-----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, MuQC4L7qUMLRZbEMLkZgenXBnHRQcgN/FXalQB95BUmZQGAdUXMR+3tumq5X6Uu7 bZXknOuprE5F8wQeqKmNNg== 0000950123-99-009001.txt : 19991018 0000950123-99-009001.hdr.sgml : 19991018 ACCESSION NUMBER: 0000950123-99-009001 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19991001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADSTAR COM INC CENTRAL INDEX KEY: 0001091599 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 223666899 STATE OF INCORPORATION: DE FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-84209 FILM NUMBER: 99721293 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/A 1 ADSTAR.COM INC 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1999 REGISTRATION NO. 333-84209 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ AMENDMENT NO. 2 TO 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 NUMBER OF MAXIMUM UNITS/SHARES PROPOSED MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SECURITY(1) PRICE(1) FEE - ----------------------------------------------------------------------------------------------------------------------------- Units, consisting of three shares of common stock, $.0001 par value, and two warrants, each to purchase one share of common stock (2).......................................... 1,150,000 $18.00 $20,700,000 $ 5,754.60 - ----------------------------------------------------------------------------------------------------------------------------- Shares of common stock included in the units (2)............ 3,450,000 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Common stock purchase warrants included in the units (2).... 2,300,000 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Shares of common stock underlying the common stock purchase warrants included in the units (3)........................ 2,300,000 $ 9.00 $20,700,000 $ 5,754.60 - ----------------------------------------------------------------------------------------------------------------------------- Representative's warrants................................... 100,000 $ 0 $ 0 $ 0(4) - ----------------------------------------------------------------------------------------------------------------------------- Units issuable upon exercise of the representative's warrants.................................................. 100,000 $21.60 $ 2,160,000 $ 600.48 - ----------------------------------------------------------------------------------------------------------------------------- Shares of common stock included in the units underlying the representative's warrants (3)............................. 300,000 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Common stock purchase warrants issuable upon exercise of the representative's warrants................................. 200,000 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Shares of common stock underlying common stock purchase warrants issuable upon exercise of the representative's warrants (3).............................................. 200,000 $ 9.00 $ 1,800,000 $ 500.40 - ----------------------------------------------------------------------------------------------------------------------------- Total Registration Fee...................................... $12,610.08 - ----------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
(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 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 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION DATED OCTOBER 1, 1999 [ADSTAR.COM LOGO] 1,000,000 UNITS EACH CONSISTING OF THREE SHARES OF COMMON STOCK AND TWO REDEEMABLE WARRANTS, EACH TO PURCHASE ONE SHARE OF COMMON STOCK ADSTAR.COM, INC. We are offering units consisting of three shares of common stock and two warrants, each to purchase an additional share of common stock. The common stock and warrants will trade only as a unit for a period of time as determined by the Company of not more than 30 days following this offering and will then trade separately. The warrants will be exercisable at an exercise price of $ [50% 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 redeem some or all of the warrants at $0.25 per warrant commencing 180 days after the date of this prospectus, if the closing bid price of our common stock on each of 10 consecutive days is greater than or equal to $ [67% of the offering price of a unit] and we provide 30 days prior written notice of redemption. Our common stock 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 "ASCU," "ASC" and "ASCWS," respectively. We expect that the units will be priced at between $16 and $18 per unit. INVESTING IN THE UNITS INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
- --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- 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 $850,000, 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. 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. 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.] 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 has developed a one-stop marketplace on the Web for advertisers to buy classified ads. We enable advertisers by accessing our Web site on their computers to plan, schedule, compose and purchase classified advertising from a large number of print and on-line publishers. 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. This 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. 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 largest newspapers in the United States. We have had losses from operations in each of the last two years. Our stockholders' deficit was $1,066,311 as of June 30, 1999. 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. - Price and pay for each ad using a credit or debit card. In contrast to our historical business, from which we have earned revenue from software licensing fees, our Advertise123.com revenues are transaction fee based; allowing us to earn revenue based on numbers of ads and advertising dollar volume. 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. 3 6 THE OFFERING Securities Offered.............. 1,000,000 units. Each unit consists of three shares of common stock and two warrants, each to purchase one additional share of common stock. The common stock and warrants will trade only as a unit for a period of time as determined by the Company of not more than 30 days following the offering. For more information, see "Description of Securities." Warrants........................ The warrants will be exercisable at an exercise price of $ [50% 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 $ , [67% of 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, 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 the date of this prospectus. After the offering, there will be 6,000,000 shares outstanding. Both of these numbers exclude up to 2,496,780 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 $14,915,000, 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." 4 7 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 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus.
