise Price"). Each Warrant Certificate issued as a part of a Unit offered to the public as described in the recitals, above, shall be dated _____________, 1999; each other Warrant Certificate shall be dated the date on which the Warrant Agent receives valid issuance instructions from the Company or a transferring holder of a Warrant Certificate or, if such instructions specify another date, such other date. 2 3 For purposes of this Agreement, the term "close of business" on any given date shall mean 5:00 p.m., Eastern time, on such date; provided, however, that if such date is not a business day, it shall mean 5:00 p.m., Eastern time, on the next succeeding business day. For purposes of this Agreement, the term "business day" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in New York, New York are authorized or obligated by law to be closed. Each Warrant Certificate shall be executed on behalf of the Company by the Chairman of the Board or its President or a Vice President, either manually or by facsimile signature printed thereon, and have affixed thereto the Company's seal or a facsimile thereof which shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. Each Warrant Certificate shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any Warrant Certificate shall cease to be such officer of the Company before countersignature by the Warrant Agent and issue and delivery thereof by the Company, such Warrant Certificate, nevertheless, may be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificate had not ceased to be such officer of the Company. Section 3. Subsequent Issue of Warrant Certificates Subsequent to their original issuance, no Warrant Certificates shall be reissued except (i) Warrant Certificates issued upon transfer thereof in accordance with Section 4 hereof, (ii) Warrant Certificates issued upon any combination, split-up or exchange of Warrant Certificates pursuant to Section 4 hereof, (iii) Warrant Certificates issued in replacement of mutilated, destroyed, lost or stolen Warrant Certificates pursuant to Section 5 hereof, (iv) Warrant Certificates issued upon the partial exercise of Warrant Certificates pursuant to Section 7 hereof, and (v) Warrant Certificates issued to reflect any adjustment or change in the Exercise Price or the number or kind of shares purchasable thereunder pursuant to Section 22 hereof. The Warrant Agent is hereby irrevocably authorized to countersign and deliver, in accordance with the provisions of said Sections 4, 5, 7 and 22, the new Warrant Certificates required for purposes thereof, and the Company, whenever required by the Warrant Agent, will supply the Warrant Agent with Warrant Certificates duly executed on behalf of the Company for such purposes. Section 4. Transfers and Exchanges of Warrant Certificates The Warrant Agent will keep or cause to be kept books for registration of ownership and transfer of the Warrant Certificates issued hereunder. Such registers shall show the names and addresses of the respective holders of the Warrant Certificates and the number of Warrants evidenced by each such Warrant Certificate. The Warrant Agent shall, from time to time, register the transfer of any outstanding Warrants upon the books to be maintained by the Warrant Agent for that purpose, upon surrender of the Warrant Certificate evidencing such Warrants, with the Form of Assignment duly filled in and executed with such signature guaranteed by a banking institution or NASD member and such supporting documentation as the Warrant Agent or the Company may reasonably require, to the Warrant Agent at its stock transfer office in __________, California at any time on or before the Expiration Date, and upon payment to the Warrant Agent for the account of the Company of an amount equal to any applicable transfer tax. Payment of the amount of such tax may be made in cash, or by certified or official bank check, payable in lawful money of the United States of America to the order of the Company. Upon receipt of a Warrant Certificate, with the Form of Assignment duly filled in and executed, accompanied by payment of an amount equal to any applicable transfer tax, the Warrant Agent shall promptly cancel the surrendered Warrant Certificate and countersign and deliver to the transferee a new Warrant Certificate for the number of full Warrants transferred to such transferee; provided, however, that in case the registered holder of any Warrant Certificate shall elect to transfer fewer than all of the Warrants evidenced by such Warrant 3 4 Certificate, the Warrant Agent in addition shall promptly countersign and deliver to such registered holder a new Warrant Certificate or Certificates for the number of full Warrants not so transferred. Any Warrant Certificate or Certificates may be exchanged at the option of the holder thereof for another Warrant Certificate or Certificates of different denominations, of like tenor and representing in the aggregate the same number of Warrants, upon surrender of such Warrant Certificate or Certificates, with the Form of Assignment duly filled in and executed, to the Warrant Agent, at any time or from time to time after the close of business on the date hereof and prior to the close of business on the Expiration Date. The Warrant Agent shall promptly cancel the surrendered Warrant Certificate and deliver the new Warrant Certificate pursuant to the provisions of this Section. Section 5. Mutilated, Destroyed, Lost or Stolen Warrant Certificates Upon receipt by the Company and the Warrant Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of any Warrant Certificate, and in the case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and reimbursement to them of all reasonable expenses incidental thereto, and, in the case of mutilation, upon surrender and cancellation of the Warrant Certificate, the Warrant Agent shall countersign and deliver a new Warrant Certificate of like tenor for the same number of Warrants. Section 6. Adjustments of Number and Kind of Shares Purchasable and Exercise Price The number and kind of securities or other property purchasable upon exercise of a Warrant shall be subject to adjustment from time to time upon the occurrence, after the date hereof, of any of the following events: A. In case the Company shall (1) pay a dividend in, or make a distribution of, shares of capital stock on its outstanding Common Stock, (2) subdivide its outstanding shares of Common Stock into a greater number of such shares or (3) combine its outstanding shares of Common Stock into a smaller number of such shares, the total number of shares of Common Stock purchasable upon the exercise of each Warrant outstanding immediately prior thereto shall be adjusted so that the holder of any Warrant Certificate thereafter surrendered for exercise shall be entitled to receive at the same aggregate Exercise Price the number of shares of capital stock (of one or more classes) which such holder would have owned or have been entitled to receive immediately following the happening of any of the events described above had such Warrant been exercised in full immediately prior to the record date with respect to such event. Any adjustment made pursuant to this Subsection shall, in the case of a stock dividend or distribution, become effective as of the record date therefor and, in the case of a subdivision or combination, be made as of the effective date thereof. If, as a result of an adjustment made pursuant to this Subsection, the holder of any Warrant Certificate thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock of the Company, the Board of Directors of the Company (whose determination shall be conclusive and shall be evidenced by a Board resolution filed with the Warrant Agent) shall determine the allocation of the adjusted Exercise Price between or among shares of such classes of capital stock. B. In the event of a capital reorganization or a reclassification of the Common Stock (except as provided in Subsection A. above or Subsection E. below), any Warrantholder, upon exercise of Warrants, shall be entitled to receive, in substitution for the Common Stock to which he would have become entitled upon exercise immediately prior to such reorganization or reclassification, the shares (of any class or classes) or other securities or property of the Company (or cash) that he would have been entitled to receive at the same aggregate Exercise Price upon such reorganization or reclassification if such Warrants had been exercised immediately prior to the record date with respect to such event; and in any such case, appropriate provision (as determined by the Board of Directors of the Company, whose determination shall be conclusive and shall be evidenced by a certified Board resolution filed with the Warrant Agent) shall be made for the application of this Section 6 with respect to the rights and interests thereafter of the Warrantholders (including but not limited to the allocation of the Exercise Price between or among shares of classes of capital stock), to the end that this Section 6 (including the adjustments of the 4 5 number of shares of Common Stock or other securities purchasable and the Exercise Price thereof) shall thereafter be reflected, as nearly as reasonably practicable, in all subsequent exercises of the Warrants for any shares or securities or other property (or cash) thereafter deliverable upon the exercise of the Warrants. C. Whenever the number of shares of Common Stock or other securities purchasable upon exercise of a Warrant is adjusted as provided in this Section 6, the Company will promptly file with the Warrant Agent a certificate signed by a Chairman or co-Chairman of the Board or the President or a Vice President of the Company and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company setting forth the number and kind of securities or other property purchasable upon exercise of a Warrant, as so adjusted, stating that such adjustments in the number or kind of shares or other securities or property conform to the requirements of this Section 6, and setting forth a brief statement of the facts accounting for such adjustments. Promptly after receipt of such certificate, the Company, or the Warrant Agent at the Company's request, will deliver, by first-class, postage prepaid mail, a brief summary thereof (to be supplied by the Company) to the registered holders of the outstanding Warrant Certificates; provided, however, that failure to file or to give any notice required under this Subsection, or any defect therein, shall not affect the legality or validity of any such adjustments under this Section 6; and provided, further, that, where appropriate, such notice may be given in advance and included as part of the notice required to be given pursuant to Section 12 hereof. D. In case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, the corporation formed by such consolidation or merger or the corporation which shall have acquired such assets, as the case may be, shall execute and deliver to the Warrant Agent a supplemental warrant agreement providing that the holder of each Warrant then outstanding shall have the right thereafter (until the expiration of such Warrant) to receive, upon exercise of such Warrant, solely the kind and amount of shares of stock and other securities and property (or cash) receivable upon such consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock of the Company for which such Warrant might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrant agreement shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided in this Section. The above provision of this Subsection shall similarly apply to successive consolidations, mergers, sales or transfers. The Warrant Agent shall not be under any responsibility to determine the correctness of any provision contained in any such supplemental warrant agreement relating to either the kind or amount of shares of stock or securities or property (or cash) purchasable by holders of Warrant Certificates upon the exercise of their Warrants after any such consolidation, merger, sale or transfer or of any adjustment to be made with respect thereto, but subject to the provisions of Section 20 hereof, may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, a certificate of a firm of independent certified public accountants (who may be the accountants regularly employed by the Company) with respect thereto. E. Irrespective of any adjustments in the number or kind of shares issuable upon exercise of Warrants, Warrant Certificates theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Warrant Certificates initially issuable pursuant to this Warrant Agreement. F. The Company may retain a firm of independent public accountants of recognized standing, which may be the firm regularly retained by the Company, selected by the Board of Directors of the Company or the Executive Committee of said Board, and not disapproved by the Warrant Agent, to make any computation required under this Section, and a certificate signed by such firm shall, in the absence of fraud or gross negligence, be conclusive evidence of the correctness of any computation made under this Section. G. For the purpose of this Section, the term "Common Stock" shall mean (i) the Common Stock or (ii) any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at 5 6 any time as a result of an adjustment made pursuant to this Section, the holder of any Warrant thereafter surrendered for exercise shall become entitled to receive any shares of capital stock of the Company other than shares of Common Stock, thereafter the number of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this Section, and all other provisions of this Agreement, with respect to the Common Stock, shall apply on like terms to any such other shares. H. The Company may, from time to time and to the extent permitted by law, reduce the exercise price of the Warrants by any amount for a period of not less than 20 days. If the Company so reduces the exercise price of the Warrants, it will give not less than 15 days' notice of such decrease, which notice may be in the form of a press release, and shall take such other steps as may be required under applicable law in connection with any offers or sales of securities at the reduced price. Section 7. Exercise and Redemption of Warrants Unless the Warrants have been redeemed as provided in this Section 7, the registered holder of any Warrant Certificate may exercise the Warrants evidenced thereby, in whole at any time or in part from time to time during the period commencing 30 days after the offering of these warrants and expiring at or prior to the close of business, on the Expiration Date, subject to the provisions of Section 9, at which time the Warrant Certificates shall be and become wholly void and of no value. Warrants may be exercised by their holders or redeemed by the Company as follows: A. Exercise of Warrants shall be accomplished upon surrender of the Warrant Certificate evidencing such Warrants, with the Form of Election to Purchase on the reverse side thereof duly filled in and executed, to the Warrant Agent at its stock transfer office in _________, California, together with payment to the Company of the Exercise Price (as of the date of such surrender) of the Warrants then being exercised and an amount equal to any applicable transfer tax and, if requested by the Company, any other taxes or governmental charges which the Company may be required by law to collect in respect of such exercise. Payment of the Exercise Price and other amounts may be made by wire transfer of good funds, or by certified or bank cashier's check, payable in lawful money of the United States of America to the order of the Company. No adjustment shall be made for any cash dividends, whether paid or declared, on any securities issuable upon exercise of a Warrant. B. Upon receipt of a Warrant Certificate, with the Form of Election to Purchase duly filled in and executed, accompanied by payment of the Exercise Price of the Warrants being exercised (and of an amount equal to any applicable taxes or government charges as aforesaid), the Warrant Agent shall promptly request from the Transfer Agent with respect to the securities to be issued and deliver to or upon the order of the registered holder of such Warrant Certificate, in such name or names as such registered holder may designate, a certificate or certificates for the number of full shares of the securities to be purchased, together with cash made available by the Company pursuant to Section 8 hereof in respect of any fraction of a share of such securities otherwise issuable upon such exercise. If the Warrant is then exercisable to purchase property other than securities, the Warrant Agent shall take appropriate steps to cause such property to be delivered to or upon the order of the registered holder of such Warrant Certificate. In addition, if it is required by law and upon instruction by the Company, the Warrant Agent will deliver to each Warrantholder a prospectus which complies with the provisions of Section 9 of the Securities Act of 1933 and the Company agrees to supply Warrant Agent with sufficient number of prospectuses to effectuate that purpose. C. In case the registered holder of any Warrant Certificate shall exercise fewer than all of the Warrants evidenced by such Warrant Certificate, the Warrant Agent shall promptly countersign and deliver to the registered holder of such Warrant Certificate, or to his duly authorized assigns, a new Warrant Certificate or Certificates evidencing the number of Warrants that were not so exercised. D. Each person in whose name any certificate for securities is issued upon the exercise of Warrants shall for all purposes be deemed to have become the holder of record of the securities represented thereby as of, and such certificate shall be dated, the date upon which the Warrant Certificate was duly surrendered in proper form and 6 7 payment of the Exercise Price (and of any applicable taxes or other governmental charges) was made; provided, however, that if the date of such surrender and payment is a date on which the stock transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares as of, and the certificate for such shares shall be dated, the next succeeding business day on which the stock transfer books of the Company are open (whether before, on or after the Expiration Date) and the Warrant Agent shall be under no duty to deliver the certificate for such shares until such date. The Company covenants and agrees that it shall not cause its stock transfer books to be closed for a period of more than 20 consecutive business days except upon consolidation, merger, sale of all or substantially all of its assets, dissolution or liquidation or as otherwise provided by law. E. The Warrants outstanding at the time of a redemption may be redeemed at the option of the Company, in whole or in part on a pro-rata basis, at any time if, at the time notice of such redemption is given by the Company as provided in Paragraph F, below, the Daily Price has exceeded $_____ for the twenty consecutive trading days immediately preceding the date of such notice, at a price equal to $0.25 per Warrant (the "Redemption Price"). For the purpose of the foregoing sentence, the term "Daily Price" shall mean, for any relevant day, the closing bid price on that day as reported by the principal exchange or quotation system on which prices for the Common Stock are reported. On the redemption date the holders of record of redeemed Warrants shall be entitled to payment of the Redemption Price upon surrender of such redeemed Warrants to the Company at the principal office of the Warrant Agent in ___________, California. F. Notice of redemption of Warrants shall be given at least 30 days prior to the redemption date by mailing, by registered or certified mail, return receipt requested, a copy of such notice to the Warrant Agent and to all of the holders of record of Warrants at their respective addresses appearing on the books or transfer records of the Company or such other address designated in writing by the holder of record to the Warrant Agent not less than 40 days prior to the redemption date. 7 8 G. From and after the redemption date, all rights of the Warrantholders (except the right to receive the Redemption Price) shall terminate, but only if (a) no later than one day prior to the redemption date the Company shall have irrevocably deposited with the Warrant Agent as paying agent a sufficient amount to pay on the redemption date the Redemption Price for all Warrants called for redemption and (b) the notice of redemption shall have stated the name and address of the Warrant Agent and the intention of the Company to deposit such amount with the Warrant Agent no later than one day prior to the redemption date. H. The Warrant Agent shall pay to the holders of record of redeemed Warrants all monies received by the Warrant Agent for the redemption of Warrants to which the holders of record of such redeemed Warrants who shall have surrendered their Warrants are entitled. I. Any amounts deposited with the Warrant Agent that are not required for redemption of Warrants may be withdrawn by the Company. Any amounts deposited with the Warrant Agent that shall be unclaimed after six months after the redemption date may be withdrawn by the Company, and thereafter the holders of the Warrants called for redemption for which such funds were deposited shall look solely to the Company for payment. The Company shall be entitled to the interest, if any, on funds deposited with the Warrant Agent and the holders of redeemed Warrants shall have no right to any such interest. J. If the Company fails to make a sufficient deposit with the Warrant Agent as provided above, the holder of any Warrants called for redemption may at the option of the holder (a) by notice to the Company declare the notice of redemption a nullity as to such holder, or (b) maintain an action against the Company for the Redemption Price. If the holder brings such an action, the Company will pay reasonable attorneys' fees of the holder. If the holder fails to bring an action against the Company for the Redemption Price within 60 days after the redemption date, the holder shall be deemed to have elected to declare the notice of redemption to be a nullity as to such holder and such notice shall be without any force or effect as to such holder. Except as otherwise specifically provided in this Paragraph J, a notice of redemption, once mailed by the Company as provided in Paragraph F shall be irrevocable. Section 8. Fractional Interests The Company shall not be required to issue any Warrant Certificate evidencing a fraction of a Warrant or to issue fractions of shares of securities on the exercise of the Warrants. If any fraction (calculated to the nearest one-hundredth) of a Warrant or a share of securities would, except for the provisions of this Section, be issuable on the exercise of any Warrant, the Company shall, at its option, either purchase such fraction for an amount in cash equal to the current value of such fraction computed on the basis of the closing market price (as quoted on NASDAQ) on the trading day immediately preceding the day upon which such Warrant Certificate was surrendered for exercise in accordance with Section 7 hereof or issue the required fractional Warrant or share. By accepting a Warrant Certificate, the holder thereof expressly waives any right to receive a Warrant Certificate evidencing any fraction of a Warrant or to receive any fractional share of securities upon exercise of a Warrant, except as expressly provided in this Section 8. Section 9. Reservation of Equity Securities The Company covenants that it will at all times reserve and keep available, free from any pre-emptive rights, out of its authorized and unissued equity securities, solely for the purpose of issue upon exercise of the Warrants, such number of shares of equity securities of the Company as shall then be issuable upon the exercise of all outstanding Warrants ("Equity Securities"). The Company covenants that all Equity Securities which shall be so issuable shall, upon such issue, be duly authorized, validly issued, fully paid and non-assessable. The Company covenants that if any equity securities, required to be reserved for the purpose of issue upon exercise of the Warrants hereunder, require registration with or approval of any governmental authority under any federal or state law before such shares may be issued upon exercise of Warrants, the Company will use all commercially reasonable efforts to cause such securities to be duly registered, or approved, as the case may 8 9 be, and, to the extent practicable, take all such action in anticipation of and prior to the exercise of the Warrants, including, without limitation, filing any and all post-effective amendments to the Company's Registration Statement on Form SB-2 (Registration No. ___-_____) necessary to permit a public offering of the securities underlying the Warrants at any and all times during the term of this Agreement, provided, however, that in no event shall such securities be issued, and the Company is authorized to refuse to honor the exercise of any Warrant, if such exercise would result in the opinion of the Company's Board of Directors, upon advice of counsel, in the violation of any law; and provided further that, in the case of a Warrant exercisable solely for securities listed on a securities exchange or for which there are at least two independent market makers, in lieu of obtaining such registration or approval, the Company may elect to redeem Warrants submitted to the Warrant Agent for exercise for a price equal to the difference between the aggregate low asked price, or closing price, as the case may be, of the securities for which such Warrant is exercisable on the date of such submission and the Exercise Price of such Warrants; in the event of such redemption, the Company will pay to the holder of such Warrants the above-described redemption price in cash within 10 business days after receipt of notice from the Warrant Agent that such Warrants have been submitted for exercise. Section 10. Reduction of Conversion Price Below Par Value Before taking any action that would cause an adjustment pursuant to Section 6 hereof reducing the portion of the Exercise Price required to purchase one share of capital stock below the then par value (if any) of a share of such capital stock, the Company will use its best efforts to take any corporate action which, in the opinion of its counsel, may be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of such capital stock. Section 11. Payment of Taxes The Company covenants and agrees that it will pay when due and payable any and all federal and state documentary stamp and other original issue taxes which may be payable in respect of the original issuance of the Warrant Certificates, or any shares of Common Stock or other securities upon the exercise of Warrants. The Company shall not, however, be required (i) to pay any tax which may be payable in respect of any transfer involved in the transfer and delivery of Warrant Certificates or the issuance or delivery of certificates for Common Stock or other securities in a name other than that of the registered holder of the Warrant Certificate surrendered for purchase or (ii) to issue or deliver any certificate for shares of Common Stock or other securities upon the exercise of any Warrant Certificate until any such tax shall have been paid, all such tax being payable by the holder of such Warrant Certificate at the time of surrender. Section 12. Notice of Certain Corporate Action In case the Company after the date hereof shall propose (i) to offer to the holders of Common Stock, generally, rights to subscribe to or purchase any additional shares of any class of its capital stock, any evidences of its indebtedness or assets, or any other rights or options or (ii) to effect any reclassification of Common Stock (other than a reclassification involving merely the subdivision or combination of outstanding shares of Common Stock) or any capital reorganization, or any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or any sale, transfer or other disposition of its property and assets substantially as an entirety, or the liquidation, voluntary or involuntary dissolution or winding-up of the Company, then, in each such case, the Company shall file with the Warrant Agent and the Company, or the Warrant Agent on its behalf, shall mail (by first-class, postage prepaid mail) to all registered holders of the Warrant Certificates notice of such proposed action, which notice shall specify the date on which the books of the Company shall close or a record be taken for such offer of rights or options, or the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, voluntary or involuntary dissolution or winding-up shall take place or commence, as the case may be, and which shall also specify any record date for determination of holders of Common Stock entitled to vote thereon or participate therein and shall set forth such facts with respect thereto as shall be reasonably necessary to indicate any adjustments in the Exercise Price and the number or kind of shares or other securities purchasable upon exercise 9 10 of Warrants which will be required as a result of such action. Such notice shall be filed and mailed in the case of any action covered by clause (i) above, at least ten days prior to the record date for determining holders of the Common Stock for purposes of such action or, if a record is not to be taken, the date as of which the holders of shares of Common Stock of record are to be entitled to such offering; and, in the case of any action covered by clause (ii) above, at least 20 days prior to the earlier of the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, voluntary or involuntary dissolution or winding-up is expected to become effective and the date on which it is expected that holders of shares of Common Stock of record on such date shall be entitled to exchange their shares for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, voluntary or involuntary dissolution or winding-up. Failure to give any such notice or any defect therein shall not affect the legality or validity of any transaction listed in this Section 12. Section 13. Disposition of Proceeds on Exercise of Warrant Certificates, etc. The Warrant Agent shall account promptly to the Company with respect to Warrants exercised and concurrently pay to the Company all moneys received by the Warrant Agent for the purchase of securities or other property through the exercise of such Warrants. The Warrant Agent shall keep copies of this Agreement available for inspection by Warrantholders during normal business hours at its stock transfer office. Copies of this Agreement may be obtained upon written request addressed to the Warrant Agent at its stock transfer office in __________, California. Section 14. Warrantholder Not Deemed a Stockholder No Warrantholder, as such, shall be entitled to vote, receive dividends or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise of the Warrants represented thereby for any purpose whatever, nor shall anything contained herein or in any Warrant Certificate be construed to confer upon any Warrantholder, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, merger, conveyance or otherwise), or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 12 hereof), or to receive dividend or subscription rights, or otherwise, until such Warrant Certificate shall have been exercised in accordance with the provisions hereof and the receipt of the Exercise Price and any other amounts payable upon such exercise by the Warrant Agent. Section 15. Right of Action All rights of action in respect to this Agreement are vested in the respective registered holders of the Warrant Certificates; and any registered holder of any Warrant Certificate, without the consent of the Warrant Agent or of any other holder of a Warrant Certificate, may, in his own behalf for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company suitable to enforce, or otherwise in respect of, his right to exercise the Warrants evidenced by such Warrant Certificate, for the purchase of shares of the Common Stock in the manner provided in the Warrant Certificate and in this Agreement. Section 16. Agreement of Holders of Warrant Certificates Every holder of a Warrant Certificate by accepting the same consents and agrees with the Company, the Warrant Agent and with every other holder of a Warrant Certificate that: 10 11 A. the Warrant Certificates are transferable on the registry books of the Warrant Agent only upon the terms and conditions set forth in this Agreement; and B. the Company and the Warrant Agent may deem and treat the person in whose name the Warrant Certificate is registered as the absolute owner of the Warrant (notwithstanding any notation of ownership or other writing thereon made by anyone other than the Company or the Warrant Agent) for all purposes whatever and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. Section 17. Cancellation of Warrant Certificates In the event that the Company shall purchase or otherwise acquire any Warrant Certificate or Certificates after the issuance thereof, such Warrant Certificate or Certificates shall thereupon be delivered to the Warrant Agent and be canceled by it and retired. The Warrant Agent shall also cancel any Warrant Certificate delivered to it for exercise, in whole or in part, or delivered to it for transfer, split-up, combination or exchange. Warrant Certificates so canceled shall be delivered by the Warrant Agent to the Company from time to time, or disposed of in accordance with the instructions of the Company. Section 18. Concerning the Warrant Agent The Company agrees to pay to the Warrant Agent from time to time, on demand of the Warrant Agent, reasonable compensation for all services rendered by it hereunder and also its reasonable expenses, including counsel fees, and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Warrant Agent for, and to hold it harmless against, any loss, liability or expense, incurred without gross negligence, bad faith or willful misconduct on the part of the Warrant Agent, arising out of or in connection with the acceptance and administration of this Agreement. Section 19. Merger or Consolidation or Change of Name of Warrant Agent Any corporation into which the Warrant Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Warrant Agent shall be a party, or any corporation succeeding to the corporate trust business of the Warrant Agent, shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor warrant agent under the provisions of Section 21 hereof. In case at the time such successor to the Warrant Agent shall succeed to the agency created by this Agreement, any of the Warrant Certificates shall have been countersigned but not delivered, any such successor to the Warrant Agent may adopt the countersignature of the original Warrant Agent and deliver such Warrant Certificates so countersigned; and in case at that time any of the Warrant Certificates shall not have been countersigned, any successor to the Warrant Agent may countersign such Warrant Certificates either in the name of the predecessor Warrant Agent or in the name of the successor Warrant Agent; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement. In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrant Certificates shall have been countersigned but not delivered, the Warrant Agent may adopt the countersignature under its prior name and deliver Warrant Certificates so countersigned; and in case at that time any of the Warrant Certificates shall not have been countersigned, the Warrant Agent may countersign such Warrant Certificates either in its prior name or in its changed name; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement. Section 20. Duties of Warrant Agent 11 12 The Warrant Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Warrant Certificates, by their acceptance thereof, shall be bound: A. The Warrant Agent may consult with counsel satisfactory to it (who may be counsel for the Company or the Warrant Agent's in-house counsel), and the opinion of such counsel shall be full and complete authorization and protection to the Warrant Agent as to any action taken, suffered or omitted by it in good faith and in accordance with such opinion; provided, however, that the Warrant Agent shall have exercised reasonable care in the selection of such counsel. Fees and expenses of such counsel, to the extent reasonable, shall be paid by the Company. B. Whenever in the performance of its duties under this Agreement, the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by a Chairman or co-Chairman of the Board or the President or a Vice President or the Secretary of the Company and delivered to the Warrant Agent; and such certificate shall be full authorization to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. C. The Warrant Agent shall be liable hereunder only for its own gross negligence, bad faith or willful misconduct. D. The Warrant Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Warrant Certificates (except its countersignature on the Warrant Certificates and such statements or recitals as describe the Warrant Agent or action taken or to be taken by it) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. E. The Warrant Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Warrant Agent) or in respect of the validity or execution of any Warrant Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Warrant Certificate; nor shall it be responsible for the making of any change in the number of shares of Common Stock for which a Warrant is exercisable required under the provisions of Section 6 or responsible for the manner, method or amount of any such change or the ascertaining of the existence of facts that would require any such adjustment or change (except with respect to the exercise of Warrant Certificates after actual notice of any adjustment of the Exercise Price); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock to be issued pursuant to this Agreement or any Warrant Certificate or as to whether any shares of Common Stock will, when issued, be validly issued, fully paid and non-assessable. F. The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or take any other action likely to involve expense unless the Company or one or more registered holders of Warrant Certificates shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrants or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of judgment shall be for the ratable benefit of the registered holders of the Warrant Certificates, as their respective rights or interests may appear. G. The Warrant Agent and any stockholder, director, officer or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to or otherwise act as fully 12 13 and freely as though it were not Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. H. The Warrant Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from a Chairman or co-Chairman of the Board or President or a Vice President or the Secretary or the Controller of the Company, and to apply to such officers for advice or instructions in connection with the Warrant Agent's duties, and it shall not be liable for any action taken or suffered or omitted by it in good faith in accordance with instructions of any such officer. I. The Warrant Agent will not be responsible for any failure of the Company to comply with any of the covenants contained in this Agreement or in the Warrant Certificates to be complied with by the Company. J. The Warrant Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys, agents or employees and the Warrant Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys, agents or employees or for any loss to the Company resulting from such neglect or misconduct; provided, however, that reasonable care shall have been exercised in the selection and continued employment of such attorneys, agents and employees. K. The Warrant Agent will not incur any liability or responsibility to the Company or to any holder of any Warrant Certificate for any action taken, or any failure to take action, in reliance on any notice, resolution, waiver, consent, order, certificate, or other paper, document or instrument reasonably believed by the Warrant Agent to be genuine and to have been signed, sent or presented by the proper party or parties. L. The Warrant Agent will act hereunder solely as agent of the Company in a ministerial capacity, and its duties will be determined solely by the provisions hereof. The Warrant Agent will not be liable for anything which it may do or refrain from doing in connection with this Agreement except for its own negligence, bad faith or willful conduct. Section 21. Change of Warrant Agent The Warrant Agent may resign and be discharged from its duties under this Agreement upon 30 days' prior notice in writing mailed, by registered or certified mail, to the Company. The Company may remove the Warrant Agent or any successor warrant agent upon 30 days' prior notice in writing, mailed to the Warrant Agent or successor warrant agent, as the case may be, by registered or certified mail. If the Warrant Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Warrant Agent and shall, within 15 days following such appointment, give notice thereof in writing to each registered holder of the Warrant Certificates. If the Company shall fail to make such appointment within a period of 15 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent, then the Company agrees to perform the duties of the Warrant Agent hereunder until a successor Warrant Agent is appointed. After appointment and execution of a copy of this Agreement in effect at that time, the successor Warrant Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed; but the former Warrant Agent shall deliver and transfer to the successor Warrant Agent, within a reasonable time, any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Failure to give any notice provided for in this Section, however, or any defect therein shall not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of the successor warrant agent, as the case may be. Section 22. Issuance of New Warrant Certificates Notwithstanding any of the provisions of this Agreement or the several Warrant Certificates to the contrary, the Company may, at its option, issue new Warrant Certificates in such form as may be approved by its 13 14 Board of Directors to reflect any adjustment or change in the Exercise Price or the number or kind of shares purchasable under the several Warrant Certificates made in accordance with the provisions of this Agreement. Section 23. Notices Notice or demand pursuant to this Agreement to be given or made on the Company by the Warrant Agent or by the registered holder of any Warrant Certificate shall be sufficiently given or made if sent by first-class or registered mail, postage prepaid, addressed (until another address is filed in writing by the Company with the Warrant Agent) as follows: AdStar.com, Inc. at 4553 Glencoe Avenue, Suite 325 Marina del Rey, California 90292 Subject to the provisions of Section 21, any notice pursuant to this Agreement to be given or made by the Company or by the holder of any Warrant Certificate to or on the Warrant Agent shall be sufficiently given or made if sent by first-class or registered mail, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company) as follows: ------------------------- ------------------------- ------------------------- Any notice or demand authorized to be given or made to the registered holder of any Warrant Certificate under this Agreement shall be sufficiently given or made if sent by first-class or registered mail, postage prepaid, to the last address of such holder as it shall appear on the registers maintained by the Warrant Agent. Section 24. Modification of Agreement The Warrant Agent may, without the consent or concurrence of the Warrantholders, by supplemental agreement or otherwise, concur with the Company in making any changes or corrections in this Agreement that the Warrant Agent shall have been advised by counsel (who may be counsel for the Company) are necessary or desirable to cure any ambiguity or to correct any defective or inconsistent provision or clerical omission or mistake or manifest error herein contained, or to make any other provisions in regard to matters or questions arising hereunder and which shall not be inconsistent with the provisions of the Warrant Certificates and which shall not adversely affect the interests of the Warrantholders. As of the date hereof, this Agreement contains the entire and only agreement, understanding, representation, condition, warranty or covenant between the parties hereto with respect to the matters herein, supersedes any and all other agreements between the parties hereto relating to such matters, and may be modified or amended only by a written agreement signed by both parties hereto pursuant to the authority granted by the first sentence of this Section. Section 25. Successors All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 26. California Contract This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of California and for all purposes shall be construed in accordance with the laws of said State. 14 15 Section 27. Termination This Agreement shall terminate as of the close of business on the Expiration Date, or such earlier date upon which all Warrants shall have been exercised or redeemed, except that the Warrant Agent shall account to the Company as to all Warrants outstanding and all cash held by it as of the close of business on the Expiration Date. Section 28. Benefits of this Agreement Nothing in this Agreement or in the Warrant Certificates shall be construed to give to any person or corporation other than the Company, the Warrant Agent, and their respective successors and assigns hereunder and the registered holders of the Warrant Certificates any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent, their respective successors and assigns hereunder and the registered holders of the Warrant Certificates. Section 29. Descriptive Headings The descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. Section 30. Counterparts This Agreement may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, all as of the day and year first above written. AdStar.com, Inc. By: --------------------------------- Title: ------------------------------ By: ------------------------------- Title: 15 16 EXHIBIT A VOID AFTER 5 P.M. PACIFIC TIME ON __________, 2004 WARRANTS TO PURCHASE COMMON STOCK W_____ _________ Warrants ADSTAR.COM, INC. CUSIP ______________ THIS CERTIFIES THAT or registered assigns, is the registered holder of the number of Warrants ("Warrants") set forth above. Each Warrant entitles the holder thereof to purchase from AdStar.com, Inc., a corporation incorporated under the laws of the State of Delaware ("Company"), subject to the terms and conditions set forth hereinafter and in the Warrant Agreement hereinafter more fully described (the "Warrant Agreement") referred to, at any time during the period commencing 30 days after the offering of these warrants and expiring on or before the close of business on ___________, 2004 or, if such Warrant is redeemed as provided in the Warrant Agreement, at any time prior to the effective time of such redemption (the "Expiration Date"), one fully paid and non-assessable share of Common Stock of the Company ("Common Stock") upon presentation and surrender of this Warrant Certificate, with the instructions for the registration and delivery of Common Stock filled in, at the stock transfer office in __________, California, of __________________, Warrant Agent of the Company ("Warrant Agent") or of its successor warrant agent or, if there be no successor warrant agent, at the corporate offices of the Company, and upon payment of the Exercise Price (as defined in the Warrant Agreement) and any applicable taxes paid either in cash, or by certified or official bank check, payable in lawful money of the United States of America to the order of the Company. Each Warrant initially entitles the holder to purchase one share of Common Stock for $______. The number and kind of securities or other property for which the Warrants are exercisable are subject to further adjustment in certain events, such as mergers, splits, stock dividends, recapitalizations and the like, to prevent dilution. The Company may redeem any or all outstanding and unexercised Warrants at any time if the Daily Price has exceeded $_____ for twenty consecutive trading days immediately preceeding the date of notice of such redemption, upon 30 days notice, at a price equal to $____ per Warrant. For the purpose of the foregoing sentence, the term "Daily Price" shall mean, for any relevant day, the closing bid price on that day as reported by the principal exchange or quotation system on which prices for the Common Stock are reported. All Warrants not theretofore exercised or redeemed will expire on _________, 2004. This Warrant Certificate is subject to all of the terms, provisions and conditions of the Warrant Agreement, dated as of ____________, 1999 ("Warrant Agreement"), between the Company and the Warrant Agent, to all of which terms, provisions and conditions the registered holder of this Warrant Certificate consents by acceptance hereof. The Warrant Agreement is incorporated herein by reference and made a part hereof and reference is made to the Warrant Agreement for a full description of the rights, limitations of rights, obligations, duties and immunities of the Warrant Agent, the Company and the holders of the Warrant Certificates. Copies of the Warrant Agreement are available for inspection at the stock transfer office of the Warrant Agent or may be obtained upon written request addressed to the Company at 4553 Glencoe Avenue, Suite 325, Marina del Rey, California 90292, Attention: Chief Financial Officer. i 17 The Company shall not be required upon the exercise of the Warrants evidenced by this Warrant Certificate to issue fractions of Warrants, Common Stock or other securities, but shall make adjustment therefor in cash on the basis of the current market value of any fractional interest as provided in the Warrant Agreement. In certain cases, the sale of securities by the Company upon exercise of Warrants would violate the securities laws of the United States, certain states thereof or other jurisdictions. The Company has agreed to use all commercially reasonable efforts to cause a registration statement to continue to be effective during the term of the Warrants with respect to such sales under the Securities Act of 1933, and to take such action under the laws of various states as may be required to cause the sale of securities upon exercise to be lawful. However, the Company will not be required to honor the exercise of Warrants if, in the opinion of the Board of Directors, upon advice of counsel, the sale of securities upon such exercise would be unlawful. In certain cases, the Company may, but is not required to, purchase Warrants submitted for exercise for a cash price equal to the difference between the market price of the securities obtainable upon such exercise and the exercise price of such Warrants. This Warrant Certificate, with or without other Certificates, upon surrender to the Warrant Agent, any successor warrant agent or, in the absence of any successor warrant agent, at the corporate offices of the Company, may be exchanged for another Warrant Certificate or Certificates evidencing in the aggregate the same number of Warrants as the Warrant Certificate or Certificates so surrendered. If the Warrants evidenced by this Warrant Certificate shall be exercised in part, the holder hereof shall be entitled to receive upon surrender hereof another Warrant Certificate or Certificates evidencing the number of Warrants not so exercised. No holder of this Warrant Certificate, as such, shall be entitled to vote, receive dividends or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose whatever, nor shall anything contained in the Warrant Agreement or herein be construed to confer upon the holder of this Warrant Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof or give or withhold consent to any corporate action (whether upon any matter submitted to stockholders at any meeting thereof, or give or withhold consent to any merger, recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, conveyance or otherwise) or to receive notice of meetings or other actions affecting stockholders (except as provided in the Warrant Agreement) or to receive dividends or subscription rights or otherwise until the Warrants evidenced by this Warrant Certificate shall have been exercised and the Common Stock purchasable upon the exercise thereof shall have become deliverable as provided in the Warrant Agreement. If this Warrant Certificate shall be surrendered for exercise within any period during which the transfer books for the Company's Common Stock or other class of stock purchasable upon the exercise of the Warrants evidenced by this Warrant Certificate are closed for any purpose, the Company shall not be required to make delivery of certificates for shares purchasable upon such transfer until the date of the reopening of said transfer books. Every holder of this Warrant Certificate by accepting the same consents and agrees with the Company, the Warrant Agent, and with every other holder of a Warrant Certificate that: (a) this Warrant Certificate is transferable on the registry books of the Warrant Agent only upon the terms and conditions set forth in the Warrant Agreement, and (b) the Company and the Warrant Agent may deem and treat the person in whose name this Warrant Certificate is registered as the absolute owner hereof (notwithstanding any notation of ownership or other writing thereon made by anyone other than the Company or the Warrant Agent) for all purposes whatever and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. The Company shall not be required to issue or deliver any certificate for shares of Common Stock or other securities upon the exercise of Warrants evidenced by this Warrant Certificate until any tax which may be ii 18 payable in respect thereof by the holder of this Warrant Certificate pursuant to the Warrant Agreement shall have been paid, such tax being payable by the holder of this Warrant Certificate at the time of surrender. This Warrant Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Warrant Agent. WITNESS the facsimile signatures of the proper officers of the Company and its corporate seal. Dated: AdStar.com, Inc. By: --------------------------------- Chief Executive Officer Attest: ------------------------------ Secretary Countersigned - ----------------------------- By: --------------------------- Authorized Officer iii EX-4.3 7 FORM OF UNDERWRITERS WARRANT 1 Exhibit 4.3 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND IS NOT TRANSFERABLE EXCEPT AS PROVIDED HEREIN ADSTAR.COM, INC. PURCHASE WARRANT Issued to: PAULSON INVESTMENT COMPANY, INC. Exercisable to Purchase 100,000 Units of ADSTAR.COM, INC. Void after _________, 2004 2 This is to certify that, for value received and subject to the terms and conditions set forth below, the Warrantholder (hereinafter defined) is entitled to purchase, and the Company promises and agrees to sell and issue to the Warrantholder, at any time on or after __________, 1999 and on or before __________, 2004, up to 100,000 Units (hereinafter defined) at the Exercise Price (hereinafter defined). This Warrant Certificate is issued subject to the following terms and conditions: 1. Definitions of Certain Terms. Except as may be otherwise clearly required by the context, the following terms have the following meanings: (a) "Act" means the Securities Act of 1933, as amended. (b) "Cashless Exercise" means an exercise of Warrants in which, in lieu of payment of the Exercise Price, the Holder elects to receive a lesser number of Securities such that the value of the Securities that such Holder would otherwise have been entitled to receive but has agreed not to receive, as determined by the closing price of such Securities on the date of exercise or, if such date is not a trading day, on the next prior trading day, is equal to the Exercise Price with respect to such exercise. A Holder may only elect a Cashless Exercise if the Securities issuable by the Company on such exercise are publicly traded securities. (c) "Closing Date" means the date on which the Offering is closed. (d) "Commission" means the Securities and Exchange Commission. (e) "Common Stock" means the common stock, 0.0001 par value, of the Company. (f) "Company" means AdStar.com, Inc., a Delaware corporation. (g) "Company's Expenses" means any and all expenses payable by the Company or the Warrantholder in connection with an offering described in Section 6 hereof, except Warrantholder's Expenses. (h) "Effective Date" means the date on which the Registration Statement is declared effective by the Commission. (i) "Exercise Price" means the price at which the Warrantholder may purchase one Unit upon exercise of Warrants as determined from time to time pursuant to the provisions hereof. The initial Exercise Price is $____ per Unit. (j) "Offering" means the public offering of Units made pursuant to the Registration Statement. 2 3 (k) "Participating Underwriter" means any underwriter participating in the sale of the Securities pursuant to a registration under Section 6 of this Warrant Certificate. (l) "Registration Statement" means the Company's registration statement (File No. 333 -_____) as amended on the Closing Date. (m) "Rules and Regulations" means the rules and regulations of the Commission adopted under the Act. (n) "Securities" means the securities obtained or obtainable upon exercise of the Warrant or securities obtained or obtainable upon exercise, exchange, or conversion of such securities. (o) "Stock Derivative Securities" means the Common Stock included in the Units issuable on exercise of Warrants or any Securities issuable in lieu of such Common Stock pursuant to the provisions of Section 3. (p) "Unit" means two shares of Common Stock and one Unit Warrant. (q) "Unit Warrant" means a warrant to purchase one share of Common Stock issued pursuant to the Warrant Agreement. (r) "Warrant Agreement" means that certain Warrant Agreement, dated as of ________, 1999, by and between the Company and ____________________. (s) "Warrant Certificate" means a certificate evidencing the Warrant. (t) "Warrantholder" means a record holder of the Warrant or Securities. The initial Warrantholder is Paulson Investment Company, Inc. (u) "Warrantholder's Expenses" means the sum of (i) the aggregate amount of cash payments made to an underwriter, underwriting syndicate, or agent in connection with an offering described in Section 6 hereof multiplied by a fraction the numerator of which is the aggregate sales price of the Securities sold by such underwriter, underwriting syndicate, or agent in such offering and the denominator of which is the aggregate sales price of all of the securities sold by such underwriter, underwriting syndicate, or agent in such offering and (ii) all out-of-pocket expenses of the Warrantholder, except for the fees and disbursements of one firm retained as legal counsel for the Warrantholder that will be paid by the Company. (v) "Warrant" means the warrant evidenced by this certificate, any similar certificate issued in connection with the Offering, or any certificate obtained upon transfer or partial exercise of the Warrant evidenced by any such certificate. 3 4 2. Exercise of Warrants. All or any part of the Warrant may be exercised commencing on the first anniversary of the Effective Date and ending at 5 p.m. Pacific Time on the fifth anniversary of the Effective Date by surrendering this Warrant Certificate, together with appropriate instructions, duly executed by the Warrantholder or by its duly authorized attorney, at the office of the Company, 4553 Glencoe Avenue, Suite 325, Marina del Rey, California 90292, or at such other office or agency as the Company may designate. The date on which such instructions are received by the Company shall be the date of exercise. If the Holder has elected a Cashless Exercise, such instructions shall so state. Upon receipt of notice of exercise, the Company shall immediately instruct its transfer agent to prepare certificates for the Securities to be received by the Warrantholder upon completion of the Warrant exercise. When such certificates are prepared, the Company shall notify the Warrantholder and deliver such certificates to the Warrantholder or as per the Warrantholder's instructions immediately upon payment in full by the Warrantholder, in lawful money of the United States, of the Exercise Price payable with respect to the Securities being purchased, if any. If the Warrantholder shall represent and warrant that all applicable registration and prospectus delivery requirements for their sale have been complied with upon sale of the Securities received upon exercise of the Warrant, such certificates shall not bear a legend with respect to the Securities Act of 1933. If fewer than all the Securities purchasable under the Warrant are purchased, the Company will, upon such partial exercise, execute and deliver to the Warrantholder a new Warrant Certificate (dated the date hereof), in form and tenor similar to this Warrant Certificate, evidencing that portion of the Warrant not exercised. The Securities to be obtained on exercise of the Warrant will be deemed to have been issued, and any person exercising the Warrants will be deemed to have become a holder of record of those Securities, as of the date of the payment of the Exercise Price. 3. Adjustments in Certain Events. The number, class, and price of the Stock Derivative Securities are subject to adjustment from time to time upon the happening of certain events as follows: (a) If the outstanding shares of the Company's Common Stock are divided into a greater number of shares or a dividend in stock is paid on the Common Stock, the number of shares of Common Stock for which the Warrant is then partially exercisable will be proportionately increased and the Exercise Price will be proportionately reduced; and, conversely, if the outstanding shares of Common Stock are combined into a smaller number of shares of Common Stock, the number of shares of Common Stock for which the Warrant is then exercisable will be proportionately reduced and the Exercise Price will be proportionately increased. The increases and reductions provided for in this subsection 3(a) will be made with the intent and, as nearly as practicable, the effect that neither the percentage of the total equity of the Company obtainable on exercise of the Warrants nor the price payable for such percentage upon such exercise will be affected by any event described in this subsection 3(a). 4 5 (b) In case of any change in the Common Stock through merger, consolidation, reclassification, reorganization, partial or complete liquidation, purchase of substantially all the assets of the Company, or other change in the capital structure of the Company, then, as a condition of such change, lawful and adequate provision will be made so that the holder of this Warrant Certificate will have the right thereafter to receive upon the exercise of the Warrant the kind and amount of shares of stock or other securities or property to which he would have been entitled if, immediately prior to such event, he had held the number of shares of Common Stock obtainable upon the exercise of the Warrant. In any such case, appropriate adjustment will be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the Warrantholder, to the end that the provisions set forth herein will thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. The Company will not permit any change in its capital structure to occur unless the issuer of the shares of stock or other securities to be received by the holder of this Warrant Certificate, if not the Company, agrees to be bound by and comply with the provisions of this Warrant Certificate. (c) When any adjustment is required to be made in the number of shares of Common Stock, other securities, or the property purchasable upon exercise of the Warrant, the Company will promptly determine the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (i) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (ii) cause a copy of such statement to be mailed to the Warrantholder within thirty (30) days after the date of the event giving rise to the adjustment. (d) No fractional shares of Common Stock or other securities will be issued in connection with the exercise of the Warrant, but the Company will pay, in lieu of fractional shares, a cash payment therefor on the basis of the mean between the bid and asked prices of the Common Stock in the over-the-counter market or the closing price on a national securities exchange on the day immediately prior to exercise. (e) If securities of the Company or securities of any subsidiary of the Company are distributed pro rata to holders of Common Stock, such number of securities will be distributed to the Warrantholder or his assignee upon exercise of his rights hereunder as such Warrantholder or assignee would have been entitled to if this Warrant Certificate had been exercised prior to the record date for such distribution. The provisions with respect to adjustment of the Common Stock provided in this Section 3 will also apply to the securities to which the Warrantholder or his assignee is entitled under this subsection 3(e). (f) Notwithstanding anything herein to the contrary, there will be no adjustment made hereunder on account of the sale of the Common Stock or other Securities purchasable upon exercise of the Warrant. 5 6 4. Reservation of Securities. The Company agrees that the number of shares of Common Stock or other Securities sufficient to provide for the exercise of the Warrant upon the basis set forth above will at all times during the term of the Warrant be reserved for exercise. 5. Validity of Securities. All Securities delivered upon the exercise of the Warrant will be duly and validly issued in accordance with their terms, and the Company will pay all documentary and transfer taxes, if any, in respect of the original issuance thereof upon exercise of the Warrant. 6. Registration of Securities Issuable on Exercise of Warrant Certificate. (a) The Company will register the Securities with the Commission pursuant to the Act so as to allow the unrestricted sale of the Securities to the public from time to time commencing on the first anniversary of the Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of the Effective Date (the "Registration Period"). The Company will also file such applications and other documents necessary to permit the sale of the Securities to the public during the Registration Period in those states in which the Units were qualified for sale in the Offering or such other states as the Company and the Warrantholder agree to. In order to comply with the provisions of this Section 6(a), the Company is not required to file more than one registration statement. No registration right of any kind, "piggyback" or otherwise, will last longer than five years from the Effective Date. (b) The Company will pay all of the Company's Expenses and each Warrantholder will pay its pro rata share of the Warrantholder's Expenses relating to the registration, offer, and sale of the Securities. (c) Except as specifically provided herein, the manner and conduct of the registration, including the contents of the registration, will be entirely in the control and at the discretion of the Company. The Company will file such post-effective amendments and supplements as may be necessary to maintain the currency of the registration statement during the period of its use. In addition, if the Warrantholder participating in the registration is advised by counsel that the registration statement, in their opinion, is deficient in any material respect, the Company will use its best efforts to cause the registration statement to be amended to eliminate the concerns raised. (d) The Company will furnish to the Warrantholder the number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as it may reasonably request in order to facilitate the disposition of Securities owned by it. (e) The Company will, at the request of Warrantholders holding at least 50 percent of the then outstanding Warrants, (i) furnish an opinion of the counsel representing the Company for the purposes of the registration pursuant to this Section 6, 6 7 addressed to the Warrantholders and any Participating Underwriter, (ii) furnish an appropriate letter from the independent public accountants of the Company, addressed to the Warrantholders and any Participating Underwriter, and (iii) make representations and warranties to the Warrantholders and any Participating Underwriter. A request pursuant to this subsection (e) may be made on three occasions. The documents required to be delivered pursuant to this subsection (e) will be dated within ten days of the request and will be, in form and substance, equivalent to similar documents furnished to the underwriters in connection with the Offering, with such changes as may be appropriate in light of changed circumstances. 7. Indemnification in Connection with Registration. (a) If any of the Securities are registered, the Company will indemnify and hold harmless each selling Warrantholder, any person who controls any selling Warrantholder within the meaning of the Act, and any Participating Underwriter against any losses, claims, damages, or liabilities, joint or several, to which any Warrantholder, controlling person, or Participating Underwriter may be subject under the Act or otherwise; and it will reimburse each Warrantholder, each controlling person, and each Participating Underwriter for any legal or other expenses reasonably incurred by the Warrantholder, controlling person, or Participating Underwriter in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities, joint or several (or actions in respect thereof), arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained, on the effective date thereof, in any such registration statement or any preliminary prospectus or final prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any case to the extent that any loss, claim, damage, or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any registration statement, preliminary prospectus, final prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished by a Warrantholder for use in the preparation thereof. The indemnity agreement contained in this subparagraph (a) will not apply to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Company, such approval not to be unreasonably withheld. (b) Each selling Warrantholder, as a condition of the Company's registration obligation, will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed any registration statement or other filing or any amendment or supplement thereto, and any person who controls the Company within the meaning of the Act, against any losses, claims, damages, or liabilities to which the Company or any such director, officer, or controlling person may become subject under the Act or otherwise, and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with 7 8 investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in said registration statement, any preliminary or final prospectus, or other filing, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in said registration statement, preliminary or final prospectus, or other filing, or amendment or supplement, in reliance upon and in conformity with written information furnished by such Warrantholder for use in the preparation thereof; provided, however, that the indemnity agreement contained in this subparagraph (b) will not apply to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Warrantholder, such approval not to be unreasonably withheld. (c) Promptly after receipt by an indemnified party under subparagraphs (a) or (b) above of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, notify the indemnifying party of the commencement thereof; but the omission to notify the indemnifying party will not relieve it from any liability that it may have to any indemnified party otherwise than under subparagraphs (a) and (b). (d) If any such action is brought against any indemnified party and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; and after notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. 8. Restrictions on Transfer. This Warrant Certificate and the Warrant may not be sold, transferred, assigned or hypothecated for a one-year period after the Effective Date except to underwriters of the Offering or to individuals who are either a partner or an officer of such an underwriter or by will or by operation of law. The Warrant may be divided or combined, upon request to the Company by the Warrantholder, into a certificate or certificates evidencing the same aggregate number of Warrants. 9. No Rights as a Shareholder. Except as otherwise provided herein, the Warrantholder will not, by virtue of ownership of the Warrant, be entitled to any rights of a shareholder of the Company but will, upon written request to the Company, be entitled to receive such quarterly or annual reports as the Company distributes to its shareholders. 8 9 10. Notice. Any notices required or permitted to be given hereunder will be in writing and may be served personally or by mail; and if served will be addressed as follows: If to the Company: AdStar.com, Inc. 4553 Glencoe Avenue, Suite 325 Marina del Rey, California 90292 Attn: Treasurer If to the Warrantholder: at the address furnished by the Warrantholder to the Company for the purpose of notice. Any notice so given by mail will be deemed effectively given 48 hours after mailing when deposited in the United States mail, registered or certified mail, return receipt requested, postage prepaid and addressed as specified above. Any party may by written notice to the other specify a different address for notice purposes. 11. Applicable Law. This Warrant Certificate will be governed by and construed in accordance with the laws of the State of Oregon, without reference to conflict of laws principles thereunder. All disputes relating to this Warrant Certificate shall be tried before the courts of Oregon located in Multnomah County, Oregon to the exclusion of all other courts that might have jurisdiction. Dated as of , 1999 ADSTAR.COM, INC. By: ---------------------- President Agreed and Accepted as of , 1999 PAULSON INVESTMENT COMPANY, INC. By: ----------------------------- Lorraine Maxfield, Senior Vice President -- Research 9 EX-10.1 8 1999 STOCK OPTION PLAN 1 AD-STAR SERVICES, INC. 1999 STOCK OPTION PLAN 1. Purpose; Types of Awards; Construction. The purpose of the Ad-Star Services, Inc. 1999 Stock Option Plan (the "Plan") is to align the interests of officers, other key employees, consultants and non-employee directors of Ad-Star Services, Inc. (the "Company") and its subsidiaries with those of the shareholders of the Company, to afford an incentive to such officers, employees, consultants and directors to continue as such, to increase their efforts on behalf of the Company and to promote the success of the Company's business. To further such purposes, the Committee, as defined below, may grant options to purchase Common Shares. The provisions of the Plan are intended to satisfy the requirements of Section 16(b) of the Securities Exchange Act of 1934 and of Section 162(m) of the Internal Revenue Code of 1986, as amended, and shall be interpreted in a manner consistent with the requirements thereof, as now or hereafter construed, interpreted and applied by regulations, rulings and cases. 2. Definitions. As used in this Plan, the following words and phrases shall have the meanings indicated below: (a) "Agreement" shall mean a written agreement entered into between the Company and an Optionee in connection with an award under the Plan. (b) "Board" shall mean the Board of Directors of the Company. (c) "Cause" when used in connection with the termination of an Optionee's employment by the Company or the cessation of an Optionee's service as a consultant or a member of the Board, shall mean (i) the conviction of the Optionee for the commission of a felony, (ii) the willful and continued failure by the Optionee substantially to perform his duties and obligations to the Company or a Subsidiary (other than any such failure resulting from his incapacity due to physical or mental illness), or (iii) the willful engaging by the Optionee in misconduct that is demonstrably injurious to the Company or a Subsidiary. For purposes of this Section 2(c), no act, or failure to act, on an Optionee's part shall be considered "willful" unless done, or omitted to be done, by the Optionee in bad faith and without reasonable belief that his action or omission was in the best interest of the Company. The Committee shall determine whether a termination of employment is for Cause for purposes of the Plan. 2 (d) "Change in Control" shall mean the occurrence of the event set forth in any of the following paragraphs: (i) any Person (as defined below) is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act (as defined below)), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its subsidiaries) representing 50% or more of the combined voting power of the Company's then outstanding securities; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Company or a direct or indirect subsidiary thereof with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its subsidiaries) representing 50% or more of the combined voting power of the Company's then outstanding securities; or (iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale. 2 3 For purposes of this Section 2(d), "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" shall mean a committee established by the Board to administer the Plan. (g) "Common Shares" shall mean the common shares, without par value, of the Company. (h) "Company" shall mean Ad-Star Services, Inc., a corporation organized under the laws of the State of New York, or any successor corporation. (i) "Disability" shall mean an Optionee's inability to perform his duties with the Company or on the Board by reason of any medically determinable physical or mental impairment, as determined by a physician selected by the Optionee and acceptable to the Company. (j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time, and as now or hereafter construed, interpreted and applied by regulations, rulings and cases. (k) "Fair Market Value" per share as of a particular date shall mean (i) if the Common Shares are then listed on a national securities exchange, the closing sales price per Common Shares on the national securities exchange on which the Common Shares are principally traded for the last preceding date on which there was a sale of such Common Shares on such exchange, or (ii) if the Common Shares are then traded in an over-the-counter market, the closing bid price for the Common Shares in such over-the-counter market for the last preceding date on which there was a sale of such Common Shares in such market, or (iii) if the Common Shares are not then listed on a national securities exchange or traded in an over-the-counter market, such value as the Committee, in its sole discretion, shall determine. (l) "Incentive Stock Option" shall mean any option intended to be and designated as an incentive stock option within the meaning of Section 422 of the Code. (m) "Non-employee Director" shall mean a member of the Board who is not an employee of the Company. 3 4 (n) "Nonqualified Option" shall mean an Option that is not an Incentive Stock Option. (o) "Option" shall mean the right, granted hereunder, to purchase Common Shares. Options granted by the Committee pursuant to the Plan may constitute either Incentive Stock Options or Nonqualified Stock Options. (p) "Optionee" shall mean a person who receives a grant of an Option. (q) "Option Price" shall mean the exercise price of the Common Shares covered by an Option. (r) "Parent" shall mean any company (other than the Company) in an unbroken chain of companies ending with the Company if, at the time of granting an Option, each of the companies other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other companies in such chain. (s) "Plan" shall mean this Ad-Star Services, Inc. 1999 Stock Option Plan. (t) "Retirement" shall mean the retirement of an Optionee in accordance with the terms of any tax-qualified retirement plan maintained by the Company or a Subsidiary in which the Optionee participates. If the Optionee is not a participant in such a plan, such term shall mean the termination of the Optionee's employment or cessation of the Optionee's service as a member of the Board, other than by reason of death, Disability or Cause on or after attainment of the age of 65. (u) "Rule 16b-3" shall mean Rule 16b-3, as from time to time in effect, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, including any successor to such Rule. (v) "Subsidiary" shall mean any company (other than the Company) in an unbroken chain of companies beginning with the Company if, at the time of granting an Option, each of the companies other than the last company in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other companies in such chain. (w) "Ten Percent Stockholder" shall mean an Optionee who, at the time an Incentive Stock Option is granted, owns (or is deemed to own pursuant to the attribution rules of Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary. 4 5 3. Administration. The Plan shall be administered by the Committee, the members of which shall, except as may otherwise be determined by the Board, be "non-employee directors" under Rule 16b-3 and "outside directors" under Section 162(m) of the Code. The Committee shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority to grant Options; to determine which Options shall constitute Incentive Stock Options and which Options shall constitute Nonqualified Stock Options; to determine the purchase price of the Common Shares covered by each Option; to determine the persons to whom, and the time or times at which awards shall be granted; to determine the number of shares to be covered by each award; to interpret the Plan; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the Agreements (which need not be identical) and to cancel or suspend awards, as necessary; and to make all other determinations deemed necessary or advisable for the administration of the Plan. The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, including delegating to one or more of the Company's management employees the authority to grant Options to employees who are not "insiders" for purposes of Section 16 of the Exchange Act and who are not "covered employees" for purposes of Section 162(m) of the Code, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. The Board shall have sole authority, unless expressly delegated to the Committee, to grant Options to Non-employee Directors. All decisions, determination and interpretations of the Committee shall be final and binding on all Optionees of any awards under this Plan. The Board shall have the authority to fill all vacancies, however caused, in the Committee. The Board may from time to time appoint additional members to the Committee, and may at any time remove one or more Committee members. One member of the Committee shall be selected by the Board as chairman. The Committee shall hold its meetings at such times and places as it shall deem advisable. All determinations of the Committee shall be made by a majority of its members either present in person or participating by conference telephone at a meeting or by written consent. The Committee may appoint a secretary and make such rules and regulations for the conduct of its business as it shall deem advisable, and shall keep minutes of its meetings. Anything to the contrary, notwithstanding the duties and responsibilities of the Committee may be exercised by the Board. No member of the Board or Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any award granted hereunder. 5 6 4. Eligibility. Awards may be granted to officers and other key employees of and consultants to the Company, and its Subsidiaries, including officers and directors who are employees, and to Non-employee Directors. In determining the persons to whom awards shall be granted and the number of shares to be covered by each award, the Committee shall take into account the duties of the respective persons, their present and potential contributions to the success of the Company and such other factors as the Committee shall deem relevant in connection with accomplishing the purpose of the Plan. 5. Stock. The maximum number of Common Shares reserved for the grant of awards under the Plan shall be 500,000, subject to adjustment as provided in Section 8 hereof. Such shares may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be required by the Company. If any outstanding award under the Plan should for any reason expire, be canceled or be forfeited without having been exercised in full, the Common Shares allocable to the unexercised, canceled or terminated portion of such award shall (unless the Plan shall have been terminated) become available for subsequent grants of awards under the Plan. 6. Terms and Conditions of Options. Each Option granted pursuant to the Plan shall be evidenced by an agreement (an "Option Agreement"), in such form and containing such terms and conditions as the Committee shall from time to time approve, which Agreement shall comply with and be subject to the following terms and conditions, unless otherwise specifically provided in such Option Agreement: (a) Number of Shares. Each Option Agreement shall state the number of Common Shares to which the Option relates. (b) Type of Option. Each Option Agreement shall specifically state that the Option constitutes an Incentive Stock Option or a Nonqualified Stock Option. (c) Option Price. Each Option Agreement shall state the Option Price, which shall not be less than one hundred percent (100%) of the Fair Market Value of the Common Shares covered by the Option on the date of grant unless, with respect to Nonqualified Stock Options, otherwise determined by the Committee. The Option Price shall be subject to adjustment as provided in Section 8 hereof. The date as of which the Committee adopts a resolution expressly granting an Option shall be considered the day on which such Option is granted, unless such resolution specifies a different date. 6 7 (d) Medium and Time of Payment. The Option Price shall be paid in full, at the time of exercise, in cash or in Common Shares then owned by the Optionee having a Fair Market Value equal to such Option Price or in a combination of cash and Common Shares or, unless the Committee shall determine otherwise, by a cashless exercise procedure through a broker-dealer. (e) Exercise Schedule and Period of Options. Each Option Agreement shall provide the exercise schedule for the Option as determined by the Committee; provided, however, that, the Committee shall have the authority to accelerate the exercisability of any outstanding Option at such time and under such circumstances as it, in its sole discretion, deems appropriate. The exercise period shall be ten (10) years from the date of the grant of the Option unless otherwise determined by the Committee; provided, however, that, in the case of an Incentive Stock Option, such exercise period shall not exceed ten (10) years from the date of grant of such Option. The exercise period shall be subject to earlier termination as provided in Sections 6(f) and 6(g) hereof. An Option may be exercised, as to any or all full Common Shares as to which the Option has become exercisable, by written notice delivered in person or by mail to the Secretary of the Company, specifying the number of shares of Common Shares with respect to which the Option is being exercised. Notwithstanding any other provision of this Plan, no Option granted hereunder may be exercised prior to the consummation of an underwritten public offering of the Company's securities where the gross proceeds from such offering are in excess of $5 million. (f) Termination. Except as provided in this Section 6(f) and in Section 6(g) hereof, an Option may not be exercised unless (i) with respect to an Optionee who is an employee of the Company, the Optionee is then in the employ of the Company or a Subsidiary (or a company or a Parent or Subsidiary company of such company issuing or assuming the Option in a transaction to which Section 424(a) of the Code applies), and unless the Optionee has remained continuously so employed since the date of grant of the Option and (ii) with respect to an Optionee who is a Non-employee Director, the Optionee is then serving as a member of the Board or as a member of a board of directors of a company or a Parent or Subsidiary company of such company issuing or assuming the Option. In the event that the employment of an Optionee shall terminate or the service of an Optionee as a member of the Board shall cease (other than by reason of death, Disability, Retirement or Cause), all Options of such Optionee that are exercisable at the time of such termination may, unless earlier terminated in accordance with their terms, be exercised within ninety (90) days after the date of such termination or service (or such different period as the Committee shall prescribe). (g) Death, Disability or Retirement of Optionee. If an Optionee shall die while employed by the Company or a Subsidiary or serving as a member of the Board, or within ninety (90) days after the date of termination of such Optionee's employment or cessation of such Optionee's service (or within such different period as the Committee may have provided pursuant to Section 6(f) hereof), or if the Optionee's employment shall terminate or service shall cease by reason of Disability or Retirement, all Options theretofore granted to such Optionee (to the extent otherwise exercisable) may, unless earlier terminated in accordance with their terms, be exercised by the Optionee or by his beneficiary, at any time 7 8 within one year after the death, Disability or Retirement of the Optionee (or such different period as the Committee shall prescribe). In the event that an Option granted hereunder shall be exercised by the legal representatives of a deceased or former Optionee, written notice of such exercise shall be accompanied by a certified copy of letters testamentary or equivalent proof of the right of such legal representative to exercise such Option. Unless otherwise determined by the Committee, Options not otherwise exercisable on the date of termination of employment shall be forfeited as of such date. (h) Other Provisions. The Option Agreements evidencing awards under the Plan shall contain such other terms and conditions not inconsistent with the Plan as the Committee may determine, including penalties for the commission of competitive acts and a provision providing that no option may be exercised prior to the consummation of an underwritten initial public offering of the Company's securities pursuant to a registration statement filed pursuant to the Securities Act of 1933, as amended. 7. Incentive Stock Options. Options granted pursuant to this Section 7 are intended to constitute Incentive Stock Options and shall be subject to the following special terms and conditions, in addition to the general terms and conditions specified in Section 6 hereof. An Incentive Stock Option may not be granted to a Non-employee Director or a consultant to the Company. (a) Value of Shares. The aggregate Fair Market Value (determined as of the date the Incentive Stock Option is granted) of the Common Shares with respect to which Incentive Stock Options granted under this Plan and all other option plans of any subsidiary become exercisable for the first time by each Optionee during any calendar year shall not exceed $100,000. (b) Ten Percent Stockholder. In the case of an Incentive Stock Option granted to a Ten Percent Stockholder, (i) the Option Price shall not be less than one hundred ten percent (110%) of the Fair Market Value of the Common Shares on the date of grant of such Incentive Stock Option, and (ii) the exercise period shall not exceed five (5) years from the date of grant of such Incentive Stock Option. 8. Effect of Certain Changes. (a) In the event of any extraordinary dividend, stock dividend, recapitalization, merger, consolidation, stock split, warrant or rights issuance, or combination or exchange of such shares, or other similar transactions, each of the number of Common Shares available for awards, the number of such shares covered by outstanding awards, and the price per share of Options, as appropriate, shall be equitably adjusted by the Committee to reflect such event and preserve the value of such awards; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. 8 9 (b) Upon the occurrence of a Change in Control, each Option granted under the Plan and then outstanding but not yet exercisable shall thereupon become fully exercisable. (c) All options granted hereunder presuppose (i) a reincorporation of the Company in Delaware and the issuance of 3,000,000 shares of common stock of the Delaware Corporation in connection therewith and (ii) the initial public offering of the stock of the Delaware Corporation (collectively the "Recapitalization"). On or prior to the consummation of the Recapitalization, the Company shall make appropriate provisions or cause appropriate provisions to be made so that each Optionee shall have the right thereafter to obtain upon exercise of the option the kind and amount of shares of stock and other securities and property receivable upon the Recapitalization by a holder of the number of common shares for which the option may be exercised prior to the effective date of such Recapitalization. 9. Surrender and Exchange of Awards. The Committee may permit the voluntary surrender of all or a portion of any Option granted under the Plan or any option granted under any other plan, program or arrangement of the Company or any Subsidiary ("Surrendered Option"), to be conditioned upon the granting to the Optionee of a new Option for the same number of Common Shares as the Surrendered Option, or may require such voluntary surrender as a condition precedent to a grant of a new Option to such Optionee. Subject to the provisions of the Plan, such new Option may be an Incentive Stock Option or a Nonqualified Stock Option, and shall be exercisable at the price, during such period and on such other terms and conditions as are specified by the Committee at the time the new Option is granted. 10. Period During Which Awards May Be Granted. Awards may be granted pursuant to the Plan from time to time within a period of ten (10) years from the date the Plan is adopted by the Board, or the date the Plan is approved by the shareholders of the Company, whichever is earlier, unless the Board shall terminate the Plan at an earlier date. 11. Nontransferability of Awards. Except as otherwise determined by the Committee, awards granted under the Plan shall not be transferable otherwise than by will or by the laws of descent and distribution, and awards may be exercised or otherwise realized, during the lifetime of the Optionee, only by the Optionee or by his guardian or legal representative. 12. Approval of Shareholders. The Plan shall take effect upon its adoption by the Board and shall terminate on the tenth anniversary of such date, but the Plan (and any grants of awards made prior to the shareholder approval mentioned herein) shall be subject to the approval of Company's 9 10 shareholders, which approval must occur within twelve months of the date the Plan is adopted by the Board. 13. Agreement by Optionee Regarding Withholding Taxes. If the Committee shall so require, as a condition of exercise of a Nonqualified Stock Option (a "Tax Event"), each Optionee who is not a Non-employee Director shall agree that no later than the date of the Tax Event, such Optionee will pay to the Company or make arrangements satisfactory to the Committee regarding payment of any federal, state or local taxes of any kind required by law to be withheld upon the Tax Event. Alternatively, the Committee may provide that such an Optionee may elect, to the extent permitted or required by law, to have the Company deduct federal, state and local taxes of any kind required by law to be withheld upon the Tax Event from any payment of any kind due the Optionee. The withholding obligation may be satisfied by the withholding or delivery of Common Shares. Any decision made by the Committee under this Section 13 shall be made in its sole discretion. 14. Amendment and Termination of the Plan. The Board at any time and from time to time may suspend, terminate, modify or amend the Plan; provided, however, that, unless otherwise determined by the Board, an amendment that requires stockholder approval in order for the Plan to continue to comply with Rule 16b-3, Section 162(m) of the Code or any other law, regulation or stock exchange requirement shall not be effective unless approved by the requisite vote of shareholders. Except as provided in Section 8(a) hereof, no suspension, termination, modification or amendment of the Plan may adversely affect any award previously granted, unless the written consent of the Optionee is obtained. 15. Rights as a Shareholder. An Optionee or a transferee of an award shall have no rights as a shareholder with respect to any shares covered by the award until the date of the issuance of a stock certificate to him for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distribution of other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 8(a) hereof. 16. No Rights to Employment or Service as a Director. Nothing in the Plan or in any award granted or Agreement entered into pursuant hereto shall confer upon any Optionee the right to continue in the employ of the Company or any Subsidiary or as a member of the Board or to be entitled to any remuneration or benefits not set forth in the Plan or such Agreement or to interfere with or limit in any way the right of the Company or any such Subsidiary to terminate such Optionee's employment or service. Awards granted under the Plan shall not be affected by any change in duties or position of an 10 11 employee Optionee as long as such Optionee continues to be employed by the Company or any Subsidiary. 17. Beneficiary. An Optionee may file with the Committee a written designation of a beneficiary on such form as may be prescribed by the Committee and may, from time to time, amend or revoke such designation. If no designated beneficiary survives the Optionee, the executor or administrator of the Optionee's estate shall be deemed to be the Optionee's beneficiary. 18. Governing Law. The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of New York. 11 EX-10.4 9 EMPLOYMENT AGREEMENT 1 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of the 12th day of July, 1999 between AD-STAR SERVICES, INCORPORATED, a New York corporation (the "Company") and LESLIE BERNHARD (the "Executive"). 1. PERIOD. Subject to the terms and conditions hereof, the term of employment of the Executive under this Agreement shall be for the period (the "Employment Period") commencing on July 1, 1999 and terminating on the expiration of three (3) years from such date, unless sooner terminated by the death of the Executive or as provided in Paragraphs 4, 5 or 6 hereof. 2. DUTIES AND RESPONSIBILITIES. The Company shall employ the Executive and the Executive accepts such employment as Chief Executive Officer of the Company during the Employment Period. The Executive shall report to and be subject to the direction of the Board of Directors and shall perform such duties commensurate with her title and position as may be assigned to her from time to time by the Board of Directors. During the Employment Period, the Executive shall devote her full time, energy, skill and attention to the businesses of the Company and shall perform her duties in a diligent, trustworthy, loyal and businesslike manner. 3. COMPENSATION AND BENEFITS. (a) The Executive's base compensation shall be at the annual rate of $150,000, which amount shall be increased to $200,000 commencing on the first day of 2 the month following the initial public offering of the Company's common stock, in each case payable in regular installments in accordance with the Company's practice for its executives, less applicable withholding for income and employment taxes as required by law and other deductions to which the Executive shall agree. (b) The Executive shall be entitled to such increase in base compensation or bonuses as and when determined by the Board of Directors. (c) Except as otherwise provided herein, the Executive shall be entitled to participate, to the extent she qualifies, in any bonus or other incentive compensation, profit-sharing or retirement plans, life or health insurance plans or other benefit plans maintained by the Company, upon such terms and conditions as are made available to executives of the Company, generally. (d) The Executive shall be entitled to reimbursement of all reasonable, ordinary and necessary business related expenses incurred by her in the course of her duties and upon submission of appropriate documentation in accordance with the Company's procedures. (e) The Executive shall be entitled to paid vacation during each calendar year in accordance with the procedures of the Company in effect from time to time. (f) The Executive shall be entitled to disability benefits and medical insurance at the same level as now provided by the Company or at such higher level as the Company may hereafter provide for other executives or employees in the Company. 2 3 (g) The Executive shall be entitled to a car allowance or use of a car in accordance with current practice. (h) The Company and Executive acknowledge that the Company and InterEquity Capital Partners, L.P. are parties to a Loan and Subscription Agreement, which contains terms which may prohibit the Company from making payments to Executive hereunder. The Company and Executive acknowledge that any such prohibited payments shall not be made to the Executive, but shall accrue to the benefit of Executive and shall be payable to Executive only at such time and only in such amounts as will not, at the time of payment, violate any of the terms and conditions of the Loan and Subscription Agreement. 4. TERMINATION IN CASE OF DEATH OR DISABILITY. In case of a Disability, which for this purpose shall mean that as a result of illness or injury, the Executive is unable substantially to perform her duties hereunder for a period of at least one hundred eighty (180) consecutive days, the Company may terminate the Executive's employment hereunder upon giving the Executive at least thirty (30) days' written notice of termination; provided, however, that if the Executive is eligible to receive disability payments pursuant to a disability insurance policy paid for by the Company, the Executive shall assign such benefits to the Company for all periods as to which she is receiving full payment under this Agreement. This Agreement shall terminate upon the death of the Executive. 5. OTHER TERMINATION BY THE COMPANY. (a) The Company may terminate the Executive's employment for Cause (as defined in sub-paragraph (b) below); provided, however, that the Company shall not terminate this Agreement for reasons set forth in Section 5(b)(i) unless the Company shall first have delivered to the Executive a notice which specifically identifies such Cause and the Executive shall not have cured the same within thirty (30) days after receipt of such notice (the "Cure Period"). (b) "Cause" shall mean (i) a material breach by the Executive of any of the terms, covenants, agreements or representations set forth herein, or (ii) the Executive willingly engaging in misconduct which is materially injurious to the 3 4 Company, monetarily or otherwise, including, but not limited to, engaging in any conduct which constitutes a crime under federal, state or local laws (other than traffic violations). 6. TERMINATION BY THE EXECUTIVE FOR "GOOD REASON". The Executive may terminate her employment for "Good Reason" if: (a) she is assigned, without her express written consent, any duties inconsistent with her positions, duties, responsibilities, authority and status with the Company as of the date hereof, or her reporting responsibilities or titles as in effect as of the date hereof are changed; provided, however, that prior to termination of employment by Executive pursuant to this Section 6(a), Executive shall notify the Company's Board of Directors in writing of the causes for such termination and the Board shall have twenty (20) days from the receipt of such notice to substantially cure such causes for termination; or (b) her compensation or benefits are reduced; provided, however, that the deferral of payments provided for in Section 3(h) of this Agreement shall not constitute a reduction in compensation or benefits. 7. LIQUIDATED DAMAGES. It is understood that if the Executive (i) shall elect to terminate her employment for a Good Reason (as defined above) or (ii) her employment is terminated by the Company otherwise than as provided in Section 4 and 5, the Executive will suffer damages which will be difficult to calculate. Consequently, in the event of a termination of the Executive's employment for either of these reasons, the Executive shall be entitled by way of liquidated damages and not as a penalty to receive a single lump sum payment in an amount equal to the amount of the compensation payments that, but for her termination of employment under this Section 7, would have been payable to the Executive for the remainder of the Employment Period or twelve (12) months, whichever is higher. Such payment shall be made by the Company to the Executive within fifteen (15) days following her termination of employment for the reason set forth in this 4 5 Section 7. The Executive shall not be required to mitigate the amount of any payment provided in this Section 7 nor shall the amount payable under this Section be reduced by any compensation earned by the Executive after the date of her termination of employment. 8. CONFIDENTIALITY; NON-COMPETE. (a) The Executive agrees that during the Employment Period, or at any time thereafter, she will not, directly or indirectly, use for her own benefit or for the benefit of any third party, or reveal or cause to be revealed to any person, firm, entity or corporation, any Confidential Information (as defined herein) which relates to the Company or its customers. Confidential Information shall include, but not be limited to, trade secrets, supplier lists, customer lists, intellectual property and any other information, whether or not proprietary, which relates to the business of the Company and which otherwise is not considered to be public information; provided, however, that the parties acknowledge that it is not the intention of this paragraph to include within its subject matter (i) information not proprietary to the Company, (ii) information which is then in the public domain, or (iii) information required to be disclosed by law. (b) The Executive further agrees that during the Employment Period and for a period of eighteen (18) months thereafter, she will not, directly or indirectly, in any manner (i) engage in any business which competes with any business conducted by the Company, and will not, directly or indirectly, own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be employed by 5 6 or connected in any manner with any corporation, firm, entity, or business that is so engaged unless duly authorized by written consent of the Company; provided, however, that nothing herein shall prohibit the Executive from owning not more than three (3%) percent of the outstanding stock of any publicly held corporation; (ii) persuade or attempt to persuade any employee of the Company to leave the employ of the Company or to become employed by any other entity; (iii) persuade or attempt to persuade any current customer or former customer to reduce the amount of business it does or intends or anticipates doing with the Company or (iv) take any action which might divert from the Company any opportunity of which she became aware during her employment with the Company which would be within the scope of any of the businesses then engaged in or planned to be engaged in by the Company. (c) The Executive acknowledges that a violation of any of the covenants contained in this paragraph 8 may cause irreparable injury to the Company and that the Company will be entitled, in addition to any other rights and remedies it may have, to injunctive relief; provided, however, that nothing contained herein constitutes a waiver by the Executive of her rights to contest the existence of any such violation of such covenants. (d) In the event the covenants contained in this paragraph 8 should be held by any court or other duly constituted judicial authority to be void or otherwise unenforceable in any particular jurisdiction or with respect to any particular activity, then such covenants so affected shall be deemed to have been amended and modified so as to eliminate therefrom the particular jurisdiction or activity as to which such 6 7 covenants are so held to be void or otherwise unenforceable, and, as to all other jurisdictions and activities covered hereby, the terms and provisions hereof shall remain in full force and effect. (e) In the event this Agreement shall be terminated, then notwithstanding such termination, the provisions of this paragraph 8 shall survive such termination. 9. SUCCESSORS; BINDING AGREEMENT. This Agreement shall inure to the benefit of and be enforceable by the parties hereto, their personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 10. NOTICE. Any notice, request, instruction or other document to be given hereunder by any party shall be in writing and shall be deemed to have been duly given when delivered personally or five (5) days after dispatch by registered or certified mail, postage prepaid, return receipt requested, to the party to whom the same is so given or made: If to the Company addressed to: Ad-Star Services, Incorporated 4553 Glencoe Avenue, Suite 325 Marina del Rey, California 90292 If to the Executive to: Leslie Bernhard Ad-Star Services, Incorporated 4553 Glencoe Avenue, Suite 325 Marina del Rey, California 90292 7 8 11. GOVERNING LAW; CHANGE OR TERMINATION. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California applicable to agreements made and to be performed in California, and may not be changed or terminated orally. 12. VALIDITY. The invalidity or unenforceability of any provision of this Agreement in any respect shall not affect the validity or enforceability of such provision in any other respect or of any other provision of this Agreement, all of which shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to be duly executed and delivered as of the date first hereinabove written. AD-STAR SERVICES, INCORPORATED BY: B.J. Donek _________________________________ NAME: TITLE: CFO /s/ Leslie Bernhard ______________________________________ LESLIE BERNHARD 8 EX-10.5 10 EMPLOYMENT AGREEMENT 1 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of the 12th day of July, 1999 between AD-STAR SERVICES, INCORPORATED, a New York corporation (the "Company") and ELI ROUSSO (the "Executive"). 1. PERIOD. Subject to the terms and conditions hereof, the term of employment of the Executive under this Agreement shall be for the period (the "Employment Period") commencing on July 1, 1999 and terminating on the expiration of three (3) years from such date, unless sooner terminated by the death of the Executive or as provided in Paragraphs 4, 5 or 6 hereof. 2. DUTIES AND RESPONSIBILITIES. The Company shall employ the Executive and the Executive accepts such employment as Executive Vice President and Chief Technology Officer of the Company during the Employment Period. The Executive shall report to and be subject to the direction of the Board of Directors and shall perform such duties commensurate with his title and position as may be assigned to him from time to time by the Board of Directors. During the Employment Period, the Executive shall devote his full time, energy, skill and attention to the businesses of the Company and shall perform his duties in a diligent, trustworthy, loyal and businesslike manner. 2 3. COMPENSATION AND BENEFITS. (a) The Executive's base compensation shall be at the annual rate of $150,000, which amount shall be increased to $200,000 commencing on the first day of the month following the initial public offering of the Company's common stock, in each case payable in regular installments in accordance with the Company's practice for its executives, less applicable withholding for income and employment taxes as required by law and other deductions to which the Executive shall agree. (b) The Executive shall be entitled to such increase in base compensation or bonuses as and when determined by the Board of Directors. (c) Except as otherwise provided herein, the Executive shall be entitled to participate, to the extent he qualifies, in any bonus or other incentive compensation, profit-sharing or retirement plans, life or health insurance plans or other benefit plans maintained by the Company, upon such terms and conditions as are made available to executives of the Company, generally. (d) The Executive shall be entitled to reimbursement of all reasonable, ordinary and necessary business related expenses incurred by him in the course of his duties and upon submission of appropriate documentation in accordance with the Company's procedures. (e) The Executive shall be entitled to paid vacation during each calendar year in accordance with the procedures of the Company in effect from time to time. 2 3 (f) The Executive shall be entitled to disability benefits and medical insurance at the same level as now provided by the Company or at such higher level as the Company may hereafter provide for other executives or employees in the Company. (g) The Executive shall be entitled to a car allowance or use of a car in accordance with current practice. (h) The Company and Executive acknowledge that the Company and InterEquity Capital Partners, L.P. are parties to a Loan and Subscription Agreement, which contains terms which may prohibit the Company from making payments to Executive hereunder. The Company and Executive acknowledge that any such prohibited payments shall not be made to the Executive, but shall accrue to the benefit of Executive and shall be payable to Executive only at such time and only in such amounts as will not, at the time of payment, violate any of the terms and conditions of the Loan and Subscription Agreement. 4. TERMINATION IN CASE OF DEATH OR DISABILITY. In case of a Disability, which for this purpose shall mean that as a result of illness or injury, the Executive is unable substantially to perform his duties hereunder for a period of at least one hundred eighty (180) consecutive days, the Company may terminate the Executive's employment hereunder upon giving the Executive at least thirty (30) days' written notice of termination; provided, however, that if the Executive is eligible to receive disability payments pursuant to a disability insurance policy paid for by the Company, the Executive shall assign such benefits to the Company for all periods as to which he is receiving full payment under this Agreement. This Agreement shall terminate upon the death of the Executive. 5. OTHER TERMINATION BY THE COMPANY. (a) The Company may terminate the Executive's employment for Cause (as defined in sub-paragraph (b) below); provided, however, that the Company shall not terminate this Agreement for reasons set forth in Section 5(b)(i) unless the Company shall first have delivered to the Executive a notice which specifically identifies such Cause and the Executive shall not have cured the same within thirty (30) days after receipt of such notice (the "Cure Period"). 3 4 (b) "Cause" shall mean (i) a material breach by the Executive of any of the terms, covenants, agreements or representations set forth herein, or (ii) the Executive willingly engaging in misconduct which is materially injurious to the Company, monetarily or otherwise, including, but not limited to, engaging in any conduct which constitutes a crime under federal, state or local laws (other than traffic violations). 6. TERMINATION BY THE EXECUTIVE FOR "GOOD REASON". The Executive may terminate his employment for "Good Reason" if: (a) he is assigned, without his express written consent, any duties inconsistent with his positions, duties, responsibilities, authority and status with the Company as of the date hereof, or his reporting responsibilities or titles as in effect as of the date hereof are changed; provided, however, that prior to termination of employment by Executive pursuant to this Section 6(a), Executive shall notify the Company's Board of Directors in writing of the causes for such termination and the Board shall have twenty (20) days from the receipt of such notice to substantially cure such causes for termination; or (b) his compensation or benefits are reduced; provided, however, that the deferral of payments provided for in Section 3(h) of this Agreement shall not constitute a reduction in compensation or benefits. 