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------- ------------------------- 1997 1998 1998 1999 ----------- ----------- ----------- ----------- STATEMENTS OF OPERATIONS DATA: Revenues.......................... $1,148,233 $1,559,361 $ 761,908 $ 781,043 Cost of revenues.................. 565,329 800,532 371,545 489,817 ---------- ---------- ---------- ---------- Gross profit.................... 582,904 758,829 390,363 291,226 Sales, general and administrative expenses........................ 634,029 820,574 341,580 661,645 ---------- ---------- ---------- ---------- Income (loss) from operations..... (51,125) (61,745) 48,783 (370,419) Interest expense.................. 7,873 4,518 2,644 45,800 ---------- ---------- ---------- ---------- Income (loss) before taxes........ (58,998) (66,263) 46,139 (416,219) Provision for taxes............... 823 2,760 1,380 1,380 ---------- ---------- ---------- ---------- Net income (loss) -- historical... $ (59,821) $ (69,023) $ 44,759 $ (417,599) ========== ========== ========== ========== Pro forma net income (loss)....... $ (59,798) $ (67,063) $ 45,739 $ (416,619) ========== ========== ========== ========== Pro forma earnings (loss) per share -- basic and diluted...... $ (0.03) $ (0.15) Pro forma weighted average shares -- basic and diluted..... 2,625,107 2,727,431
- --------------- Pro forma net income (loss) has been computed on the basis described in Note 1 and Note 2 of Notes to Financial Statements and assumes the pro forma tax provisions described in those notes. 5 8 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 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 $17.00 per unit; - payment of the underwriting discount and estimated offering expenses payable by us; - the repayment of notes payable of $1,595,450 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.
JUNE 30, 1999 -------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ---------- ------------ -------------- Cash and cash equivalents.............. $ 112,883 $ 962,883 $14,282,433 Working capital........................ (155,713) 655,968 14,060,462 Total assets........................... 1,297,241 2,147,241 15,466,791 Notes payable, net of current portion.............................. 1,768,792 1,372,970 -- Total liabilities...................... 2,363,552 2,006,049 548,135 Redeemable common stock................ -- 137,536 -- Total stockholders' equity (deficit)... (1,066,311) 3,656 14,918,656
6 9 ------------------------ We were incorporated in New York in 1991 as the successor to a business that was started in 1986. On August 31, 1999 we reincorporated in Delaware and issued or, reserved for issuance, an aggregate of 3,000,000 shares of common stock in exchange for all the outstanding shares of our predecessor including shares to be issued upon conversion of our convertible notes. 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 7 10 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. GROWTH OF HISTORICAL ADSTAR BUSINESS IS LIMITED 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. 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 ability to develop an on-line business. 8 11 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; - 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 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. If because of these factors, the revenues are not generated in the amounts and within the time periods necessary to sustain our operations our prospects for our on-line business will be seriously compromised. 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 six months ended June 30, 1999 we incurred a net loss of approximately $418,000. Our accumulated deficit as of June 30, 1999 was approximately $1,095,000. Our 1999 first half 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. 9 12 OUR INITIAL CO-MARKETING DISTRIBUTION AGREEMENTS, UPON WHICH WE DEPEND TO FACILITATE THE ADDITION OF NEW PUBLISHERS ON OUR WEB SITE, 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, which is essential to success in our on-line business. OUR EARLY STAGE AND UNTESTED INTERNET OPERATIONS ARE PARTICULARLY 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. We have not yet suffered any breakdowns in service. However, our service has not yet been tested by repeated and continuous use and vulnerability to interruptions in service should increase as we develop increased traffic on our Web site. If because of interruptions 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. THE SUCCESSFUL INTRODUCTION OF OUR NEW ON-LINE BUSINESS MAY DIMINISH THE VALUE OF OUR HISTORICAL LICENSED SOFTWARE BUSINESS, CAUSING MANY OF OUR NEWSPAPER CUSTOMERS TO TERMINATE OR NOT RENEW THEIR SOFTWARE LICENSE AGREEMENTS 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 revenue and cash flow. OUR ON-LINE BUSINESS COULD 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 like 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. 10 13 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 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 and operate profitably cannot be assured. WE MAY BE UNABLE TO MANAGE OUR GROWTH WHICH CONTEMPLATES MORE THAN A FOUR FOLD INCREASE IN OUR WORK FORCE Our business plan contemplates an increase in the number of our employees from 16 to 65 over a period of 12-18 months. The recruitment, training and integration of these persons into our operations will place a significant strain on our managerial, operational and financial resources. To handle this influx of personnel and our projected growth in customer base and operations we must install and operate new and more complex accounting, bookkeeping and telephone 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 business and prospects. WE MAY NOT BE ABLE TO RETAIN KEY EXISTING EMPLOYEES OR ATTRACT THE LARGE NUMBER OF ADDITIONAL EMPLOYEES ESSENTIAL TO THE SUCCESS OF OUR NEW ON-LINE BUSINESS Our performance is substantially dependent on the performance of our senior management and key technical personnel and on our ability to attract the new internet oriented employees required in the implementation of our business plan. Our success depends in the first instance on the continued efforts of our Chief Executive Officer, Leslie Bernhard, and on our Executive Vice President and Chief Technical Officer, Eli Rousso. In addition, our future personnel needs contemplate more than a quadrupling of our work force over a period of 12-18 months. The competition for Internet oriented people of the type we will be seeking is intense and we may be hard pressed to find the personnel needed as fast as we need them. If we are unable to retain our key existing employees or to rapidly attract, hire and assimilate the qualified employees we will be seeking, the growth of our on-line business will be arrested and we will not be able to meet the projected revenue increases within the time period contemplated in our business plan, if at all. 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 these 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. 11 14 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. OUR LIMITED INTERNET EXPERIENCE MAY AFFECT OUR ABILITY 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 and in particular by our limited experience and short operating history in this market. For these reasons, our future success depends on: - our ability to adapt the rapidly changing technologies to the needs of our advertising and publishing clients; and - our ability to continually improve the performance, features and reliability of our on-line services. 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. WE DO NOT OWN ANY PATENTS AND 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 including 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 determining whether patent protection is available for certain aspects of our technology, we do not currently own any patents or patent applications on our technology and we have no assurance that our rights to that technology are patentable or otherwise protectable. 12 15 Moreover there is no assurance that others might not develop alternate technologies that might be more effective than ours whether or not we obtain patent protection. We have recently begun to use the trademark and Internet domain name Advertise123.com but have not yet applied for registration of the trademark. 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 trademark 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 this trademark. Despite our existing trademark rights in the marks AD-STAR, from use and registration, and Advertise123.com, from use and our proposed expanded federal protection for these marks, the marks remain susceptible to trademark infringement due to the frequent illicit use and piracy of trademarks by "cybersquatters" on the Internet. Although we own the domain names Advertise123.com and AD-STAR.com, there remains the risk that third parties will seek to register our marks AD-STAR and Advertise123 in the other "top level" domains, e.g., .org, .net, and .gov, or that they will register close copies of our marks that we may be unable to stop. 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. If for any of the above reasons we are deprived of any proprietary rights to our technology or trade style our prospects for success may be seriously and adversely affected. See "Business -- Intellectual Property". 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 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 back-up Internet services or facilities or other back-up 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 substantially increase our work force. Our operating expenses will increase substantially as the number of employees increases. We estimate that the costs associated with the increase of the number of our 13 16 employees from 16 to 65 will be at least $3,000,000. We expect the net proceeds from this offering will be sufficient to meet our cash needs for at least 12 months. However, if the actual costs of our expanded operations are higher than projected or the revenues from our new operations fall below our current expectations, we may need additional financing before the expiration of 12 months. In either event if our revenues are