7. LIQUIDATED DAMAGES. It is understood that if the Executive (i) shall elect to terminate his employment for a Good Reason (as defined above) or (ii) his employment is terminated by the Company otherwise than as provided in Section 4 and 5, the Executive will suffer damages which will be difficult to calculate. Consequently, in the event of a termination of the Executive's employment for either of these reasons, the Executive shall be entitled by way of liquidated damages and not as a penalty to receive a single lump sum payment in an amount equal to the amount of the compensation payments that, but for his termination of employment under this Section 4 5 7, would have been payable to the Executive for the remainder of the Employment Period or twelve (12) months, whichever is higher. Such payment shall be made by the Company to the Executive within fifteen (15) days following his termination of employment for the reason set forth in this Section 7. The Executive shall not be required to mitigate the amount of any payment provided in this Section 7 nor shall the amount payable under this Section be reduced by any compensation earned by the Executive after the date of his termination of employment. 8. CONFIDENTIALITY; NON-COMPETE. (a) The Executive agrees that during the Employment Period, or at any time thereafter, he will not, directly or indirectly, use for his own benefit or for the benefit of any third party, or reveal or cause to be revealed to any person, firm, entity or corporation, any Confidential Information (as defined herein) which relates to the Company or its customers. Confidential Information shall include, but not be limited to, trade secrets, supplier lists, customer lists, intellectual property and any other information, whether or not proprietary, which relates to the business of the Company and which otherwise is not considered to be public information; provided, however, that the parties acknowledge that it is not the intention of this paragraph to include within its subject matter (i) information not proprietary to the Company, (ii) information which is then in the public domain, or (iii) information required to be disclosed by law. 5 6 (b) The Executive further agrees that during the Employment Period and for a period of eighteen (18) months thereafter, he will not, directly or indirectly, in any manner (i) engage in any business which competes with any business conducted by the Company, and will not, directly or indirectly, own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be employed by or connected in any manner with any corporation, firm, entity, or business that is so engaged unless duly authorized by written consent of the Company; provided, however, that nothing herein shall prohibit the Executive from owning not more than three (3%) percent of the outstanding stock of any publicly held corporation; (ii) persuade or attempt to persuade any employee of the Company to leave the employ of the Company or to become employed by any other entity; (iii) persuade or attempt to persuade any current customer or former customer to reduce the amount of business it does or intends or anticipates doing with the Company or (iv) take any action which might divert from the Company any opportunity of which he became aware during his employment with the Company which would be within the scope of any of the businesses then engaged in or planned to be engaged in by the Company. (c) The Executive acknowledges that a violation of any of the covenants contained in this paragraph 8 may cause irreparable injury to the Company and that the Company will be entitled, in addition to any other rights and remedies it may have, to injunctive relief; provided, however, that nothing contained herein constitutes a waiver by the Executive of his rights to contest the existence of any such violation of such covenants. 6 7 (d) In the event the covenants contained in this paragraph 8 should be held by any court or other duly constituted judicial authority to be void or otherwise unenforceable in any particular jurisdiction or with respect to any particular activity, then such covenants so affected shall be deemed to have been amended and modified so as to eliminate therefrom the particular jurisdiction or activity as to which such covenants are so held to be void or otherwise unenforceable, and, as to all other jurisdictions and activities covered hereby, the terms and provisions hereof shall remain in full force and effect. (e) In the event this Agreement shall be terminated, then notwithstanding such termination, the provisions of this paragraph 8 shall survive such termination. 9. SUCCESSORS; BINDING AGREEMENT. This Agreement shall inure to the benefit of and be enforceable by the parties hereto, their personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 10. NOTICE. Any notice, request, instruction or other document to be given hereunder by any party shall be in writing and shall be deemed to have been duly given when delivered personally or five (5) days after dispatch by registered or certified mail, postage prepaid, return receipt requested, to the party to whom the same is so given or made: If to the Company addressed to: Ad-Star Services, Incorporated 4553 Glencoe Avenue, Suite 325 Marina del Rey, California 90292 7 8 If to the Executive to: Eli Rousso Ad-Star Services, Incorporated 4553 Glencoe Avenue, Suite 325 Marina del Rey, California 90292 11. GOVERNING LAW; CHANGE OR TERMINATION. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California applicable to agreements made and to be performed in California, and may not be changed or terminated orally. 12. VALIDITY. The invalidity or unenforceability of any provision of this Agreement in any respect shall not affect the validity or enforceability of such provision in any other respect or of any other provision of this Agreement, all of which shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to be duly executed and delivered as of the date first hereinabove written. AD-STAR SERVICES, INCORPORATED BY: /s/ B.J. DOUEK _________________________________ NAME: B.J. DOUEK TITLE: CFO & VP /s/ ELI ROUSSO ______________________________________ ELI ROUSSO 8 EX-10.6 11 MEMORANDUM OF AGREEMENT 1 Exhibit 10.6 MEMORANDUM OF AGREEMENT FOR CAREERPATH.COM / AD-STAR WEB-BASED JOB ADVERTISEMENT POSTING PRODUCT AGREEMENT This Memorandum of Agreement ("MOA") is entered into by and between CareerPath.com, LLC, a Delaware limited liability company ("CareerPath.com") and Ad-Star Services, a New York corporation ("Ad-Star") as of March 11, 1999 (the "MOA Date"). 1) DEFINITIVE AGREEMENT. CareerPath.com and Ad-Star agree to use their best efforts to negotiate and execute a more detailed definitive agreement with respect to the matters set forth in this MOA (the "Definitive Agreement") based on the terms set forth in this MOA within thirty (30) days after the MOA Date. Notwithstanding the parties' agreement to use their best efforts to negotiate and execute the Definitive Agreement, the parties acknowledge that this MOA reflects the parties' agreement on the essential terms of the parties' agreement with respect to the business relationship and other matters set forth in this MOA and the parties intend that this MOA shall be a binding and enforceable agreement of the parties, notwithstanding any failure of the parties to execute the Definitive Agreement. If the parties fail to execute the Definitive Agreement, all references in this MOA to the Definitive Agreement shall be deemed to refer to this MOA. 2) FUNCTIONAL SPECIFICATIONS. CareerPath.com will deliver to Ad-Star, after consultation, assistance and mutual agreement from Ad-Star, within seven (7) days after the MOA Date, functional specifications (the "Functional Specifications") setting forth the requirements (as established in the marketing requirements document attached hereto) for the Service (as defined below). 3) WEB-BASED JOB ADVERTISEMENT POSTING SERVICE. Ad-Star will provide to CareerPath.com and its affiliates who provide job-related products or services ("Affiliates") a complete web-based job advertisement service, including software (the "Product") and related services, conforming to the Functional Specifications (the "Service"), including but not limited to the following: a) Phase I Development. Within thirty (30) days after the parties agree upon the Functional Specifications, Ad-Star will provide the "Phase I Development" as per the Functional Specifications, including but not limited to the following: i) An Ad-Star project manager acceptable to CareerPath.com during the Term who will function as the primary point of contact with Ad- Star and have authority to manage and authorize Ad-Star's performance; ii) Development and hosting of a CareerPath.com branded and CareerPath.com/Affiliate co-branded web-enabled ad taking product for CareerPath.com and at least ten (10) Affiliates; iv) Multiple ad insertions covered by a single bill; v) Credit card clearing; vi) An online proofing tool for CareerPath.com operations use in the ad approval process; 2 vii) Customer support during the Term by qualified personnel Monday through Thursday 6 a.m. to 5 P.M. and on Friday from 6 a.m. to 7 P.M. Pacific Standard Time to CareerPath.com, Affiliates and customers of CareerPath.com and its Affiliates; viii) Conform the ads to a format specified by CareerPath.com; ix) Delivery of the online ads to CareerPath.com for addition to CareerPath.com's database(s) in conformance with the delivery schedule specified by CareerPath.com in its sole discretion, but in no event will the frequency of delivery be less than daily; x) Forwarding of credit card billing data to CareerPath.com except for the credit card account numbers; xi) Delivery of reports providing information on total national advertisements, total local advertisements, advertisements per Affiliate and other information to be specified in the Functional Specifications; xii) Commercially reasonable initial training of CareerPath.com and Affiliate personnel by qualified Ad-Star personnel in the use of the Product, to be further specified in the Functional Specifications; and xiii) Daily backup of the Product and CareerPath.com data. The backup media shall be stored in a secure, off-site location. b) Phase II Development. Within sixty (60) days after the parties agree upon the Functional Specifications, Ad-Star will provide the "Phase II Development" as per the Functional Specifications, including but not limited to the following: i) Development and hosting of a CareerPath.com/Affiliate web-enabled co-branded job advertisement posting product for the remainder of the then current Affiliates (up to 100), in addition to the ten (10) Affiliates covered by Phase I. In addition, Ad-Star will develop and host such a product for new Affiliates promptly after they become Affiliates; ii) Account creation/administration for CareerPath.com to create and administer accounts for Affiliates, advertising agencies, and customers as per the Functional Specification; iii) Account creation/administration for Affiliates to create and administer accounts for advertising agencies and customers as per the Functional Specification; 3 iv) Advanced reports for CareerPath.com, Affiliates, agencies, companies and individuals, including but not limited to end-user information and statistics, to be further specified in the Functional Specifications; v) Integration with Affiliate and/or CareerPath.com front end billing when requested by Affiliates or CareerPath.com for contract and other advertisers and modifiable to various advertiser rate cards; vi) Archival of current and past advertisements during the Term for editing, modification and resubmission; vii) Ongoing software support such as updating pricing for national and local ads, changes to ad package frequencies, updating features and data feed protocols/specifications and other general maintenance and support for CareerPath.com and all Affiliates as further specified in the Functional Specifications; viii) Participation in the CareerPath.com/Affiliate working group for discussion and development of the Product and future enhancements; ix) Advanced payment options available to the end-user such as checking account and telephone bill as further specified in the Functional Specifications; x) Forwarding of all billing information to CareerPath.com except for credit account numbers; xi) Additional commercially reasonable training of CareerPath.com and Affiliate personnel by qualified Ad-Star personnel in the use of the Product, to be further specified in the Functional Specifications; and xii) At the option of CareerPath.com and its Affiliates, online to print ad placing capabilities in the Product for CareerPath.com and all Affiliates may be added, and compensation for such capability shall be mutually agreed upon, but in no event shall such compensation exceed 5% of the gross ad price for such print ads. c) FUTURE PRODUCT DEVELOPMENT i) All updates, upgrades and additional enhancements and bug fixes done in the general course of Ad-Star product development will be provided to CareerPath.com and its Affiliates free of charge. ii) CareerPath.com shall also receive additional upgrades, enhancements and bug fixes to the Product as specified in the Functional Specifications free of charge. iii) Ad-Star will work with CareerPath.com to continually enhance the Service and Product and generate future releases of the Product. The parties will meet at least quarterly to discuss enhancements and future releases of the Product in order to maintain the 3 4 Product as a "best of class" product. Upon CareerPath.com's request, Ad-Star shall promptly provide all development and other services necessary to produce such enhancements and future releases. Such services will be provided on commercially reasonable terms, including commercially reasonable rates, and Ad-Star will allocate all resources necessary to undertake such efforts in an efficient and prompt manner. 4. Performance Standards. Ad-Star will create and deliver a "best of class" Product that will represent CareerPath.com with the highest standards in the World Wide Web marketplace. The Product will be delivered within the specified time as outlined in this MOA. If Ad-Star anticipates that there will be any delay in delivering material components of the Product, such delay must be documented and submitted in writing to CareerPath.com at least two (2) weeks prior to the scheduled delivery date and Ad-Star will exhaust all possible solutions to deliver the Product within the scheduled delivery date, including, but not limited to, the hiring of more personnel. CareerPath.com may terminate this Agreement if it determines, in its sole discretion, that the Product will not meet CareerPath.com's business objectives because of such delay. 5. Ad-Star Web Service. During the Term, the response time of the Ad-Star web site(s) containing the Product shall be as quick or quicker than most major commercial web sites. Initially, from the time a request is received from an end user, the Ad-Star service must respond within 1.5 seconds and send the response back out to the end-user over the internet. The Ad-Star web site(s) containing the Product shall have 99.9% availability. In addition, the Functional Specifications will include additional technical performance standards consistent with "best of class" performance. 6. Intellectual Property. Ad-Star represents and warrants that the Service and Product and its performance under this MOA and the Definitive Agreement shall not violate any intellectual property rights of a third party and Ad-Star agrees to indemnify CareerPath.com, the Affiliates and their respective officers, directors, agents and affiliates from and against any claims, losses and expenses related thereto. All intellectual property developed by Ad-Star for CareerPath.com in connection with Ad-Star's performance under this MOA and the Definitive Agreement ("Developed IP")(but excluding pre-existing intellectual property of Ad-Star's used in Ad-Star's general products or general upgrades or enhancements developed for Ad-Star's general products) shall be deemed to be a "work made for hire" as that term may be defined from time to time in Section 101 of the Copyright Act (17 U.S.C. 101) or any successor, and will be the sole property of CareerPath.com. Ad-Star hereby assigns all rights in and to the Developed IP to CareerPath.com. The parties understand that Ad-Star is concurrently developing the Product for general release and distribution in addition to CareerPath.com's use. In order to avoid confusion, the parties agree that the Developed IP delivered by Ad-Star pursuant to this MOA for the one time development fee of $58,000 shall be limited to the customized materials related specifically to CareerPath.com and Affiliates and shall not include any general functionality of the Product. Nothing contained herein shall prohibit Ad-Star from upgrading or enhancing its general products separately from the specific work it does for CareerPath.com, to be a "best of class" Product that will provide Ad-Star's affiliates with the highest standards in the World Wide Web marketplace, provided that no Developed IP is used. Ad-Star hereby grants to CareerPath.com a royalty-free (other than the consideration expressly set forth in this MOA), non-exclusive, worldwide license to all intellectual property other than the Developed IP included during the Term within the Product and the parties shall promptly after the Product becomes operational enter into a commercial reasonable software 4 5 escrow agreement with a reputable escrow service for the deposit and escrow of the source code to all software used from time to time in the Product. The rights and licenses granted under this MOA and the Definitive Agreement are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of rights to "intellectual property" as defined under Section 101 of the U.S. Bankruptcy Code. 7. Financial Consideration. In consideration for Ad-Star's provision of the Product and the performance of Ad-Star's other obligations under the Definitive Agreement, CareerPath.com will make the following payments to Ad-Star. a) One Time Development and Implementation Fee. Subject to meeting the three milestones set forth below, CareerPath.com will pay to Ad-Star a one-time, non-recurring development and implementation fee of $58,000. This fee will be paid in three (3) installments based on milestones. One-third (1/3) of this fee will be paid on the MOA Date. If the parties cannot agree upon the Functional Specifications as set forth in Section 2, Ad-Star shall immediately refund such fee. An additional one-third (1/3) of this fee will be paid after the Phase I Development is delivered by Ad-Star and accepted by CareerPath.com. The remaining one-third (1/3) of this fee will be paid after the Phase II Development is delivered by Ad-Star and accepted by CareerPath.com. The parties shall mutually agree upon an additional implementation fee, if any, for the addition of more than one hundred (100) Affiliates as set forth in Section 3(b)(i). (b) Percentage of Revenues. Ad-Star is entitled to five percent (5%) of revenues for ads taken by the Ad-Star system. Ad-Star will garner five percent (5%) of the gross ad price. For example an ad sells online for $100.00, Ad-Star will receive $5.00. Revenue will be paid once a month after billing reconciliation. All returns and charge backs occurring within that month will be credited against the gross amount due to Ad-Star in that month. (c) Additional Dedicated End User Support. If CareerPath.com requests additional dedicated personnel to provide end user support in addition to the customer support provided pursuant to Section 3 above, CareerPath.com will pay Ad-Star for Ad-Star's reasonable and approved out of pocket cost of providing such additional dedicated customer support personnel. CareerPath.com will bear the burden of cost for support phones lines answered under the CareerPath.com name. (d) Most Favored Financial Terms. If Ad-Star offers to any other person or entity more favorable financial terms than the terms offered to CareerPath.com, Ad-Star must offer to CareerPath.com the best terms offered to any such other person or entity. (e) Payment Processing Fee. CareerPath.com will pay all payment processing fees such as those incurred for online processing of credit cards and ACH debiting. These fees will be passed along from Ad-Star to CareerPath.com at cost. In addition, a reasonable reserve for fraud may be established by Ad-Star. 5 6 8. TERM. The term of the Definitive Agreement ("Term") will be three (3) years. CareerPath.com may extend the Term annually, for additional one (1) year periods by providing notice to Ad-Star no less than one hundred and eighty (180) days prior to the expiration of the Term or extended Term. If CareerPath.com elects not to extend the Term, then beginning one hundred and eighty (180) days prior to such expiration, Ad-Star will cooperate with CareerPath.com in a commercially reasonable manner to ensure a smooth transition to any other web-based job posting capabilities that CareerPath.com chooses to utilize. 9. EXCLUSIVE PROMOTIONAL AND MARKETING AGREEMENT. From the MOA Date until the sixtieth (60th) day following the effective date of the Definitive Agreement, CareerPath.com and Ad-Star will exercise commercially reasonable efforts to negotiate and execute an exclusive promotional and marketing agreement in the area of employment advertising on the World Wide Web. Such agreement may include without limitation, the premium positioning of CareerPath.com on all sales and distribution channels that Ad-Star offers through its Microsoft Windows based and web-based ad taking service, and the positioning of AdStar on the CareerPath.com and/or its Affiliate sites. During such period Ad-Star shall not enter into discussions or negotiations with any other person or entity in connection with a similar agreement. The exclusive promotional and marketing agreement will include a promotional, marketing and/or other relationship beyond the scope of the basic provision of development and services primarily addressed in this MOA. 10. CONFIDENTIALITY. CareerPath.com and Ad-Star agree that all of the terms of this MOA and any other information provided by one party to the other that (a) if written, is labeled confidential or proprietary, or (b) if oral, is clearly indicated by the disclosing party to be confidential or proprietary prior to disclosure, ("Confidential Information") will be kept confidential by and will not be used by the receiving party or any of its officers, directors, agents or other affiliates except as necessary to perform under this MOA or the Definitive Agreement until the earlier of (a) the date as of which both parties agree otherwise in writing and (b) January 1, 2002. In addition, the terms of the Non-Disclosure Agreement between the parties dated January 27, 1999 is incorporated in this Section 10 by reference. In order to avoid confusion, the existence of and the terms contained in Section 9 are Confidential Information. The receiving party shall be obligated to use at least the same level of care in protecting the disclosing party's Confidential Information as it uses in protecting its own proprietary or confidential information, which shall in no event be less than commercially reasonable efforts. For avoidance of doubt, Confidential Information shall not include information that (i) is known to the receiving party prior to the receipt from the disclosing party directly or indirectly from a source other than one having an obligation of confidentiality for the disclosing party; (ii) becomes known (independently of disclosure by the disclosing party) to the receiving party directly or indirectly from a source other than one having an obligation of confidentiality to the disclosing party; (iii) becomes publicly known or otherwise ceases to be secret or confidential, except through a breach of this MOA or the Definitive Agreement by the receiving party; or (iv) is independently developed by the receiving party. The parties agree that the confidentiality provisions of this Section 10 shall be binding upon the parties and shall survive the termination of this MOA and the Definitive Agreement and the failure of the parties to execute the Definitive Agreement. 11. INJUNCTIVE RELIEF. The Parties acknowledge that it will be impossible to measure in money the 6 7 damages that would be suffered if the parties fail to comply with their obligations under this MOA or the Definitive Agreement and that in the event of any such failure, an aggrieved party will be irreparably damaged and will not have an adequate remedy at law. The parties agree that in addition to any other remedies available to the parties under this MOA or the Definitive Agreement or at law, the parties shall have the right to obtain injunctive relief, including specific performance, and if any action should be brought in equity to enforce any of the provisions of this MOA or the Definitive Agreement, neither party shall raise the defense that there is an adequate remedy at law. 12. SEVERABILITY. In the event that any provision of this MOA or the Definitive Agreement is held to be invalid, illegal or unenforceable by an arbitrator, court or other authority of competent jurisdiction, (i) the validity, legality and enforceability of the remaining provisions hereof shall not be affected or impaired thereby in any way, and such invalid, illegal, or unenforceable provision shall be construed by limiting such provision so as to be valid, legal and enforceable to the maximum extent permitted by law and (ii) the parties shall use their best efforts to enter into alternative arrangements which will grant each of the parties the same, or as nearly the same as possible, economic and other rights and obligations as were granted under the provisions of this MOA or the Definitive Agreement which were held to be invalid, illegal or unenforceable. 13. FURTHER ASSURANCES. From time to time, as and when requested by a party, the other party shall execute and deliver, or cause to be executed and delivered, all such documents and instruments and shall take, or cause to be taken, all such further or other actions as may be reasonably necessary or desirable to consummate the transactions contemplated by this MOA or the Definitive Agreement. 14. CHOICE OF LAW, ARBITRATION, AMENDMENT, ASSIGNMENT, EXECUTION. This MOA and the Definitive Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to the conflicts of law principles thereof. All disputes relating to this MOA or the Definitive Agreement that the parties are unable to resolve shall be submitted to arbitration before the American Arbitration Association in Los Angeles, California, before a single arbitrator, in accordance with the arbitration rules of the American Arbitration Association. Notwithstanding the foregoing, the parties may seek specific performance or injunctive relief in any court of competent jurisdiction. This MOA and the Definitive Agreement may be amended only by a written agreement executed by both parties. This MOA and the Definitive Agreement shall inure solely to the benefit of and be binding upon each of the parties and their respective successors and permitted assigns. This MOA and the Definitive Agreement shall not be assignable without the prior written consent of the other party. This MOA may be executed in counterparts, which taken together shall constitute one and the same instrument. 7 8 CareetPath.com and Ad-Star have caused this MOA to be executed by persons duly authorized as of the day and year first above written. CAREERPATH.COM,LLC AD-STAR SERVICES /s/ Stephen B. Ste. Marie /s/ Leslie Berhnard - -------------------------- -------------------------- Chief Executive Officer President, CEO 8 EX-10.7 12 DISTRIBUTION AND SERVICE AGREEMENT 1 DISTRIBUTION AND SERVICE AGREEMENT - -------------------------------------------------------------------------------- This Distribution and Service Agreement ("Agreement") is made and entered into between Ad-Star Services Inc., a New York Corporation ("AdStar") with offices at 4553 Glencoe Avenue, Suite 325, Marina del Rey, CA 90292 and PowerAdz.com LLC. a New York Corporation (the "Company"), with offices at 96 Thompson Hill Road, Rensselaer, NY 12144 as of February 9, 1999 ("Effective Date"). NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions herein contained, ADSTAR and the Company agree as follows: 1) Purpose: Company provides a classified advertising Web publishing and hosting service (using but not limited to "AdQuest, CarCast, AuctionHill, ThinkHomes and Career Gold Brands") for affiliated publications ("Affiliates") on the World Wide Web part of the Internet ("www.adquest.com"). AdStar provides an Internet based marketplace for the buying and selling of classified advertising ("Ad-StarNet") for its media and advertisers clients (collectively "Clients"). The parties wish to incorporate Ad-StarNet into Company's Web site for the purpose of allowing Affiliates' users to place ads through Ad-StarNet and to make Affiliate's publications capable of taking these advertisements through Ad-StarNet. 2) Responsibilities of the Parties: The responsibilities of the parties are detailed in Attachment A. 3) General: 3.1 Each party shall be solely responsible for supplying and managing its own Web site at its own expense and neither party shall have any obligation or liability whatsoever with respect to the Web site of the other. Each party shall manage, review, delete, edit, create, update and otherwise manage all content and services available on or through its respective Web site. Not withstanding the above, responsibilities of each party detailed in Attachment A cannot be deleted or substantively edited without the mutual consent of the other party. 3.2 Each party shall promptly inform the other of (a) any information related to its Web site that could reasonably be anticipated to lead to a claim, demand, or liability of or against the other party by any third party, (b) any changes to its Web site which would substantially change the content in any area to which the other party has linked, and (c) any changes in its Web site which would substantially change the page(s) in which links to the other party appear. 3.3 AdStar grants to the Company during the term of this Agreement a non-exclusive, royalty-free, world-wide right and license to use its trade names, trademarks, service names and service marks ("AdStar Marks") in the co-branded pages referred to in Attachment A hereto (the "Co-branded pages"), and in connection with the distribution, marketing and promotion of Ad-StarNet and the Co-branded pages, subject to the following conditions: (a) the Company shall comply with all guidelines that AdStar may provide from time to time; (b) the look and feel, the use of all logos, the design, and the overall quality of the Co-branded pages shall be subject to AdStar's approval; (c) any use of the AdStar Marks shall inure to the benefit of AdStar; and (d) the Company shall submit to AdStar for its prior approval, not to be unreasonably withheld, all advertising, promotional and other material bearing any AdStar Marks. 3.4 The Company grants to AdStar during the term of this Agreement a non-exclusive, royalty-free, world-wide right and license to use its trade names, trademarks, service names and service marks ("Company Marks") in Ad-StarNet and in connection with the distribution, marketing and promotion of the Ad-StarNet and the co-branded pages, subject to the following conditions: (a) AdStar shall comply with all guidelines that the Company may provide from time to time; (b) any use of the Company Marks shall inure to the benefit of the Company; and (c) AdStar shall submit to Company for its prior approval, not to be 1 Confidential 2 unreasonably withheld, all advertising, promotional and other material bearing any Company Marks. 3.5 The look and feel of both parties' logos and brands as used by the other party, along with the overall quality of the Co-branded pages must meet with the mutual approval of both parties, not to be unreasonably withheld. 3.6 Nothing in this Agreement shall be deemed to grant to the Company any ownership interest in the AdStar Marks or to AdStar any ownership interest in the Company Marks. Further, neither Company nor Ad-Star is granted any ownership interest in the marks of their respective Affiliates and Clients. 3.7 The "Ad-Star ad taking services," as it is referred to in this Agreement and accompanying Attachments, includes all services enabled by Ad-Star, including but not limited to its logos, marks, code and design elements incorporated into the Co-branded pages, and in whole the Ad-Star's central Web site and other sites which Ad-Star enables for the buying and selling of advertisements into and from Affiliates, Clients and affiliates of other Ad-Star Clients. Not withstanding the above, certain added value applications of the Ad-Star ad taking services, beyond those expressly provided for in this Agreement, may be excluded by Ad-Star from this Agreement, or negotiated separately. 4) Promotional Efforts: Each party will submit to the other party, for its prior written approval, which shall not be unreasonably withheld or delayed, all press releases, and marketing, advertising, and other promotional materials that refer to the other party and/or its trade names, trademarks, service names and service marks (the "Materials"). Copy substantially similar to that already approved shall be deemed approved. 5) Fees, Share of Advertising Revenue and Payment: Ad-Star will pay Company and its Affiliates advertising revenues earned and actually received, less applicable fees, in a calendar month within thirty (30) days of the end of that calendar month. Each party will provide the other party with a monthly report with all information necessary to show the basis on which advertising revenues and fee payments are calculated in accordance with this Agreement. Each party will have the right, at its own expense, to inspect and audit the accounting books and records of the other party that are specifically relevant to the determination of fees and payments due under this Agreement. In the event such inspection and audit shows a discrepancy in payments in the recipient party's disfavor of five percent (5%) or more, then the other party shall promptly reimburse the recipient party for the costs and expense of such inspection and audit and pay the amount of any underpayment. Ad-Star applicable fees which will be deducted from advertising revenues include: a) The Ad-Star transaction fee, which includes Company's share of such fee, which is defined in Attachment A; b) The merchant processing fees (note that these fees for credit cards are estimated in the range of 2.5% to 3.5% of the total charge plus a per transaction fee of $.80; ACH is estimated to be $1.25 per transaction and $2 for ACH refunds and $10 for each return item); c) a reserve for credit card charge backs of three percent (3%) of the total advertising revenues for a rolling twelve (12) months. This reserve will serve to reduce fluctuations in monthly payments and may be adjusted from time to time with written notice to more accurately reflect the actual charge back experience. Sole liability for chargebacks will remain with the Affiliate and/or Client who is the primary publisher of the advertising, where the primary publisher is defined as the publisher receiving payment for the advertising, excluding transaction fees. 6) Non-Exclusivity: Both parties agree and acknowledge that nothing in this Agreement shall be deemed or construed to provide the other with any manner of exclusivity. 7) Timing: Both parties will use reasonable commercial efforts to work on their respective responsibilities as identified in this Agreement and attachment A, towards a February 17, 1999 beta release of the Ad-Star ad taking functionality through the Co-branded pages and Ad-Star's sites. Subsequently, both parties will work towards a fully functional live production date of March 15, 1999. 2 Confidential 3 8) Assignability: This Agreement shall not be assigned, sublicensed or transferred by either party, without the prior written consent of the other party, which shall not be unreasonably withheld or delayed. An acquisition, merger or other change of control of either the Company or AdStar shall not be deemed an assignment. 9) Confidentiality: Each party acknowledges and agrees that any and all information relating to the other party's business and not publicly known including, without limitation, the contents of this Agreement, technical processes and formulas, source codes, trade secrets, names, addresses and information about users and advertisers, product designs, sales, costs and other unpublished financial information, product plans, and marketing data is confidential and proprietary information. Each party agrees that it will not use or disclose any confidential or proprietary information for any purpose other than in connection with the performance of and obligations under the terms and conditions of this Agreement or as required by a court of competent jurisdiction. 10) Representations and Warranties, Disclaimers, and Advertising Acceptability: Each party represents and warrants to the other that (a) its Web site is a functional Internet site accessible to subscribers and users of the Internet; (b) it has the right and authority to enter into and perform all obligations under this Agreement; and (c) its execution and performance of this Agreement does not and will not violate any agreement to which such party is bound. In the event of an error, delay, defect, breakdown or failure of either party's Web site, that party's obligation shall be limited to using its reasonable efforts to restore its Web site to operation as soon as feasible. The Company does not review or exercise control over the advertisements, and, consequently, all advertisements on the Company's Web site or coming through the Co-branded pages are provided AS IS, and the Company expressly disclaims any responsibility for the accuracy, quality or nature of such advertisements. The Company further represents and warrants to Ad-Star that the Company's Web site (excluding advertisements) does not and will not contain any content or material, that infringes any proprietary right of any third party, including, without limitation, any copyright, trademark, patent or trade secret, or that violates any law or governmental regulation. Ad-Star does not obtain the advertisements which are bought and sold through Ad-StarNet, nor does it review or exercise control over such advertisements, and, consequently, all advertisements coming through Ad-StarNet are provided AS IS, and Ad-Star expressly disclaims any responsibility for the accuracy, quality or nature of such advertisements. Ad-Star further represents and warrants to Company that Ad-Star's Web site (excluding advertisements) does not and will not contain any content or material, that infringes any proprietary right of any third party, including, without limitation, any copyright, trademark, patent or trade secret, or that violates any law or governmental regulation. The Company and Ad-Star reserve the right to refuse to publish any advertisement, including, without limitation, any advertisement that: would or might violate any law or governmental regulation; would or might violate or infringe any right of any third party; it determines is inappropriate or might subject it to liability or adverse publicity; or is otherwise injurious to its interests; provided that, neither party shall be responsible for, or be obligated to review, any content, advertisement, or other material on the other's Web site. Notwithstanding the foregoing, the stated circumstances shall not absolve Ad-Star of the obligation, as identified in this Agreement, to process and transmit all successfully transacted advertisements placed through the Ad-Star ad taking service for Company and/or its Affiliates to Company and/or its Affiliates. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, REGARDING ANY MATTER SUBJECT TO THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF 3 Confidential 4 MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE. 11) Indemnity: Each party will defend, indemnify, save and hold harmless the other party, AdStar's clients and Company Affiliates, and their officers, directors, agents and employees, from any and all third-party claims, demands, liabilities, costs or expenses, including, without limitation, reasonable attorneys' fees ("Liabilities"), resulting from the indemnifying party's breach of any representation or warranty contained in this Agreement. Each party agrees to (a) promptly notify the other party in writing of any indemnifiable claim or demand and (b) give the other party the opportunity to defend or negotiate a settlement of any such claim or demand at such other party's expense and cooperate fully with the other party, at that other party's expense, in defending or settling such claim or demand. The indemnifying party will not settle a claim or demand for the indemnified party without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Each party reserves the right, at its own expense, to participate in the defense of any matter otherwise subject to indemnification by the other party. 12) Limitation of Liability: In no event will either party be liable to the other party for consequential, incidental, special, punitive, exemplary, or indirect damages, including, but not limited to, loss of profits or sales or loss of or damage to data, regardless of the form of action, whether in contract, tort, breach of warranty or otherwise, even if a party has been advised of the possibility thereof. Moreover, except for the indemnification obligations and charge back allowance and liability described above, in no event shall the maximum liability of either party arising out of or relating to the transaction which is the subject matter of this Agreement, regardless of cause, exceed the amounts payable by either party to the other under this Agreement. 13) Term and Termination: The initial term of this Agreement will be for the period of three (3) years from the Effective Date and will automatically renew for successive one year periods unless terminated by either party. Either party may terminate this Agreement after the initial term for any reason on ninety (90) days' prior written notice. Notwithstanding the foregoing, either party may terminate this Agreement with immediate effect if the other party is in breach of a material obligation hereunder and fails to cure such breach within ninety (90) days of notice from the non-breaching party or fails to promptly after notice from the non-breaching party begin to cure such breach and diligently pursue its cure if such breach is curable but is not capable of being cured within ninety (90) days of notice from the non-breaching party. Upon termination, each party shall promptly return to the other all of the confidential information (as defined above) of the other party in its possession or control. Sections 5, 8, 9, 10, 11, 12, 13 and 14 shall survive termination or expiration. 14) General Provisions: 14.1 Amendment: No change, amendment or modification of any provision of this Agreement shall be valid unless set forth in a written instrument signed by both parties. 14.2 Entire Agreement: This Agreement sets forth the entire agreement and supersedes any prior agreements, written or oral, of the parties with respect to the transactions set forth herein. 14.3 Construction: In the event that any provision of this Agreement conflicts with the law under which this Agreement is to be construed, or if any such provision is held invalid by a court with jurisdiction over the parties to this Agreement, such provision shall be deemed to be restated to reflect as nearly as possible the original intentions of the parties in accordance with the applicable law, and the remainder of this Agreement shall remain in full force and effect. There shall be no presumption for or against either party as a result of such party being the principal drafter of this Agreement. 14.4 Independent Contractors: The parties to this Agreement are independent contractors. Neither party is an agent, representative, or partner of the other party. Neither party shall have any right, power or authority to enter into any agreement for, or on behalf of, or incur any obligation or liability of, or to otherwise bind, the other party. This Agreement shall not be interpreted or construed to create an association, agency, joint venture or partnership between the parties or to impose any liability attributable to such a relationship upon either party. 4 Confidential 5 14.5 Governing Law: This Agreement will be governed by and construed in accordance with the laws of the State of New York, without giving effect to principles of conflicts of law. 14.6 Arbitration: A. In the event of any disagreement, controversy or dispute regarding performance under or interpretation of this Agreement, the parties agree to attempt to reach a negotiated resolution. If such dispute remains unresolved for a period of thirty (30) days after one party has provided written notice of the dispute to the other, then each party shall designate an officer to meet to endeavor to resolve the dispute. Arbitration in accordance with this section may not be commenced by either party until said officers determine in good faith that a negotiated resolution is unlikely, or the passage of thirty (30) days from their first meeting, whichever occurs later. Upon the expiration of said thirty (30) day period, if a negotiated resolution has not been reached, the disagreement, controversy or dispute shall be settled by binding arbitration in accordance with the commercial arbitration rules of the American Arbitration Association and judgement upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitration shall be conducted in New York, NY by three arbitrators. One arbitrator shall be selected by AdStar, one arbitrator shall be selected by Company and the third arbitrator shall be selected by the American Arbitration Association and shall be subject to approval by both AdStar and Company. AdStar and Company intend that this provision for settling disputes be irrevocable. 14.7 Attorney's Fees: In any action or proceeding to enforce any of the terms or provisions of this Agreement or on account of the breach hereof, the party prevailing shall be entitled to recover all its expenses, including, without limitation, reasonable attorney's fees from the other party. 14.8 Notice: Any notices herein shall be given to the appropriate party at the address specified above or at such address as the party shall specify in writing. Notice shall be deemed given: upon personal delivery; if sent by fax, upon confirmation of receipt; or if sent by certified or registered mail, postage prepaid, upon receipt. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. FOR COMPANY: FOR ADSTAR: PowerAdz.com LLC. Ad-Star Services, Inc. By: By: Name: s/ Robert Godgart Name: s/ Leslie Bernhard -------------------------- -------------------- Title: Chairman Title: President -------------------------- -------------------- 5 Confidential 6 ATTACHMENT A - RESPONSIBILITIES OF THE PARTIES Company Shall: a) Assign a Company employee as the project contact to assist AdStar in the design of the Web page interface look and feel which will be consistent with Company's Web environment and will be based on AdStar's required information. The interface will use the AdStar demo site, Ad-StarNet, and Ad-Star private label templates as guides for the fields of information that are needed and the flow of the Web pages. Company and Ad-Star will mutually agree on the final implemented look and feel along with the fields of data that are required. The Co-branded pages will accommodate ad placement into all participating Company Affiliates and Ad-Star Clients; and when linked to from a Company Affiliate Web site, will also include that publication as the default selection. Collectively the Web pages that include Ad-Star ad taking services which make up the Affiliates' versions and the Company's own version of Ad-Star's marketplace for buying and selling classified advertising are hereto and previously called the "Co-branded pages". Company and Ad-Star will mutually agree on the final implemented look and feel on the Co-branded pages. b) promote the Ad-Star ad taking services to its Affiliates through e-mails, updates and other communications to its Affiliates. Company will use its customer service workers or other qualified representatives to enlist its Affiliates in the program. Company will include the Ad-Star ad taking services into its basic service for all new Company Affiliates and as an automatic upgrade to all existing Company Affiliates. c) ensure that its participating Affiliates publish the ads delivered to them through the Ad-Star ad taking services in accordance with what the advertiser has paid for, e.g. appropriate placement and frequency. d) will promote the Co-branded pages to the users of its Web site with permanent buttons from the navigation bars across the top and left hand sides of its Web site. These permanent buttons will link to the Co-branded pages. In addition, Company will include a link to the Co-branded pages in the "What's New" section at launch. AdStar Shall: a) provide company with an exclusive means to place State Association buys where Company has exclusive relationship, existing and future, with the Newspaper State Association. A "State Association buy" is defined as the ability to buy through the Ad-Star ad taking services all newspapers in the Newspaper State Association, which participate and are Company affiliates, with a single selection rather than having to identify each newspaper separately. The State Association buy will only be available for a pre-defined formatted ad, which is acceptable by all participating newspapers and Ad-Star. b) provide Company and its Affiliates with the ability to take ads through the Ad-Star ad taking services into the Affiliates print and online environments. These ads will be pre-paid and conform to the reasonable pricing instructions from the publication. AdStar will deliver the advertising coming through the Ad-Star ad taking services to the appropriate Company Affiliate for publication via e-mail. Advertising may alternatively be delivered to Company Affiliate via fax for an additional cost to cover telecommunications charges. If this option is elected, all telecommunications charges will be deducted from advertising revenues paid to Affiliate in the same fashion as other applicable fees as detailed in Section 5) of the Agreement to which this Attachment A is attached. c) assist in the marketing to key Company Affiliates and making marketing and training presentations to the Company sales force. Additional presentations requested by Company beyond what AdStar considers reasonable will be made at the expense of Company or other mutually agreed arrangement. d) support and maintain the Company ad taking functionality including hosting of the Co-branded pages. Ad-Star will upgrade the Ad-Star ad taking service on the Co-branded pages at no charge when the upgrade enhances already existing capabilities of the Ad-Star ad taking service. Other reasonable updating, such as once a year, of pricing tables for Company Affiliates' publications will be done free of charge on an annual basis for each Company Affiliate that generates over 1,200 paid ads for the previous 12 months to the update. Otherwise there will be a fee for updating pricing tables of $200 per update. Ad-Star will provide reasonable telephone support for Company and its Affiliates with regard to the ad taking functionality at 310-577-8255 during normal business hours, Pacific Standard 6 Confidential 7 Time. In addition, Ad-Star will provide e-mail support exclusively for advertisers using the Company version of the Ad-Star ad taking services. e) in the event that it goes out of business, grant Company a contingent license to use the Source Code in a manner limited to maintaining the Co-branded pages such that Company can support only Company's Existing Affiliates. "Existing Affiliates" is defined as those Affiliates whom Ad-Star has included in the Ad-Star ad taking service at the time of the granting of the contingent license. f) provide Company with a percentage of every "Ad-Star transaction fee" ("Ad-Star transaction fee" is a per ad fee charged, excluding merchant processing fees, reserves for payment chargebacks and fax telecommunication charges) charged to Company Affiliates and Ad-Star Clients for ad placement, based on the channel through which the ad was originated and the Publication Status (i.e. Publication Status is determined by whether or not the Company Affiliate is a Pre-existing Ad-Star Client or if the Publications is not a Company Affiliate (Ad-Star Client solely). A list of Company Affiliates as of the Effective Date is included as Attachment B. A list of Ad-Star Clients as of the Effective Date is included as Attachment C.). If Company adds a new Affiliate the Publication Status will be "Company Affiliate First" unless the Publications already has an Agreement with Ad-Star at the time of becoming a Company Affiliate. Note that if a Company Affiliate or Company Affiliate First does not host their classified Web site with Company, Company must get Affiliate to place prominent links to the Co-branded pages or their private label version of the Ad-Star ad taking services from their classified Web site and to agree to the terms of this Agreement, in order for that Affiliate to be included as a Company Affiliate for the purposes of determining Publication Status and transaction fees due Company. The percentage of the transaction fee due to Company is indicated in the following table: CHANNEL BY WHICH AD IS ORIGINATED
PUBLICATION STATUS COMPANY WEB SITES PUBLICATION'S WEB SITE AD-STARNET Company Affiliate First 40% 40% 25% (i.e. not a pre-existing Ad-Star Client) Pre-existing Ad-Star Client 25% 0% 0% Ad-Star Client solely 25% 0% 0% (i.e. not a Company Affiliate)
Note that whenever a user comes through Company's Web site and places an ad in a non-Company Affiliate publication, Company will receive 25% of the transaction fee paid as a distribution fee. Ad-Star will pay Company and its Affiliates their appropriate advertising revenues or fees in accordance with the terms of Section 5 above of the Agreement to which this Attachment A is attached. g) determine the initial Ad-Star transaction fee that is best borne by the marketplace, which at the time of this Agreement is expected to be three dollars ($3.00). Ad-Star shall also determine changes in transaction fees and communicate to the Company such changes, with sixty (60) days advance notice. Absent mutual consent of Ad-Star and Company, subsequent changes to transaction fee will only be on a calendar year basis. The transaction fee for each ad will be netted against the pre-payment of the ad collected by Ad-Star as detailed in Section 5 of the Agreement to which this Attachment A is attached. Not withstanding the above, the total Ad-Star transaction fee for State Association buys will be determined by the number of Affiliates in the State Association buy multiplied by the Ad-Star transaction fee (e.g. 10 Affiliates x $3.00=$30.00), however the total Ad-Star transaction fee for a State Association buy will not exceed ten percent (10%) of the total advertising revenue for the particular buy (e.g. 10 Affiliates x $25.00 (individual ad revenue per Affiliate) = $250.00 (total advertising revenue), so the Maximum Ad-Star transaction fee for this buy is $250.00 * 10%= $25.00). In addition, the Minimum Ad-Star transaction fee for a State Association buy is $.75 per Affiliate in the particular buy, (e.g. 10 Affiliates x $6.00 (individual ad revenue per Affiliate) = $60.00, so the minimum Ad-Star transaction fee for this buy is 10 Affiliates x $.75 = $7.50. Note that when the Minimum Ad-Star transaction fee is greater than the Maximum Ad-Star transaction fee, the Minimum Ad-Star transaction fee shall rule. h) Provide Company with an initial exclusive right to market the AdStar ad taking services to Company First Affiliates for a reasonable period of time, not to exceed 90 days. 7 Confidential 8 i) reserve the right to refuse service to any Company Affiliate at AdStar's reasonable discretion, after first using reasonable means to remedy cause of refusal. j) provide additional revenue generating opportunities for the Co-branded pages. Revenue from all e-commerce opportunities on the Co-branded pages will be split evenly between Ad-Star and Company after a mutually agreed share for the Affiliate. k) Ad-Star and Company agree to split all banner advertising impressions on the Co-branded pages on a fifty-fifty (50/50) basis. The mechanism for distributing the banner impressions between Ad-Star and Company will be developed in greater detail Each company will retain full responsibility for selling the advertising impressions allocated to it as well as one hundred percent (100%) of all revenues derived from said advertising. Finally, it is understood that Affiliates retain the right to refuse selected banner advertising on their versions of the Co-branded sites. l) use reasonable efforts to provide Company with pageview counts for visitors from Company and Affiliate Web sites to the Co-branded pages. m) collect information necessary for setting up Ad-Star's ad taking service from participating Affiliates and coordinate launch with Affiliates. 8 Confidential EX-10.8 13 DISTRIBUTION AND SERVICE AGREEMENT 1 DISTRIBUTION AND SERVICE AGREEMENT This Distribution and Service Agreement ("Agreement") is made and entered into between Ad-Star Services Inc., a New York Corporation ("Ad-Star") with offices at 4553 Glencoe Avenue, Suite 325, Marina del Rey, CA 90292 and AdOne Classified Network, Inc., a Delaware Corporation (the "Company"), with offices at 361 Broadway, Suite 100, New York, NY 10013 as of November 19, 1998 ("Effective Date"). NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions herein contained, AD-STAR and the Company agree as follows: 1) Purpose: Company owns and operates the AdOne Classified Network, a system for collecting, displaying, distributing, redistributing and publishing classified advertisements on the Internet for itself and its affiliates ("Affiliates"), with a central Web site currently located at www.classifiedwarehouse.com ("Classified Warehouse"). Ad-Star provides an Internet based marketplace for the buying and selling of classified advertising ("Ad-StarNet") for its media and advertisers clients (collectively "Clients"). The parties wish to incorporate Ad-StarNet into Company's Web site for the purpose of allowing Affiliates' users to place ads through Ad-StarNet and to make Affiliate's publications capable of taking these advertisements through Ad-StarNet. 2) Responsibilities of the Parties: The responsibilities of the parties are detailed in Attachment A. 3) General: 3.1 This Agreement covers business dealings for North America only. As such it includes all business relationships referred to in this Agreement, for Company and its Affiliates doing business in North America. 3.2 Each party shall be solely responsible for supplying and managing its own Web site at its own expense and neither party shall have any obligation or liability whatsoever with respect to the Web site of the other. Each party shall manage, review, delete, edit, create, update and otherwise manage all content and services available on or through its respective Web site. Notwithstanding the above, responsibilities of each party detailed in Attachment A cannot be deleted or substantively edited without the mutual consent of the other party 3.3 Each party shall promptly inform the other of (a) any information related to its Web site that could reasonably be anticipated to lead to a claim, demand, or liability of or against the other party by any third party, (b) any changes to its Web site which would substantially change the content in any area to which the other party has linked, and (c) any changes in its Web site which would substantially change the page(s) in which links to the other party appear. 3.4 Ad-Star grants to the Company during the term of this Agreement a non-exclusive, royalty-free, world-wide right and license to use its trade names, trademarks, service names and service marks ("Ad-Star Marks") in the co-branded pages referred to in Attachment A hereto (the " Co-branded pages"), and in connection with the distribution, marketing and promotion of Ad-StarNet and the Co-branded pages, subject to the following conditions: (a) the Company shall comply with all guidelines that Ad-Star may provide from time to time; (b) the look and feel, the use of all logos, the design, and the overall quality of the Co-branded pages shall be subject to Ad-Star's approval; (c) any use of the Ad-Star Marks shall inure to the benefit of Ad-Star; and (d) the Company shall submit to Ad-Star for its prior approval, not to be unreasonably withheld, all advertising, promotional and other material bearing any Ad-Star Marks. 1 Confidential 2 3.5 The Company grants to Ad-Star during the term of this Agreement a non-exclusive, royalty-free, world-wide right and license to use its trade names, trademarks, service names and service marks ("Company Marks") in Ad-StarNet and in connection with the distribution, marketing and promotion of the Ad-StarNet and the Co-branded pages, subject to the following conditions: (a) Ad-Star shall comply with all guidelines that the Company may provide from time to time; (b) any use of the Company Marks shall inure to the benefit of the Company; and (c) Ad-Star shall submit to Company for its prior approval, not to be unreasonably withheld, all advertising, promotional and other material bearing any Company Marks. 3.6 The look and feel of both parties logos and brands as used by the other party, along with the overall quality of the Co-branded pages must meet with the mutual approval of both parties, not to be unreasonably withheld. 3.7 Nothing in this Agreement shall be deemed to grant to the Company any ownership interest in the Ad-Star Marks or to Ad-Star any ownership interest in the Company Marks. Further, neither Company nor Ad-Star is granted any ownership interest in the marks of their respective Affiliates and Clients 3.8 The "Ad-Star ad taking services," as it is referred to in this Agreement and accompanying Attachments, includes all services enabled by Ad-Star, including but not limited to its logos, marks, code and design elements incorporated into the Co-branded pages, and in whole the Ad-Star's central Web site and other sites which Ad-Star enables for the buying and selling of advertisements into and from Affiliates, Clients and affiliates of other Ad-Star Clients. Not withstanding the above, certain added value applications of the Ad-Star ad taking services, beyond those expressly provided for in this Agreement, may be excluded by Ad-Star from this Agreement, or negotiated separately. 4) Promotional Efforts: Each party will submit to the other party, for its prior written approval, which shall not be unreasonably withheld or delayed, all press releases, and marketing, advertising, and other promotional materials that refer to the other party and/or its trade names, trademarks, service names and service marks (the "Materials"). Copy substantially similar to that already approved shall be deemed approved. 5) Fees, Share of Advertising Revenue and Payment: Ad-Star will pay Company and its Affiliates advertising revenues earned and actually received, less applicable fees, in a calendar month within thirty (30) days of the end of that calendar month. Each party will provide the other party with a monthly report with all information necessary to show the basis on which advertising revenues and fee payments are calculated in accordance with this Agreement. Each party will have the right, at its own expense, to inspect and audit the accounting books and records of the other party that are specifically relevant to the determination of fees and payments due under this Agreement. In the event such inspection and audit shows a discrepancy in payments in the recipient party's disfavor of five percent (5%) or more, then the other party shall promptly reimburse the recipient party for the costs and expense of such inspection and audit and pay the amount of any underpayment. Ad-Star applicable fees which will be deducted from advertising revenues include: a) The Ad-Star transaction fee, which includes Company's share of such fee, which is defined in Attachment A; b) The merchant processing fees (note that these fees for credit cards are estimated in the range of 2.5% to 3.5% of the total charge plus a per transaction fee of $.80; ACH is estimated to be $1.25 per transaction and $2 for ACH refunds and $10 for each return item); c) a reserve for credit card charge backs of three percent (3%) of the total advertising revenues for a rolling twelve (12) months. This reserve will serve to reduce fluctuations in monthly payments and may be adjusted from time to time with written notice to more accurately reflect the actual charge back experience. Sole liability for chargebacks will remain with the Affiliate and/or Client who is the primary publisher of the advertising, where the primary publisher is defined as the publisher receiving payment for the advertising, excluding transaction fees. 2 Confidential 3 6) Non-Exclusivity: Both parties agree and acknowledge that nothing in this Agreement shall be deemed or construed to provide the other with any manner of exclusivity. 7) Timing: Both parties will use reasonable commercial efforts to work on their respective responsibilities as identified in this Agreement and attachment A, towards a January 15, 1999 beta release of the ad taking functionality through the Co-branded pages and Ad-Star's own site. Subsequently, both parties will work towards a fully functional live production date of February 1, 1999. The live production on February 1, 1999 will included a minimum of ten (10) Company Affiliates, or up to a maximum of twenty (20) Company Affiliates. The actual number of Company Affiliates and any change to these minimum and maximum requirements will be based on mutual consent of the parties. Company will be Ad-Star's first network Client to be mutually announced if Company is first network Client Agreement signed by the Effective Date. In addition, Company will be the first network Client of Ad-Star to launch if Company provides all needed information and performs its requirements as identified in this Agreement and Attachments. 8) Assignability: This Agreement shall not be assigned, sublicensed or transferred by either party, without the prior written consent of the other party, which shall not be unreasonably withheld or delayed. An acquisition, merger or other change of control of either the Company or Ad-Star shall not be deemed an assignment. 9) Confidentiality: Each party acknowledges and agrees that any and all information relating to the other party's business and not publicly known including, without limitation, the contents of this Agreement, technical processes and formulas, source codes, trade secrets, names, addresses and information about users and advertisers, product designs, sales, costs and other unpublished financial information, product plans, and marketing data is confidential and proprietary information. Each party agrees that it will not use or disclose any confidential or proprietary information for any purpose other than in connection with the performance of and obligations under the terms and conditions of this Agreement or as required by a court of competent jurisdiction. 10) Representations and Warranties, Disclaimers, and Advertising Acceptability: Each party represents and warrants to the other that (a) its Web site is a functional Internet site accessible to subscribers and users of the Internet; (b) it has the right and authority to enter into and perform all obligations under this Agreement; and (c) its execution and performance of this Agreement does not and will not violate any agreement to which such party is bound. In the event of an error, delay, defect, breakdown or failure of either party's Web site, that party's obligation shall be limited to using its reasonable efforts to restore its Web site to operation as soon as feasible. The Company does not review or exercise control over the advertisements, and, consequently, all advertisements on the Company's Web site or coming through the Co-branded pages are provided AS IS, and the Company expressly disclaims any responsibility for the accuracy, quality or nature of such advertisements. The Company further represents and warrants to Ad-Star that the Company's Web site does not and will not contain any content or material, (excluding advertisements) that infringes any proprietary right of any third party, including, without limitation, any copyright, trademark, patent or trade secret, or that violates any law or governmental regulation. Ad-Star does not obtain the advertisements which are bought and sold through Ad-StarNet, nor does it review or exercise control over such advertisements, and, consequently, all advertisements coming through Ad-StarNet are provided AS IS, and Ad-Star expressly disclaims any responsibility for the accuracy, quality or nature of such advertisements. Ad-Star further represents and warrants to Company that Ad-Star's Web site does not and will not contain any content or material, (excluding advertisements) that infringes any proprietary right of any third party, including, without limitation, any copyright, trademark, patent or trade secret, or that violates any law or governmental regulation. 3 Confidential 4 The Company and Ad-Star reserve the right to refuse to publish any advertisement, including, without limitation, any advertisement that: would or might violate any law or governmental regulation; would or might violate or infringe any right of any third party; it determines is inappropriate or might subject it to liability or adverse publicity; or is otherwise injurious to its interests; provided that, neither party shall be responsible for, or be obligated to review, any content, advertisement, or other material on the other's Web site. Notwithstanding the foregoing, the stated circumstances shall not absolve Ad-Star of the obligation, as identified in this Agreement, to process and transmit all successfully transacted advertisements placed through the Ad-Star ad taking service for Company and/or its Affiliates to Company and/or its Affiliates. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, REGARDING ANY MATTER SUBJECT TO THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE. 11) Indemnity: Each party will defend, indemnify, save and hold harmless the other party, Ad-Star's clients and Company Affiliates, and their officers, directors, agents and employees, from any and all third-party claims, demands, liabilities, costs or expenses, including, without limitation, reasonable attorneys' fees ("Liabilities"), resulting from the indemnifying party's breach of any representation or warranty contained in this Agreement. Each party agrees to (a) promptly notify the other party in writing of any indemnifiable claim or demand and (b) give the other party the opportunity to defend or negotiate a settlement of any such claim or demand at such other party's expense and cooperate fully with the other party, at that other party's expense, in defending or settling such claim or demand. The indemnifying party will not settle a claim or demand for the indemnified party without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Each party reserves the right, at its own expense, to participate in the defense of any matter otherwise subject to indemnification by the other party. 12) Limitation of Liability: In no event will either party be liable to the other party for consequential, incidental, special, punitive, exemplary, or indirect damages, including, but not limited to, loss of profits or sales or loss of or damage to data, regardless of the form of action, whether in contract, tort, breach of warranty or otherwise, even if a party has been advised of the possibility thereof. Moreover, except for the indemnification obligations and charge back allowance and liability described above, in no event shall the maximum liability of either party arising out of or relating to the transaction which is the subject matter of this Agreement, regardless of cause, exceed the amounts payable by either party to the other under this Agreement. 13) Term and Termination: The initial term of this Agreement will be for the period of three (3) years from the Effective Date and will automatically renew for successive one year periods unless terminated by either party. Either party may terminate this Agreement after the initial term for any reason on sixty (60) days' prior written notice. Notwithstanding the foregoing, either party may terminate this Agreement with immediate effect if the other party is in breach of a material obligation hereunder and fails to cure such breach within thirty (30) days of notice from the non-breaching party or fails to promptly after notice from the non-breaching party begin to cure such breach and diligently pursue its cure if such breach is curable but is not capable of being cured within thirty (30) days of notice from the non-breaching party. Upon termination, each party shall promptly return to the other all of the confidential information (as defined above) of the other party in its possession or control. Sections 5, 8, 9, 10, 11, 13 and 14 shall survive termination or expiration. 14) General Provisions: 14.1 Amendment: No change, amendment or modification of any provision of this Agreement shall be valid unless set forth in a written instrument signed by both parties. 14.2 Entire Agreement: This Agreement sets forth the entire agreement and supersedes any prior agreements, written or oral, of the parties with respect to the transactions set forth herein. 4 Confidential 5 14.3 Construction: In the event that any provision of this Agreement conflicts with the law under which this Agreement is to be construed, or if any such provision is held invalid by a court with jurisdiction over the parties to this Agreement, such provision shall be deemed to be restated to reflect as nearly as possible the original intentions of the parties in accordance with the applicable law, and the remainder of this Agreement shall remain in full force and effect. There shall be no presumption for or against either party as a result of such party being the principal drafter of this Agreement. 14.4 Independent Contractors: The parties to this Agreement are independent contractors. Neither party is an agent, representative, or partner of the other party. Neither party shall have any right, power or authority to enter into any agreement for, or on behalf of, or incur any obligation or liability of, or to otherwise bind, the other party. This Agreement shall not be interpreted or construed to create an association, agency, joint venture or partnership between the parties or to impose any liability attributable to such a relationship upon either party. 14.5 Governing Law: This Agreement will be governed by and construed in accordance with the laws of the State of New York, without giving effect to principles of conflicts of law. 14.6 Arbitration: A. In the event of any disagreement, controversy or dispute regarding performance under or interpretation of this Agreement, the parties agree to attempt to reach a negotiated resolution. If such disagreement, controversy or dispute remains unresolved for a period of thirty (30) days after one party has provided written notice of the disagreement, controversy or dispute to the other, then each party shall designate an officer to meet to endeavor to resolve the disagreement, controversy or dispute. Arbitration in accordance with this section may not be commenced by either party until said officers determine in good faith that a negotiated resolution is unlikely, or the passage of thirty (30) days from their first meeting, whichever occurs later (the "Negotiation Termination Date"). Upon the Negotiation Termination Date, if a negotiated resolution has not been reached, the disagreement, controversy or dispute shall be settled by binding arbitration in accordance with the commercial arbitration rules of the American Arbitration Association and judgement upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitration shall be conducted in New York County, NY by three arbitrators. One arbitrator shall be selected by Ad-Star, one arbitrator shall be selected by Company and the third arbitrator shall be selected by the American Arbitration Association and shall be subject to approval by both Ad-Star and Company. Ad-Star and Company intend that this provision for settling disputes be irrevocable. 14.7 Attorney's Fees: In any action or proceeding to enforce any of the terms or provisions of this Agreement or on account of the breach hereof, the party prevailing shall be entitled to recover all its expenses, including, without limitation, reasonable attorney's fees from the other party. 14.8 Notice: Any notices herein shall be given to the appropriate party at the address specified above or at such address as the party shall specify in writing. Notice shall be deemed given: upon personal delivery; if sent by fax, upon confirmation of receipt; or if sent by certified or registered mail, postage prepaid, upon receipt. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. FOR COMPANY: FOR AD-STAR: AdOne Classified Network, Inc. Ad-Star Services, Inc. By: By: Name: /s/ Brendan Burns Name: /s/ Adam Leff _________________________ _____________________ Title: VP & GM COO & VP _________________________ Title:_____________________ 5 Confidential 6 ATTACHMENT A - RESPONSIBILITIES OF THE PARTIES General Provisions: a) Ad-Star and Company agree to use reasonable commercial efforts to comply with and fulfill the technical requirements in Attachment D to which this Attachment A is attached, and which is incorporated into this Agreement in full. Technical requirements in Attachment D apply to Company Affiliates except for Pre-existing Ad-Star Clients, as defined below. b) Ad-Star and Company agree that all Co-branded pages that incorporate Ad-Star's ad taking services will be consistent with Company's Web site look and feel and each Affiliate's private label Web site look and feel. These interfaces will be based on Ad-Star's required information and will use the Ad-StarNet Web site and Ad-Star private label templates, as guides for the fields of information that are needed and the flow of the pages. Collectively the Web pages that include Ad-Star ad taking services which make up the Affiliates' versions and the Company's own version of Ad-Star's marketplace for buying and selling classified advertising are hereto and previously called the "Co-branded pages". Company and Ad-Star will mutually agree on the final implemented look and feel along with the fields of data and functionalities that are required on the Co-branded pages not already incorporated by this reference to Attachment D. The Co-branded pages will accommodate online ad placement into each and every participating Company Affiliate. Company Shall: a) use reasonable commercial efforts to promote the Ad-Star ad taking service to its Affiliates through e-mails, updates and other communications to its Affiliates. Company will use its customer service workers or other qualified representatives to enlist its Affiliates in the Ad-Star ad taking services. Company will include the Ad-Star ad taking services into its basic service, on a per Affiliate opt-out basis, for all new Company Affiliates and as part of its planned Affiliate interface upgrade for Q4'98. This means that Ad-Star's ad taking service will be the only such service initially offered to Company Affiliates as part of their basic service and Affiliate must choose not to use service, i.e. "opt-out", in order to exclude such service from their contract, at which time Company may offer the Affiliate any other ad taking services not expressly precluded by this Agreement. b) require participating Affiliates to approve and sign compliance statement, to be mutually agreed upon by Ad-Star and the Company, obligating Affiliates to publish the ads delivered to them through the Ad-Star ad taking service in accordance with what the advertiser has paid for, e.g. appropriate placement and frequency. c) prominently promote the Co-branded pages to the users of its Web site with permanent link buttons throughout its Web site, entitled "Place an ad" or something else to the same effect. These permanent buttons will link to the Co-branded pages. In addition, Company will use reasonable commercial efforts to promote its Co-branded page, which will include Ad-StarNet and any other vendors who provide similar services to the Company or its Affiliates, with available resources. In no case will another vendor, which provides similar service, be more prominently displayed than Ad-Star. d) include all participating Company Affiliates for ad placement from within the Ad-Star enabled Co-branded pages. Furthermore, at Company's sole discretion, Company will also include the ability to place ads into all other Ad-Star Client publications, provided by Ad-Star, from the Co-branded pages. This will enable ad placement into other publications in addition to the Company participating Affiliate publications. e) NOT develop any type of online classified ad taking capability which is in any way similar to Ad- Star's ad taking services for buying and selling advertising. In the event that Company and/or its Affiliates require any specific ad taking capabilities not provided by Ad-Star, Ad-Star shall have the first right to provide such capabilities before Company can seek such capabilities elsewhere, including, but not limited to capabilities designed and implemented by Company. f) Collect all information necessary for setting up Ad-Star's ad taking service from each participating Affiliate. Ad-Star shall provide Company with a list and/or form which identifies all necessary information. 6 Confidential 7 Ad-Star Shall: a) provide Company and its Affiliates with the ability to take ads through Ad-Star's ad taking services into the Affiliates print and online environments from Affiliates own site, from Company's site and from Ad-Star's central site and other Ad-Star enabled sites. These ads will be pre-paid and conform to the reasonable pricing instructions from the publication, such as different rates per line, category, word or character. Ad-Star will deliver via e-mail in a mutually agreed format the advertising coming through the Ad-Star ad taking services to the appropriate Company Affiliate for publication. Advertising may alternatively be delivered to Company Affiliate via fax for an additional cost to cover telecommunications charges. If this option is elected, all telecommunications charges will be deducted from advertising revenues paid to Affiliate in the same fashion as other applicable fees as detailed in Section 5) of the Agreement to which this Attachment A is attached. b) assist in the marketing the Ad-Star ad taking service to Company Affiliates, at it own discretion, including making presentations to the Company sales force. c) support and maintain the Company ad taking functionality including hosting of the Co-branded pages. Ad-Star will upgrade the Ad-Star ad taking service on the Co-branded pages at no charge when the upgrade enhances already existing capabilities of the Ad-Star ad taking service. Other reasonable updating, such as once a year, of pricing tables for Company Affiliates' publications will be done free of charge on an annual basis for each Company Affiliate that generates over 1,200 paid ads for the previous 12 months to the update. Otherwise there will be a fee for updating pricing tables of $200 per update. Ad-Star will provide reasonable telephone support for Company and its Affiliates with regard to the ad taking functionality at 310-577-8255 during normal business hours, Pacific Standard Time. In addition, Ad-Star will provide e-mail support exclusively for advertisers using the Company version of the Ad-Star ad taking services. d) in the event that it ceases to do business in the ordinary course, grant Company a contingent license to use the Source Code in a manner limited to maintaining the Co-branded pages such that Company can support only Company's Existing Affiliates. "Existing Affiliates" is defined as those Affiliates whom Ad-Star has included in the Ad-Star ad taking service at the time of the granting of the contingent license. e) provide Company with a percentage of every "Ad-Star transaction fee" ("Ad-Star transaction fee" is a per ad fee charged, excluding merchant processing fees, reserves for payment chargebacks and fax telecommunication charges) charged to Company Affiliates and Ad-Star Clients for ad placement, based on the channel through which the ad was originated and the Publication Status (i.e. Publication Status is determined by whether or not the Company Affiliate is a Pre-existing Ad-Star Client or if the Publications is not a Company Affiliate (Ad-Star Client solely). A list of Company Affiliates as of the Effective Date is included as Attachment B. A list of Ad-Star Clients as of the Effective Date is included as Attachment C.). If Company adds a new Affiliate the Publication Status will be Company Affiliate First unless the Publications already has an Agreement with Ad-Star at the time of becoming a Company Affiliate. Note that if a Company Affiliate does not host their classified Web site with Company, Company must get Affiliate to place prominent links to the Co-branded pages or their private label version of the Ad-Star ad taking services from their classified Web site and to agree to the terms of this Agreement, in order for that Affiliate to be included as a Company Affiliate for the purposes of determining Publication Status and transaction fees due Company. The percentage of the transaction fee due to Company is indicated in the following table: CHANNEL BY WHICH AD IS ORIGINATED
PUBLICATION STATUS COMPANY WEB SITES PUBLICATION'S WEB SITE AD-STARNET ------------------ ----------------- ---------------------- ---------- Company Affiliate First 50% 50% 33% (i.e. not a pre-existing Ad-Star Client) Pre-existing Ad-Star Client 33% 0% 0% Ad-Star Client solely 33% 0% 0% (i.e. not a Company Affiliate)
7 Confidential 8 Note that whenever a user comes through Company's Web site and places an ad in a non-Company Affiliate publication, Company will receive 33% of the transaction fee paid as a distribution fee. Ad-Star will pay Company and its Affiliates their appropriate advertising revenues or fees in accordance with the terms of Section 5 above of the Agreement to which this Attachment A is attached. f) shall determine the initial Ad-Star transaction fee that is best borne by the marketplace, which at the time of this Agreement is expected to be three dollars ($3.00). Ad-Star shall also determine changes in transaction fees and communicate to the Company such changes, with sixty (60) days advance notice. Absent mutual consent of Ad-Star and Company, subsequent changes to transaction fee will only be on a calendar year basis. The transaction fee for each ad will be netted against the pre-payment of the ad collected by Ad-Star as detailed in Section 5 of the Agreement to which this Attachment A is attached. g) reserve the right to refuse to include any new Affiliate, at its sole discretion, on Ad-Star's central site. Ad-Star will include all of Company Affiliates on Company's version of Ad-Star, when such Affiliate complies with the terms of this Agreement. h) NOT publish for any consumer purposes under its own brand any ads, which were originated through Ad-Star's ad taking Web pages. Furthermore, Ad-Star shall not redistribute ads for any consumer purposes, other than as directed by ad originator or Ad-Star Client. i) Ad-Star will not engage in the publication, distribution or redistribution of any ad content generated from Company Affiliates through Ad-Star Net or its successors which is not for advertiser use. Ad-Star Net will process and transmit Company Affiliates' sold classified ads solely to the party the Company Affiliate selects. j) provide the Company access to monthly insertion statistics regarding all of its participating Company Affiliate First Publications and all Affiliates who are also Pre-existing Ad-Star Clients, when those Pre-existing Ad-Star Clients provide their consent to release this data to Company. k) on a monthly basis provide the Company, in a mutually agreed upon format and transmission method, billing information (excluding credit card information) of advertisers placing advertisements with Company Affiliates through the Ad-Star ad taking service, subject to the prior consent by respective Affiliate. If this involves substantial programming for Ad-Star there may be a reasonable set up charge. l) Agree that Company and its Affiliates reserve full ownership respectively of all Co-branded pages, except those logos, marks and code and design elements provided by Ad-Star. Inclusion of banner advertising on Co-branded pages requires the approval of all parties involved, namely Ad-Star, Company and Affiliate. Revenue from all banner advertising opportunities will be split evenly between Ad-Star and Company after a mutually agreed share for the Affiliate and a twenty percent (20%) commission for the selling party of the banner ads. Furthermore, unless mutually agreed by both parties earlier, there will be no banner advertising on Co-branded pages for a period of six (6) months from the Effective Date. Company and its Affiliates, when they are Company Affiliate First Publications, reserve the right at their sole discretion to provide all other e-commerce opportunities from the Co-branded pages during phase 2 when such pages are hosted by Company, as defined in Attachment D. Prior to phase 2, all e-commerce opportunities included on the Co-branded pages will be determined by Ad-Star. Revenue from these e-commerce opportunities, prior to phase 2, will be split evenly between Ad-Star and Company after a mutually agreed share for the Affiliate. Only when Company hosts Co-branded pages will the inclusion of all such e-commerce opportunities from the Co-branded pages be determined by Company. At which time when Ad-Star provides such e-commerce opportunities, they shall be by mutual consent as between Ad-Star and Company and apportioned subject to mutual agreement. m) Will provide Company Affiliate with either the customer service support for crediting back classified advertisement purchases made through Co-branded pages as required by Affiliate or provide Affiliate with the online capability to apply such credits themselves. In both cases Affiliate will be liable for all 8 Confidential 9 credit card processing charges for such credits. These fees will be deducted from advertising fees due to Affiliate in a similar fashion to other applicable fees as described in Section 5 of the Agreement to which this Attachment A is attached. 9 Confidential EX-10.9 14 AGREEMENT DATED 03-16-1999 1 AGREEMENT AGREEMENT dated as of March 16, 1999 by and between JAMES E. MANN, residing at 10 Old Road Lane, Mount Kisco, New York 10549 ("Mann") and AD-STAR SERVICES, INC., a New York corporation, having its principal offices at 4553 Glencoe Avenue, Marina del Rey, California 90292 ("Ad-Star"). WHEREAS, Publishing Technologies , Inc. ("PTI") by agreement dated as of February 1, 1994 by and among Ad-Star, PTI, Eli Rousso ("Rousso") and Leslie F. Bernhard ("Bernhard") (the "License Agreement") heretofore granted an exclusive license to Ad-Star to service the business conducted by PTI prior to June 1, 1991 and by Ad-Star since June 1, 1991 (the "Ad-Star Business"); and WHEREAS, the License Agreement also provided inter alia as follows: (a) Ad-Star will pay PTI a royalty of five percent of all Ad-Star Customer License Fees and Customer License Renewal Fees, or $100,000 a year, whichever is greater; (b) Ad-Star granted to PTI a non-transferable option to purchase 15% of its Common Stock for one dollar; (c) PTI granted to Ad-Star an option to purchase all the shares of Ad-Star at a purchase price adjustable each year based on the royalty payments made under (a) above at a price as of February 1, 1994 of $770,000, as set out more fully in the License Agreement; and (d) Rousso, Bernhard and Ad-Star agreed that they would not compete with the Ad-Star Business in certain respects; and WHEREAS, Compton Management Associates Limited ("Compton") on or about May 1, 1994 acquired all the outstanding Common Stock of PTI, which latter company was thereafter liquidated and its assets distributed to Compton; and 2 WHEREAS, Compton, on or about November 6, 1995, liquidated its business and in connection therewith transferred all its assets, rights and privileges formerly owned by PTI to Mann; and WHEREAS, the Company has received a letter of intent for an initial public offering and is negotiating with prospective lenders to provide interim financing; and WHEREAS, the acquisition by Ad-Star of all the PTI assets will facilitate the consummation of this financing. NOW, THEREFORE, for good and valuable consideration exchanged by the parties, receipt of which is acknowledged, the parties have agreed as follows: 1. Mann represents and warrants (a) that the assets and business formerly owned and conducted by PTI consisting of all its assets, tangible and intangible, including all the intellectual property and software owned by PTI, its rights under the License Agreement, including the rights to the royalty payments and the rights to enforce the non-competition provisions all as referred to in the second Whereas Clause above were transferred to him and that he is the sole and exclusive owner of such assets and rights and (b) that he has the power, right and authority to transfer the License Agreement and PTI's rights thereunder to Ad-Star and that upon the transfer of such rights under this Agreement Ad-Star will be fully vested with the exclusive rights of ownership to the assets and business relating to the Ad-Star Business. 2. The parties hereto have agreed that as of the date hereof the option price at which Ad-Star can acquire the PTI business under the License Agreement is fixed at $751,709.57 and that Ad-Star by this agreement does hereby exercise its option by delivering to Mann its note (the "Note") in the form annexed hereto in such amount payable to Mann. 2 3 3. Such Note with interest at the rate of 10 percent per annum is payable in equal monthly installments of $8,333.33, such payments to be applied in the following order: first to the accrued and unpaid interest to the date of payment and the balance to reduce the principal amount thereof. The installment payments under the Note shall commence on the first day of the month following the date of this Agreement and shall continue until the principal balance is paid in full. Ad-Star will prepay the Note in full upon the consummation of a initial public offering of Ad-Star's Common Stock resulting in the receipt by the Company of at least $5,000,000 in gross proceeds. 4. Mann by this instrument does hereby assign, sell, transfer, grant and convey to Ad-Star its successors and assigns all of the assets, rights and privileges formerly owned or held by PTI which have devolved upon Mann including, without limitation, PTI's rights under the License Agreement, consisting among other things of, the right to receive royalties from Ad-Star, and to enforce certain non-competition provisions against Rousso, Bernhard and Ad-Star, and all rights in and to intellectual property and software relating to the Ad-Star Business or otherwise formerly owned or used by PTI. IN WITNESS WHEREOF, the parties have signed this Agreement as of the day and year first above written. /s/ James E. Mann ---------------------------------- JAMES E. MANN AD-STAR SERVICES, INC. BY: /s/ Leslie Bernhard ------------------------------- President ---------------------------------- ---------------------------------- 3 EX-10.10 15 WARRANT 1 WARRANT AGREEMENT NEITHER THESE WARRANTS NOR THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF ANY WARRANTS HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE "BLUE SKY" OR SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED, DISTRIBUTED OR OTHERWISE DISPOSED OF UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SALE OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENT IS AVAILABLE, AND IF AN EXEMPTION SHALL BE AVAILABLE, THE COMPANY RECEIVES AN OPINION OF COUNSEL STATING THAT SUCH OFFER, SALE, TRANSFER, ASSIGNMENT, PLEDGE, HYPOTHECATION, DISTRIBUTION OR OTHER DISPOSITION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT. THE RESTRICTIONS CONTAINED HEREIN ARE BINDING ON THE HOLDER HEREOF AND HIS SUCCESSORS AND ASSIGNS. Void after 5:00 P.M. Eastern Standard time, on the Warrant Expiration Date. WARRANTS TO PURCHASE 30,000 SHARES OF COMMON STOCK OF AD-STAR SERVICES, INC. Ad-Star Services, Inc., a New York corporation (the "Company"), in consideration of the payment of ONE THOUSAND FIVE HUNDRED DOLLARS ($1,500), receipt of which is hereby acknowledged, hereby grants, issues and sells to JONATHAN COHEN 30,000 warrants (the "Warrants"), each entitling Jonathan Cohen and his permitted assigns (each, a "Holder"), on the terms and conditions set forth herein, to purchase one (1) fully paid and nonassessable share of Common Stock of the Company, at a purchase price of $7.50 per share (the "Warrant Exercise Price"), at any time or from time to time during the Warrant Exercise Period (as defined herein), subject to adjustment as herein provided. (Hereinafter, (i) said 2 shares of Common Stock, together with any other equity securities which may be issued by the Company with respect thereto or in substitution therefor, is referred to as the "Common Stock", (ii) the shares of the Common Stock purchasable under the Warrants are referred to as the "Warrant Shares", (iii) the holder of the Warrant is referred to as the "Holder," and (iv) the Warrants and the Warrant Shares are referred to as the "Securities.") The number of Warrant Shares issuable upon exercise of each Warrant and the Warrant Exercise Price are subject to adjustment as hereinafter provided. The "Warrant Exercise Period" shall commence on the date hereof (the "Exercise Commencement Date") and shall terminate on June 30, 2002 (the "Warrant Expiration Date"). The number of Warrants, the Warrant Shares and the Warrant Exercise Price have been determined on the assumption that the Company will be reincorporated in Delaware, that 3,000,000 shares of the Common Stock of the Delaware corporation shall be issued in connection therewith and that the Delaware corporation shall sell 2,000,000 shares of its Common Stock in an initial public offering ("IPO") at a price to the public of $7.50 per share in accordance with a letter of intent dated April 16, 1999 between the Company and Paulson Investment Company, Inc. (the "Recapitalization"). In the event that the IPO price or the number of shares sold in the IPO are changed, the Warrant Exercise Price and/or the number of Warrants shall be appropriately adjusted. For all purposes herein upon the conclusion of the Recapitalization, the "Company" shall refer to the successor Delaware corporation and the "Common Stock", "Warrant Shares" and the "Warrant" shall refer to the Common Stock or Warrant as the case may be of the Delaware corporation. 2 3 1. EXERCISE OF WARRANTS. (a) Each Warrant may be exercised at any time during the Warrant Exercise Period, by the Holder of such Warrant by the surrender of this agreement (with the subscription form at the end hereof duly executed) at the address set forth in Section 13(a) hereof, together with proper payment of the Warrant Exercise Price. Upon exercise of each Warrant, the Company shall issue and deliver to the Holder certificates for the Common Stock within ten (10) business days after such exercise and the person exercising shall be deemed to be the holder of record of the Common Stock issuable upon such exercise. No Warrant shall be exercisable after 5:00 P.M., Eastern Standard Time, on the Warrant Expiration Date. (b) Upon each exercise of the Warrants, and upon surrender by the Holder of this agreement, the Company shall execute and deliver to the Holder a replacement agreement, which will reflect the exercise of such number of Warrants. 2. EFFECT OF CERTAIN CHANGES. In case of any reorganization or reclassification of the Common Stock, or a consolidation or merger of the Company with any other corporation (other than a wholly-owned subsidiary of the Company), or in case of any sale or transfer of all or substantially all of the assets of the Company, pursuant to which all of the outstanding shares of the Common Stock are converted into other securities or property, the Company shall make appropriate provision or cause appropriate provision to be made so that each Holder shall have the right thereafter to obtain upon exercise of each Warrant the kind and amount of shares of stock and other securities and property receivable upon such consolidation, merger or sale by a holder of the number of shares of Common Stock for which the Warrant may be exercised 3 4 prior to the effective date of such consolidation, merger or sale. If, in connection with any such consolidation, merger or sale, each holder of shares of Common Stock is entitled to elect to receive either securities, cash, or other assets upon completion of such transaction, the Company shall provide or cause to be provided to each Holder the right to elect the securities, cash, or other assets for which each Warrant may be exercised by the Holder subject to the same conditions applicable to holders of Common Stock (including, without limitation, notice of the right to elect, limitations on the period in which such election shall be made, and the effect of failing to exercise such election). The Company shall not effect any such transaction unless the provisions of this Section 2 have been complied with. The above provisions shall similarly apply to successive reorganizations, reclassifications, mergers or consolidations. 3. ADJUSTMENT OF WARRANT EXERCISE PRICE AND NUMBER OF SECURITIES ISSUABLE UPON EXERCISE OF WARRANTS. (a) (i) In case the Company shall, at any time or from time to time after the date hereof, pay a dividend or make a distribution on its shares of Common Stock in shares of Common Stock, subdivide or reclassify its outstanding Common Stock into a greater number of shares, or combine or reclassify its outstanding Common Stock into a smaller number of shares, the Warrant Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the holder of each Warrant exercised after such date shall be entitled to receive the aggregate number and kind of shares which, if such Warrant had been exercised immediately prior to such time, he would have owned upon such exercise and been entitled to receive upon such dividend, subdivision, combination or reclassification. Such 4 5 adjustment shall be made successively whenever any event listed in this Section 3(a) shall occur. (ii) Whenever the Warrant Exercise Price payable upon exercise of each Warrant is adjusted pursuant to Section 3(a)(i) hereof, the number of shares of Common Stock purchasable upon exercise of each Warrant shall simultaneously be adjusted by multiplying the number of shares issuable upon exercise of each Warrant in effect on the date immediately prior to such adjustment by the Warrant Exercise Price in effect on such date and dividing the product so obtained by the Warrant Exercise Price, as adjusted. (b) The Company may retain a firm of independent public accountants of recognized standing selected by the Board of Directors (who may be the regular accountants employed by the Company) to make any computation or determination required by this Section 3, and a certificate signed by such firm shall be conclusive evidence of the correctness of such adjustment. (c) After each adjustment of the Warrant Exercise Price pursuant to this Section 3, the Company will promptly prepare a certificate signed by the President, Vice President or Treasurer of the Company setting forth: (A) the Warrant Exercise Price as so adjusted, (B) the number of shares of Common Stock purchasable upon exercise of each Warrant after such adjustment, and (C) a brief statement of the facts accounting for such adjustment. The Company will promptly cause such certificate to be sent by first class mail to the Holder at his/her last address as it shall appear herein. Failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the transaction. The affidavit of an officer of the Company that such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. In addition, upon surrender by the Holder of 5 6 this agreement, or of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this agreement, and of an unsecured indemnity from the Holder reasonably satisfactory to the Company, if lost, stolen or destroyed, the Company shall execute and deliver to the Holder a replacement to this agreement, which will reflect the Warrant Exercise Price as so adjusted and the number of shares of Common Stock purchasable upon exercise of each Warrant after such adjustment. (d) Any determination as to whether an adjustment in the Warrant Exercise Price in effect hereunder is required pursuant to Section 3, or as to the amount of any such adjustment, if required, shall be binding upon the Holder if made in good faith by the Board of Directors of the Company. 4. FRACTIONAL WARRANTS AND FRACTIONAL SHARES. If the number of shares of Common Stock purchasable upon the exercise of each Warrant is adjusted pursuant to Section 3 hereof, the Company shall not be required to issue fractions of shares upon exercise of the Warrants. When multiple Warrants are exercised by a Holder at the same time, the aggregate number of Warrant Shares issuable as a result of such exercise (including fractional shares) shall be rounded down to the nearest whole number of shares and such whole number of shares only shall be issued to the Holder. With respect to any such fraction of a share called for upon any exercise of a Warrant, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the Warrant Exercise Price then in effect. 5. RESERVATION OF WARRANT SHARES. The Company agrees that, prior to the expiration of the Warrants, the Company will at all times have authorized and reserved, and will keep available, solely for issuance or delivery upon the exercise of the Warrants, the 6 7 number of shares of the Common Stock as from time to time shall be receivable upon the exercise of the Warrants. 6. FULLY PAID STOCK; TAXES. The Company agrees that the shares of the Common Stock represented by each and every certificate for Warrant Shares deliverable on the exercise of each Warrant shall, at the time of such delivery, be validly issued and outstanding, fully paid and nonassessable, and not subject to preemptive rights, and the Company will take all such actions as may be necessary to ensure that the par value or stated value, if any, per share of the Common Stock is at all times equal to or less than the then Warrant Exercise Price. The Company further covenants and agrees that it will pay, when due and payable, any and all Federal and state stamp, original issue or similar taxes that may be payable in respect of the issue of any Warrant Shares or certificate therefor. 7. TRANSFER. (a) SECURITIES LAWS. The Securities have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or under any state securities laws, and, unless so registered, may not be transferred, sold, pledged, hypothecated or otherwise disposed of unless an exemption from such registration is available. In the event the Holder desires to transfer any Securities issued and such transfer is not otherwise prohibited, the Holder must give the Company prior written notice of such proposed transfer including the name and address of the proposed transferee. Such transfer may be made only either (i) upon publication by the Securities and Exchange Commission (the "Commission") of a ruling, interpretation, opinion or "no action letter" based upon facts presented to said Commission, or (ii) upon receipt by the Company of an opinion of counsel to the Company to the effect that the proposed transfer will not violate the provisions of the Securities Act, the Securities and 7 8 Exchange Act of 1934, as amended (the "Exchange Act"), the rules and regulations promulgated under either such act, or any applicable state securities or "blue sky" laws, or in the case the Security to be sold or transferred has been registered under the Securities Act, that there is in effect a registration statement in which is included a prospectus meeting the requirements of Section 10(a) of the Securities Act, which is being or will be delivered to the purchaser or transferee at or prior to the time of delivery of the certificates or agreements evidencing the Securit(ies) to be sold or transferred. (b) CONDITIONS TO TRANSFER. Prior to any such proposed transfer, and as a condition thereto, if such transfer is not made pursuant to an effective registration statement under the Securities Act, the Holder will, if requested by the Company, deliver to the Company (i) an investment covenant signed by the proposed transferee, (ii) an agreement by such transferee to the impression of the restrictive investment legend set forth herein on the certificate, certificates or agreement representing the Securities acquired by such transferee, (iii) an agreement by such transferee that the Company may place a "stop transfer order" with its transfer agent or registrar, and (iv) an agreement by the transferee to indemnify the Company to the same extent as set forth in the next succeeding paragraph. (c) INDEMNITY. The Holder acknowledges that the Holder understands the meaning and legal consequences of this Section 7, and the Holder hereby agrees to indemnify and hold harmless the Company, its representatives and each officer and director thereof from and against any and all loss, damage or liability (including all attorneys' fees and costs incurred in enforcing this indemnity provision) due to or arising out of (a) the inaccuracy of any representation or the breach of any warranty of the Holder contained in, or any other breach of, this agreement, (b) any transfer of the Securities in violation of the Securities Act, the 8 9 Exchange Act or the rules and regulations promulgated under either of such acts, (c) any transfer of the Securities not in accordance with this agreement, or (d) any untrue statement or omission to state material fact in connection with the investment representations or with respect to the facts and representations supplied by the Holder to counsel to the Company upon which its opinion as to a proposed transfer shall have been based. (d) TRANSFER. The Warrants and the Warrant Shares may be transferred by the Holder in whole or in part at any time or from time to time, except as otherwise restricted hereby. Upon surrender of the Warrants to the Company or at the office of its stock transfer agent, if any, with assignment documentation duly executed and funds sufficient to pay any transfer tax, and upon compliance with the foregoing provisions, the Company shall, without charge, execute and deliver a new agreement covering the Securities in the name of the assignee named in such instrument of assignment, and this agreement shall promptly be canceled. Any assignment, transfer, pledge, hypothecation or other disposition of the Securities attempted contrary to the provisions hereby, or any levy of execution, attachment or other process attempted upon the Warrants, shall be null and void and without effect. (e) LEGEND AND STOP TRANSFER ORDERS. Unless the Warrant Shares have been registered under the Securities Act, upon exercise of any of the Warrants and the issuance of any of the Warrant Shares, the Company shall instruct its transfer agent to enter stop transfer orders with respect to such shares, and all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE "BLUE SKY" OR SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, ASSIGNED 9 10 OR TRANSFERRED, AND ANY TRANSFER OR PURPORTED TRANSFER SHALL NOT BE OPERABLE UNDER THE UNIFORM COMMERCIAL CODE, AND THE COMPANY SHALL HAVE NO DUTY TO REGISTER A TRANSFER OF THESE SECURITIES EXCEPT (i) PURSUANT TO A REGISTRATION STATEMENT UNDER THE SECURITIES ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH RESPECT TO THESE SECURITIES, OR (ii) PURSUANT TO A SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF ANY APPLICABLE "BLUE SKY" OR SIMILAR STATE SECURITIES LAWS, BUT ONLY UPON A HOLDER HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THE PROPOSED DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE SECURITIES ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR STATE SECURITIES LAW. THESE SECURITIES ARE GOVERNED BY THE TERMS OF A WARRANT AGREEMENT BETWEEN THE COMPANY AND THE HOLDER HEREOF, DATED AS OF JUNE __, 1999. THE RESTRICTIONS CONTAINED HEREIN ARE BINDING ON THE HOLDER HEREOF AND HIS/HER SUCCESSORS AND ASSIGNS. 8. REGISTRATION OPTIONS. (a) PIGGYBACK REGISTRATION. (i) The Company shall advise the Holder (or permitted assignee thereof) by written notice at least thirty (30) days prior to the filing of any registration statement or post-effective amendment to a registration statement under the Securities Act covering Common Stock of the Company (other than a registration statement on Form S-4 or Form S-8 or any successor forms thereto), which will qualify as a Qualified Offering (defined below), and shall, upon the written request of the Holder to be received no later than 15 (fifteen) days thereafter and subject to Section 8(a)(iv) hereof, include in any such registration statement or post-effective amendment to a registration statement, such information as may be required to permit 10 11 a public offering of the Warrant Shares held by or issuable upon the exercise of the Holder's Warrants (the "Registrable Securities"). (A "Qualified Offering" shall be defined as an underwritten public offering, other than an initial public offering, of securities of the Company, for the Company's own account, pursuant to the Securities Act for cash, which offering places a market capitalization on the Company, calculated prior to receipt of the proceeds of the offering, of no less than thirty-seven million, five hundred thousand dollars ($37,500,000).) (ii) The Company shall (i) supply prospectuses and such other documents as the Holder may request in order to facilitate the public sale or other disposition of the Registrable Securities, (ii) use its best efforts to register and qualify any of the Registrable Securities for sale in such states as the Holder designates, provided that the Company shall not be required to qualify as a foreign corporation or a dealer in securities or execute a general consent to service of process in any jurisdiction in any action, (iii) shall do any and all other acts and things which may be reasonably necessary or desirable to enable the Holder to consummate the public sale or other disposition of the Registrable Securities, and (iv) furnish indemnification in the manner provided in Section 8(a)(vi) hereof. (iii) The Holder shall furnish information and indemnification as set forth in Section 8(a)(vi) hereof, except that the maximum indemnification amount which may be recovered from the Holder shall be limited to the amount of proceeds received by the Holder from the sale of the Registrable Securities. (iv) The Company shall use its best efforts to cause the managing underwriter or underwriters to permit the Holder of Registrable Securities requested to be included in the registration to include such securities in such underwritten offering on the same terms and 11 12 conditions as any similar securities of the Company included therein. Notwithstanding the foregoing, if the managing underwriter or underwriters of such offering advises the Holder of the Registrable Securities that the total amount of securities which they intend to include in such offering is such as to materially and adversely affect the success of such offering, then the amount of securities to be offered for the account of the Holder of Registrable Securities shall be eliminated, reduced, or limited to the extent necessary to reduce the total amount of securities to be included in such offering to the amount, if any, recommended by such managing underwriter or underwriters (any such reduction or limitation in the total amount of Registrable Securities to be included in such offering to be borne by the holders of Securities of other stockholders proposed to be included therein on a pro rata basis). (v) The holder of Registrable Securities shall be responsible for his/her own separate legal fees and expenses and any underwriting discounts and commissions on the securities sold by the Holder, and shall not be responsible for any other expenses of such registration, including the incremental state and federal filing fees associated with the securities sold by the Holder. (vi) (1) Whenever, pursuant to and in accordance with this Section 8(a), a registration statement is filed, amended or supplemented, the Company shall indemnify and hold harmless each holder of the securities covered by such registration statement, amendment or supplement (a "Distributing Holder") against any losses, claims, damages, or liabilities, joint or several, to which the Distributing Holder, or any such controlling person (within the meaning of the Securities Act) thereof, 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 any untrue statement or alleged untrue statement of material fact 12 13 contained in any such registration statement or any preliminary prospectus or final prospectus constituting a part thereof or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and shall reimburse the Distributing Holder for any legal and other expenses reasonably incurred by the Distributing Holder in connection with investigating or defending any such loss, claim, damage, or liability, or action; provided, however, that the Company shall not be liable in any such case to the extent, but only to the extent, that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, such preliminary prospectus, such final prospectus, or such amendment or supplement in reliance upon and in conformity with written information furnished by such Distributing Holder in his/her capacity as such, for use in the preparation thereof. (2) The Distributing Holder shall indemnify and hold harmless the Company, each of its directors, each of its officers who have signed such registration statement or any preliminary prospectus or final prospectus constituting a part thereof or such amendments and supplements thereto, each person, if any, who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, or liabilities, joint or several, to which the Company or any such director, officer or controlling person 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 any untrue statement or alleged untrue statement of any material fact contained in any such registration statement or any preliminary prospectus or final prospectus constituting a part thereof or any amendment or 13 14 supplement thereto, or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in such registration statement, such preliminary prospectus, such final prospectus, or such amendment or supplement in reliance upon and in conformity with written information furnished by such Distributing Holder, in his/her capacity as such, for use therein, and shall reimburse the Company or any such director, officer or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action. (3) Promptly after receipt by an indemnified party of notice of the commencement of any action covered by this Section 8(a)(vi), such indemnified party shall, if a claim in respect thereof is to be made by the indemnified party against any indemnifying party, give the indemnifying party notice of the commencement thereof. The omission so to notify the indemnifying party of the commencement of any such action shall not relieve the indemnifying party from any liability which it may have to any indemnified party under this Section 8(a)(vi), unless and to the extent the relevant indemnifying party is prejudiced as a result of such omission. (4) In case any action covered by this Section 8(a)(vi) is brought against any indemnified party, and the indemnified party notifies an indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after 14 15 notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 8(a)(vi) for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof. (vii) The piggyback registration rights provided in this Section 8(a) shall remain in effect until the Warrant Expiration Date. (b) NO OTHER REGISTRATION OPTIONS. Except as otherwise provided in this Section 8, the Company shall have no obligation to register the Securities. 