insufficient to provide the necessary cash flow for ongoing operations, 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 the successful implementation of our planned business expansion. CONCENTRATION OF VOTING RIGHTS MAY PREVENT YOU FROM HAVING ANY VOICE IN CORPORATE AFFAIRS Upon the successful completion of this offering, Leslie Bernhard and Eli Rousso will each have voting rights with respect to 22% 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. This 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 AT THE TIME YOU INVEST AND IN THE FUTURE UPON OUR ISSUANCE OF ADDITIONAL SHARES. As an investor purchasing units in this offering you will incur an immediate $3.21 dilution in net tangible book value for each share of stock included in the units you purchase. In addition, we have issued options to our employees to purchase an aggregate of 381,780 shares at prices substantially below the cost of the shares that you will acquire in this offering. To the extent these options are exercised at prices below our net tangible book value per share at the time of exercise they will dilute the then net tangible book value of all our outstanding shares, including yours. And if in the future the Company should issue additional shares for acquisitions or other corporate purposes at prices below the per share net tangible book value at the time of issuance you and our other stockholders will suffer a still further dilution of your and their stock interests. This dilution may adversely affect the market price of our stock. For a more detailed description please refer to "Dilution". 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 these 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. 14 17 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. Based on discussions with our publishing clients, we believe that all, or substantially all, of them have taken steps to make themselves Year 2000 compliant. As to prospective advertisers, we believe most all current PC models that they will be using to access our Web site will be Year 2000 compliant and that any Year 2000 problems with this group will arise only with the use of older PC models. Presently, we believe that the primary risks that we face with regard to the Year 2000 are those arising from other third-party providers of services or products. If, however, they, we or new publishers to our system encounter Year 2000 problems we in turn may suffer serious interruptions or reduced revenues in the conduct of our business. FORWARD-LOOKING STATEMENTS 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 like "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. 15 18 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 $17.00 per unit, are estimated to be $14,915,000 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............................................. $ 3,500,000 23% Sales and marketing................................ 3,750,000 25 Product development and site maintenance........... 3,000,000 20 Debt retirement.................................... 1,595,450 11 General corporate purposes including working capital.......................................... 3,069,550 21 ----------- --- Total.............................................. $14,915,000 100% =========== ===
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 indebtedness of: - $745,450 payable in monthly installments of $8,333.33 through March 2013 which includes interest at 10% per annum for the purchase of technology which we formerly licensed from the seller; and - $850,000 for a loan 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. Both items of indebtedness are prepayable on completion of this offering. 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. 16 19 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. On July 13, 1999 we entered into a loan with InterEquity Capital Partners, L.P. which prohibits us from paying dividends or making distributions on our stock while this loan is outstanding. Because we intend to use a portion of the proceeds from this offering to repay InterEquity, the restriction on dividends and distributions will cease to apply. 17 20 CAPITALIZATION The following table sets forth our capitalization as of June 30, 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 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 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 $17.00 per unit; - payment of the underwriting discounts and estimated offering expenses that we will pay; - the repayment of notes payable of $1,595,450 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. 18 21
JUNE 30, 1999 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ---------- ---------- ----------- Notes payable, net of current portion... $1,768,792 $1,372,970 -- ---------- ---------- ----------- 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; 6,000,000 pro forma as adjusted (1)....................... 28,300 296 600 Additional paid-in capital............ -- 3,360 15,055,592 Accumulated deficit................... (1,094,611) -- (137,536) ---------- ---------- ----------- Total stockholders' equity (deficit)........................ (1,066,311) 3,656 14,198,656 ---------- ---------- ----------- Total capitalization............. $ 702,481 $1,514,162 $14,198,656 ========== ========== ===========