9. REDEMPTION. (a) On not less than thirty (30) days written notice given, at any time after 6 months following the Exercise Commencement Date, the Warrants may be redeemed at the option of the Company, at a redemption price of $0.01 per Warrant, provided that (i) the Market Price of the Warrant Shares issuable upon exercise of the Warrant shall equal or exceed 4 x an amount equal to the Warrant Exercise Price per share (the "Target Price"), subject to adjustment as set forth in Section 3 above, (ii) the resale of the Warrant Shares issuable upon exercise of the Warrants shall be subject to an effective registration statement under the Securities Act or are fully saleable under Rule 144 under the Regulations under the Securities Act, and (iii) the Holder of the Warrants is not then subject to a lock-up agreement or restriction on resale of Common Stock. "Market Price" for the purpose of this Section 9 shall mean (i) the average closing bid price for any ten (10) consecutive trading days within a period of thirty (30) consecutive trading days ending within five (5) days prior to the date of the notice of redemption, which notice shall be mailed no later than five (5) days thereafter, of the Common Stock as reported by the National Association of Securities Dealers, Inc. Automatic 15 16 Quotation System, or (ii) the last reported sale price, for ten (10) consecutive business days, ending within five (5) days of the date of the notice of redemption, which notice shall be mailed no later than five (5) days thereafter, on the primary exchange on which the Common Stock is traded, if the Common Stock is traded on a national securities exchange. (b) If the Company desires to exercise its right to redeem the Warrants, it shall mail a notice of redemption to each Holder of the Warrants to be redeemed, first class, postage prepaid, not later than the thirtieth day before the date fixed for redemption, at his or her last address as shall appear on the records maintained by the Company. Any notice mailed in the manner provided herein shall be conclusively presumed to have been duly given whether or not the Holder receives such notice. (c) The notice of redemption shall specify (i) the redemption price, (ii) the date fixed for redemption, (iii) the place where the Warrants shall be delivered and the redemption price paid, and (iv) that the right to exercise the Warrants shall terminate at 5:00 P.M. New York City local time on the business day immediately preceding the date fixed for redemption. The date fixed for the redemption of the Warrant shall be the Redemption Date. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a Holder (a) to whom notice was not mailed or (b) whose notice was defective. An affidavit of the Secretary or an Assistant Secretary of the Company (or Warrant Agent, if applicable) that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (d) Any right to exercise a Warrant shall terminate at 5:00 P.M. (New York City local time) on the business day immediately preceding the Redemption Date. On and after the 16 17 Redemption Date, the Holder of the Warrants shall have no further rights except to receive, upon surrender of the Warrant, the Redemption Price. (e) From and after the Redemption Date specified, the Company shall, at the place specified in the notice of redemption, upon presentation and surrender to the Company by or on behalf of the Holder thereof of one or more warrant agreements evidencing Warrants to be redeemed, deliver or cause to be delivered to or upon the written order of the Holder a sum in cash equal to the redemption price of each such Warrant. From and after the Redemption Date and upon the deposit or setting aside by the Company of a sum sufficient to redeem all the Warrants called for redemption, such Warrants shall expire and become void and all rights hereunder and under the warrant agreement, except the right to receive payment of the redemption price, shall cease. (f) If the shares of the Company's Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, the Target Price shall be proportionally adjusted by the ratio which the total number of shares of Common Stock outstanding immediately prior to such event bears to the total number of shares of Common Stock to be outstanding immediately after such event. 10. LOCK-UP. The Holder agrees that, in the event of a public offering of newly issued securities of Common Stock, for the Company's own account, pursuant to the Securities Act, for cash, and the underwriter in such offering requires the principal shareholders of the Company to agree to a lock-up period during which such shareholders will not dispose of or pledge their shares, the Holder will agree to the lock-up period prescribed by the underwriter, which lock-up may include any of the Securities. 17 18 11. LOSS, ETC. OF WARRANT. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this agreement or any replacement thereto, and of an unsecured indemnity from the Holder reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of this agreement, if mutilated, the Company shall execute and deliver to the Holder a new agreement of like date, tenor and denomination. 12. INJUNCTIVE RELIEF. The parties hereto agree that the remedy at law for any breach of this agreement is inadequate and that should any dispute arise concerning the sale or disposition of stock, an injunction may be issued, including an injunction restraining any sale or disposition pending the determination of such controversy. Such remedy shall, however, be cumulative and not exclusive, and shall be in addition to any other remedy which the parties may have. 13. SUCCESSORS AND ASSIGNS. This Agreement and all of its provisions shall be binding upon the respective transferees, successors, assigns, heirs, legatees, executors, administrators and personal representatives of the parties hereto. This Agreement shall in all respects be governed by, regulated and construed under and in accordance with the laws of the State of New York. 14. HOLDER NOT HOLDER. Except as otherwise provided herein, this agreement does not confer upon the Holder any right to vote or to consent to or receive notice as a stockholder of the Company, as such, in respect of any matters whatsoever, or any other rights or liabilities as a stockholder, prior to the exercise hereof. 18 19 15. COMMUNICATION. No notice or other communication under this agreement shall be effective unless the same is in writing and is mailed by first-class mail, postage prepaid, addressed to: (a) the Company at 4553 Glencoe Avenue, Suite 325, Marina del Rey, California 90292 or such other address as the Company has designated in writing to the Holder, with a copy to Morse, Zelnick, Rose & Lander, LLP, 450 Park Avenue, New York, New York 10022, Attn.: Howard L. Morse, Esq. (b) the Holder at _______________________________ or such other address as the Holder has designated in writing to the Company, with a copy to _______________________ Attn.: _______________. 16. RESCISSION. If in connection with any proposed underwritten initial public offering of any of the Company's capital stock, the Managing Underwriter or Underwriters advise the Company that this Warrant will be treated as underwriters compensation by the NASD and will affect the amount of compensation such underwriters will be entitled to take in connection with such initial public offering the Company may elect to rescind this agreement by cancelling the Warrant and returning to the Holder the $1,500 received in connection with its issuance. 17. HEADINGS. The headings of this agreement have been inserted as a matter of convenience and shall not affect the construction hereof. 18. APPLICABLE LAW; VENUE. This agreement shall be governed by and construed in accordance with the laws of the State of New York. Any action relating to this agreement, the Warrants, the Options or the Warrant Shares shall be brought in a court located within New York County, New York. 19 20 JONATHAN COHEN ________________________________________ AD-STAR SERVICES, INC. By: ____________________________________ Name: Title: Agreed and Accepted as of ________ __, 1999 20 21 SUBSCRIPTION FORM To be Executed by the Holder in Order to Exercise Warrant The undersigned Holder hereby irrevocably elects to exercise ______ Warrants represented by this agreement, and to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in the name of PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER ___________________________________________ ___________________________________________ ___________________________________________ [please print or type name and address] and be delivered to ___________________________________________ ___________________________________________ ___________________________________________ [please print or type name and address] If the exercise of the within Warrant was solicited by a member of the National Association of Securities Dealers, Inc. please write the name of the NASD member in the space below. ________________________________________ (Name of NASD Member) Dated:_____________________ X_______________________________________ ________________________________________ ________________________________________ ________________________________________ Taxpayer Identification Number ________________________________________ Signature Guaranteed ________________________________________ EX-10.11 16 WARRANT 1 EXHIBIT 10.11 WARRANT AGREEMENT NEITHER THESE WARRANTS NOR THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF ANY WARRANTS HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE "BLUE SKY" OR SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED, DISTRIBUTED OR OTHERWISE DISPOSED OF UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SALE OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENT IS AVAILABLE, AND IF AN EXEMPTION SHALL BE AVAILABLE, THE COMPANY RECEIVES AN OPINION OF COUNSEL STATING THAT SUCH OFFER, SALE, TRANSFER, ASSIGNMENT, PLEDGE, HYPOTHECATION, DISTRIBUTION OR OTHER DISPOSITION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT. THE RESTRICTIONS CONTAINED HEREIN ARE BINDING ON THE HOLDER HEREOF AND HIS SUCCESSORS AND ASSIGNS. Void after 5:00 P.M. Eastern Standard time, on the Warrant Expiration Date. WARRANTS TO PURCHASE 30,000 SHARES OF COMMON STOCK OF AD-STAR SERVICES, INC. Ad-Star Services, Inc., a New York corporation (the "Company"), in consideration of the payment of ONE THOUSAND FIVE HUNDRED DOLLARS ($1,500), receipt of which is hereby acknowledged, hereby grants, issues and sells to RONALD S. POSNER 30,000 warrants (the "Warrants"), each entitling Ronald S. Posner and his permitted assigns (each, a "Holder"), on the terms and conditions set forth herein, to purchase one (1) fully paid and nonassessable share of Common Stock of the Company, at a purchase price of $7.50 per share (the "Warrant Exercise Price"), at any time or from time to time during the Warrant Exercise Period (as defined herein), subject to adjustment as herein provided. (Hereinafter, (i) said 2 shares of Common Stock, together with any other equity securities which may be issued by the Company with respect thereto or in substitution therefor, is referred to as the "Common Stock", (ii) the shares of the Common Stock purchasable under the Warrants are referred to as the "Warrant Shares", (iii) the holder of the Warrant is referred to as the "Holder," and (iv) the Warrants and the Warrant Shares are referred to as the "Securities.") The number of Warrant Shares issuable upon exercise of each Warrant and the Warrant Exercise Price are subject to adjustment as hereinafter provided. The "Warrant Exercise Period" shall commence on the date hereof (the "Exercise Commencement Date") and shall terminate on June 30, 2002 (the "Warrant Expiration Date"). The number of Warrants, the Warrant Shares and the Warrant Exercise Price have been determined on the assumption that the Company will be reincorporated in Delaware, that 3,000,000 shares of the Common Stock of the Delaware corporation shall be issued in connection therewith and that the Delaware corporation shall sell 2,000,000 shares of its Common Stock in an initial public offering ("IPO") at a price to the public of $7.50 per share in accordance with a letter of intent dated April 16, 1999 between the Company and Paulson Investment Company, Inc. (the "Recapitalization"). In the event that the IPO price or the number of shares sold in the IPO are changed, the Warrant Exercise Price and/or the number of Warrants shall be appropriately adjusted. For all purposes herein upon the conclusion of the Recapitalization, the "Company" shall refer to the successor Delaware corporation and the "Common Stock", "Warrant Shares" and the "Warrant" shall refer to the Common Stock or Warrant as the case may be of the Delaware corporation. 1. EXERCISE OF WARRANTS. (a) Each Warrant may be exercised at any time during the Warrant Exercise Period, by the Holder of such Warrant by the surrender of this agreement (with the subscription form 2 3 at the end hereof duly executed) at the address set forth in Section 13(a) hereof, together with proper payment of the Warrant Exercise Price. Upon exercise of each Warrant, the Company shall issue and deliver to the Holder certificates for the Common Stock within ten (10) business days after such exercise and the person exercising shall be deemed to be the holder of record of the Common Stock issuable upon such exercise. No Warrant shall be exercisable after 5:00 P.M., Eastern Standard Time, on the Warrant Expiration Date. (b) Upon each exercise of the Warrants, and upon surrender by the Holder of this agreement, the Company shall execute and deliver to the Holder a replacement agreement, which will reflect the exercise of such number of Warrants. 2. EFFECT OF CERTAIN CHANGES. In case of any reorganization or reclassification of the Common Stock, or a consolidation or merger of the Company with any other corporation (other than a wholly-owned subsidiary of the Company), or in case of any sale or transfer of all or substantially all of the assets of the Company, pursuant to which all of the outstanding shares of the Common Stock are converted into other securities or property, the Company shall make appropriate provision or cause appropriate provision to be made so that each Holder shall have the right thereafter to obtain upon exercise of each Warrant the kind and amount of shares of stock and other securities and property receivable upon such consolidation, merger or sale by a holder of the number of shares of Common Stock for which the Warrant may be exercised prior to the effective date of such consolidation, merger or sale. If, in connection with any such consolidation, merger or sale, each holder of shares of Common Stock is entitled to elect to receive either securities, cash, or other assets upon completion of such transaction, the 3 4 Company shall provide or cause to be provided to each Holder the right to elect the securities, cash, or other assets for which each Warrant may be exercised by the Holder subject to the same conditions applicable to holders of Common Stock (including, without limitation, notice of the right to elect, limitations on the period in which such election shall be made, and the effect of failing to exercise such election). The Company shall not effect any such transaction unless the provisions of this Section 2 have been complied with. The above provisions shall similarly apply to successive reorganizations, reclassifications, mergers or consolidations. 3. ADJUSTMENT OF WARRANT EXERCISE PRICE AND NUMBER OF SECURITIES ISSUABLE UPON EXERCISE OF WARRANTS. (a) (i) In case the Company shall, at any time or from time to time after the date hereof, pay a dividend or make a distribution on its shares of Common Stock in shares of Common Stock, subdivide or reclassify its outstanding Common Stock into a greater number of shares, or combine or reclassify its outstanding Common Stock into a smaller number of shares, the Warrant Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the holder of each Warrant exercised after such date shall be entitled to receive the aggregate number and kind of shares which, if such Warrant had been exercised immediately prior to such time, he would have owned upon such exercise and been entitled to receive upon such dividend, subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed in this Section 3(a) shall occur. (ii) Whenever the Warrant Exercise Price payable upon exercise of each Warrant is adjusted pursuant to Section 3(a)(i) hereof, the number of shares of Common Stock 4 5 purchasable upon exercise of each Warrant shall simultaneously be adjusted by multiplying the number of shares issuable upon exercise of each Warrant in effect on the date immediately prior to such adjustment by the Warrant Exercise Price in effect on such date and dividing the product so obtained by the Warrant Exercise Price, as adjusted. (b) The Company may retain a firm of independent public accountants of recognized standing selected by the Board of Directors (who may be the regular accountants employed by the Company) to make any computation or determination required by this Section 3, and a certificate signed by such firm shall be conclusive evidence of the correctness of such adjustment. (c) After each adjustment of the Warrant Exercise Price pursuant to this Section 3, the Company will promptly prepare a certificate signed by the President, Vice President or Treasurer of the Company setting forth: (A) the Warrant Exercise Price as so adjusted, (B) the number of shares of Common Stock purchasable upon exercise of each Warrant after such adjustment, and (C) a brief statement of the facts accounting for such adjustment. The Company will promptly cause such certificate to be sent by first class mail to the Holder at his/her last address as it shall appear herein. Failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the transaction. The affidavit of an officer of the Company that such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. In addition, upon surrender by the Holder of this agreement, or of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this agreement, and of an unsecured indemnity from the Holder reasonably satisfactory to the Company, if lost, stolen or destroyed, the Company shall execute and deliver to the Holder a replacement to this agreement, which will reflect the Warrant Exercise 5 6 Price as so adjusted and the number of shares of Common Stock purchasable upon exercise of each Warrant after such adjustment. (d) Any determination as to whether an adjustment in the Warrant Exercise Price in effect hereunder is required pursuant to Section 3, or as to the amount of any such adjustment, if required, shall be binding upon the Holder if made in good faith by the Board of Directors of the Company. 4. FRACTIONAL WARRANTS AND FRACTIONAL SHARES. If the number of shares of Common Stock purchasable upon the exercise of each Warrant is adjusted pursuant to Section 3 hereof, the Company shall not be required to issue fractions of shares upon exercise of the Warrants. When multiple Warrants are exercised by a Holder at the same time, the aggregate number of Warrant Shares issuable as a result of such exercise (including fractional shares) shall be rounded down to the nearest whole number of shares and such whole number of shares only shall be issued to the Holder. With respect to any such fraction of a share called for upon any exercise of a Warrant, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the Warrant Exercise Price then in effect. 5. RESERVATION OF WARRANT SHARES. The Company agrees that, prior to the expiration of the Warrants, the Company will at all times have authorized and reserved, and will keep available, solely for issuance or delivery upon the exercise of the Warrants, the number of shares of the Common Stock as from time to time shall be receivable upon the exercise of the Warrants. 6. FULLY PAID STOCK; TAXES. The Company agrees that the shares of the Common Stock represented by each and every certificate for Warrant Shares deliverable on the exercise of each Warrant shall, at the time of such delivery, be validly issued and outstanding, fully 6 7 paid and nonassessable, and not subject to preemptive rights, and the Company will take all such actions as may be necessary to ensure that the par value or stated value, if any, per share of the Common Stock is at all times equal to or less than the then Warrant Exercise Price. The Company further covenants and agrees that it will pay, when due and payable, any and all Federal and state stamp, original issue or similar taxes that may be payable in respect of the issue of any Warrant Shares or certificate therefor. 7. TRANSFER. (a) SECURITIES LAWS. The Securities have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or under any state securities laws, and, unless so registered, may not be transferred, sold, pledged, hypothecated or otherwise disposed of unless an exemption from such registration is available. In the event the Holder desires to transfer any Securities issued and such transfer is not otherwise prohibited, the Holder must give the Company prior written notice of such proposed transfer including the name and address of the proposed transferee. Such transfer may be made only either (i) upon publication by the Securities and Exchange Commission (the "Commission") of a ruling, interpretation, opinion or "no action letter" based upon facts presented to said Commission, or (ii) upon receipt by the Company of an opinion of counsel to the Company to the effect that the proposed transfer will not violate the provisions of the Securities Act, the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), the rules and regulations promulgated under either such act, or any applicable state securities or "blue sky" laws, or in the case the Security to be sold or transferred has been registered under the Securities Act, that there is in effect a registration statement in which is included a prospectus meeting the requirements of Section 10(a) of the Securities Act, which is being or will be delivered to the 7 8 purchaser or transferee at or prior to the time of delivery of the certificates or agreements evidencing the Securit(ies) to be sold or transferred. (b) CONDITIONS TO TRANSFER. Prior to any such proposed transfer, and as a condition thereto, if such transfer is not made pursuant to an effective registration statement under the Securities Act, the Holder will, if requested by the Company, deliver to the Company (i) an investment covenant signed by the proposed transferee, (ii) an agreement by such transferee to the impression of the restrictive investment legend set forth herein on the certificate, certificates or agreement representing the Securities acquired by such transferee, (iii) an agreement by such transferee that the Company may place a "stop transfer order" with its transfer agent or registrar, and (iv) an agreement by the transferee to indemnify the Company to the same extent as set forth in the next succeeding paragraph. (c) INDEMNITY. The Holder acknowledges that the Holder understands the meaning and legal consequences of this Section 7, and the Holder hereby agrees to indemnify and hold harmless the Company, its representatives and each officer and director thereof from and against any and all loss, damage or liability (including all attorneys' fees and costs incurred in enforcing this indemnity provision) due to or arising out of (a) the inaccuracy of any representation or the breach of any warranty of the Holder contained in, or any other breach of, this agreement, (b) any transfer of the Securities in violation of the Securities Act, the Exchange Act or the rules and regulations promulgated under either of such acts, (c) any transfer of the Securities not in accordance with this agreement, or (d) any untrue statement or omission to state material fact in connection with the investment representations or with respect to the facts and representations supplied by the Holder to counsel to the Company upon which its opinion as to a proposed transfer shall have been based. 8 9 (d) TRANSFER. The Warrants and the Warrant Shares may be transferred by the Holder in whole or in part at any time or from time to time, except as otherwise restricted hereby. Upon surrender of the Warrants to the Company or at the office of its stock transfer agent, if any, with assignment documentation duly executed and funds sufficient to pay any transfer tax, and upon compliance with the foregoing provisions, the Company shall, without charge, execute and deliver a new agreement covering the Securities in the name of the assignee named in such instrument of assignment, and this agreement shall promptly be canceled. Any assignment, transfer, pledge, hypothecation or other disposition of the Securities attempted contrary to the provisions hereby, or any levy of execution, attachment or other process attempted upon the Warrants, shall be null and void and without effect. (e) LEGEND AND STOP TRANSFER ORDERS. Unless the Warrant Shares have been registered under the Securities Act, upon exercise of any of the Warrants and the issuance of any of the Warrant Shares, the Company shall instruct its transfer agent to enter stop transfer orders with respect to such shares, and all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE "BLUE SKY" OR SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, ASSIGNED OR TRANSFERRED, AND ANY TRANSFER OR PURPORTED TRANSFER SHALL NOT BE OPERABLE UNDER THE UNIFORM COMMERCIAL CODE, AND THE COMPANY SHALL HAVE NO DUTY TO REGISTER A TRANSFER OF THESE SECURITIES EXCEPT (i) PURSUANT TO A REGISTRATION STATEMENT UNDER THE SECURITIES ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH RESPECT TO THESE SECURITIES, OR (ii) PURSUANT TO A SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF ANY 9 10 APPLICABLE "BLUE SKY" OR SIMILAR STATE SECURITIES LAWS, BUT ONLY UPON A HOLDER HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THE PROPOSED DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE SECURITIES ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR STATE SECURITIES LAW. THESE SECURITIES ARE GOVERNED BY THE TERMS OF A WARRANT AGREEMENT BETWEEN THE COMPANY AND THE HOLDER HEREOF, DATED AS OF JUNE __, 1999. THE RESTRICTIONS CONTAINED HEREIN ARE BINDING ON THE HOLDER HEREOF AND HIS/HER SUCCESSORS AND ASSIGNS. 8. REGISTRATION OPTIONS. (a) PIGGYBACK REGISTRATION. (i) The Company shall advise the Holder (or permitted assignee thereof) by written notice at least thirty (30) days prior to the filing of any registration statement or post-effective amendment to a registration statement under the Securities Act covering Common Stock of the Company (other than a registration statement on Form S-4 or Form S-8 or any successor forms thereto), which will qualify as a Qualified Offering (defined below), and shall, upon the written request of the Holder to be received no later than 15 (fifteen) days thereafter and subject to Section 8(a)(iv) hereof, include in any such registration statement or post-effective amendment to a registration statement, such information as may be required to permit a public offering of the Warrant Shares held by or issuable upon the exercise of the Holder's Warrants (the "Registrable Securities"). (A "Qualified Offering" shall be defined as an underwritten public offering, other than an initial public offering, of securities of the Company, for the Company's own account, pursuant to the Securities Act for cash, which offering places a market capitalization on the Company, calculated prior to receipt of the 10 11 proceeds of the offering, of no less than thirty-seven million, five hundred thousand dollars ($37,500,000).) (ii) The Company shall (i) supply prospectuses and such other documents as the Holder may request in order to facilitate the public sale or other disposition of the Registrable Securities, (ii) use its best efforts to register and qualify any of the Registrable Securities for sale in such states as the Holder designates, provided that the Company shall not be required to qualify as a foreign corporation or a dealer in securities or execute a general consent to service of process in any jurisdiction in any action, (iii) shall do any and all other acts and things which may be reasonably necessary or desirable to enable the Holder to consummate the public sale or other disposition of the Registrable Securities, and (iv) furnish indemnification in the manner provided in Section 8(a)(vi) hereof. (iii) The Holder shall furnish information and indemnification as set forth in Section 8(a)(vi) hereof, except that the maximum indemnification amount which may be recovered from the Holder shall be limited to the amount of proceeds received by the Holder from the sale of the Registrable Securities. (iv) The Company shall use its best efforts to cause the managing underwriter or underwriters to permit the Holder of Registrable Securities requested to be included in the registration to include such securities in such underwritten offering on the same terms and conditions as any similar securities of the Company included therein. Notwithstanding the foregoing, if the managing underwriter or underwriters of such offering advises the Holder of the Registrable Securities that the total amount of securities which they intend to include in such offering is such as to materially and adversely affect the success of such offering, then the amount of securities to be offered for the account of the Holder of Registrable Securities shall 11 12 be eliminated, reduced, or limited to the extent necessary to reduce the total amount of securities to be included in such offering to the amount, if any, recommended by such managing underwriter or underwriters (any such reduction or limitation in the total amount of Registrable Securities to be included in such offering to be borne by the holders of Securities of other stockholders proposed to be included therein on a pro rata basis). (v) The holder of Registrable Securities shall be responsible for his/her own separate legal fees and expenses and any underwriting discounts and commissions on the securities sold by the Holder, and shall not be responsible for any other expenses of such registration, including the incremental state and federal filing fees associated with the securities sold by the Holder. (vi) (1) Whenever, pursuant to and in accordance with this Section 8(a), a registration statement is filed, amended or supplemented, the Company shall indemnify and hold harmless each holder of the securities covered by such registration statement, amendment or supplement (a "Distributing Holder") against any losses, claims, damages, or liabilities, joint or several, to which the Distributing Holder, or any such controlling person (within the meaning of the Securities Act) thereof, 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 any untrue statement or alleged untrue statement of material fact contained in any such registration statement or any preliminary prospectus or final prospectus constituting a part thereof or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and shall reimburse the Distributing Holder for any legal and other expenses reasonably incurred by the 12 13 Distributing Holder in connection with investigating or defending any such loss, claim, damage, or liability, or action; provided, however, that the Company shall not be liable in any such case to the extent, but only to the extent, that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, such preliminary prospectus, such final prospectus, or such amendment or supplement in reliance upon and in conformity with written information furnished by such Distributing Holder in his/her capacity as such, for use in the preparation thereof. (2) The Distributing Holder shall indemnify and hold harmless the Company, each of its directors, each of its officers who have signed such registration statement or any preliminary prospectus or final prospectus constituting a part thereof or such amendments and supplements thereto, each person, if any, who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, or liabilities, joint or several, to which the Company or any such director, officer or controlling person 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 any untrue statement or alleged untrue statement of any material fact contained in any such registration statement or any preliminary prospectus or final prospectus constituting a part thereof or any amendment or supplement thereto, or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in such registration statement, such preliminary prospectus, such final prospectus, or such amendment or supplement in reliance 13 14 upon and in conformity with written information furnished by such Distributing Holder, in his/her capacity as such, for use therein, and shall reimburse the Company or any such director, officer or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action. (3) Promptly after receipt by an indemnified party of notice of the commencement of any action covered by this Section 8(a)(vi), such indemnified party shall, if a claim in respect thereof is to be made by the indemnified party against any indemnifying party, give the indemnifying party notice of the commencement thereof. The omission so to notify the indemnifying party of the commencement of any such action shall not relieve the indemnifying party from any liability which it may have to any indemnified party under this Section 8(a)(vi), unless and to the extent the relevant indemnifying party is prejudiced as a result of such omission. (4) In case any action covered by this Section 8(a)(vi) is brought against any indemnified party, and the indemnified party notifies an indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel 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 liable to such indemnified party under this Section 8(a)(vi) for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof. 14 15 (vii) The piggyback registration rights provided in this Section 8(a) shall remain in effect until the Warrant Expiration Date. (b) NO OTHER REGISTRATION OPTIONS. Except as otherwise provided in this Section 8, the Company shall have no obligation to register the Securities. 9. REDEMPTION. (a) On not less than thirty (30) days written notice given, at any time after 6 months following the Exercise Commencement Date, the Warrants may be redeemed at the option of the Company, at a redemption price of $0.01 per Warrant, provided that (i) the Market Price of the Warrant Shares issuable upon exercise of the Warrant shall equal or exceed 4 x an amount equal to the Warrant Exercise Price per share (the "Target Price"), subject to adjustment as set forth in Section 3 above, (ii) the resale of the Warrant Shares issuable upon exercise of the Warrants shall be subject to an effective registration statement under the Securities Act or are fully saleable under Rule 144 under the Regulations under the Securities Act, and (iii) the Holder of the Warrants is not then subject to a lock-up agreement or restriction on resale of Common Stock. "Market Price" for the purpose of this Section 9 shall mean (i) the average closing bid price for any ten (10) consecutive trading days within a period of thirty (30) consecutive trading days ending within five (5) days prior to the date of the notice of redemption, which notice shall be mailed no later than five (5) days thereafter, of the Common Stock as reported by the National Association of Securities Dealers, Inc. Automatic Quotation System, or (ii) the last reported sale price, for ten (10) consecutive business days, ending within five (5) days of the date of the notice of redemption, which notice shall be mailed no later than five (5) days thereafter, on the primary exchange on which the Common Stock is traded, if the Common Stock is traded on a national securities exchange. 15 16 (b) If the Company desires to exercise its right to redeem the Warrants, it shall mail a notice of redemption to each Holder of the Warrants to be redeemed, first class, postage prepaid, not later than the thirtieth day before the date fixed for redemption, at his or her last address as shall appear on the records maintained by the Company. Any notice mailed in the manner provided herein shall be conclusively presumed to have been duly given whether or not the Holder receives such notice. (c) The notice of redemption shall specify (i) the redemption price, (ii) the date fixed for redemption, (iii) the place where the Warrants shall be delivered and the redemption price paid, and (iv) that the right to exercise the Warrants shall terminate at 5:00 P.M. New York City local time on the business day immediately preceding the date fixed for redemption. The date fixed for the redemption of the Warrant shall be the Redemption Date. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a Holder (a) to whom notice was not mailed or (b) whose notice was defective. An affidavit of the Secretary or an Assistant Secretary of the Company (or Warrant Agent, if applicable) that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (d) Any right to exercise a Warrant shall terminate at 5:00 P.M. (New York City local time) on the business day immediately preceding the Redemption Date. On and after the Redemption Date, the Holder of the Warrants shall have no further rights except to receive, upon surrender of the Warrant, the Redemption Price. (e) From and after the Redemption Date specified, the Company shall, at the place specified in the notice of redemption, upon presentation and surrender to the Company by or on behalf of the Holder thereof of one or more warrant agreements evidencing Warrants to be 16 17 redeemed, deliver or cause to be delivered to or upon the written order of the Holder a sum in cash equal to the redemption price of each such Warrant. From and after the Redemption Date and upon the deposit or setting aside by the Company of a sum sufficient to redeem all the Warrants called for redemption, such Warrants shall expire and become void and all rights hereunder and under the warrant agreement, except the right to receive payment of the redemption price, shall cease. (f) If the shares of the Company's Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, the Target Price shall be proportionally adjusted by the ratio which the total number of shares of Common Stock outstanding immediately prior to such event bears to the total number of shares of Common Stock to be outstanding immediately after such event. 10. LOCK-UP. The Holder agrees that, in the event of a public offering of newly issued securities of Common Stock, for the Company's own account, pursuant to the Securities Act, for cash, and the underwriter in such offering requires the principal shareholders of the Company to agree to a lock-up period during which such shareholders will not dispose of or pledge their shares, the Holder will agree to the lock-up period prescribed by the underwriter, which lock-up may include any of the Securities. 11. LOSS, ETC. OF WARRANT. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this agreement or any replacement thereto, and of an unsecured indemnity from the Holder reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of this agreement, if mutilated, the Company shall execute and deliver to the Holder a new agreement of like date, tenor and denomination. 17 18 12. INJUNCTIVE RELIEF. The parties hereto agree that the remedy at law for any breach of this agreement is inadequate and that should any dispute arise concerning the sale or disposition of stock, an injunction may be issued, including an injunction restraining any sale or disposition pending the determination of such controversy. Such remedy shall, however, be cumulative and not exclusive, and shall be in addition to any other remedy which the parties may have. 13. SUCCESSORS AND ASSIGNS. This Agreement and all of its provisions shall be binding upon the respective transferees, successors, assigns, heirs, legatees, executors, administrators and personal representatives of the parties hereto. This Agreement shall in all respects be governed by, regulated and construed under and in accordance with the laws of the State of New York. 14. HOLDER NOT HOLDER. Except as otherwise provided herein, this agreement does not confer upon the Holder any right to vote or to consent to or receive notice as a stockholder of the Company, as such, in respect of any matters whatsoever, or any other rights or liabilities as a stockholder, prior to the exercise hereof. 15. COMMUNICATION. No notice or other communication under this agreement shall be effective unless the same is in writing and is mailed by first-class mail, postage prepaid, addressed to: (a) the Company at 4553 Glencoe Avenue, Suite 325, Marina del Rey, California 90292 or such other address as the Company has designated in writing to the Holder, with a copy to Morse, Zelnick, Rose & Lander, LLP, 450 Park Avenue, New York, New York 10022, Attn.: Howard L. Morse, Esq. 18 19 (b) the Holder at 32 Lower Crescent, Sausalito, California 94965, or such other address as the Holder has designated in writing to the Company. 16. RECISSION. If in connection with any proposed underwritten initial public offering of any of the Company's capital stock, the Managing Underwriter or Underwriters 19 20 advise the Company that this Warrant will be treated as underwriters compensation by the NASD and will affect the amount of compensation such underwriters will be entitled to take in connection with such initial public offering the Company may elect to rescind this agreement by cancelling the Warrant and returning to the Holder the $1,500 received in connection with its issuance. 17. HEADINGS. The headings of this agreement have been inserted as a matter of convenience and shall not affect the construction hereof. 18. APPLICABLE LAW; VENUE. This agreement shall be governed by and construed in accordance with the laws of the State of New York. Any action relating to this agreement, the Warrants, the Options or the Warrant Shares shall be brought in a court located within New York County, New York. RONALD S. POSNER ______________________________________ AD-STAR SERVICES, INC. By: __________________________________ Name: Title: Agreed and Accepted as of ________ __, 1999 20 21 SUBSCRIPTION FORM To be Executed by the Holder in Order to Exercise Warrant The undersigned Holder hereby irrevocably elects to exercise ______ Warrants represented by this agreement, and to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in the name of PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER ____________________________________________ ____________________________________________ ____________________________________________ [please print or type name and address] and be delivered to ____________________________________________ ____________________________________________ ____________________________________________ [please print or type name and address] If the exercise of the within Warrant was solicited by a member of the National Association of Securities Dealers, Inc. please write the name of the NASD member in the space below. ____________________________________ (Name of NASD Member) Dated:_____________________ X___________________________________ ___________________________________ ___________________________________ ___________________________________ Taxpayer Identification Number ___________________________________ Signature Guaranteed ___________________________________ EX-10.12 17 INTEREQUITY AGREEMENT 1 LOAN AND SUBSCRIPTION AGREEMENT AD-STAR SERVICES, INC., a New York corporation, with its principal office at 4553 Glencoe Avenue, Suite 325, Marina del Rey, California 90292 and any successor thereto (hereinafter referred to as "Borrower"), and INTEREQUITY CAPITAL PARTNERS, L.P., a Delaware limited partnership, having an office at 220 Fifth Avenue, New York, N.Y. 10001 (hereinafter referred to as "Lender"), hereby enter into this Loan Agreement ("Agreement") dated as of July 13, 1999. SECTION 1. CERTAIN DEFINITIONS 1.1 The following terms used in this Agreement will have the meanings given below: ADDITIONAL LOAN Defined in Section 4.8 of the Security Agreement. ADDITIONAL LOAN NOTE Defined in Section 4.8 of the Security Agreement. AFFIDAVIT OF CONFESSION OF JUDGMENT Defined in Section 6.1(c). CASH FLOW ANALYSIS PROJECTIONS Defined in Section 10.1(r). CASH IN-FLOWS All Cash In-Flows realized including, without limitation, revenues, cash balances from borrowings and asset sales. CASH OUTFLOWS All expenditures, including, without limitation, general expenses and financing liabilities CLAIMS AND EXPENSES Any and all claims, lawsuits of any kind, judgments, losses, damages, liabilities, penalties, costs and reasonable expenses arising out of transactions contemplated under this Agreement or under the Collateral Documents, including all "Legal Costs and Expenses" (defined below) incurred in connection therewith. CLOSING SHARES Defined in Section 4.1. COLLATERAL Shall have the meaning assigned to such term in the Security Agreement. COLLATERAL DOCUMENTS The Note, any Additional Loan Note, the Security Agreement, the Affidavit of Confession of Judgment, the Patent and Trademark Collateral Assignment, the Copyright Security Agreement, and the applicable UCC-1 Statements. 1 2 COMPANY Borrower COPYRIGHT OFFICE Defined in Section 6.3. COPYRIGHT SECURITY AGREEMENT Defined in Section 6.3 DOCUMENTATION Technical specifications; information regarding version numbers and usage of the development environment, editors, assemblers, compilers, library managers, linkers; any worksheets, flowcharts or other programming materials relating to the Programs; any user manuals, reference manuals, training manuals or installation guides relating to the Programs; and other licensed third party programs used in connection with the Programs. EBIT Earnings of the Borrower before interest and taxes of the Borrower. EBITDA Earnings of the Borrower before interest, taxes, depreciation and amortization of the Borrower. EIGHTEEN MONTH ANNIVERSARY DATE The eighteen month anniversary of the Loan Closing Date. FIRST YEAR ANNIVERSARY DATE The first year anniversary of the Loan Closing Date. HOLDER Lender and any transferee of Lender's Equity. INTEREST COVERAGE Ratio of EBIT of the Borrower to interest expense of the Borrower. JUNIOR LENDERS Shall mean, collectively, each of the purchasers of a Junior Note pursuant to the terms of the Subscription Agreement, and any of their successors and assigns. JUNIOR NOTE Shall mean a 12% convertible subordinated unsecured note issued by the Company pursuant to the terms of the Subscription Agreement. LEGAL COSTS AND EXPENSES Any and all reasonable attorneys' fees and disbursements, court costs and other litigation expenses. 2 3 LENDER EQUITY Defined in Section 4.2(e). LICENSEE PROGRAMS Programs in the form delivered to licensees of the Company. LOAN Defined in Section 2.1. LOAN CLOSING AND THE Defined in Section 2.2. LOAN CLOSING DATE MANDATORY COMPENSATION REDUCTIONS Defined in Section 10.1(r) MATURITY DATE The expiration of five years from the Loan Closing Date. NET WORTH Total assets of the Borrower minus total liabilities of the Borrower. NINE MONTH ANNIVERSARY DATE The ninth month anniversary of the Loan Closing Date. NOTE Defined in Section 2.2. OFFERING The public offering of Shares where the Company raises gross proceeds of at least $12,000,000. PATENT AND TRADEMARK ASSIGNMENT Defined in Section 6.1(b). PERMITTED LIENS Defined in Section 9.1(k). POST-CLOSING SHARES Defined in Section 4.2. PRINCIPALS Leslie Bernhard, President; Eli Rousso, Executive Vice President; PRO FORMA BALANCE SHEET A balance sheet delivered by Borrower to Lender prior to the Loan Closing Date taking into account the proceeds of the Loan and other costs and expenditures from March 31, 1999, in form and substance satisfactory to Lender. PROGRAMS All computer programs in object code and source code formats and accompanying documentation licensed by the Company as part of its business. QUALIFIED SALE Defined in Section 4.4(b). REGISTRATION RIGHTS AGREEMENT The Registration Rights Agreement dated as of the date hereof between the Company and the Lender, 3 4 in form and substance satisfactory to Lender. SBA REGULATIONS Defined in Section 5.2. SEC United States Securities and Exchange Commission and any successor thereto. SECURITY AGREEMENT Defined in Section 6.1(a). SHARE CERTIFICATE A certificate representing the Shares. SHARES Borrower's shares of Common Stock, without par value. SIX MONTH ANNIVERSARY DATE The sixth month anniversary of the Loan Closing Date. SOURCE CODE Shall mean uncompiled and/or unassembled program coding that is used to produce the object code files or libraries that are subsequently linked together to make the non-modifiable runtime format of the Programs. This Source Code shall be the same that is used by the Company's programming staff to maintain, modify and enhance the Programs. SUBORDINATION AGREEMENT Each Subordination Agreement between the Company, a Junior Lender and the Lender, in form and substance satisfactory to Lender. SUBSCRIPTION AGREEMENT As the context may require, any or all of the Subscription Agreements dated as of April 30, 1999 and March 12, 1999 and March 22, 1999 pursuant to which the Company collectively offered the Junior Notes in a maximum aggregate principal amount of $1,500,000 (and any additional subscription agreement which may be subsequently executed in connection with such offering of the Junior Notes), as may be applicable to the respective Junior Note. TEMPLATE SOURCE CODE Source Code for the Programs which are the basis for any Licensee Program. UNIFORM COMMERCIAL CODE The Uniform Commercial Code as is in effect in the State of New York. 4 5 SECTION 2. THE LOAN 2.1 Simultaneously with the execution of this Agreement, Lender is purchasing a note of the Borrower for a purchase price equal to 99.88235% of the principal amount of $850,000 US Dollars (such purchase referred to either as the "Note Purchase" or the "Loan"; and, together with any Additional Loans that may be advanced pursuant to Section 4.8 of the Security Agreement, the "Loans") receipt of which is acknowledged by Borrower. 2.2 The Loan is evidenced by a promissory note (the "Note") made by the Borrower payable to Lender, which is being executed and delivered to Lender contemporaneously herewith (such loan and delivery being hereinafter called the "Loan Closing" and the date thereof being hereinafter called the "Loan Closing Date"). A copy of the Note is attached to this Agreement as Exhibit 1. 2.3 The Note is payable in accordance with its provisions which include, inter alia: (a) Interest (computed on the basis of a 360-day year) on the unpaid principal amount of the Loan for the period from and including the date the Loan is disbursed to but excluding the date the Loan shall be paid in full shall be at the rate of fourteen percent (14 %) per annum. Interest payments only shall be payable monthly in arrears commencing on the first day of the month following the date of the Note and continuing on the first day of each succeeding month until the first day of the month following the Six Month Anniversary Date. After the first day of the month following the Six Month Anniversary Date, the principal of the Note together with interest thereon shall be amortized and payable in fifty-four (54) equal successive monthly installments commencing on March 1, 2000 and concluding on the Maturity Date. (b) The principal of the Note and accrued interest thereon shall become immediately due and payable upon the occurrence of an Event of Default as defined in Article 5 of the Security Agreement. (c) Notwithstanding any provision in this Agreement or in the Note, in no event shall the interest rate applicable to the Loan exceed that permitted by the laws or governmental regulations applicable to the Lender that limit rates of interest that may be charged or collected by Lender. If any payment hereunder or under the Note shall be found to constitute a payment of interest in excess of that permitted under the laws or governmental regulations applicable to the Lender that limit rates of interest that may be charged or collected by the Lender, then the amount of such excess payment shall be refunded to Borrower. (d) The Note may be prepaid in full or in part at any time without penalty; provided, however, that such prepayments are made in increments of at least $100,000 (or the unpaid balance on the Note, if less). SECTION 3. COMMITMENT FEE 3.1 As of the Loan Closing Date, Borrower has paid Lender a commitment fee of $17,000, receipt of which is hereby acknowledged by Lender. 5 6 SECTION 4. LENDER EQUITY 4.1 Simultaneously with the Loan Closing Date hereunder, the Lender is purchasing 1.603 shares from the Borrower, representing 1.5% of the total common equity of the Borrower (the "Closing Shares") and the rights described in Section 4.2 hereof for a purchase price equal to $1,000. The Closing Shares when delivered shall be validly issued, fully paid and nonassessable, and not subject to preemptive rights. 4.2 (a) If the Loans have not been repaid in full on the Nine Month Anniversary Date, the Ten Month Anniversary Date or the Eleventh Month Anniversary Date, then on each such anniversary date where any portion of the Loans remain unpaid, Borrower shall deliver to Lender additional Shares representing 1/3 of 1% of Borrower's total common equity then outstanding after giving effect to the issuance of such additional Shares to Lender (after taking into account (i) any dividend paid or distribution made to the holders of such common equity in Shares or any security or other instrument convertible into common equity, (ii) any subdivision or combination of the Shares or (iii) any reclassification of the Shares). (b) On the First Year Anniversary Date, if repayment of the Loans in full has not occurred, Borrower shall deliver to Lender Shares representing an additional 1% of Borrower's total common equity then outstanding after giving effect to such issuance of additional shares (after taking into account (i) any dividend paid or distribution made to the holders of such common equity in Shares or any security or other instrument convertible into common equity, (ii) any subdivision or combination of the Shares or (iii) any reclassification of the Shares). (c) On the Eighteen Month Anniversary Date, if repayment of Loans in full has not occurred, or if before then at any time an Offering has occurred and no repayment in full of the Loan has been made (within 3 business days of the completion of the Offering), Lender may exchange all of its Shares for Shares representing 14% of Borrower's total common equity then outstanding after giving effect to such exchange (after taking into account (i) any dividend paid or distribution made to the holders of such common equity in Shares or any security or other instrument convertible into common equity (ii) any subdivision or combination of the Shares or (iii) any reclassification of the Shares). (d) For every six-month period following the Eighteen Month Anniversary Date, Borrower shall deliver to Lender Shares representing 0.5% of Borrower's then outstanding total common equity then outstanding after giving effect to the issuance of such additional Shares to Lender (after taking into account (i) any dividend paid or distribution made to the holders of such common equity in Shares or any security or other instrument convertible into common equity, (ii) any subdivision or combination of the Shares or (iii) any reclassification of the Shares) so long as any portion of the Loans remains unpaid at the end of each such six-month period. (e) The Shares issued and delivered by Borrower to Lender in accordance with this Section 4.2 (collectively, the "Post-Closing Shares"; and, together with the Closing Shares, "Lender Equity") shall be reserved by the Company and shall, in each 6 7 case, be, when delivered, validly issued, fully paid and nonassessable, and not subject to preemptive rights, and the Company acknowledges that in connection with any such issuance or exchange of Post-Closing Shares, Lender has given Borrower consideration for such Post-Closing Shares and that a portion of such consideration in an amount equal to or greater than (i) if such post-closing shares are assigned par value in the Company's Certificate of Incorporation, the par value or (ii) if such Post-Closing Shares are without par value, the value of the Post-Closing Shares (as duly determined by the Company's Board of Directors in accordance with the corporate law of the jurisdiction of its incorporation) has been allocated to the Company's capital account. Upon Lender's request, in connection with any issuance of Post-Closing Shares pursuant to this Section 4.2 (including Post-Closing Shares issued in connection with the exchange contemplated by Section 4.2(c)), Borrower shall deliver to Lender prior to such issuance a legal opinion from counsel reasonably satisfactory to Lender stating that the Post-Closing Shares then being issued are validly issued, fully paid and nonassessable and are not subject to preemptive rights. (f) Lender acknowledges that each of the Shares and the Post-Closing Shares shall be subject to certain lock-up restrictions imposed by any underwriter in connection with any future public offering of such shares, and Lender shall execute and deliver any lock-up agreement requested by such underwriter to evidence such lock-up restrictions; provided, however, that the terms of any such lock-up agreement shall be no more restrictive to Lender than the terms of any other lock-up agreement executed by any other holder of the Company's Shares. 4.3 Lender shall receive the demand and piggyback registration rights set forth in the Registration Rights Agreement being delivered to Lender as of the Closing Date. In addition, (i) the Shares held by Lender are not freely transferable without first being registered with the SEC or (ii) if the exchange of Shares for Post-Closing Shares described in Section 4.2(c) hereof has occurred, then Lender will receive demand and piggyback registration rights whenever such rights are granted to others on terms which are superior to the terms (including, without limitation, any holding periods) set forth in Registration Rights Agreement. 4.4 (a) If at the Maturity Date, or at any time thereafter, a "Qualified Sale", as hereinafter defined, has not occurred, Lender may sell its Shares to the Borrower for a purchase price equal to the value of such Shares pro rata to the total value of the Borrower, when the total value of the Borrower shall be deemed equal to (i) ten times EBITDA (as calculated by the most recent year-end financial statements or by reference to the twelve months prior to the date of such sale, whichever is higher) or (ii) if more than the amount calculated in (i), that price established by an independent valuation by an appraiser chosen by Lender ("Lender's Appraiser"). The independent valuation shall be at the expense of Lender. If Borrower disagrees with such appraised value, Borrower may hire another appraiser at its sole cost and expense ("Borrower's Appraiser"). If Lender's Appraiser and Borrower's Appraiser cannot agree on a value within fifteen days after Borrower's Appraiser has been designated, Borrower's Appraiser and Lender's Appraiser shall select a third appraiser (the "Third Appraiser") to determine the value of the Company. The determination of the Third Appraiser shall be final and binding, and the fees and expenses of the Third Appraiser shall be shared equally by the parties. If the Lender shall decide to exercise its option to sell its Shares to the Company as 7 8 described herein, the Lender shall send to the Company written notice of such decision in accordance with Section 17 of this Agreement, and, the Company shall effectuate within thirty (30) days after receipt of such notice, the sale of such Shares. The closing of such sale shall be held at a place and time satisfactory to Lender. (b) For purposes of Section 4.4(a), "Qualified Sale" shall mean (i) a public offering by Borrower resulting in total gross proceeds to the Borrower of not less than $8,000,000, or (ii) a sale by Borrower of a significant part of its assets and business not in the ordinary course of its business or a merger or consolidation, in any of which cases the aggregate consideration received by Borrower and/or its stockholders is not less than $8,000,000. 4.5 The Company further covenants and agrees that it will pay, when due and payable, any and all federal and state stamp, original issue or similar taxes that may be payable in respect of the original issue of any Closing Shares or Post-Closing Shares or certificates therefor. 4.6 The Lender acknowledges the following restrictions on any transfer of the Shares issued in connection with this Agreement: (a) Neither the Closing Shares nor the Post-Closing Shares issuable upon the terms of Section 4.2 hereof have been registered under the Securities Act of 1933, as amended (the "Securities Act"), or under any state securities laws, and unless so registered, may not be transferred, sold, pledged, hypothecated or otherwise disposed of unless an exemption from such registration is available. In the event a Holder desires to transfer the Closing Shares or any of the Post-Closing Shares issued hereunder, the Holder must give the Company prior written notice of such proposed transfer including the name and address of the proposed transferee. Such transfer may be made only upon receipt by the Company of an opinion of counsel to the Company to the effect that the proposed transfer will not violate the provisions of the Securities Act, the rules and regulations promulgated thereunder, or any applicable state securities or "blue sky" laws, because such transfer is exempt from the registration requirements. (b) Prior to any such proposed transfer, and as a condition thereto, if such transfer is not made pursuant to an effective registration statement under the Securities Act, the Holder will, if requested by the Company, deliver to the Company (i) an investment covenant signed by the proposed transferee, (ii) an agreement by such transferee to the impression of the restrictive investment legend set forth herein on the certificate or certificates representing the securities acquired by such transferee, (iii) and an agreement by such transferee that the Company may place a "stop transfer order" with its transfer agent or registrar. (c) Except as restricted hereby, the Shares may be transferred by the Holder in whole or in part at any time or from time to time. Upon surrender of the Shares Certificate to the Company or at the office of its stock transfer agent, if any, with assignment documentation duly executed and funds sufficient to pay any transfer tax, and upon compliance with the foregoing provisions, the Company shall, without charge, execute and deliver a new Share Certificate in the name of the assignee named in such instrument or assignment, and this Share Certificate shall promptly be canceled. Any assignment, transfer, pledge, hypothecation or other disposition of 8 9 the shares attempted contrary to these provisions, or any levy of execution, attachment or other process attempted upon the Shares, shall be null and void and without effect. (d) Unless the Shares have been registered under the Securities Act, upon issuance of any of the Closing or Post-Closing Shares, the Company shall instruct its transfer agent to enter stop transfer orders with respect to such shares, and all certificates representing such Shares shall bear on the face thereof substantially the following legend: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS AMENDED (THE "SECURITIES ACT"), OR THE "BLUE SKY" OR SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, ASSIGNED OR TRANSFERRED, AND ANY TRANSFER OR PURPORTED TRANSFER SHALL NOT BE RIGHTFUL UNDER THE UNIFORM COMMERCIAL CODE, AND THE COMPANY SHALL HAVE NO DUTY TO REGISTER A TRANSFER OF THESE SECURITIES EXCEPT (i) PURSUANT TO A REGISTRATION STATEMENT UNDER THE SECURITIES ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH RESPECT TO THESE SECURITIES, OR (ii) PURSUANT TO A SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF ANY APPLICABLE "BLUE SKY" OR SIMILAR STATE SECURITIES LAWS, BUT ONLY UPON THE HOLDER HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THE PROPOSED DISPOSITION IS CONSISTENT WITH THE SECURITIES ACT. THESE SECURITIES ARE GOVERNED BY THE TERMS OF A LOAN AND SUBSCRIPTION AGREEMENT BETWEEN THE COMPANY AND THE HOLDER HEREOF DATED __________, 1999. THE RESTRICTIONS CONTAINED HEREIN ARE BINDING ON THE HOLDER HEREOF AND HIS/HER SUCCESSORS AND ASSIGNS. 4.7 Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of a Share Certificate and of an unsecured indemnity from the Holder reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of the Share Certificate, if mutilated, the Company shall execute and deliver to the Holder a new Share Certificate of like date, tenor and denomination. 9 10 SECTION 5. USE OF PROCEEDS 5.1 The proceeds of the Loan will be used by the Borrower for marketing, expansion, implementation of internet capability, and transaction costs associated with this Agreement and for general operating and working capital purposes. 5.2 Borrower shall not use the proceeds of the Loan for any purpose contrary to the purposes contemplated by the Small Business Investment Act of 1958, as amended, including any subsequent amendments, or for any purpose that may be in conflict with any regulations issued by the U. S. Small Business Administration as they relate to the Small Business Investment Company program (such regulations, the "SBA Regulations"). Such prohibited uses include: (i) personal use by shareholders, officers and employees of Borrower; (ii) use for any relending or reinvesting purposes, if the primary business activity of such person involves, directly or indirectly, providing funds to others, the purchase of debt obligations, factoring, or long term leasing of equipment with no provision for maintenance or repair; (iii) use for purchasing any stock in or providing capital to any small business investment company; (iv) use for making any real estate purchases if a Borrower is classified under Major Group 65 of the Standard Industrial Classification Manual unless such transaction would otherwise be exempt by virtue of Section 901(c) of the SBA Regulations pertaining to Small Business Investment Companies; (v) use for purposes contrary to the public interest, including but not limited to activities which are in violation of law, or inconsistent with free competitive enterprise; or (vi) use for foreign investment and use outside the United States except as may be permitted under Section 901 (e) of the SBA Regulations pertaining to Small Business Investment Companies. SECTION 6. COLLATERAL 6.1 The Loan is secured as provided in the following documents, which are being executed and delivered simultaneously with this Agreement: (a) a security agreement from Borrower in substantially the form attached hereto as Exhibit 2 granting Lender the security interests set forth therein (the "Security Agreement"); (b) a collateral assignment of all of Borrower's patents and trademarks in form appropriate for recording and satisfactory to Lender's counsel (the "Patent and Trademarks Assignment") in substantially the form attached hereto as Exhibit 3; 10 11 (c) an Affidavit of Confession of Judgment against, and executed by, Borrower in favor of Lender (in the form attached hereto as Exhibit 4); and (d) UCC-1 Financing Statements granting Lender a security interest in property of Borrower in form and content satisfactory to Lender. 6.2 It is understood and agreed that Lender shall have a first priority security interest in all Borrower' assets, which security interest may be freely assigned by Lender. Lender hereby acknowledges that Borrower has entered into the Subscription Agreement with the Junior Lenders for the issuance of the Junior Notes in a maximum aggregate principal amount not to exceed $1.5 million and, in connection therewith, the Borrower shall procure that each Junior Lender execute and deliver a Subordination Agreement in form and substance satisfactory to Lender (x) with respect to Junior Notes outstanding as of the Loan Closing Date in an aggregate principal amount of not less than $850,000 on the Loan Closing Date, (y) with respect to the remainder of any Junior Notes outstanding as of the Loan Closing Date, in accordance with Section 10.1(n) hereof and (z) prior to issuance of any additional Junior Notes. 6.3 Within fourteen (14) days of the Loan Closing Date, Borrower shall deliver to Lender a Copyright Security Agreement describing in detail each software program subject to copyright protection (the "Copyright Security Agreement"), in form and substance satisfactory to Lender, to be filed with the United States Copyright Office (the "Copyright Office"). In the event that Borrower decides to register any copyright of the Borrower with the Copyright Office subsequent to the Loan Closing Date and prior to the date the Loans have been paid in full, Borrower, without further request or action on the part of Lender, shall, (a) prior to such registration, deliver to Lender a proposed amendment to the Copyright Security Agreement (referencing the registration application of such copyright), and, (b) after Lender has approved such amendment to the Copyright Security Agreement (each such amendment to be reasonably satisfactory to Lender and Lender's counsel), arrange to file such amendment to the Copyright Security Agreement with the Copyright Office simultaneously with the registration of such copyrights. SECTION 7. CLOSING DOCUMENTS 7.1 Simultaneously with the execution and delivery of this Agreement, the Loan is being funded and Borrower is delivering or has delivered to Lender the following documents, duly executed and (where required) witnessed or notarized: (a) the Note; (b) the documents set forth in Section 6. 1; (c) Secretary's Certificate of Borrower as to (i) Certificate of Incorporation, (ii) By-laws (iii) resolutions of its Board of Directors authorizing (A) the borrowing hereunder, (B) the issuance of the Closing Shares and the issuance of the Post-Closing Shares, and (C) the execution and delivery of this Agreement and the transactions contemplated hereby and thereby; (d) Opinion Letter of Attorneys for Borrower (in form and content attached hereto as Exhibit 5); 11 12 (e) Remaining commitment fee in the amount of $8,500 by checks; (f) Share Certificate(s), duly executed by the Company in accordance with the By-laws of the Company, representing the Closing Shares; (g) Registration Rights Agreement; and (h) Subordination Agreements in respect of the Junior Notes representing an aggregate principal amount of not less than $850,000. SECTION 8. CONDITIONS PRECEDENT TO PERFORMANCE BY LENDER Lender's obligation to make the Loan on the Loan Closing Date is subject to the satisfaction of the following conditions (or waiver thereof by Lender): (a) All documents required to be executed and delivered by Borrower in accordance with Section 7 shall have been executed in fact and made available to Lender; (b) Lender shall be satisfied with all personal and business credit checks; (c) Lender shall have reviewed and found satisfactory a signed commitment letter for the underwriting of the Offering; (d) Lender shall be satisfied with all of its legal and financial due diligence; (e) Lender shall be satisfied with all employment agreements and non-compete agreements with the Borrower's key management, operating and technical personnel; (f) There shall have been no material change in the ownership or corporate structure of the Borrower since March 31, 1999; provided, however, that Lender acknowledges that the shares of Jeff Diamond (representing nineteen (19%) of the common equity of the Borrower) may be repurchased by the Borrower (or purchased by one or more third parties with the consent of the Lender, provided, that the Lender shall not be unreasonable in withholding any such consent) for a price not to exceed $500,000 (such purchase price limitation to apply only to a repurchase by the Borrower) so long as Lender is satisfied with any additional financing arrangements related to the repurchase; (g) All appraisals of the Collateral requested by Lender shall have been accomplished and shall be satisfactory to Lender; (h) All environmental impact statements requested by Lender shall have been delivered to Lender and shall be satisfactory to Lender; (i) The Loan shall be in compliance with any and all regulations issued by the U.S. Small Business Administration as they relate to the Small Business Investment Company program; 12 13 (j) All representations and warranties of Borrower shall be true and correct as of the Loan Closing Date and a Principal shall have certified thereto; (k) The Registration Rights Agreement shall be in form and substance satisfactory to Lender; and (l) Borrower shall have delivered to Lender the Pro Forma Balance Sheet. SECTION 9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS 9.1 To induce Lender to make the Loan hereunder, the Borrower represents, warrants and agrees that: (a) Borrower validly exists and is in good standing under the laws of New York and is qualified to do business in California and in other states where the ownership of property or the nature of the business conducted by it requires such qualification except for where the failure to be so qualified would not have a material adverse affect (it being understood that the failure to be qualified in California would have a material adverse effect); Borrower has no subsidiaries. (b) Borrower has the requisite corporate authority and power to enter into this Agreement, to borrow money as contemplated hereby, to issue the Note and the Closing Shares and the Post-Closing Shares, and to execute and deliver this Agreement, each of the Collateral Documents and any other documents required and described in this Agreement, and the execution and delivery of this Agreement, the Collateral Documents and the documents to be delivered hereunder have been duly authorized by Borrower; The Agreement, the Collateral Documents, and such other documents are valid and enforceable against Borrower in accordance with their terms. (c) Borrower's financial statements consisting of a balance sheet as of December 31, 1998 and a statement of operations for the year then ended, a balance sheet as of December 31, 1997 and a statement of operations for the year then ended, and an unaudited interim balance sheet as of March 31, 1999 and a statement of operations for the three months then ended, have been prepared in accordance with United States generally accepted accounting principles ("GAAP") applied on a consistent basis and present fairly in all material respects the financial position of Borrower as of the dates of the respective balance sheets and the results of its operations for the applicable periods then ended. (d) All representations made by Borrower to Lender in this Agreement or in any Collateral Document are true and correct in all material respects as of this date. (e) Borrower is not a party to, or threatened by, any suits, actions, claims, or investigations by any governmental body or legal, administrative or arbitration proceeding which may result, either singly or in the aggregate, in any material adverse change in the business, prospects or assets of the Borrower. 13 14 (f) There are no outstanding orders, judgments, writs, injunctions or decrees of any court, governmental agency, or arbitration tribunal which may result, either singly or in the aggregate, in any material adverse change in the business, prospects or assets of Borrower. (g) Borrower is not a party to, or bound by, any contract or instrument which would be in breach as a result of any of the transactions contemplated by this Agreement. (h) Borrower is not in breach of, in default under, or in violation of, any decree, order, rule or regulation, or any indenture, contract, agreement, deed, lease, loan agreement, commitment, bond, note, deed of trust, restrictive covenant, license, instrument or obligation or, to its knowledge, any law to which it is a party or by which it is bound, or to which any of its assets is subject, in each case which breach, default or violation would have a material adverse effect on Borrower, and the execution, delivery and performance of this Agreement and the Collateral Documents will not constitute any such breach, default or violation, or require consent or approval of any court, governmental agency, or body, except as may be expressly provided herein or shall have been obtained. (i) Since March 31, 1999, there has not been a material adverse change in the condition (financial or otherwise) of the Borrower, except as previously disclosed in writing by Borrower to Lender. (j) Borrower is a small business concern, as defined under the Small Business Investment Act and Regulations, in accordance with SBA Form 480 thereunder and accordingly is entitled to receive the proceeds of this Loan. (k) There are no liens, security interests or encumbrances of any kind on any of the assets of Borrower other than Permitted Liens and Lender shall upon the filing of UCC statements as appropriate and the recording of the Patent and Trademark Assignment have a first priority perfected security interest in all such assets. As used herein, "Permitted Liens" shall mean: (i) liens for taxes or assessments which are either (A) not delinquent or (B) being contested diligently and in good faith by appropriate proceedings and as to which Borrower has posted a bond in an amount satisfactory to Lender; and (ii) statutory liens, such as mechanic's, materialman's warehouseman's carrier's or other like liens incurred in good faith in the ordinary course of business provided that the underlying obligations relating to such liens are paid when due in accordance with their terms. (l) Each employment and non-compete agreement relating to the Principals, a copy of which has been previously delivered to Lender, has not been modified or amended and is, as of the date hereof, in full force and effect. (m) As of the date hereof the number of Shares of each class of Borrower's outstanding stock are as set forth in Schedule 9.1(m) hereto. 14 15 (n) Except as set forth in Schedule 9.1(n), there are no outstanding options, warrants or agreements by the Borrower to issue any additional Shares or securities convertible into Shares. (o) Since December 31, 1998, there has not been any material change in the ownership or control of Borrower or in the corporate structure or business of Borrower. (p) Borrower owns or validly licenses all trademarks, trademark applications, tradenames (including, without limitation, all rights in and to the trademark and tradename and all derivatives thereof), logos, copyrights, copyrightable works, computer software (including data and related documentation), trade secrets, patents, know how, inventions and similar intellectual property rights and patents and patent applications (collectively "Rights") utilized in and necessary to the conduct of its business as currently being conducted or as is proposed to be conducted (the "Borrower Rights"). Schedule 9.1(p) contains a complete and correct list of all patents and patent applications, trademarks, trademark applications, tradenames, logos and copyrights currently owned by or licensed by or to Borrower in the conduct of its business indicating, where applicable, the registered and beneficial owner and the expiration date thereof and if the subject of a license, the name of each Licensee. The conduct of the business of Borrower as currently conducted and as proposed to be conducted does not, and will not, infringe upon valid Rights of others in any way. Neither the validity of any Borrower Rights, nor the use thereof by Borrower, is the subject of any pending or threatened action to which Borrower, is a party. Borrower does not know of any material use that has been made or is now being made of any of Borrower Rights except by Borrower. (q) Borrower is in full compliance with the rules, regulations, procedures and requirements of the U.S. Small Business Administration as they relate to the Small Business Investment Company program and this transaction. (r) Borrower's opening balance sheet at the Loan Closing Date shall be substantially the same as the Pro Forma Balance Sheet submitted by the Borrower on July 12, 1999. (s) As of the Loan Closing Date, Borrower has issued Junior Notes in an aggregate principal amount of $1,050,000. Borrower further represents that the maximum aggregate principal amount of Junior Notes authorized to be offered by the Company pursuant to the Subscription Agreement is $1,500,000. (t) As of the Loan Closing Date, no "Associate" (as such term is defined in the SBA Regulations) of the Lender owns either voting equity interests or total equity interests (including potential interests) of five percent (5%) or more in the Borrower. SECTION 10. CERTAIN AFFIRMATIVE COVENANTS 10.1 While the Note is outstanding, the Borrower will do and comply with the following: 15 16 (a) Borrower will promptly make all payments of interest and principal on the Note when due; (b) Borrower will comply with the terms and conditions in this Agreement and in those contained in each Collateral Document; (c) Borrower will keep accurate and complete books and records and maintain them at its principal office set forth in the first sentence of the Agreement; (d) Borrower will furnish to Lender: (i) within ninety (90) days after the end of each calendar year a balance sheet of Borrower and an income statement of Borrower showing the financial condition as of the close of such fiscal year and the results of its operations for such fiscal year and statements of shareholders' equity of Borrower and statements of cash flows of Borrower. All of the foregoing financial statements shall be audited by an independent certified public accountants ("CPA") selected by Borrower and reasonably acceptable to Lender, it being agreed that Price Waterhouse Coopers is acceptable to Lender; (ii) within forty-five (45) days after the end of each calendar quarter, unaudited balance sheets, income statements, statements of shareholders' equity and statements of cash flows of Borrower as of the end of such quarterly period, prepared and certified by the Chief Financial Officer of Borrower as presenting fairly in all material respects the financial condition and results of operations of Borrower, prepared in accordance with GAAP applied on a consistent basis subject to year-end adjustments; (e) For purposes of verifying Borrower's compliance with the provisions of this Agreement and the Collateral Documents, upon five (5) business day's prior notice, Borrower shall permit any authorized representative of Lender and its attorneys and accountants to inspect, examine and make copies and abstracts of the books of account and records of Borrower at reasonable times during normal business hours, and to inspect the Collateral given as security for the Loans; provided, however, that prior to an Event of Default, such inspections will occur no more than once a year and Borrower shall pay all of Lender's reasonable expenses in connection therewith in an amount not to exceed Five Thousand Dollars ($5,000.00), and provided further that (x) from and after the occurrence of an Event of Default and during the continuance thereof, there shall be no limit on either the number of such inspections which can be made by or on behalf of Lender or on the expenses therefor payable by Borrower and (y) from and after the third occurrence of an Event of Default, there shall be no limit on either the number of such inspections which can be made on behalf of Lender or on the expenses therefor payable by Borrower; (f) Borrower shall notify Lender of (i) litigation involving amounts of $15,000. or more to which Borrower is a party by mailing to Lender by certified mail within five (5) business days of receipt thereof, a copy of the complaint, motion for judgment, or other such 16 17 pleadings served on or by Borrower and (ii) any litigation to which Borrower is not a party but which it becomes aware of and which could substantially and adversely affect the operation of Borrower's business or the collateral pledged for this Loan by mailing to Lender by certified mail, a copy of all pleadings obtained by Borrower regarding such litigation within five (5) business days of Borrower's receipt therefor, or if no pleadings are obtained, a letter setting out the facts known about the litigation within five (5) business days after Borrower learns of such litigation. Mailings under this paragraph shall be addressed to: Abraham Goldstein, Managing Director InterEquity Capital Partners, L.P. 220 Fifth Avenue New York, New York 10001 (g) Borrower shall continue to conduct its business in substantially the same general character and manner as conducted as of the date of this Agreement and as proposed to be conducted as set forth in Schedule 10.1(g) and to maintain, preserve and keep, in all material respects its properties, buildings, equipment and fixtures necessary for the operation of its business in reasonable repair and condition (ordinary wear and tear excepted) and promptly pay and discharge or cause to be paid and discharged as and when due any and all income taxes, federal or otherwise, lawfully assessed and imposed upon them, and any and all lawful taxes, rates, levies and assessments whatsoever upon its properties and every part thereof and, on demand, will deliver to Lender certificates or other evidence satisfactory to Lender attesting thereto, provided however that, if Borrower has posted a bond in an amount satisfactory to Lender, nothing contained herein shall be construed as prohibiting Borrower from contesting in good faith the validity of any such income taxes, federal or otherwise, or such other taxes, rates, levies or assessments, and provided, further that Lender, in its sole discretion, shall have the right to remove any liens imposed on the Collateral and Borrower shall promptly reimburse Lender for all amounts so paid by it, including expenses incurred by Lender in connection therewith; (h) Borrower shall defend at all times any claim by a third party relating to the possession of, or interest in its assets, including, without limitation, the Borrower Rights; (i) Borrower shall make all payments to creditors as shall be necessary to preserve Lender's security interests in the Collateral given to secure the Loans; (j) Borrower shall execute and deliver to Lender any additional documents necessary to perfect Lender's security interests in the Collateral given to secure the Loans including (but not limited to) extensions of the Affidavit of Confession of Judgment referred to in Section 6. 1 (c); (k) The Chief Executive Officer or Chief Financial Officer of Borrower shall submit a certificate to Lender within forty-five (45) days after the end of each fiscal quarter that to the best of such officer's knowledge and belief, Borrower is in compliance with all of the terms, provisions, conditions and covenants set forth in this Loan Agreement; (l) Borrower shall, at all times, keep reserved for issuance that number of Shares as may be required to be issued under Section 4 of this Agreement and, if necessary to 17 18 effectuate this covenant, shall take prompt action and use its best efforts to cause the number of authorized shares to be increased; (m) Each employment and non-compete agreement between the Borrower and each of the Principals and other key management, operating, and technical personnel, as has been reviewed and deemed satisfactory to the Lender shall remain in full force and effect without any modification or amendment thereof; (n) Borrower shall: (i)(A) within thirty (30) days of the Loan Closing Date, escrow the Template Source Code, (B) within seventy-five (75) days of the Loan Closing Date, escrow the Source Code relating to the Licensee Programs for the five licensees of the Company then producing the greatest revenues for the Company, (C) within ninety (90) days of the Loan Closing Date, escrow the Documentation relating to the Template Source Code, (D) within 120 days of the Loan Closing Date, escrow the Source Code relating to all Licensee Programs (to the extent not previously escrowed in accordance with subsection (i)(B) hereof), (E) within 150 days of the Loan Closing Date, escrow the Documentation relating to the Source Code for the licensee then-producing the greatest revenues for the Company, (F) within 180 days of the Loan Closing Date, escrow the Documentation relating to the Source Code for approximately one-third of the Licensee Programs, (G) within 210 days of the Loan Closing Date, escrow the Documents relating to the Source Code for approximately one-third of the Licensee Programs (it being understood that such obligation is in addition to the escrow of Documentation relating to Source Code for Licensee Programs under subsection (i) (E) and (i) (F) hereof, so that, as of the date 210 days from the Loan Closing Date, approximately two-thirds of the Documentation relating to the Source Code for Licensee Programs will have been delivered into escrow), and (G) within 240 days from the Loan Closing Date, escrow the remaining Documentation relating to the Source Code for Licensee Programs (so that, as of the date 240 days from the Loan Closing Date, Documentation relating to the Source Code for ninety-five percent (95%) of the Licensee Programs has been escrowed), in each case, for purpose of this subsection (i), with a software escrow agent satisfactory to Lender, and pursuant to a software escrow agreement in form and substance satisfactory to Lender, which escrow agreement shall include a worldwide, perpetual, royalty-free license (with full rights to grant sublicenses) to use and create derivative works from the Programs in object code and source code format; (ii) (A) within three (3) days of the Loan Closing Date, obtain (and thereafter maintain) business interruption insurance and insurance on the business assets of Borrower in the amount equal to the value of such business assets; and (B) within twenty (20) days of the Loan Closing Date obtain (and thereafter maintain) key man life insurance on the life of each of the Principals in the amount of $850,000 (in the case of (A) and (B) of this subsection (ii) such insurance to be from licensed carriers acceptable to Lender, with the policies thereon made payable to Lender as its interest may appear); (iii) within thirty (30) days of the Loan Closing Date, furnish to Lender, Subordination Agreements for any Junior Lender which did not execute and deliver a Subordination Agreement on the Loan Closing Date; and (iv) upon the proposed issuance of any additional Junior Notes, furnish to Lender a Subordination Agreement duly executed and delivered by such Junior Lender simultaneously with such issuance; (o) Borrower shall comply with all federal, state and local laws, ordinances, regulations and requirements applicable to it and to its business, including (without limitation) 18 19 federal and state securities laws and zoning laws and ordinances except where the failure to so comply would not have a material adverse effect on Borrower; (p) For so long as the Note is outstanding the Borrower shall meet the following financial tests: (i) MINIMUM REVENUES. Revenues of the Borrower for the financial quarters listed below shall be equal to or greater than the amount specified opposite such date:
Quarter ending on or about Minimum Revenues -------------------------- ---------------- September 30, 1999 $375,000 December 31, 1999 375,000 March 31, 2000 550,000 June 30, 2000 600,000 September 30, 2000 625,000 December 31, 2000 625,000 March 31, 2001 875,000 All subsequent quarters 875,000
(ii) EBITDA. EBITDA of the Borrower for the financial quarters listed below shall be equal to or greater than the amount specified opposite such date:
Quarter ending on or about EBITDA -------------------------- ------ September 30, 1999 $(500,000) December 31, 1999 (350,000) March 31, 2000 (200,000) June 30, 2000 50,000 September 30, 2000 100,000 December 31, 2000 150,000 March 31, 2001 200,000 All subsequent quarters 200,000
(iii) INTEREST COVERAGE. After September 30, 2000, Interest Coverage of the Borrower for the financial quarters listed below shall be equal to or greater than the coverage ratio specified opposite such date:
Quarter ending on or about Coverage Ratio -------------------------- -------------- September 30, 2000 and all subsequent quarters 1.5:1
(iv) MINIMUM NET WORTH. The Net Worth of the Borrower for the periods listed below shall be equal to or greater than the amount specified opposite such periods: 19 20
Period Minimum Net Worth ------ ----------------- July 13, 1999 - March 31, 2000 $ (1.5 million) April 1, 2000 - December 31, 2000 (1.2 million) January 1, 2001 - December 31, 2001 (500,000) January 1, 2002 - December 31, 2002 300,000 All subsequent periods through 500,000 the Maturity Date
(v) CASH FLOW COVERAGE. The ratio represented by all Cash In-Flows divided by all Cash Outflows at all times shall be equal to or greater than 1.1:1; (q) The Borrower will complete the proposed Offering in an amount of not less than $12 million by December 31, 2000; (r) If (i)(A) at year end 1999 or (B) if at the end of each month from January 2000 through April 2000, the Borrower has not achieved the revenue and EBITDA levels for such period shown on the cash flow analysis projections attached hereto as Schedule 10.1(r) (the "Cash Flow Analysis Projections") or (ii) for each month after April 2000, -- the Borrower has not achieved (A) revenues of at least $300,000 and (B) --- a positive EBITDA, the compensation amounts of the Principals are to be reduced by an annualized rate of $100,000 (a monthly rate of $8,333) (such reductions, the "Mandatory Compensation Reductions"). The Mandatory Compensation Reductions are to be for the full rate specified in the preceding sentence and shall not take into account any payments required to be made for any applicable federal and state income taxes or any other withholdings on any such deferred amount. The Company may not, and hereby covenants that it shall not, designate any cash amounts to be paid to the Principals in lieu of the Mandatory Compensation Reductions. Such Mandatory Compensation Reductions shall be deferred for payment until certain commercial targets (such targets to be determined by Lender (taking into account the amount by which the Cash Flow Analysis Projections were not met) at its sole discretion at such time) have been attained; (s) Borrower shall keep all Source Code in a fireproof, storage facility separate from the Borrower's chief place of operations; and (t) Borrower shall ensure that, prior to repayment in full of the Loans, no "Associate" (as such term is defined in the SBA Regulations) of the Lender shall own five percent (5%) or more of voting equity interests or total equity interests (including potential interests) in the Borrower. SECTION 11. CERTAIN NEGATIVE COVENANTS 11.1 Until such date as the Loan is repaid in full, except with the prior written consent of Lender (whose consent may be refused without explanation and without any legal recourse by Borrower), Borrower will not: (a) [intentionally omitted] 20 21 (b) except for the subordinated loans (evidenced by the Junior Notes in an aggregate maximum principal amount of $1,500,000) permitted herein, incur any indebtedness for borrowed money including any capitalized lease arrangements or; (c) engage in any line of business materially different from those which Borrower is now engaged in except as set forth in Schedule 10.1(g); (d) become a party to any merger or consolidation with any corporation, company or entity of any kind whatsoever, or sell substantially all of its assets, or otherwise liquidate or dispose of its business; (e) sell any of its securities in a public offering, sell any of its assets other than in the ordinary course of business or sell Shares at such prices or in such amounts that the holdings of the Principals of common equity will be reduced to below 51% of the outstanding Shares; (f) become a guarantor of obligations of any other person, firm, corporation or entity, except in connection with depositing checks and other instruments for the payment of money acquired in the normal course of its business; (g) transfer, sell, lease or in any other manner convey to any person other than in the ordinary course of its business any equitable, beneficial or legal interest in any of the Collateral securing the Loan; (h) except as otherwise contemplated herein, create or permit to exist any mortgage interest, pledge, security interest, title retention device, or other encumbrance in the Collateral securing the Note junior to Lender's lien or security interest thereon, except for liens of taxes and assessments not delinquent or contested in good faith, or those machinery and equipment purchases and leases which may arise in the ordinary and necessary course of business; (i) knowingly permit any judgment obtained against Borrower which is not covered by insurance (as evidenced by a written acknowledgement of such coverage by the applicable insurance company) in an amount exceeding $10,000 to remain unpaid for a period of thirty (30) days following the entry thereof, without obtaining a stay of execution or bonding or causing such judgment to be bonded; (j) except as otherwise contemplated herein, pay any dividends or make any other distributions with respect to its capital stock (including, without limitation, the Shares); (k) pay any bonus to or increase the salary of any employee if the effect of such payment would cause a breach of any other representation or covenant made by Borrower in this Agreement; (l) increase the salary of and/or pay a bonus to any executive officer of Borrower which in the aggregate exceeds 10% of his compensation for the year; (m) [intentionally omitted] 21 22 (n) make any payment to the Principals for salary, bonus, expenses or otherwise (whether or not such salary has been earned or such other payment is due) if the effect of such payment would cause a breach of any other representation or covenant made by Borrower in this Agreement; provided that any payment so deferred may thereafter be made to the extent that such payment would not at the time of such payment cause a breach of any representation or covenant made by Borrower in this Agreement; (o) organize or acquire any subsidiary without the prior written consent of Lender in each instance, it being agreed by Borrower that in the event of the organization or acquisition by it of any subsidiary, each and every covenant contained in this Agreement shall apply to each such subsidiary and the financial covenants shall include Borrower and each such subsidiary on a consolidated basis; (p) in the event of the organization or acquisition of any subsidiary by Borrower, permit any such subsidiary to perform any act which Borrower has agreed not to perform hereunder; or (q) If there has been an Event of Default as described in Section 5.11(a) of the Security Agreement (a "Payment Default"), then, until such Payment Default has been cured, Borrower shall not make any compensation payment whatsoever (whether scheduled or unscheduled) to the Principals or grant to the Principals any bonus or benefit in lien of such compensation payment. SECTION 12. REPRESENTATION ON BORROWER'S BOARD OF DIRECTORS 12.1 For so long as the Loan, remains outstanding Lender shall have the right, but not the obligation, to send an observer to all meetings of Borrower's Board of Directors and the Lender shall be entitled to receive notice of all Board meetings in the same course and manner as the directors comprising the Board. Each year, the Borrower shall reimburse Lender's representative for all reasonable costs and expenses incurred by Lender's representative in connection with observing one of Borrower's Board of Directors' meetings. 12.2 Upon the occurrence, and continuation, for three months of a default by Borrower of any of its covenants under this Agreement or any of the Collateral Documents, Lender shall have the right to designate a director to Borrower's Board of Directors. Under the circumstances set forth in the preceding sentence, Borrower shall take such steps, or cause such steps to be taken, including, if necessary, amending the by-laws and increasing the size of the Board so as to permit the election of Lender's designee to the Board. Upon appointment of Lender's representative to the Board, Borrower shall reimburse Lender's representative for all costs and expenses incurred by Lender's representative in connection with attending each of Borrower's Board of Directors' meetings and performing his services as a member of the Borrower's Board of Directors. SECTION 13. IRREGULAR PAYMENT 13.1 Lender may accept late payments and partial payments even though marked "payment in full" or words of similar import, without losing any of its rights under this Agreement or under the Notes. 22 23 SECTION 14. DELAY IN ENFORCEMENT 14.1 Lender may delay in enforcing its rights under this Agreement or a Collateral Document without losing or prejudicing such rights. SECTION 15. NO BROKER 15.1 Borrower represents and warrants to Lender that it has not dealt with any broker or finder, whether or not licensed, in connection with this Agreement or the loan transactions under this Agreement. 15.2 Borrower agrees to defend, indemnify and hold harmless Lender from any and all Claims and Expenses based on, or arising from, its representations and warranties in Section 9. SECTION 16. LOAN EXPENSES 16.1 Borrower agrees to pay, promptly after demand is made, all reasonable out-of-pocket expenses incurred by Lender in connection with the making, amending, perfection, enforcement or payment or liquidation of the Loan which is the subject of this Agreement, including (but not limited to) Lender's legal fees and disbursements. It is understood that the legal fees shall be capped at $20,000 plus reasonable disbursements for the making of this Agreement only. SECTION 17. NOTICES 17.1 Unless otherwise expressly provided elsewhere in this Agreement, any notice, request, consent, election, demand or other communication ("notice") to be given or made by the parties under this Agreement must be in writing and either: (a) delivered by hand, telecopier or overnight delivery by Federal Express or other recognized carrier; or (b) sent by certified or registered mail, return receipt requested, postage prepaid. 17.2 Each notice to be given: (a) to Lender, will be addressed to: Abraham Goldstein, Managing Director InterEquity Capital Partners, L.P. 220 Fifth Avenue New York, New York 10001 (b) to Borrower, will be addressed to it at its address set forth in the preamble on page 1 of this Agreement, Attn: Chief Financial Officer. 23 24 17.3 A copy of each notice must be sent simultaneously and in like manner to the following persons: (a) (in case of a notice to Lender) to: Rosenman & Colin LLP 575 Madison Avenue New York, NY 10022 Attn: Elizabeth Evans, Esq. (b) (in the case of a notice to Borrower) to: Morse, Zelnick, Rose & Lander, LLP 450 Park Avenue New York, NY 10022 Attn: Howard L. Weinreich, Esq. 17.4 Borrower and Lender may, by notice to the others, change the address to which future notices are to be sent or add or change a person to whom a notice or a copy of a notice is to be sent. 17.5 Unless otherwise provided elsewhere in this Agreement, each notice shall be considered to be given on: (a) the date delivered by hand or telecopier (unless it is not a business day or is not received before 5:30 P.M., in which case the notice shall be considered given on the next business day after being sent); (b) the next business day after being sent by overnight courier; (c) the third full business day following the date of mailing postage prepaid in the United States Mail. However, a notice of a change of address of person pursuant to Section 17.4 shall not be deemed given until received. 17.6 A notice that is mailed must be deposited into an official mail depository maintained by the United States Postal Service or (if mailed outside the United States) by an equivalent postal authority. 17.7 Failure to accept a notice is deemed receipt of it and does not invalidate the notice or excuse the performance of an obligation. SECTION 18. ENTIRE AGREEMENT 18.1 All prior and contemporaneous statements, representations, promises, understandings, agreements, projections and opinions, whether written or oral made to each other 24 25 with regard to this transaction, are merged in this Agreement and the Collateral Documents. This Agreement and the Collateral Documents constitute the entire agreement of the parties. 18.2 The Borrower understands that the covenants set forth in this Loan Agreement are in addition to the covenants set forth in the Security Agreement and the Patent and Trademark Assignment. SECTION 19. CHANGES AND WAIVERS 19.1 A provision of this Agreement will be considered to have been changed or waived only if the change or waiver is expressly made in writing signed by the party to be charged. 19.2 The failure to insist on strict performance of any provision will not mean that the provision has been waived or that the right to insist thereafter on strict performance of that or any other provision has been waived. SECTION 20. FURTHER ASSURANCES 20.1 In furtherance of its obligations contained herein, Borrower agrees to execute and deliver such documents as may be necessary in order to close or effectuate or confirm any provisions of this Agreement or the Collateral Documents. 20.2 Borrower acknowledges and agrees that Lender will not be required to be party to that certain Shareholders' Agreement made as of April 30, 1999 between the Borrower and the Junior Lenders. SECTION 21. GOVERNING LAW; VENUE FOR LAWSUITS 21.1 The laws of the State of New York will govern this Agreement and the interpretation and enforcement of its provisions, without regard to legal principles of conflict of laws. 21.2 The parties each hereby agree that any action, suit or proceeding under this Agreement shall be brought in the State of New York, and each party hereby submits to the jurisdiction of the courts of the State of New York (both State and Federal). Borrower hereby irrevocably appoints Morse, Zelnick, Rose & Lander, LLP as its authorized agent upon whom process may be served in any such action, suit or proceeding. Borrower agrees that service of process on such agent with a copy of such process delivered to it in the manner permitted under Section 17 shall constitute effective service upon it. Borrower agrees to take any and all actions, including the execution and filing of all documents and instruments, as may be necessary or appropriate to effect and continue the appointment of such agent in full force and effect, or if necessary by reason of any fact or condition relating to such agent, to replace such agent to the satisfaction of Lender and Borrower agrees that service of process upon such agent or any replacement therefore with a copy to it shall be deemed in every respect effective service of process in any such suit, action or proceeding in any such court. 25 26 SECTION 22. WAIVER OF JURY TRIAL 22.1 Each Party waives the right to a trial by jury in any litigation arising under this agreement or under any Collateral Document. 22.2 Any claim for which a jury trial cannot legally be waived shall not be asserted as a counterclaim or joined with any lawsuit in which a jury trial is waived, unless the failure to assert it would prevent the claim from being made later. SECTION 23. INVALID PROVISIONS SEVERED 23.1 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity of the other provisions, which shall be enforced to the fullest extent permitted by law. SECTION 24. CAPTIONS; EXHIBITS; AND GRAMMAR 24.1 The paragraph captions are for convenience only. They are not part of the text of this Agreement and are not to be used to interpret its provisions. 24.2 All Exhibits and Schedules to this Agreement are incorporated in, and are part of, this Agreement as fully as though set forth herein. 24.3 Unless otherwise specified, all references in this Agreement to a Section, paragraph Schedule or Exhibit mean a Section, paragraph Schedule or Exhibit of this Agreement or an Exhibit attached to this Agreement. 24.4 The use of the singular includes the plural and the use of any gender includes any other gender whenever required by the sense of this Agreement. SECTION 25. REIMBURSEMENT FOR ENFORCEMENT 25.1 In the event Borrower fails to perform any of its obligations under this Agreement or under any Collateral Document, then Borrower shall pay any and all Claims and Expenses incurred by the Lender in enforcing or establishing its rights hereunder or thereunder. SECTION 26. NO NEGATIVE CONSTRUCTION AGAINST DRAFTING PARTY 26.1 The parties acknowledge that they are sophisticated and are represented by experienced, knowledgeable attorneys. The parties agree that the normal rules of construction to resolve ambiguities against the party whose counsel drafted this Agreement shall not be followed in the interpretation of this Agreement. Consequently, no negative inference or interpretation shall be made by a court in enforcing the provisions of this Agreement against the party whose attorney drafted this Agreement. 26 27 SECTION 27. NO OTHER PARTIES 27.1 The representations, warranties and agreements of Borrower contained herein are intended solely for the benefit of Lender, and shall confer no rights hereunder, whether legal or equitable, in any other third person, and no other person shall be entitled to rely thereon. SECTION 28. COUNTERPARTS 28.1 This Agreement may be signed in counterparts, each of which will be deemed an original document. All counterparts will constitute one document which may be sufficiently evidenced by one such counterpart. Each counterpart will be binding on the signatory to such counterpart notwithstanding that it is not signed by both signatories to this Agreement. SECTION 29. INDEMNIFICATION 29.1 Borrower agrees to indemnify Lender, its officers, directors, principals and affiliates from and against any Claims and Expenses incurred or suffered by them or any of them arising out of the transactions contemplated hereunder, except for any Claim or Expense that is solely the result of Lender's gross negligence or willful misconduct. 29.2 If the facts giving rise to any such indemnification shall involve any claim or demand by any third party against Lender, the Borrower shall be entitled to defend or prosecute such claim at its expense and through counsel of its own choosing reasonably acceptable to Lender, if it advises the Lender in writing of its intention to do so within fifteen (15) days after notice of such claim has been given to the Borrower (without prejudice to the right of Lender to participate at its expense through counsel of its own choosing). Lender shall cooperate in the defense and/or settlement of such claim, but shall be entitled to be reimbursed for all costs and expenses incurred by it in connection therewith. SECTION 30. SUCCESSORS AND ASSIGNS 30.1 This Agreement shall bind Borrower and its successors. Borrower may not assign this Agreement without the written consent of Lender. 30.2 This Agreement shall be binding upon and shall inure to the benefit of Lender, its successors and assigns. SECTION 31. RELEASE OF COLLATERAL 31.1 Upon complete satisfaction of all amounts owed in connection with any Loan made hereunder Lender will (a) release the Assignment of Patents and Trademarks assigned to it as Collateral herewith, (b) execute UCC-3 Termination Statements in all appropriate jurisdictions and (c) release the Copyright Security Agreement. 31.2 Lender acknowledges and agrees that, upon complete satisfaction of all amounts owed in connection with any Loan, that the obligations set forth in Section 4.4 hereof will no longer be secured by the Collateral. 27 28 [INTENTIONALLY LEFT BLANK] 28 29 IN WITNESS WHEREOF Borrower and Lender have executed this Agreement and affixed their seals as of the date first above stated. AD-STAR SERVICES INC. /s/ Leslie Bernhard ____________________________________ Name: Leslie Bernhard Title: President INTEREQUITY CAPITAL PARTNERS, L.P. By: /s/ Abraham Goldstein ____________________________________ Name: Abraham Goldstein Title: Managing Director 29 EX-10.13 18 FORM OF SUBSCRIPTION AGREEMENT 1 SUBSCRIPTION AGREEMENT THIS SUBSCRIPTION AGREEMENT (the "Agreement") is made as of March 22, 1999 between AD-STAR SERVICES, INC., a New York corporation, with its principal offices at 4553 Glencoe Avenue, Marina del Rey, California 90292 (the "Company"), and the undersigned (each a "Purchaser," and collectively, "Purchasers"). WHEREAS, the Company is offering a maximum of thirty (30) of its 12% convertible subordinated unsecured notes in the principal amount of $50,000 each (the "NOTES"), substantially in the form annexed hereto as Exhibit A; and WHEREAS, the Company desires to sell to Purchaser and Purchaser desires to purchase Notes having a principal amount as is set forth on the signature page hereof. NOW, THEREFORE, in consideration of the premises and the covenants herein contained and for other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. PURCHASE AND SALE OF NOTES. Subject to the terms and conditions hereinafter set forth, Purchaser hereby subscribes for and agrees to purchase from the Company, Notes having the principal amount set forth on the signature page hereto and the Company hereby agrees to sell such Notes to Purchaser. The purchase price for each Note shall be $50,000 which shall be the stated principal amount of each Note (the "PURCHASE PRICE") and the issue date of a Note shall be the Closing Date (as defined below) for such Note and shall appear on such Note. The Purchase Price is payable by certified or bank check made payable to the Company or by wire transfer of funds, contemporaneously with the execution and delivery of this Subscription Agreement. The Notes being purchased by Purchaser will be delivered by the Company within two (2) days of the Closing Date (as defined below). Purchaser hereby authorizes and directs the Company to deliver the Notes purchased pursuant to this Agreement to the address set forth on the signature page hereto. SECTION 2. DESCRIPTION OF THE NOTES. 