- ------------------------- (1) Based on the number of shares of common stock outstanding as of June 30, 1999. Excludes: - 381,780 shares of common stock issuable upon the exercise of stock options granted in April and July 1999; and - 115,000 shares of common stock issuable upon the exercise of warrants granted in July and August 1999; and - 114,926 shares of common stock acquired by us from a former officer and director on July 28, 1999 19 22 DILUTION Our pro forma tangible book deficit as of June 30, 1999 was $178,663, 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 June 30, 1999. In making this calculation we have given effect to the conversion of $1,050,000 principal amount of our convertible notes which were issued in March and April 1999 and interest of $19,967, 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 $17.00 per unit and after deducting estimated underwriting discounts and expenses of this offering, our pro forma net tangible book value at June 30, 1999 would have been $14,736,337 or $2.46 per share, representing an immediate increase in net tangible book value of $2.52 per share to the existing stockholders and an immediate dilution of $3.21 or 56.7% 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............................... $5.67 Pro forma net tangible book deficit at June 30, 1999...... $(0.06) Increase in pro forma net tangible book value attributable to new investors....................................... $ 2.52 ------ Pro forma net tangible book value after offering............ 2.46 ----- Dilution to new investors................................... $3.21 =====
The following table sets forth, on a pro forma basis as of June 30, 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 50% $ 1,078,300 5.96% $0.36 New investors........... 3,000,000 50% 17,000,000 94.04% 5.67 --------- --- ----------- ------ Total.............. 6,000,000 100% $18,078,300 100.00% ========= === =========== ======
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 which may at the time they are exercised may have a dilutive effect on the stock interest of all stockholders. We have 381,780 shares which are issuable upon exercise of options held by key employees. 255,135 of these options are exercisable at $2.65 per share and 126,645 are exercisable at $4.00 per share. We have also granted warrants to purchase 115,000 shares. 60,000 are issuable at an exercise price equivalent to the price of shares in this offering. The remaining 55,000 shares are issuable only upon completion of this offering at an exercise price equivalent to 110% of the share price in this offering and the company expects to take a charge of approximately $90,000 at that time for the vested portion, and may recognize additional charges in the future periods as the amounts vest. 20 23 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 of 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 six month periods ended June 30, 1998 and 1999 and the balance sheet data for June 30, 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 these 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, SIX MONTHS ENDED JUNE 30, ------------------------ -------------------------- 1997 1998 1998 1999 ---------- ---------- ---------- ---------- STATEMENTS OF OPERATIONS DATA: Revenues.................. $1,148,233 $1,559,361 $ 761,908 $ 781,043 Cost of revenues.......... 565,329 800,532 371,545 489,817 ---------- ---------- ---------- ---------- Gross profit............ 582,904 758,829 390,363 291,226 Sales, general and administrative expenses................ 634,029 820,574 341,580 661,645 ---------- ---------- ---------- ---------- Income (loss) from operations.............. (51,125) (61,745) 48,783 (370,419) Interest expense.......... 7,873 4,518 2,644 45,800 ---------- ---------- ---------- ---------- Income (loss) before taxes................... (58,998) (66,263) 46,139 (416,219) Provision for taxes....... 823 2,760 1,380 1,380 ---------- ---------- ---------- ---------- Net income (loss) -- historical.............. $ (59,821) $ (69,023) $ 44,759 $ (417,599) ========== ========== ========== ========== Pro forma net income (loss)(1)............... $ (59,798) $ (67,063) $ 45,739 $ (416,619) Pro forma earnings (loss) per share -- basic and diluted (2)............. $ (0.03) $ (0.15) Pro forma earnings (loss) per share -- basic and diluted (2)............. 2,625,107 2,727,431
21 24
DECEMBER 31, 1998 JUNE 30, 1999 ----------------- ------------- BALANCE SHEET DATA: Cash and cash equivalents....................... $ 90,007 $ 112,883 Working capital................................. 271,794 (155,713) Total assets.................................... 339,147 1,297,241 Notes payable, net of current portion........... -- 1,768,792 Total liabilities............................... 535,151 2,363,552 Total stockholders' equity (deficit)............ (196,004) (1,066,311)