2.1 INTEREST. Each Note shall bear interest at the rate of twelve percent (12%) per annum on the principal amount of the Notes from its Closing Date. 2.2 INTEREST PAYMENTS; ELECTION. (a) Except as provided in subparagraph (b) of this subsection 2.2, accrued interest on the Notes shall be payable annually, in arrears, in immediately available funds on the date which is the anniversary date of the Closing. (b) If on or before March 31, 2000, the Company does not receive net proceeds of $2,000,000 in the aggregate from any one or more public offerings or private placements of (i) the Company's equity securities or (ii) the Company's debt securities (excluding the Notes) which are convertible into or exchangeable for the Company's equity securities or are accompanied by warrants or other rights to purchase the Company's equity securities (such offerings or placements collectively referred to as a "QUALIFIED FINANCING"), then each holder of a Note, upon written notice delivered to the Company (an "ELECTION NOTICE") at any time after March 31, 2000 but prior to May 2 15, 2000, may elect (an "ELECTION") to modify the terms of any or all of such holder's Notes such that (i) the entire principal balance of such Note and all accrued interest shall be payable in forty-seven (47) equal monthly installments on the first day of each month commencing on June 1, 2000 and (ii) the holder's right to convert such Note into shares of Common Stock, as provided herein, shall terminate effective as of the date of such Election. (c) If the Company does not complete a Qualified Financing on or before March 31, 2001, each Note that has not been modified pursuant to an Election shall automatically be modified such that the entire principal balance of such Note and all accrued interest shall be payable in thirty-five (35) equal monthly installments on the first day of each month commencing on June 1, 2001; provided, however, that the holder's right to convert such Note into shares of Common Stock shall continue in full force and effect until the Maturity Date. 2.3 MATURITY DATE. The unpaid principal balance of a Note, plus all accrued and unpaid interest thereon, shall be due in full on April 1, 2004. 2.4 SECURITY. The Notes shall be unsecured obligations of the Company. 2.5 CONVERSION. (a) CONVERSION AT HOLDERS' OPTION. Subject to and upon compliance with the provisions of this subsection 2.5, a holder of a Note (except a Note regarding which an Election has occurred) shall have the right, at such holder's option, at any time to convert such Note, in whole but not in part, into the number of shares of Common Stock obtained by dividing (i) the then outstanding principal amount of the Note plus any accrued and unpaid interest by (ii) the Conversion Price then in effect. (b) MANDATORY CONVERSION. If the Company shall consummate the sale of its Common Stock in a bona fide, firm commitment underwriting pursuant to a registration statement under the Securities Act of 1933, as amended (or on any form other than an S-4 or S-8 (or any successor form)), the net proceeds to the Company of which are not less than $5,000,000 (a "QUALIFIED PUBLIC OFFERING"), then effective upon the closing of such Qualified Public Offering, the Notes (except any Note regarding which an Election has occurred) shall automatically be converted into the number of shares of Common Stock obtained by dividing (i) the then outstanding principal amount of the Note plus any accrued and unpaid interest by (ii) the Conversion Price then in effect. (c) CONVERSION PRICE. The conversion price (the "CONVERSION PRICE") per share of Common Stock for which each Note is convertible shall be adjusted pursuant to paragraph (d) of this subsection 2.5. The initial Conversion Price shall be the dollar amount that is the quotient of (i) the sum of $6,000,000 plus the total principal amount Notes sold by the Company prior to the Termination Date divided by (ii) 105.26 (adjusted as provided in subsection 2.5(d)(i) for any of the events described in subsection 2.5(d)(i), the record date of which is prior to the Closing Date for each Note, as if the event had occurred after the Closing Date). (d) CONVERSION PRICE ADJUSTMENT. The Conversion Price of each Note shall be adjusted from time to time as follows: (i) If the Company shall after the Closing Date of such Note (a) pay a dividend or make a distribution on its capital stock in shares of Common Stock, (b) subdivide its 2 3 outstanding Common Stock into a greater number of shares, (c) combine its outstanding Common Stock into a smaller number of shares or (d) issue any shares of capital stock by reclassification of its outstanding Common Stock, the Conversion Price in effect at the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such dividend or distribution or at the opening of business on the day on which such subdivision, combination or reclassification becomes effective, as the case may be, shall be adjusted so that the holder of any Note thereafter converted shall be entitled to receive the number of shares of Common Stock that such holder would have owned or have been entitled to receive after the happening of any of the events described above had such Note been converted immediately prior to the record date in the case of a dividend or a distribution or the effective date in the case of a subdivision, combination or reclassification. (ii) If the Company shall issue after the Closing Date of such Note any Common Stock (except Common Stock issuable upon conversion of the Notes) for a consideration per share of less than the Conversion Price in effect immediately prior to the issuance of such Common Stock, the Conversion Price shall immediately be adjusted to equal the price determined by multiplying the Conversion Price by a fraction, the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding on the close of business on the date immediately preceding such issuance and (B) the number of shares that could be purchased at the Conversion Price from the aggregate proceeds to the Company of such issuance, and the denominator of which shall be the number of shares of Common Stock outstanding immediately following such issuance. In determining whether any Common Stock was issued by the Company at less than the Conversion Price then in effect, there shall be taken into account any consideration received by the Company upon issuance, the value of such consideration, if other than cash, to be determined in good faith by the Board of Directors. (iii) If the Company shall issue after the Closing Date of such Note rights or options or warrants exercisable for Common Stock at a price per share less than the Conversion Price in effect on the date that is the issue date for such rights, options or warrants, then the Conversion Price shall be adjusted (effective on the first business day following the issue date) to equal the price determined by multiplying the Conversion Price in effect on such issue date by a fraction, the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding on the close of business on such issue date and (B) the number of shares that could be purchased at the Conversion Price from the aggregate proceeds to the Company from the issuance of such rights, options or warrants plus the aggregate proceeds to be received by the Company upon the exercise of such rights, options or warrants for Common Stock, and the denominator of which shall be the sum of (AA) the number of shares of Common Stock outstanding on the close of business on the issue date and (BB) the number of additional shares of Common Stock offered for subscription or purchase pursuant to such rights, options or warrants. In determining whether any rights, options or warrants entitle holders thereof to subscribe for or purchase the Common Stock at less than the Conversion Price then in effect, there shall be taken into account any consideration received by the Company upon issuance, and any consideration expected to be received upon exercise of such rights, options or warrants, the value of such consideration, if other than cash, to be determined in good faith by the Board of Directors. (iv) Notwithstanding any other provision of this subsection 2.5, the Conversion Price shall not be adjusted to reflect the issuance by the Company to employees, officers, directors, or consultants of the Company (either directly or pursuant to a stock option plan or restricted stock plan approved by the shareholders and directors of the Company) of up to an aggregate of 15.79 3 4 shares of Common Stock or of rights or options exercisable for up to an aggregate of 15.79 shares of Common Stock, adjusted to reflect subsequent stock splits, stock dividends, combinations, reverse stock splits, or reclassifications. (v) If the Company intends to enter into any consolidation with or merger of the Company with or into another corporation or other entity, or in the case of any sale, lease or conveyance to another corporation of the assets of the Company as an entirety or substantially as an entirety, then the Company shall give each holder of a Note not less than sixty (60) days prior written notice of the closing date for such transaction, and each holder of a Note (except any holder of a Note as to which an Election has occurred) shall have the right to convert its Note into Common Stock of the Company pursuant to the terms of this Agreement. (e) DIVIDENDS. Each holder of a Note (whether or not such holder has made an Election) shall, unless such Note is paid in full on or before the record date for such dividend, be entitled to receive a share of all assets (including cash) or securities (other than Common Stock or rights, options or warrants referred to in subparagraph (d)(iii) of this subsection 2.5) that are paid by dividend or distribution on or after such Note's Closing Date to the holders of Common Stock, in each case as if such Note had been converted into shares of Common Stock at the Conversion Price in effect on the record date relating to such dividend or distribution. (f) CONVERSION PROCEDURE. (i) In the event of a mandatory conversion pursuant to paragraph (b) of this subsection 2.5, the Company shall notify the holders of the Notes immediately upon receipt of the proceeds of the Qualified Public Offering. Upon receipt of such notice, each holder of a Note (provided no Election has been made with respect to such Note) shall deliver such Note to the Company. (ii) In order to exercise the conversion right pursuant to paragraph (a) of this subsection 2.5, a holder of a Note shall deliver such Note to the Company accompanied by a written notice to the Company that the holder thereof elects to convert such Note. (iii) Within three (3) days after receipt of a Note delivered for conversion, the Company shall deliver to such holder a certificate for the number of whole shares and any fractional share of Common Stock issuable upon the conversion. Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the Notes shall have been delivered pursuant to section 11.2 hereof or, in the case of a mandatory conversion pursuant to paragraph (b) of this subsection 2.5, in accordance with such subsection. (g) TAXES ON CONVERSION. SUBJECT TO THE RESTRICTIONS ON TRANSFER CONTAINED HEREIN, the issuance of certificates for shares of Common Stock upon the conversion of the Notes shall be made without charge to the holders of the Notes for such certificates or any tax in respect of the issuance of such certificates, and such certificates shall be issued in the respective names of, or in such names as may be directed by, such holders; provided, however, that in the event that certificates for shares of Common Stock are to be issued in a name other than the name of the holder of the Note, such Note when surrendered for conversion, shall be accompanied by an instrument of transfer, in form satisfactory to the Company, duly executed by such holder or his duly authorized attorney; and provided further, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates 4 5 in a name other than that of the holder of the Note, and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid or is not applicable. (h) COMPANY TO PROVIDE STOCK. All shares of Common Stock that may be issued upon conversion of the Notes shall be newly-issued, duly authorized, validly issued, fully paid and non-assessable when so issued. The Company agrees to take any and all actions that may be necessary to ensure that it has a sufficient number of shares of Common Stock to issue upon the conversion of the Notes. 2.6 PREPAYMENT. With respect to any Note, the Company shall not prepay all or any portion of the principal amount outstanding thereunder at any time prior to the first anniversary of the Closing Date for such Note, except that prepayment shall occur, whether before or after such anniversary, if such prepayment is required by the holder of such Note by reason of acceleration following default or any other acceleration event under the Note. After such first anniversary, the Company may prepay all (but no portion less than all) of such principal amount of any such Note, provided that the Company first shall give the holder thereof not less than thirty (30) days prior written notice of its intention to prepay an amount specified in such notice, such prepayment shall occur in such amount and in no other amount, and such prepayment shall occur on the date set forth in the notice which date shall be the first day of a calendar month, provided, however, that the holder of the Note (except for a Note as to which an Election has occurred) shall have the right prior to the anticipated prepayment date set forth in the notice to exercise its conversion option contained in Section 2.5(a) hereof and convert its Note into Common Stock of the Company, in which case the prepayment notice shall be of no further force or effect. 2.7 DEFAULTS AND REMEDIES. (a) EVENTS OF DEFAULT. Each of the following events is herein referred to as an Event of Default: (i) if any representation or warranty made herein, or in the Notes, or in any report, certificate, financial statement or other instrument furnished in connection with this Agreement, shall be false, inaccurate or misleading in any material respect when made or when deemed made hereunder; (ii) any default in the payment of any principal or interest under any of the Notes when the same shall be due and payable, whether at the due date thereof or by acceleration or otherwise; (iii) any material default in the due observance or performance of any other covenant, condition or agreement to be observed or performed pursuant to the terms hereof, and the continuance of such default unremedied for a period of fifteen (15) days after written notice thereof to the Company setting forth in reasonable detail the circumstances of such default; (iv) if the Company shall: (A) apply for or consent to the appointment of a receiver, trustee, custodian or liquidator of it or any of its properties, (B) admit in writing its inability to pay its debts as they mature, (C) make a general assignment for the benefit of creditors, (D) be adjudicated a bankrupt or insolvent or be the subject of an order for relief under Title 5 6 11 of the United States Code, or any successor thereto, or (E) file a voluntary petition in bankruptcy, or a petition or an answer seeking reorganization or an arrangement with creditors or to take advantage or any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or an answer admitting the material allegations of a petition filed against it in any proceeding under any such law, or (vi) take or permit to be taken any action in furtherance of or for the purpose of effecting any of the foregoing; (v) if any order, judgment or decree shall be entered, without the application, approval or consent of the Company, by any court of competent jurisdiction, approving a petition seeking reorganization of the Company, or appointing a receiver, trustee, custodian or liquidator of the Company, or of all or any substantial part of its assets, and such order, judgment or decree shall continue unstayed and in effect for any period of sixty (60) days; or (vi) if final judgment(s) for the payment of money in excess of $200,000 individually or $250,000 in the aggregate shall be rendered against the Company, and the same shall remain undischarged or unbonded for a period of thirty (30) consecutive days, during which execution shall not be effectively stayed. (b) REMEDIES. Upon the occurrence of any Event of Default, and at all times thereafter during the continuance thereof: (i) the Notes shall, at the option of the holders thereof, in accordance with Section 2.6 hereof (except in the case of any event described in Sections 2.7(a)(iv) and (v) hereof, the occurrence of which shall automatically effect acceleration, regardless of any action or forbearance in respect of any prior or ongoing default or Event of Default which may be inconsistent with such automatic acceleration), become immediately due and payable, as to principal, interest and premium, without presentment, demand, protest, notice or other requirement of any kind, all of which are hereby expressly waived, anything contained herein or in the Notes to the contrary notwithstanding, (ii) all outstanding obligations under the Notes, shall bear interest at the default rate of interest of 18% as provided in the Notes, (iii) the holders of the Notes may file suit against the Company on the Notes and/or seek specific performance or injunctive relief thereunder (whether or not a remedy exists at law or is adequate), (iv) the holders of the Notes shall have the right to seek to exercise any and all remedies as they may determine in their discretion (without any requirement of marshalling of assets, or other such requirement) that may be available at law or in equity. 2.8 CHANGE IN TERMS. If, prior to the completion of a Qualified Financing, the Company shall issue one or more convertible debt instruments having terms which are more beneficial to the holder of such instrument than the terms of the Notes (e.g., a higher rate of interest or a lower conversion price), then, within five (5) days of the issuance of such convertible debt instruments, the Company shall give Purchasers written notice of such issuance, which notice shall include the date of issuance and the terms of such convertible debt instruments, and each Purchaser shall have fifteen (15) days to elect, which election shall be in writing, to have the terms of the its Notes modified or amended, as appropriate, to include such enhanced terms. SECTION 3. CLOSING. The closing of the purchase and sale of each Note ("Closing") shall take place on the date (each a "Closing Date" and collectively the "Closing Dates") that the Company receives the Purchase Price from the Purchaser of such Note, provided, however, that no Closing under this offering shall occur after April 30, 1999 (the "Termination Date"). 6 7 SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to Purchaser, which representations and warranties shall be true and correct as of the date hereof and as of the Closing Date, as follows: 4.1 ORGANIZATION; STANDING AND POWER. The Company and each of its subsidiaries (a) is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, (b) has all requisite corporate power and authority to own its properties and to carry on its businesses as now conducted and as proposed hereafter to be conducted, (c) is duly qualified and in good standing to do business as a foreign corporation in each and every jurisdiction where its assets are located and wherever such qualification is necessary to carry out its business and operations except where the failure to so qualify or be in good standing would not have a material adverse effect on the financial condition, business, operations, assets or prospects of the Company and (d) has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted, to execute and deliver, and perform all of its obligations under this Agreement. 4.2 CAPITALIZATION; RESERVED STOCK, PREEMPTIVE RIGHTS. The total authorized capital stock of the Company consists of 200 shares of Common Stock, of which, as of the date hereof, 105.26 shares have been duly and validly issued, are fully paid and nonassessable and are outstanding. The Company has reserved for issuance and will continue to reserve for issuance from time to time at least the number of shares of Common Stock into which the Notes may be converted. Except for the shares of Common Stock issuable upon conversion of the Notes, no other shares have been reserved for issuance on the Closing Date and there are no outstanding options, warrants or other rights to subscribe for or purchase from the Company any shares of its capital stock or any securities convertible into or exchangeable for its capital stock. Except for the provisions of Section 9 hereof, there are, as of the date hereof, no preemptive rights or rights of first refusal or similar rights that have not been waived, which are binding on the Company permitting any person to subscribe for or purchase from the Company shares of its capital stock pursuant to any provision of law, the Certificate of Incorporation or Bylaws of the Company or by agreement or otherwise. Attached hereto as Exhibit B is a table setting forth the capitalization of the Company as of the date hereof on an actual basis. 4.3 AUTHORIZATION. The execution and delivery by the Company of this Agreement, the performance of the Company's obligations hereunder and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action and will not, either prior to or as a result of the consummation of the transactions contemplated by this Agreement: (a) violate any provisions of any law or any governmental rule or regulation applicable to the Company or any of its subsidiaries, any provision of the Certificate of Incorporation or Bylaws of the Company or any of its subsidiaries, or any contract, indenture, agreement or other instrument to which the Company or any of its subsidiaries is a party, or by which the Company or any of its subsidiaries or any of its or their assets or properties are bound, or (b) be in conflict with, result in a breach of, or constitute (after the giving of notice or lapse of time or both) a default under, or result in the creation or imposition of any lien of any nature whatsoever upon any of the property or assets of the Company or any of its subsidiaries pursuant to the provisions of any contract, indenture, agreement or other instrument to which the Company is a party or by which it or its property is bound. The Company is not required to obtain any approval of stockholders nor any approval, consent or authorization from, or to file any declaration or statement with, any governmental instrumentality or agency in connection with or as a condition to the execution, delivery or performance of this Agreement other than the filing of Form D and any applicable state securities law filings, which filing or filings, as the case may be, will be made in accordance with applicable laws and regulations. 7 8 4.4 BINDING OBLIGATION. This Agreement has been duly executed and delivered by the Company and is the legally valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. 4.5 NON-CONTRAVENTION. To the best of its knowledge, the Company or any of its subsidiaries is not in violation or breach of or in default with respect to, complying with any material provision of any contract, agreement, instrument, lease, license, arrangement or understanding to which it is a party, and each such contract, agreement, instrument, lease, license, arrangement and understanding is in full force and effect and is the legal, valid and binding obligation of the Company enforceable as to the Company in accordance with its terms (except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability). 4.6 LITIGATION. There is no action, suit or litigation, administrative proceeding, arbitration or other proceeding to which the Company is a party or of which the Company is aware, pending or threatened in writing, which might materially and adversely affect the financial condition, proposed business, property, assets or prospects of the Company. 4.7 FINANCIAL STATEMENTS. (a) The financial statements of the Company attached hereto as Exhibit C (the "Financial Statements") have been prepared on a consistent basis for all periods presented, in accordance with the books and records of the Company, are complete and correct in all material respects, and fairly present in all material respects the consolidated financial condition of the Company as at said dates, and the results of operations for the periods stated. The books of account and other financial records of the Company have not been maintained in accordance with "Generally Accepted Accounting Principals". (b) Since the date of the most recent Financial Statements, except as set forth in Schedule 4.7(b) attached hereto, there has not been (i) any change in the assets, liabilities, financial condition or operations of the Company, except changes in the ordinary course of business which have not been, either individually or in the aggregate, materially adverse to the Company, (ii) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the properties or business of the Company or (iii) any waiver or compromise by the Company or any of its subsidiaries of a valuable right or of a material debt owed it. 4.8 THE NOTES AND THE SHARES OF COMMON STOCK UNDERLYING THE NOTES. The sale, issuance and delivery of the Notes have been duly authorized by all necessary corporate action and when issued the Notes will be the legally valid and binding obligations of the Company enforceable in accordance with their terms (except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability). The shares of Common Stock issuable upon conversion of the Notes have been duly authorized and, when issued and delivered upon conversion of the Notes, will be duly and validly issued, fully paid and non-assessable, free and clear of any restrictions on transfer (other than any restrictions under the Securities Act of 1933, as amended (the "Securities Act") and state securities 8 9 laws), and any taxes, security interests, options, warrants, purchase rights, preemptive rights, contracts, commitments, equities, claims, or demands. 4.9 SECURITIES LAW EXEMPTION. Assuming the accuracy of Purchaser's representations and warranties set forth herein, the sale of the Notes pursuant to this Agreement has been made in accordance with the provisions and requirements of the Securities Act and any applicable state law. All securities issued by the Company prior to the date hereof have been issued in transactions exempt from registration under the Securities Act and in compliance with applicable state securities or Blue Sky laws. 4.10 USE OF PROCEEDS. Except as otherwise set forth in this Agreement, the proceeds from the sale of the Notes shall be used solely in connection with the development, design and launch of an e-commerce Web site dedicated to the sale and purchase of print and on line advertising. Notwithstanding the foregoing sentence, if the entire offering which is the subject of this Agreement is subscribed to, then the Company shall use a portion of the proceeds from the offering in an amount not to exceed $500,000 to repurchase from Jeffrey Diamond all of the shares of the Company's Common Stock owned by him. Schedule 4.10 hereto sets forth the Company's best estimate as to the allocation of such proceeds. 4.11 INTELLECTUAL PROPERTY. The Company owns or has the right to use (or has access to) all trade names, trademarks, trade dress, patents, trade secrets and proprietary processes necessary for its business, as now conducted, or as proposed to be conducted, without any material conflict with or infringement of the rights of others. The Company has not received any communication alleging that the Company has violated, or by conducting its business as proposed would violate, any of the trade names, trademarks, trade dress, patents, trade secrets or other proprietary rights of any other person or entity. 4.12 TITLE TO PROPERTY AND ASSETS. The Company does not own any real property. With respect to property leased by the Company, the Company has a valid leasehold interest in such property pursuant to leases which are in full force and effect, and the Company is in compliance in all material respects with the material provisions of such leases. The Company owns or has the right to use all assets and properties necessary for the conduct of its business as presently conducted. 4.13 COMPLIANCE WITH LAWS. The Company is in compliance in all material respects with all occupational safety, health, wage and hour, employment discrimination, environmental, flammability, labeling, usury and other applicable laws which are material to its businesses, and the Company is not aware of any state of facts, events, conditions or occurrences which may now or hereafter constitute or result in a violation of any of such applicable laws, or which may give rise to the assertion of any such violation, the effect of which could have a material adverse effect on the Company's business, operations or financial condition. 4.14 LICENSES AND PERMITS. The Company has obtained or is in the process of obtaining all federal, state and local licenses and permits required to be maintained in connection with and material to its operations, and all such licenses and permits obtained are valid and in full force and effect. 4.15 DISCLOSURE. The Company's business plan delivered to the Purchaser and dated as of November 20, 1998 (the "Ad-Star Business Plan") (excluding the financial projections contained therein), this Agreement, the Schedules and Exhibits (except Exhibit D) hereto, do not, to the best of the Company's knowledge, contain any untrue statement of a material fact as of the date of such 9 10 document, or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial projections included in the Ad-Star Business Plan were prepared by the Company in good faith, and the Company believes that there exists a reasonable basis for such projections. SECTION 5. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser hereby represents and warrants to the Company, which representations and warranties shall be true and correct as of the date hereof and the Closing Date, as follows: 5.1 AUTHORIZATION OF AGREEMENT. The execution, delivery and performance of this Agreement has been duly authorized by all necessary action on the part of Purchaser, does not violate any laws or regulations applicable to Purchaser and is the valid binding and enforceable obligation of Purchaser in accordance with its terms. 5.2 NON-CONTRAVENTION. To the best of Purchaser's actual knowledge, neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (a) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which Purchaser is subject or (b) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which Purchaser is a party or by which Purchaser is bound or to which any of Purchaser's assets are subject. 5.3 ACCREDITED INVESTOR. Purchaser is an "accredited investor" as that term is defined in Rule 501(a) of the Securities Act, and the rules promulgated thereunder, and Purchaser has accurately completed a Confidential Purchaser Questionnaire, a copy of which is attached hereto as Exhibit D. 5.4 INVESTMENT. Purchaser acknowledges that this offering of Notes has not been reviewed by the United States Securities and Exchange Commission ("SEC") and that the sale of the Notes pursuant hereto is intended to be a nonpublic offering pursuant to Sections 4(2) or 3(b) of the Securities Act. Purchaser represents that the Notes are being purchased for its own account, for investment and not for distribution or resale to others. Purchaser agrees that Purchaser will not sell or otherwise transfer the Notes or the shares of the Common Stock issuable upon conversion of the Notes unless such securities, as the case may be, are registered under the Securities Act or unless an exemption from such registration is available. Purchaser understands that neither the Notes nor the shares of Common Stock issuable upon conversion of the Notes have been registered under the Securities Act and they are or will be issued pursuant to a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent as expressed herein. 5.5 ACCESS TO DATA. Purchaser has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management and the opportunity to review the Company's facilities, each to Purchaser's satisfaction. Purchaser understands that such discussions, as well as any written information issued or provided by the Company, were intended to describe the aspects of the Company's business and prospects which the Company believes to be material but were not necessarily an exhaustive description thereof. Purchaser has received from the Company all materials and information it deems necessary for it to make its investment decision with respect to the Notes offered hereby, including the Risk Factors attached hereto as Exhibit E. 10 11 5.6 SPECULATIVE NATURE OF INVESTMENT. Purchaser acknowledges that the purchase of the Notes involves a high degree of risk and that (i) proceeds from the sale of the Notes will not be adequate to fully design, develop, launch and commercialize the Company's e-commerce Web site dedicated to the sale and purchase of print and on-line advertising; (ii) the Company requires additional capital to fully design, develop, launch and commercialize the Company's e-commerce Web site dedicated to the sale and purchase of print and on-line advertising and does not have any commitment for additional funds; (iii) an investment in the Company is highly speculative and only investors who can afford the loss of their entire investment should consider investing in the Company and purchasing Notes; (iv) Purchaser may not be able to liquidate its investment; (v) transferability of the Notes and the shares of Common Stock issuable upon conversion of the Notes is extremely limited; and (vi) Purchaser could sustain the loss of its entire investment. 5.7 EXPERIENCE. Purchaser acknowledges that it has prior investment experience, including investment in non-listed and non-registered securities, or has employed the services of an investment advisor, attorney or accountant to review all of the documents furnished or made available by the Company and to evaluate the merits and risks of such an investment on Purchaser's behalf. 5.8 LACK OF LIQUIDITY. Purchaser understands that there is no public market for the Notes or the Common Stock. Purchaser further understands that even if a public market develops for any of the Company's securities, Rule 144 (the "Rule") promulgated under the Securities Act limits Purchaser's ability to sell any of the Company's securities owned by Purchaser. Purchaser acknowledges that the Company may, if it desires, permit the transfer of the Notes or shares of Common Stock issuable upon conversion of the Notes out of its name only when its request for transfer is accompanied by an opinion of counsel reasonably satisfactory to the Company that neither the sale nor the proposed transfer results in a violation of the Securities Act or any applicable state "blue sky" laws (collectively "Securities Laws"). Purchaser agrees to hold the Company and its directors, officers and controlling persons and their respective heirs, representatives, successors and assigns harmless and to indemnify them against all liabilities, costs and expenses incurred by them as a result of any misrepresentation made by Purchaser contained herein or in the confidential Purchaser Questionnaire or any sale or distribution by Purchaser in violation of any Securities Laws. Purchaser acknowledges that at such time, if ever, as any of the Notes or the shares of Common Stock issuable upon conversion of the Notes are registered, sales of such securities will be subject to state securities laws, including those of states which may require any securities sold therein to be sold through a registered broker-dealer or in reliance upon an exemption from registration. 5.9 LEGENDS; STOP TRANSFER ORDERS. Purchaser consents to the placement of a legend on the Notes and on any certificate evidencing the shares of Common Stock issuable upon conversion of the Notes as set forth in Section 6 hereof. In addition, Purchaser consents to the entrance of stop transfer orders with respect to the shares of Common Stock issuable upon conversion of the Notes. 5.10 RIGHT TO REJECT SUBSCRIPTION. Purchaser understands that the Company will review this Agreement and the Confidential Purchaser Questionnaire and is hereby given authority by the undersigned to call his banks or place of employment or otherwise review the financial standing of Purchaser; and it is further agreed that the Company reserves the unrestricted right to reject or limit any subscription and to close the offer at any time prior to the Closing Date of such subscription. 11 12 5.11 ADDRESS. Purchaser hereby represents that the address of Purchaser furnished by him at the end of this Agreement is Purchaser's principal residence if Purchaser is an individual or Purchaser's principal business address if it is a corporation or other entity. 5.12 REGISTERED REPRESENTATIVE. Purchaser acknowledges that if it is a Registered Representative of a National Association of Securities Dealers, Inc. ("NASD") member firm, it must give such firm the notice required by the NASD Conduct Rules, or any applicable successor rules of the NASD receipt of which must be acknowledged by such firm on the signature page hereof. 5.13 NO OTHER REPRESENTATIONS. Purchaser hereby represents that, except as set forth herein, no representations or warranties have been made to the Purchaser by the Company or any agent, employee or affiliate of the Company and in entering into this transaction, Purchaser is not relying on any information, other than that contained herein and the results of independent investigation by the Purchaser. 5.14 PURPOSE. If Purchaser is a partnership, corporation, trust or other entity, it was not formed for the purpose of investing in the Company. 5.15 NO BROKER. There is no firm, corporation, agency or other entity or person that is entitled to a finder's fee or any type of commission in relation to or in connection with the transactions contemplated by this Agreement as a result of any agreement or understanding with Purchaser or any of its directors, officers, employees or agents. SECTION 6. LEGENDS. 6.1. NOTES. The Notes shall be endorsed with the following legend: THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY NOT BE TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO OR (II) RECEIPT BY THE COMPANY AT THE COMPANY'S SOLE COST AND EXPENSE OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER AND THAT SUCH ISSUANCE IS NOT VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS. THIS LEGEND SHALL BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE. 6.2. COMMON STOCK. Until such time as the shares of Common Stock issuable upon conversion of the Notes are registered under the Securities Act, the Company shall instruct its transfer agent to enter stop transfer orders with respect to such shares and the certificates representing such shares shall be endorsed with the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE "BLUE SKY" OR SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD, ASSIGNED, 12 13 TRANSFERRED, PLEDGED, HYPOTHECATED, DISTRIBUTED OR OTHERWISE DISPOSED OF UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SALE OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENT IS AVAILABLE, AND IF AN EXEMPTION SHALL BE AVAILABLE, THE COMPANY RECEIVES AN OPINION OF COUNSEL AT ITS SOLE COST AND EXPENSE STATING THAT SUCH OFFER, SALE, TRANSFER, ASSIGNMENT, PLEDGE, HYPOTHECATION, DISTRIBUTION OR OTHER DISPOSITION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT. THE RESTRICTIONS CONTAINED HEREIN ARE BINDING ON THE HOLDER HEREOF AND HIS SUCCESSORS AND ASSIGNS." SECTION 7. COVENANTS OF THE COMPANY. 7.1 RESTRICTED PAYMENTS. So long as Notes in the aggregate principal amount of $500,000 or more shall be outstanding, the Company shall not make any principal payment on, or redemption, repurchase, defeasance or other acquisition or retirement for value, prior to scheduled principal payment or maturity, of any indebtedness of the Company that is pari passu with or subordinate in right of payment to the Notes or any deposit with respect to the foregoing; provided, however, that this subsection 7.1 shall not apply to (a) any principal payment or redemption of such indebtedness prior to maturity (i) pursuant to a refinancing of such indebtedness on substantially similar terms or terms more favorable to the Company, or (ii) pursuant to a conversion into, or out of proceeds of a substantially concurrent issue or sale of, Common Stock, and (b) any payments made under that certain Covenant and Agreement dated as of the date hereof between the Company and James E. Mann. 7.2 DELIVERY OF FINANCIAL STATEMENTS AND REPORTS. The Company shall deliver to each holder: (a) as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year, a balance sheet of the Company as of the end of such year, and an income statement and statement of cash flow for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with GAAP and audited and certified by an independent public accountant; (b) as soon as practicable, but in any event within forty-five (45) days after the end of each fiscal quarter, a balance sheet of the Company as of the end of such quarter, and an income statement and statement of cash flows for such quarter, each to be in reasonable detail, prepared in accordance with GAAP; (c) with respect to the balance sheet, income statement, and statement of cash flows called for in subsection (b) of this Section 7.2, an instrument executed by the Chief Financial Officer or President of the Company certifying that such financial statements were prepared in accordance with GAAP consistently applied with prior practice for earlier periods and fairly present the financial condition of the Company and its results of operations for the period specified, subject to normal year-end audit adjustment in the case of quarterly financial statements; 13 14 (d) copies of all reports sent to stockholders or filed with the Securities Exchange Commission; (e) prompt written notification of all material pending or actual litigation to which the Company is or is anticipated to be a party; and (f) such other information relating to the financial condition, business, prospects or corporate affairs of the Company as a holder of a Note may from time to time reasonably request; provided, however, that the Company shall not be obligated to provide any information that it reasonably considers to be a trade secret, the disclosure of which the Company reasonably believes may adversely affect its business. 7.3 INSPECTION; OBSERVER RIGHTS. The Company shall permit each holder of a Note or a representative of any such holder, to visit and inspect the Company's properties, to examine its books of account and records, and to discuss the Company's affairs, finances, and accounts with its officers, all at such reasonable times as may be requested by such representatives. The Company will give each holder of a Note not less than two (2) days' prior written notice of each meeting of the Board of Directors of the Company and of any other committee or group exercising responsibilities comparable to those exercised by the Board of Directors, specifying the time and place of such meeting and, to the extent then known, the matters to be discussed thereat and inviting such holder (or its representative) to attend and participate therein (without, however, the right to vote thereat in such capacity). 7.4 REGULAR COURSE OF BUSINESS. The Company will operate its business in accordance with the reasonable judgment of its management diligently and in good faith, and the Company will continue to use its reasonable efforts to keep available the services of present officers and employees (other than planned retirements) and to preserve its present relationships with persons having business dealings with it. 7.5 ASSETS. The assets, property, and rights now owned by the Company will be used, preserved, and maintained, as far as practicable, in the ordinary course of business, to the same extent and in the same condition as said assets, property, and rights are on the date of this Agreement, and no unusual or novel methods of manufacture, purchase, sale, management, or operation of said properties or business or accumulation or valuation of inventory will be made or instituted. Without the prior consent of Purchaser, the Company will not encumber any of its assets or make any commitments relating to such assets, property, or business, except in the ordinary course of its business. 7.6 TAXES. The Company shall cause all of its tax returns, schedules and filings to be timely filed and all amounts shown to be due thereon to be fully paid, including any deficiencies, penalties or other charges thereafter arising. The Company has not filed, and will not file on or before the Closing Date, any election under Section 338(h)(10) or consent under Section 341(f) of the Internal Revenue Code. 7.7 INSURANCE. The Company will continue to carry its existing insurance, subject to variation in amounts required by the ordinary operations of its business. At the request of Purchaser and at the Company's sole expense, the amount of insurance against fire and other casualties which, at the date of this agreement, the Company carries on any of its properties or in respect of its operations shall be increased by such amount or amounts as Purchaser shall specify. 14 15 7.8 NO VIOLATIONS. The Company will comply in all material respects with all statutes, laws, ordinances, rules, and regulations applicable to it in the ordinary course of business. 7.9 PUBLIC ANNOUNCEMENTS. No press release or other announcement to the employees, customers, or suppliers of the Company related to this Agreement or this purchase will be issued without the joint approval of the parties mentioned or referred to in such press release or announcement, unless required by law, in which case Purchasers and the Company will consult with each other regarding the announcement. 7.10 CORPORATE EXISTENCE. The Company shall at all times maintain its corporate existence in good standing in the jurisdiction of its formation, and shall qualify to do business in all jurisdictions in which the failure to so qualify would materially impair its ability to conduct business in such jurisdictions. The Company shall not revise, alter, or restate its articles or certificate of incorporation or bylaws without the prior written consent of a majority of the interests of the Note holders, which consent shall not be unreasonably withheld or delayed. 7.11 NOTICES OF QUALIFIED FINANCINGS. In addition to such other notices as may be required under this Agreement, the Company shall provide to each holder of a Note written notice of any transactions which shall constitute or constitute a portion of a Qualified Financing within ten (10) days following the closing of such Qualified Financing, which notice shall set forth all of the material terms of such Qualified Financing. Additionally, (i) not earlier than January 1, 2000 nor later than March 1, 2000, and (ii) not earlier than January 1, 2001 nor later than March 1, 2001, the Company shall provide written notice to each holder of a Note listing all of the Company's transactions that constitute all or any portion of a Qualified Financing through the date of such notice. 7.12 RULE 144. If the Company files a registration statement pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act") and/or pursuant to the requirements of the Securities Act, it will file all reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the Securities and Exchange Commission (the "Commission") thereunder. The Company will take such further action as Purchaser may reasonably request to the extent required from time to time to enable Purchaser to sell the shares of Common Stock issuable upon conversion of the Notes without registration under the Securities Act within the limitation of the exemptions provided by (a) Rules 144 and 144A under the Securities Act, as such Rules may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the Commission. Upon the request of Purchaser, the Company will deliver to Purchaser a written statement as to whether it has complied with such requirements. 7.13 RESERVE FOR CONVERSION OF SHARES. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, for the purpose of effecting the conversion of the Notes and otherwise complying with the terms of this Agreement, such number of its duly authorized shares of Common Stock as shall be sufficient to effect the conversion of the Notes from time to time outstanding or otherwise to comply with the terms of this Agreement. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of the Notes or otherwise to comply with the terms of this Agreement, without limitation on any remedies available to the Purchaser, the Company will forthwith take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. The Company will obtain any authorization, consent, approval or other action by or make any filing with any court or administrative body that may 15 16 be required under applicable state securities laws in connection with the issuance of shares of Common Stock upon conversion of the Notes. 7.14 TRANSACTIONS WITH AFFILIATES. Except for agreements or transactions contemplated by this Agreement or as otherwise approved by the Company's Board of Directors (which shall include approval by a majority of the directors of the Company without a direct or indirect interest in the agreement or transaction if there are disinterested directors on the Board), the Company shall not enter into any agreement or transaction with any director, officer, employee or holder of more than 5% of the outstanding capital stock of any class or series of capital stock of the Company or any of its subsidiaries, any member of the family of any such person, or any corporation, partnership, trust or other entity in which any such person, or member of the family of any such person, is a director, officer, trustee, partner or holder of more than 5% of the outstanding capital stock thereof, except for agreements or transactions (i) entered into or consummated prior to the date hereof and previously disclosed to Purchaser, (ii) which are nonmaterial and in the ordinary course of business, (iii) on customary terms related to such person's employment, or (iv) are no less favorable to the Company as would be obtainable by the Company in an arms-length transaction with an independent third party. For purposes hereof, an agreement or transaction shall be deemed to be nonmaterial if it and all other agreements or transactions (excluding, for this purpose, compensation under agreements relating to employment and other compensation arrangements approved by the Company's Board of Directors) between the Company and the person or entity in question during the fiscal year do not involve an amount in excess of $20,000. SECTION 8. PURCHASER COVENANTS. 8.1 SUBORDINATION. Purchaser covenants and agrees, in the event the Company incurs any indebtedness in favor of any bank, savings and loan association, SBIC, life insurance company or other institutional lender, which indebtedness is senior in right of payment to the Notes (the "Senior Debt"), to execute and deliver, promptly upon receipt of the written request of the Company, such agreements and instruments in such form as shall be reasonably required by the holder of such Senior Debt, provided however that Purchaser shall not be required to modify the material terms of its Notes, including without limitation, the payment terms or the conversion rights. 8.2 CONFIDENTIALITY. Purchaser covenants and agrees that none of Purchaser, its agents and representatives will use for their own benefit, convey or disclose to any third party any information provided by the Company concerning its current or proposed business, operations and financial condition, other than information which is already publicly available and to the extent required by law. SECTION 9. RIGHT OF FIRST OFFER. Subject to the terms and conditions of this Section 9, and except for any securities offered pursuant to this offering or in a Qualified Public Offering, the Company hereby grants to Purchaser a right of first offer with respect to future sales by the Company of its Common Stock or securities convertible into or exercisable for any shares of its Common Stock (such Common Stock or securities, the "Applicable Securities"). In the event Company proposes a sale of Applicable Securities, the Company shall first make an offering of such Applicable Securities to each Purchaser in accordance with the following provisions: (a) the Company shall deliver a written notice (the "First-Offer Notice") to each Purchaser stating (i) the Company's bona fide intention to offer such Applicable Securities, (ii) the 16 17 number of shares of such Applicable Securities to be offered, and (iii) the price for which it proposes to offer such Applicable Securities; (b) within ten (10) calendar days after mailing of the Notice, Purchasers may elect to purchase, at the price and on the terms specified in the First-Offer Notice, Applicable Securities having an aggregate purchase price of up to 150% of the principal amount of the Notes held by Purchasers; (c) the Company may, during the 120-day period following the expiration of the ten (10) day period provided in Section 9(b) hereof, offer any Applicable Securities which have not been subscribed for pursuant to Section 9(b) hereof to any person or entity at a price not less than, and upon terms no more favorable to the offeree than, those specified in the First-Offer Notice. If the Company does not consummate the proposed sale of the Applicable Securities within such period, the right provided hereunder shall be deemed revived and such Applicable Securities shall not be offered unless first reoffered to holders of the Notes in accordance herewith. (d) Notwithstanding any other provision herein, the right of first offer pursuant to this Section 9 shall not apply (i) to the issuance of up to 15.79 shares of Common Stock (or rights or options therefor) (adjusted to reflect subsequent stock splits, stock dividends or stock distributions) issued after the date hereof to employees, officers, directors, or consultants of the Company (either directly or pursuant to a stock option plan or restricted stock plan approved by the shareholders and directors of the Company); (ii) to shares issued or issuable by the Company in connection with any merger or reorganization transaction in which the Company is the surviving company, or (iii) to the Qualified Public Offering. 10. REGISTRATION RIGHTS. 10.1 "PIGGY-BACK" REGISTRATIONS. If at any time the Company shall determine to register for its own account or the account of others under the Securities Act any of its equity securities, it shall send to each holder of Registrable Shares (as defined below), including each holder who has the right to acquire Registrable Shares, written notice of such determination and, if within twenty (20) days after receipt of such notice, such holder shall so request in writing, the Company shall include in such registration statement all or any part of the Registrable Shares such holder requests to be registered. Nothing herein shall be construed so as to require the Company, in connection with any proposed offering, to engage the services of an underwriter under this Section 10.1 as, for example, if the Company shall file a registration statement under Rule 415 of the Securities Act without the services or engagement of any underwriter. "REGISTRABLE SHARES" shall consist of any and all shares of Common Stock held by the Purchasers issued or issuable upon conversion of the Notes. If, in connection with any offering involving an underwriting of Common Stock to be issued by the Company, the managing underwriter shall impose a limitation on the number of shares of such Common Stock which may be included in the registration statement because, in its judgment, such limitation is necessary to effect an orderly public distribution, then the Company shall be obligated to include in such registration statement only such limited portion, if any, of the Registrable Shares with respect to which such holder has requested inclusion hereunder; provided, however, that the Company shall not so exclude any Registrable Shares unless it has first excluded any securities to be offered and sold by officers and employees of the Company and any securities to be offered and sold by holders 17 18 who do not have contractual rights to include such securities in such registration prior to or pari passu with the holders of Registrable Shares. Any exclusion of Registrable Shares shall be made pro rata among the holders of Registrable Shares seeking to include such shares, in proportion to the number of such shares held by each such holder. No rights or restrictions under this Section 10.1 shall be construed to limit, and shall not apply to any registration required under Section 10.2. The obligations of the Company under this Section 10.1 may be waived at any time upon the written consent of both (i) holders of a majority of the Registrable Shares then outstanding and (ii) each holder of 10% or more of the Registrable Shares then outstanding. This Section 10.1 shall not apply to a registration of shares of Common Stock in an initial public offering or on Form S-8 or Form S-4 or their then equivalents relating to an offering of shares of Common Stock in an initial public offering or to be issued solely in connection with any acquisition of any entity or business or otherwise issuable in connection with any stock option or employee benefit plan. 10.2 DEMAND REGISTRATION. Commencing upon the consummation of an IPO (but not within the period covered by a lock-up agreement (the "Lock-Up Agreement") in such form and containing such terms as shall be required by any underwriter in connection with any public offering of securities of the Company), if on any occasion one or more holders of Registrable Shares shall notify the Company in writing that it or they intend to offer or cause to be offered for public sale Registrable shares having an anticipated aggregate offering price of at least $4 million, the Company will so notify all holders of Registrable Shares, including all holders who have a right to acquire Registrable Shares. Upon written request of any holder given within twenty (20) days after the receipt by such holder from the Company of such notification, the Company will use its best efforts to cause such of the Registrable Shares as may be requested by any holder thereof (including the holder or holders giving the initial notice of intent to offer) to be registered under the Securities Act in an underwritten offering with an underwriter reasonably acceptable to the Company as expeditiously as possible. The Company shall not be required to effect more than one (1) registration pursuant to this Section 10.2, provided, however, that the Company shall not be required to register any shares under this Section 10.2 or Section 10.3 below, if, and only to the extent, a Purchaser could dispose of such shares, at the time of such demand, under Rule 144. If the Company determines to include shares to be sold by it or by other selling shareholders in any registration request pursuant to this Section 10.2, such registration shall be deemed to have been a "piggy back" registration under Section 10.1, and not a "demand" registration under this Section 10.2 if the holders of Registrable Shares are unable to include in any such registration statement at least seventy-five percent (75%) of the Registrable Shares initially requested for inclusion in such registration statement. The holders of Registrable Shares to be registered in a registered public offering pursuant to this Section 10.2 shall have the right to select the managing underwriter(s) for such offering. If, in connection with any offering involving an underwriting of Common Stock to be issued by the Company, the managing underwriter shall impose a limitation on the number of shares of such Common Stock which may be included in the registration statement because, in its judgment, such limitation is necessary to effect an orderly public distribution, then the Company shall be obliged to include in such registration statement only such limited portion of the Registrable Shares with respect to which such holder has requested inclusion hereunder; provided, however, that the Company shall not so exclude any Registrable Shares unless it has first excluded any securities to be offered and sold by 18 19 officers and employees of the Company or by holders who do not have contractual rights to include such securities in such registration prior to or pari passu with the holders of Registrable Shares. 10.3 REGISTRATIONS ON FORM S-3. In addition to the rights provided the holder of Registrable Shares in Section 10.1 and 10.2 above, if the registration of Registrable Shares under the Securities Act can be effected on Form S-3 (or any similar form having similar requirements promulgated by the Commission), then upon the written request of one or more holders of at least a majority of the Registrable Shares, the Company will so notify each holder of Registrable Shares, including each holder who has a right to acquire Registrable Shares, and then shall use its best efforts to effect, as expeditiously as possible, qualification and registration under the Securities Act on Form S-3 of all or such portion of the Registrable Shares as the holder or holders shall specify. The Company's obligations under this Section 10.3 shall expire eight years after an IPO. Any offering of Registrable Shares pursuant to this Section 10.3 shall have a minimum market value (valued at the public offering price of the Company's securities as of the effective date of the registration statement for such Offering) of at least $4 million of the securities so registered. 10.4 EFFECTIVENESS. The Company will use its best efforts to maintain the effectiveness for at least 90 days (or such shorter period of time as the underwriters need to complete the distribution of the registered offering in any Company primary offering, or nine (9) months in the case of a "SHELF" registration statement on Form S-3 pursuant to Section 10.2 or 10.3) of any registration statement pursuant to which any of the Registrable Shares are being offered, and from time to time within such period will amend or supplement such registration statement and the prospectus contained therein to the extent necessary to comply with the Securities Act and any applicable state securities statute or regulation. The Company will also provide each holder of Registrable Shares with as many copies of the prospectus contained in any such registration statement as it may reasonably request. 10.5 INDEMNIFICATION OF HOLDER OF REGISTRABLE SHARES. In the event that the Company registers any offering of the Registrable Shares under the Securities Act, to the extent permitted by law, except as hereinafter provided, the Company will indemnify and hold harmless each holder and each underwriter of the Registrable Shares (including their officers, directors, affiliates and partners) so registered (including any broker or dealer through whom such shares may be sold) and each person, if any, who controls such holder or any such underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages, expenses or liabilities, joint or several, to which they or any of them become subject under the Securities Act, applicable state securities laws or under any other statute or at common law or otherwise, as incurred, and, except as hereinafter provided, will reimburse each such holder, each such underwriter and each such controlling person, if any, for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement under which such Registrable Shares were registered under the Securities Act, in any preliminary or amended preliminary prospectus or in the final prospectus (or the registration statement or prospectus as from time to time amended or supplemented by the Company), 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 in order to make the statements therein, in the light of the circumstances in which they were made, not misleading, or any violation by the Company of any rule or regulation promulgated 19 20 under the Securities Act or any state securities laws applicable to the Company and relating to action or inaction required of the Company in connection with such registered offering. Notwithstanding the foregoing, the Company shall have no obligation to indemnify any such holder, underwriter or controlling person if: (i) such untrue statement or alleged untrue statement or omission or alleged omission was made in such registration statement, preliminary or amended preliminary prospectus or final prospectus in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by such holder of Registrable Shares (in the case of indemnification of such holder), such underwriter (in the case of indemnification of such underwriter), or such controlling person (in the case of indemnification of such controlling person) expressly for use therein, or (ii) in the case of a sale directly by such holder of Registrable Shares (including a sale of such Registrable Shares through any underwriter retained by such holder of Registrable Shares to engage in a distribution solely on behalf of such holder of Registrable Shares), such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus copies of which were delivered to such holder of Registrable Shares or such underwriter on a timely basis, and such holder of Registrable Shares failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the Registrable Shares to the person asserting any such loss, claim, damage or liability in any case where such delivery is required by the Securities Act. The indemnity provided in this Section 10.5 shall survive the transfer of any Registrable Shares by such holder or any termination of this Agreement. 10.6 INDEMNIFICATION OF COMPANY. In the event that the Company registers any offering of Registrable Shares under the Securities Act, to the extent permitted by law, each holder of the Registrable Shares so registered will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed or otherwise participated in the preparation of the registration statement, each underwriter of the Registrable Shares (including their officers, directors, affiliates and partners) so registered (including any broker or dealer through whom such of the shares may be sold) and each person, if any, who controls the Company or any such underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages, expenses or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, applicable state securities laws or under any other statute or at common law or otherwise, and, except as hereinafter provided, will reimburse the Company and each such director, officer, underwriter or controlling person for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions whether or not resulting in any liability, insofar as such losses, claims, damages, expenses liabilities or actions, arise out of or are based upon any untrue statement of a material fact contained in the registration statement under which such Registrable Shares were registered under the Securities Act, in any preliminary or amended preliminary prospectus or in the final prospectus (or in the registration statement or prospectus as from time to time amended or supplemented), or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading, but only to the extent that any such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by such holder of Registrable Shares expressly for use therein; provided, however, that such holders' obligations hereunder shall be limited to an amount equal to the proceeds received by such holder of Registrable Shares sold in any such registered offering. 20 21 10.7 INDEMNIFICATION PROCEDURES AND CONTRIBUTION. (a) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any action or proceeding (including any governmental investigation) shall be brought or asserted against any person entitled to indemnification under Sections 10.5 or 10.6 above (an "Indemnified Party") in respect of which indemnity may be sought from any party required by the terms hereof to provide such indemnification (an "Indemnifying Party") the Indemnifying Party shall assume the defense thereof, including the employment of counsel selected by the Indemnifying Party and reasonably satisfactory to such Indemnified Party, and shall assume the payment of all expenses. Such Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the Indemnifying Party has agreed to pay such fees and expenses or (ii) the named parties to any such action or proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that there may be a conflict of interest on the part of counsel employed by the Indemnifying Party to represent such Indemnified Party, or that there may be defenses available to the Indemnified Party that are different from or in addition to those available to the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party (which counsel shall be reasonably satisfactory to the Indemnifying Party), the Indemnifying Party shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Party; it being understood, however, that the Indemnifying Party shall not, in connection with any one such action or proceeding or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, it shall be liable for the fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for all such Indemnified Parties, which firm shall be designated in writing by such Indemnified Parties). The Indemnifying Party shall not be liable for any settlement of any such action or proceeding effected without its written consent, but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action or proceeding, the Indemnifying Party shall indemnify and hold harmless such Indemnified Parties from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. (b) CONTRIBUTION. In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which the Company or any holder of Registrable Shares exercising its rights under this Section 10, makes a claim for indemnification pursuant to Section 10.5 or 10.6, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding that Section 10.5 or 10,6 provides for indemnification, then in such case, the Company and such holder of Registrable Shares will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and of the holder of Registrable Shares on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations or, if the allocation provided herein is not permitted by applicable law, in such proportion as shall be appropriate to reflect the relative benefits received by the Company and any holder of Registrable Shares from the offering of the securities covered by such registration statement. The relative fault of the Company on the one hand and of the holder of Registrable Shares on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement or a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or by 21 22 the holder of Registrable Shares on the other, and each party's relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, however, that, in any such case, (A) no such holder of Registrable Shares will be required to contribute any amount in, excess of the lesser of (1) the amount for which such holder would have been liable pursuant to Section 10.6 if the indemnification provided for therein Were enforceable in accordance with the terms thereof and (2) the proceeds received by such holder of Registrable Shares offered by it pursuant to such registration statement, and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act.) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation, 10.8 EXCHANGE ACT REGISTRATION. The Company shall timely file with the Commission such information as the Commission may require under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"); and in such event, the Company shall use its best efforts to take all action pursuant to Rule 144(c) as may be required as a condition to the availability of Rule 144 or Rule 144A under the Securities Act (or any successor exemptive rule hereinafter in effect) with respect to the Common Stock. The Company shall furnish to any holder of Registrable Shares forthwith upon request (i) a written statement by the Company as to its compliance with the reporting requirements of Rule 144(c), (ii) a copy of the most recent annual or quarterly report of the Company as filed with the Commission, and (iii) such other publicly filed reports and documents as a holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a holder to sell any such Registrable Shares without registration. The Company agrees to use its best efforts to facilitate and expedite transfers of Registrable Shares pursuant to Rule 144 under the Securities Act, which efforts shall include timely notice to its transfer agent to expedite such transfers of Registrable Shares and timely filing of all reports required to be filed with the Commission within any applicable time period (such as Form 10-K, Form 10-Q and Form 8-K). 10.9 DAMAGES. The Company recognizes and agrees that the holder of Registrable Shares will not have an adequate remedy if the Company fails to comply with this Section 10 and that damages may not be readily ascertainable, and the Company expressly agrees that, in the event of such failure, it shall not oppose an application by the holder of Registrable Shares or any other person entitled to the benefits of this Section 10 requiring specific performance of any and all provisions hereof or enjoining the Company from continuing to commit any such breach of this Section 10. 10.10 FURTHER OBLIGATIONS OF THE COMPANY. Whenever under the preceding Sections of this Section 10, the Company is required hereunder to register an offering of Registrable Shares, it agrees that it shall also do the following: (a) Furnish to each selling holder such copies of each preliminary and final prospectus and such other documents as said holder may reasonably request to facilitate the public offering of its Registrable Shares; (b) Use its best efforts to register or qualify the Registrable Shares covered by said registration statement under the applicable securities or Blue Sky laws of such jurisdictions as any selling holder may reasonably request; provided, however, that the Company shall not be obligated to qualify to do business in any jurisdictions where it is not then so qualified or to take any action which would subject it to local taxation or the service of process in suits other than those arising out of the offer or sale of the securities covered by the registration statement in any jurisdiction where it is not then so subject or to conform the composition of its assets at the time to the securities or Blue Sky laws of any jurisdiction; 22 23 (c) Furnish to each selling holder a signed counterpart addressed to the selling holders, of (i) an opinion of counsel for the Company, dated the effective date of the registration statement, and (ii) "comfort" letters signed by the Company's independent public accountants who have examined and reported on the Company's financial statements included in the registration statement, to the extent permitted by the standards of the American Institute of Certified Public Accountants, covering substantially the same matters with respect to the registration statement (and the prospectus included therein) and (in the case of the accountants' "comfort" letters) with respect to events subsequent to the date of the financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' "comfort" letters delivered to the underwriters in underwritten public offerings of securities, but the Company shall be obligated hereunder only to the extent that the Company is required to deliver or cause the delivery of such opinion or comfort" letters to the underwriters in an underwritten public offering of securities; (d) Permit each selling holder of Registrable Shares or his counsel or other representatives to inspect and copy such corporate documents and records as may reasonably be requested by them after reasonable advance notice and without undue interference with the operation of the Company's business; (e) Furnish to each selling holder of Registrable Shares a copy of all documents filed with and all correspondence from or to the Commission in connection with any such offering of securities; (f) Use its best efforts to ensure the obtaining of all necessary approvals from the National Association of Securities Dealers, Inc.; and (g) Otherwise use its best efforts to comply with all applicable rules and regulations of the Commission. Whenever under the preceding Sections of this Section 10 the holders of Registrable Shares are registering such shares pursuant to any registration statement, each such holder agrees to (i) timely provide to the Company, at its request, such written information and materials as it may reasonably request in order to effect the registration of such Registrable Shares and (ii) convert (if such conversion is not otherwise automatic) the Notes to be included in any registration statement for shares of Common Stock, such conversion to be effective at the closing of such offering pursuant to such registration statement. 10.11 EXPENSES. The Company shall pay the Registration Expenses (as defined below) for registrations requested by any holders of Registrable Shares pursuant to Sections 10.1, 10.2 or 10.3 hereof. Unless a registration pursuant to Section 10.2 is withdrawn at the request of the holders of Registrable Shares requesting it (other than as a result of information concerning the business or financial condition of the Company that is made known to such holders after the date on which such registration was requested) or if the holders of a majority of the Registrable Shares requested to be included in such registration elect not to have such registration counted as a registration requested under Section 10.2, in which event the requesting holders of Registrable Shares shall pay the 23 24 Registration Expenses of such registration pro rata in accordance with the number of their Registrable Shares which were to have been included in such registration. For purposes of this Section, the term "REGISTRATION EXPENSES" shall mean all expense incurred by the Company in complying with Section 10 of this Agreement, including, without limitation, all registration and filing fees, exchange listing fees, printing expenses, fees and disbursements of counsel for the Company and one counsel for the selling holders of Registrable Shares, out-of-pocket expenses of the Company and the underwriters, state Blue Sky fees and expenses, and the expense of any special audits incidental to or required by any such registration, but excluding underwriting discount and selling commissions relating to the Registrable Shares and fees of more than one counsel for the selling holders of Registrable Shares. Such underwriting discounts and selling commissions shall be borne pro rata by the selling holders of Registrable Shares in accordance with the number of their Registrable Shares included in such registration. 10.12 TRANSFERABILITY AND EXPIRATION OF REGISTRATION RIGHTS. For all purposes of this Agreement, the "HOLDERS OF Registrable SHARES" shall include each Purchaser, and, in addition, any direct or indirect assignee or transferee of the Registrable Shares, who acquires (through an acquisition of the Notes or other convertible securities of the Company Registrable Shares originally purchased by such Purchaser pursuant to this Agreement. With respect to any Registrable Shares held by any transferee or assignee referred to in the preceding paragraph, the registration rights set forth in Section 10.1 of this Agreement shall terminate and expire when any such transferee or assignee holds less than one percent (1.0%) of the outstanding Common Stock (calculated assuming conversion of any series of the Company's preferred stock), or such transferee or assignee is otherwise eligible to sell to the public such Registrable Shares pursuant to any of the provisions of Rule 144(k) under the Securities Act. 10.13 "LOCK-UP" AND MARKET STANDSTILL. Each holder of Registrable Shares agrees that in the event the Company proposes to offer for sale to the public any or its equity securities pursuant to a registration statement under the Securities Act (whether for its own account or the account of other), including the holders of Registrable Shares), and (1) if requested in writing by the Company and an underwriter of the proposed offering of Common Stock or other securities of the Company; and (2) if all other "affiliates" and all five percent (5%) stockholders, directors, officers and other key management personnel similarly situated are requested by the Company and such underwriter to sign, and actually do sign, any "Lock-Up" Agreement" (as described herein), that such holder will not sell, grant any option or right to buy or sell, or otherwise transfer or dispose of in any manner, to the public in open market transactions, any Common Stock or other equity securities of the Company held by it during whatever time period is requested by the Company and the underwriter for restrictions on trading or transfer in connection with any public offering of the Company's equity securities (the "LOCK-UP PERIOD"). The Company agrees that it will cause Eli Rousso, Leslie F. Bernhard, and/or all other officers, directors, and holders of five percent (5%) or more of the Company's Common Stock, to sign a Lock-Up Agreement upon substantially similar terms and conditions in the event of a registration effected pursuant to Section 10.2 or 10.3 hereof. Such agreements shall be in writing and in form and substance pursuant to customary and prevailing terms and conditions for such Lock-Up Agreements. The Company may impose stop-transfer instructions with respect to the securities subject to the foregoing restrictions until the end of the Lock-Up Period. 10.14 DELAY OF REGISTRATION. For a period not to exceed 90 days (subject to the last paragraph of this Section 10.14), the Company shall not be obligated to prepare and file, or be prevented from delaying or abandoning, a registration statement pursuant to this Agreement at any time 24 25 when the Company, in its good faith judgment by the Board of Directors with the advice of counsel, reasonably believes: (a) that the filing thereof at the time requested, or the offering of Registrable Shares pursuant thereto, would materially and adversely affect (a) a pending or scheduled public offering or private placement of the Company's securities, (b) an acquisition, merger, consolidation or similar transaction by or of the Company, (c) pre-existing and continuing negotiations, discussions or pending proposals with respect to any of the foregoing transactions, or (d) the financial condition of the Company in view of the disclosure of any pending or threatened litigation, claim, assessment or governmental investigation which may be required thereby; and (b) that the failure to disclose any material information with respect to the foregoing would cause a violation of the Securities Act or the Exchange Act. If the Company defers or delays the filing of a registration statement or the offering of Registrable Shares or if the Company abandons a registration statement pursuant to this Section 10.14, then such deferral, delay or abandonment right shall exist only so long as the condition giving rise to such right exists. If the Company chooses to abandon a registration statement pursuant to, and in accordance with, this Section 10.14 then such registration shall not be deemed to be a "demand" registration under Section 10.2 10.15 FUTURE INVESTORS. If subsequent to the date hereof, the Company grants to holders or prospective holders of its securities registration rights that are more favorable than the terms or provisions of this Section 10 are to the holders of Registrable Shares, this Section 10 shall be deemed to be automatically amended (without the necessity of any action on the part of the Company or the parties hereto) to grant to the holders of Registrable Shares such more favorable registration rights, in addition to those other rights set forth herein. 10.16 INFORMATION BY HOLDER. Each holder of Registrable Shares included in any registration pursuant to this Section 10 shall furnish to the Company such information regarding such holder and the distribution proposed by such holder as the Company may request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement. 10.17 CONFLICT. In the event of a conflict between the provisions of this Section 9 and an underwriting agreement entered into by the Company and the holder(s) of Registrable Shares included in a registration pursuant to this Section 10, the provisions of such underwriting agreement shall control. 10.18 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations warranties covenants, promises and agreements contained in this Section 10 shall survive and remain in full force and effect after the Closing Date . SECTION 11. GENERAL PROVISIONS. 11.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS, AND agreements. The representations, warranties, covenants and agreements contained in this Agreement shall survive the execution of this Agreement. 25 26 11.2 NOTICES. All notices, requests, demands and other communications which are required to be or may be given under this Agreement to any party by any of the other parties shall be in writing and shall be deemed to have been duly given when (a) delivered in person, (b) the day following dispatch by a nationally recognized overnight courier service (such as Federal Express or UPS, etc.) for next day delivery or (c) five (5) days after dispatch by certified or registered first class mail, postage prepaid, return receipt requested, to the party to whom the same is so given or made. Any notice or other communication given hereunder shall be addressed to the Company, at its principal offices as set forth above or to the Purchaser at his address indicated on the signature page hereto. 11.3 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. 11.4 HEADINGS. All headings are inserted for convenience of reference only and shall not affect the meaning or interpretation of any such provisions or of this Agreement, taken as an entirety. 11.5 SEVERABILITY. If and to the extent that any court of competent jurisdiction holds any provision (or any part thereof) of this Agreement to be invalid or unenforceable, such holding shall in no way affect the validity of the remainder of this Agreement. 11.6 CHANGES, WAIVERS, ETC. Subject to Section 11.11, neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but rather may only be changed by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. It is agreed that a waiver by either party of a breach of any provision of this Agreement shall not operate, or be construed, as a waiver of any subsequent breach by that same party. 11.7 EXPENSES. The Company shall pay all reasonable costs, fees and expenses of the Purchasers in connection with the preparation of this Agreement and any other documents or certificates executed concurrently herewith and the closing of the transactions contemplated hereby. 11.8 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. The parties hereby agree that any dispute which may arise between them arising out of or in connection with this subscription Agreement shall be adjudicated before a court located in Los Angeles, California and they hereby submit to the exclusive jurisdiction of the courts of the State of California located in Los Angeles, California and of the federal courts in the Central District of California with respect to any action or legal proceeding commenced by any party, and irrevocably waive any objection they now or hereafter may have respecting the venue of any such action or proceeding brought in such a court or respecting the fact that such court is an inconvenient forum, relating to or arising out of this Subscription Agreement or any acts or omissions relating to the sale of the securities hereunder, and consent to the service of process in any such action or legal proceeding by means of registered or certified mail, return receipt requested, in care of the address set forth below or such other address as the undersigned shall furnish in writing to the other. 11.9 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, legal representatives and assigns. 26 27 11.10 INDEMNIFICATION. The Company agrees to indemnify and hold harmless the Purchasers and their affiliates, and their respective partners, officers, directors, representatives, employees and agents from and against all losses, claims, damages and liabilities in connection with or arising out of this Agreement or the Stockholders Agreement or the transactions contemplated hereby or thereby or in connection with or arising out of any litigation, investigation or proceeding initiated or brought by any third party (other than any affiliate, partner, officer, director, agent, employee or representative of a Purchaser) relating hereto or thereto, and to reimburse upon demand each of such indemnifiable parties currently and from time to time for any reasonable legal or other expenses incurred in connection with investigating or defending any of the foregoing; provided that the foregoing indemnity shall not apply to any losses, claims, damages, liabilities or related expenses to the extent a court of competent jurisdiction shall have determined in a final judgment that is not subject to further appeal that the foregoing shall have resulted primarily and directly from the willful misconduct or gross negligence of such indemnifiable party. 11.11 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding between the parties as to the subject mater thereof and incorporates and supersedes all prior discussions, agreements and understandings of any and every nature among them. 11.12 FURTHER ASSURANCES. The parties agree to execute and deliver all such further documents, agreements and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent of this Agreement. 11.13 WAIVERS AND AMENDMENTS. With the written consent of holders then holding a majority of the outstanding principal amount of the Notes, the obligations of the Company under this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), and with the same consent the Company may enter into a supplementary agreement for the purpose of adding any provisions to this Agreement or to any supplemental agreement or modifying in any manner the rights and obligations of the holders of the Notes and of the Company; provided, however, that no such waiver or supplemental agreement shall reduce the aforesaid percentage of holders of the Notes who are required to consent to any waiver or supplemental agreement without the consent of all of the holders of the Notes. Notwithstanding anything to the contrary above, the payment of interest, time of payment of interest, the interest rate payable, payment of principal and time of payment of principal on the Notes may not be changed without the written consent of holders then holding at least 80% of the outstanding principal amount of the Notes, and this provision may not be waived or amended without the written consent of holders then holding at least 80% of the outstanding principal amount of the Notes. Written notice of any such waiver, consent or agreement of amendment, modification or supplement shall be given by the Company to holders of the Notes who have not previously consented thereto in writing. 11.13 SUCCESSORS AND ASSIGNS. The terms and conditions of this Subscription Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Subscription Agreement, except as expressly provided in this Subscription Agreement. Neither this Subscription Agreement, nor its rights and obligations hereunder can be assigned by the Company, and any such attempted assignment will be void. 27 28 IN WITNESS WHEREOF, the parties have executed this Subscription Agreement as of the day and year first above written. - ---------------------------------------------- -------------------------------- Signature of Purchaser - ---------------------------------------------- -------------------------------- Name of Purchaser - ---------------------------------------------- -------------------------------- Address of Purchaser - ---------------------------------------------- -------------------------------- Social Security or Taxpayer Identification Number of Purchaser - ---------------------------------------------- -------------------------------- Principal Amount of Notes Being Subscribed For Purchase Price *IF SUBSCRIBER IS A REGISTERED REPRESENTATIVE WITH AN NASD MEMBER FIRM, HAVE THE FOLLOWING ACKNOWLEDGEMENT SIGNED BY THE APPROPRIATE PARTY: The undersigned NASD member firm acknowledges receipt of the notice required by Rule 3050 of the NASD Subscription Accepted: Conduct Rules. AD-STAR SERVICES, INC. - ---------------------------------------- Name of NASD Member Firm By: ---------------------------- By Date: ------------------------------------- -------------------------- Authorized Officer 28 29 EXHIBIT A FORM OF 12% CONVERTIBLE SUBORDINATED UNSECURED NOTE 29 EX-10.14 19 FORM OF CONVERTIBLE SUBORDINATED NOTE 1 THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY NOT BE TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO OR (II) RECEIPT BY THE COMPANY AT THE COMPANY'S SOLE COST AND EXPENSE OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER AND THAT SUCH ISSUANCE IS NOT IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS. THIS LEGEND SHALL BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE. THE SHARES REPRESENTED BY THIS CERTIFICATE OR FOR WHICH THIS CERTIFICATE OR INSTRUMENT IS EXERCISABLE OR INTO WHICH THIS CERTIFICATE OR INSTRUMENT IS CONVERTIBLE ARE SUBJECT TO ALL OF THE TERMS AND CONDITIONS OF A SHAREHOLDERS' AGREEMENT DATED AS OF MARCH 22,1999, A COPY OF WHICH IS ON FILE AT THE EXECUTIVE OFFICES OF THE COMPANY. THIS NOTE IS SUBJECT TO THE TERMS OF A SUBSCRIPTION AGREEMENT, DATED AS OF MARCH __, 1999, A COPY OF WHICH IS ON FILE AT THE EXECUTIVE OFFICES OF THE COMPANY. AD-STAR SERVICES, INC. 12% CONVERTIBLE SUBORDINATED UNSECURED PROMISSORY NOTE $50,000 March 22, 1999 Marina del Rey, California FOR VALUE RECEIVED, AD-STAR SERVICES, INC., a New York corporation (the "Company" or "Maker") with its principal executive office at 4553 Glencoe Avenue, Marina del Rey. California 90292, promises to pay to Rolling Oaks Enterprises, LLC, a Delaware limited liability company (the "Payee" or the "holder of this Note"), having an address at 1501 Main Street, Suite 201, Venice, California 90291, the principal amount of FIFTY THOUSAND DOLLARS ($50,000.00), in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, or such other form as shall be acceptable by the Payee in its sole and absolute discretion together with interest as set forth in Section 1 of this Note at such times and in such amounts as set forth in Section 2 of this Note, at Payee's address designated above or at such other place as the Payee shall have notified the Company in writing at least five (5) days before such payment is due. This Note is one of a series of similar notes in the aggregate principal amount of up to $1.5 million (collectively referred to as the "Notes") issued pursuant to a Subscription Agreement between the Company and the Purchasers (as therein defined), dated as of March __, 1999 (the "Agreement"), a copy of which is available for inspection at the Company's principal office. This Note is entitled to the benefit of certain terms, conditions, covenants and agreements contained in the Agreement. Unless otherwise specifically provided herein to the contrary, capitalized terms used herein shall have the same meaning ascribed to such terms in the Agreement. 2 1. Interest. A. Except as otherwise provided in Section 1B hereof or in Section 2 of the Agreement, interest on the principal amount hereof shall accrue at the rate of 12% per annum (the "Basic Rate") from the date hereof until paid in full. B. If an Event of Default (as defined in the Agreement) shall have occurred and shall continue while this Note is outstanding, interest on the unpaid principal balance of this Note shall accrue at a rate equal to the lesser of (i) 18% or (ii) the maximum rate permitted by law (such rate is hereinafter referred to as the "Default Rate"). C. Interest as aforesaid shall be calculated on the basis of actual number of days elapsed over a year of 360 days. 2. Payments. A. Except as otherwise provided in Section 2.B hereof or Section 2 of the Agreement, accrued interest on this Note shall be payable annually, in arrears, in immediately available funds, on the date which is the anniversary date hereof. B. If the Election (as described in Section 2 of the Agreement) is made with respect to this Note, the entire principal balance of this Note, together with the accrued but unpaid interest thereon computed at the Basic Rate, shall be paid in 47 equal monthly installments commencing June 1, 2000. C. If the Election is not made with respect to this Note and the Company does not complete a Qualified Financing (as defined in the Agreement), the entire then outstanding principal balance of this Note on or before March 31, 2001, together with the accrued but unpaid interest thereon computed at the Basic Rate, shall be paid in 35 equal monthly installments commencing June 1, 2001. 3. Maturity; Acceleration; Prepayment. A. Except as otherwise provided in Section 3.B hereof, the entire unpaid principal amount of this Note and all accrued but unpaid interest thereon shall be due and payable on April 1, 2004. B. The entire unpaid principal amount of this Note, together with all accrued and unpaid interest thereon, shall become immediately due and payable upon the occurrence of an Event of Default. C. Upon thirty (30) days' prior written notice to Payee, the principal balance of this Note may be prepaid in whole or in part at any time without premium or penalty, provided, however, that, if an Election has not been made with respect to this Note, Payee may, within such thirty (30) day period, convert this Note pursuant to Section 4 hereof. 4. Conversion. The principal amount of this Note and the accrued but unpaid interest thereon shall be convertible into shares of the Company's Common Stock upon the terms and conditions set forth in the Agreement. 2 3 5. Security. This Note is an unsecured obligation of the Company. 6. Subordination. The Company, for itself, its successors and assigns, covenants and agrees, and the Payee and each successive holder of this Note, by its acceptance of this Note, likewise covenants and agrees (expressly for the benefit of the present and future holders of the Senior Debt, as hereinafter defined), that the payment of principal of, and interest on, this Note is hereby expressly subordinated, in right of payment to the prior payment in full of the principal of, premium (if any) and interest on, all Senior Debt of the Company and its subsidiaries whether outstanding on the date hereof or hereafter incurred or created. "Senior Debt" means, collectively, (a) all Indebtedness for Borrowed Money (and all renewals, extensions, refundings, amendments and modifications of any such Indebtedness for Borrowed Money) and (b) all payment obligations of the Company pursuant to any capitalized leases entered into by the Company after the date of this Note, unless by the terms of the instrument creating or evidencing any such indebtedness it is expressly provided that such indebtedness is not superior in right of payment to this Note. "Indebtedness for Borrowed Money" means (i) all payment obligations of the Company or any of its subsidiaries to any bank, insurance company, finance company or other institutional lender, in respect of extensions of credit to the Company (or to a wholly owned subsidiary of the Company to the extent such obligations are guaranteed by the Company pursuant to a written guarantee executed by the appropriate officers of the Company) and (ii) all obligations, contingent or otherwise, relative to the face amount of all letters of credit, whether or not drawn, and banker's acceptances, in each case issued for the account of the Company (other than such as may be for the benefit of an affiliate of the Company). The provisions of this Section 6 are not for the benefit of the Company, but are solely for the purpose of defining the relative rights of the holders of the Senior Debt on the one hand, and the holders of this Note, on the other hand. Nothing contained herein (i) shall impair, as between the Company and the holder of this Note, the obligations of the Company, which are absolute and unconditional, to pay to the holder hereof all amounts payable in respect of this Note as and when the same shall become due and payable in accordance with the terms hereof or (ii) is intended to or shall affect the relative rights of the holder of this Note and the creditors (other than the holders of the Senior Debt) of the Company, or (iii) shall prevent the holder of this Note from exercising all rights, powers and remedies otherwise permitted by applicable law or upon a default or Event of Default under this Note, all subject to the rights of the holders of the Senior Debt as set forth in these subordination provisions. 7. Events of Default and Remedies. An Event of Default hereunder shall be the same as those described in Section 2.7(a) of the Agreement and the remedies available to the Payee shall be the same as those described in Section 2.7(b) of the Agreement. 8. Miscellaneous. A. Parties in Interest. All covenants, agreements and undertakings in this Note binding upon the Company or the Payee shall bind and inure to the benefit of the permitted successors and assigns of the Company and the Payee, respectively, whether so expressed or not. Any transferee or transferees of this Note, by their acceptance hereof, assume the obligations of the Payee in the Agreement with respect to the conditions and procedures for transfer of this Note. B. Notices. All notices, requests, consents and demands shall be given or made, and shall become effective, in accordance with the Agreement. C. Construction. This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of New York and any applicable laws of the United States of America 3 4 D. Enforceability. Maker acknowledges that this Note and Maker's obligations hereunder are and shall at all times continue to be absolute and unconditional in all respects, and shall at all times be valid and enforceable irrespective of any other agreements or circumstances of any nature whatsoever which might otherwise constitute a defense to this Note and the obligations of Maker evidenced hereby, unless otherwise expressly evidenced in a writing duly executed by the holder hereof. E. Payment. If the date for any payment due hereunder would otherwise fall on a day which is not a Business Day, such payment or expiration date shall be extended to the next following Business Day with interest payable at the applicable rate specified herein during such extension. "Business Day" shall mean any day other than a Saturday, Sunday, or any day which shall be in the City of New York a legal holiday or a day on which banking institutions are authorized by law to close. F. Waiver and Set-off. Maker hereby waives diligence, presentment, demand, protest and notice of any kind whatsoever. The nonexercise by Payee of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance. The Payee, in addition to any other right available to it under applicable law, shall have the right, at its option, to immediately set off against this Note all monies owed by the Payee in any capacity to Maker, whether or not due, upon the occurrence of any Event of Default, even though such charge is made or entered on the books of Payee subsequent tot hose events. G. Lost Documents. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Note or any Note exchanged for it, and (i) in the case of loss, theft or destruction, of indemnity satisfactory to it and (ii) in the case of mutilation, of surrender for cancellation of such Note, and, in any case, upon reimbursement to the Company of all reasonable expenses incidental thereto, the Company will make and deliver in lieu of such Note a new Note of like tenor and principal amount and dated as of the original date of this Note. IN WITNESS WHEREOF, this Note has been executed and delivered on the date specified above by the duly authorized representative of the Company. AD-STAR SERVICES, INC. By: _____________________________ Name: _____________________________ Title: _____________________________ 4 EX-10.15 20 FORM OF SHAREHOLDERS AGREEMENT 1 SHAREHOLDERS' AGREEMENT THIS SHAREHOLDERS' AGREEMENT (this "Agreement") is made as of March 22, 1999, among AD-STAR SERVICES, INC., a New York corporation, with its principal offices at 4553 Glencove Avenue, Marina del Rey, California 90292 (the "Company"), those persons who are current holders of the Company's Common Stock, no par value (the "Common Stock") who are identified on Exhibit A hereto (the "Shareholders") and those persons (the "Investors") who are purchasing the Company's 12% convertible subordinated unsecured notes (the "Notes"). WHEREAS, the Investors have entered into a Subscription Agreement with the Company (the "Subscription Agreement"), pursuant to which the Investors have agreed to purchase 10 of the Company's 12% convertible subordinated unsecured notes, which are convertible into shares of the Common stock; WHEREAS, it is a condition to the consummation of the transactions contemplated by the Subscription Agreement that the Company, the Investors and each of the Shareholders shall have entered into this Agreement; WHEREAS, each Shareholder presently owns the number of shares of the Common Stock set forth opposite the name of such Shareholder on Exhibit A hereto and may in the future acquire, or obtain the right to acquire, additional equity securities of the Company (all such shares and equity securities, the "Current Holder Shares"). In consideration of the covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. TAG-ALONG RIGHTS. 1.1 PROHIBITION ON TRANSFERS. None of the Shareholders, individually or jointly, shall sell, assign, transfer, hypothecate, pledge, encumber or otherwise dispose of ("Transfer") any shares of Common Stock, or any options, warrants or other rights to acquire shares of Common Stock or any securities or other instruments convertible into shares of Common Stock, now owned or hereafter acquired ("Covered Securities"), except as provided in this Section 1 or in Section 2 hereof. 1.2 NOTICE OF PROPOSED TRANSFER. Any Shareholder (a "Selling Shareholder") which enters into an agreement providing for the Transfer of any Covered Securities in a transaction covered by this Section 1 (a "Proposed Transfer") shall promptly provide written notice of such fact (a "Notice of Transfer") to the Company and the Investors. The Notice of Transfer shall set forth: (a) the name and address of the proposed transferee (the "Proposed Transferee"), (b) the number or amount and nature of the Covered Securities proposed to be transferred, (c) the proposed amount and form of consideration and terms and conditions of payment offered by the Proposed Transferee (the "Transfer Terms") and (d) that the Proposed Transferee has been informed of the "tag-along right" provided for in this Agreement and has agreed that such Proposed Transfer be accomplished in accordance with the terms hereof. 1.3 EXERCISE OF TAG-ALONG RIGHT. Each Investor who holds at least ten percent (10%) of the aggregate number of Notes outstanding or Common Stock issued upon conversion thereof 2 shall have the right to offer for sale to the Proposed Transferee, as a condition of such sale by the Selling Shareholder and pursuant to the Transfer Terms, the same proportion of shares of Common Stock owned by the Investor (either directly or upon the conversion of the Notes held by such Investor, such shares of Common Stock, the "Investor Shares") as the Proposed Transfer represents with respect to Covered Securities then owned by such Selling Shareholder. An Investor who wishes to have any of its Investor Shares included in a Proposed Transfer shall give written notice (a "Participation Notice") to the Selling Shareholder within twenty (20) days of the giving of the Notice of Transfer, stating that such Investor wishes to sell the indicated number of Investor Shares in the Proposed Transfer on the Transfer Terms, which number of Investor Shares shall not exceed the maximum number permitted pursuant to this Section 1.3. 1.4 CHANGE IN TERMS. If any of the Transfer Terms shall be changed in any way, then each Investor (whether or not such Investor gave a Participation Notice shall have the right, for a period of twenty (20) days, to re-examine its decision and to send to the Selling Shareholder a rescission of its previously-given Participation Notice or a new Participation Notice. 1.5 SECURITIES INCLUDED IN TRANSFER, CONSUMMATION OF TRANSFER. (a) All of the Covered Securities and all of the Investor Shares to be included in a Proposed Transfer pursuant to a Participation Notice (such Covered Securities and Investor Shares collectively, the "Subject Securities") shall be sold on the same terms and conditions, except that only the Selling Shareholder shall be required to provide any representations or warranties to the Proposed Transferee regarding the Subject Securities other than standard representations and warranties as to ownership of the Subject Securities. (b) All sales shall be consummated simultaneously. SECTION 2. PERMITTED TRANSFERS. Any Shareholder may at any time, except as prohibited by any agreement or understanding such Shareholder has with the Company, transfer (i) all or any portion of its Covered Securities to an Affiliate (as such term is defined in the Securities Act of 1933, as amended) of such Shareholder; (ii) not more than two percent (2%), in the aggregate, of its Covered Securities to any third parties who are not Affiliates (as such term is defined in the Securities Act of 1933, as amended); or (iii) pursuant to Rule 144 of the Securities Act of 1933, as amended (such transfer, a "Permitted Transfer"); provided, however, that, with respect to items (i) and (ii) of this Section 2, (a) the transferee shall agree in writing to be bound by the terms and provisions of this Agreement, (b) the transferor shall cause all parties to this Agreement to be notified in writing of such transfer and (c) such transfer shall constitute a complete disposition of the Covered Securities transferred, and shall neither constitute a pledge or other encumbrance thereof nor include any repurchase or similar right, but shall provide the transferee of the Covered Securities with the ability to comply in full with the terms and conditions of this Agreement. SECTION 3. LEGEND ON COVERED SECURITIES. The certificates for all Covered Securities to be issued to any Shareholder or transferred pursuant to a Permitted Transfer shall prominently bear the following restrictive endorsement (in addition to a standard securities law legend): "The shares represented by this Certificate or for which this Certificate or Instrument is exercisable or into which this Certificate or Instrument is convertible are subject to all of the terms and conditions of a 2 3 Shareholders' Agreement dated as of March , 1999, a copy of which is on file at the principal office of the Company." SECTION 4. GENERAL PROVISIONS. 4.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS, AND AGREEMENTS. The representations, warranties, covenants and agreements contained in this Agreement shall survive the execution of this Agreement. 4.2 NOTICES. All notices, requests, demands and other communications which are required to be or may be given under this Agreement to any party by any of the other parties shall be in writing and shall be deemed to have been duly given when (a) delivered in person, (b) the day following dispatch by a nationally recognized overnight courier service (such as Federal Express or UPS, etc.) for next day delivery or (c) five (5) days after dispatch by certified or registered first class mail, postage prepaid, return receipt requested, to the party to whom the same is so given or made. Any notice or other communication given hereunder shall be addressed to the addressee at its address for notices set forth as set forth above or as indicated on the signature page hereto. 4.3 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. 4.4 HEADINGS. All headings are inserted for convenience of reference only and shall not affect the meaning or interpretation of any such provisions or of this Agreement, taken as an entirety. 4.5 SEVERABILITY. If and to the extent that any court of competent jurisdiction holds any provision (or any part thereof) of this Agreement to be invalid or unenforceable, such holding shall in no way affect the validity of the remainder of this Agreement. 4.6 CHANGES, WAIVERS, ETC. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but rather may only be changed by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. It is agreed that a waiver by either party of a breach of any provision of this Agreement shall not operate, or be construed, as a waiver of any subsequent breach by that same party. 4.7 EXPENSES. The Company shall pay all reasonable costs, fees and expenses of the Purchasers in connection with the preparation of this Agreement and any other documents or certificates executed concurrently herewith and the closing of the transactions contemplated hereby. 4.8 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 4.9 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, legal representatives and assigns. 4.10 INDEMNIFICATION. The Company agrees to indemnify and hold harmless the Investors and their affiliates, and their respective partners, officers, directors, representatives, 3 4 employees and agents from and against all losses, claims, damages and liabilities in connection with or arising out of any breach by the Company of its obligations under this Agreement or the transactions contemplated hereby or in connection with or arising out of any litigation, investigation or proceeding relating thereto, and to reimburse upon demand each of such indemnifiable parties currently and from time to time for any reasonable legal or other expenses incurred in connection with investigating or defending any of the foregoing; provided that the foregoing indemnity shall not apply to any losses, claims, damages, liabilities or related expenses to the extent a court of competent jurisdiction shall have determined in a final judgment that is not subject to further appeal that the foregoing shall have resulted primarily and directly from the willful misconduct or gross negligence of such indemnifiable party. 4.11 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding between the parties as to the subject mater thereof and incorporates and supersedes all prior discussions, agreements and understandings of any and every nature among them. 4.12 FURTHER ASSURANCES. The parties agree to execute and deliver all such further documents, agreements and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent of this Agreement. 4.13 SUCCESSORS AND ASSIGNS. The terms and conditions of this Subscription Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Subscription Agreement, except as expressly provided in this Subscription Agreement. Neither this Subscription Agreement, nor its rights and obligations hereunder can be assigned by the Company, and any such attempted assignment will be void. 4.14 MERGER. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "the Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. THIS SPACE INTENTIONALLY LEFT BLANK 4 5 IN WITNESS WHEREOF, the parties have executed this Subscription Agreement as of the day and year first above written. COMPANY: AD-STAR SERVICES, INC., a New York corporation By: ________________________________ Leslie Bernhard, President By: ________________________________ Name: _______________________ Title: _______________________ INVESTORS: ROLLING OAKS ENTERPRISES, LLC a Delaware limited liability company By: ________________________________ Craig J. Coleman Director of Operations SHAREHOLDERS: ____________________________________ Leslie Bernhard ____________________________________ Eli Rousso Attachments Exhibit A List of Shareholders 5 6 LIST OF SHAREHOLDERS 1. Eli Rousso 2. Leslie F. Bernhard -----END PRIVACY-ENHANCED MESSAGE-----