- ------------------------- (1) Computed on the basis described in Note 1 and Note 2 of Notes to financial statements and assuming the pro forma tax provisions described in Note 2. (2) 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. 22 25 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. We received our first transaction fees from Internet business in June 1999. 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 began to incur expenses in 1998 that cannot be offset by the revenues generated by our historic business. These expenses caused us to be unprofitable in 1998 and 1999. We intend to continue to make significant financial investments to support publishers on our Web site, Advertise123.com for content development, technology and infrastructure development and 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. In 1999 we received through the issuance of a note the surrender of an option to acquire 15% of our stock as part of our purchase of technology we had formerly licensed. The surrender of this option increased our stockholders' deficit by $447,935 to a total of $1,066,311 at June 30, 1999 but had no impact on our cash flow available to fund operations. Through June 30, 1999, we had elected to be taxed under Subchapter S of the Internal Revenue Code of 1986. Effective July 1, 1999, we will be taxed as a Subchapter C corporation, and therefore will pay tax on our income, if any, at the corporate level. This 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. 23 26 RESULTS OF OPERATIONS The following table sets forth the results of operations expressed as a percentage of revenues:
SIX MONTH YEAR ENDED PERIOD ENDED DECEMBER 31, JUNE 30, ------------ ------------ 1997 1998 1998 1999 ---- ---- ---- ---- Revenues........................................... 100% 100% 100% 100% Cost of revenues................................... 49% 51% 49% 63% --- --- --- --- Gross profit....................................... 51% 49% 51% 37% Sales, general and administrative expenses......... 55% 53% 45% 85% --- --- --- --- Income (loss) from operations...................... (4)% (4)% 6% (47)% Interest expense................................... (1)% -- -- (6)% --- --- --- --- Income (loss) before taxes......................... (5)% (4)% 6% (53)% Provision for taxes................................ -- -- -- -- --- --- --- --- Net income (loss).................................. (5)% (4)% 6% (53)%
SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 REVENUES. Revenues increased by 3% to $781,043 for the six months ended June 30, 1999 from $761,908 for the six months ended June 30, 1998. The increase in revenues resulted primarily from an increase in computer hardware sales to $88,279 in 1999 from $22,351 in 1998 and our recording our first Internet revenues in June 1999 of $29,650. The increase was offset in part by a decrease in license and end-user support revenues (referred to as "service revenues") to $651,114 in 1999 from $727,557 in 1998. While we expect to continue to recognize service revenues from existing and potential new software licensing contracts, we expect that Internet 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, to configure end-user software for the newspaper's advertiser clients, to make payments to publications for transactions placed on our Internet system, to pay costs of installing publications on our Internet system, to provide customer training and end-user support, and to pay costs of hardware sales and royalty fees. These costs increased to $489,817, as compared to $371,545 in 1998. Personnel costs associated with cost of revenues increased to $243,537 in 1999 compared with $157,371 in 1998 as we added technical support and end user support staff. Hardware expense increased to $77,597 in 1999 from $17,613 in 1998. These increases were offset in part by a reduction in royalty expense to $8,594 in 1999 from $55,148 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. 24 27 SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative expense consists primarily of salaries of business development personnel, sales and marketing personnel and other marketing, trade show and travel expense. These personnel costs increased to $382,059 in 1999 from $184,028 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. INTEREST EXPENSE. Interest expense increased for the six months ended June 30, 1999 to $45,800 from $2,644 due to the issuance by us of $1,050,000 of 12% convertible notes in March and April 1999 and a 10% note for $751,710 to purchase the technology, intellectual property and software rights for the AdStar technology. Payments on the 10% note are equivalent to royalty payments we were required to make under the pre-existing license agreement. The 12% convertible notes will be converted into common stock concurrently with this offering. We intend to pay the 10% notes with proceeds from this offering. 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 June 30, 1999, the Company had cash and cash equivalents of $112,883 compared with $90,007 at December 31, 1998. At June 30, 1999 we had no material commitments for capital expenditures. Over the next 12 months we do not expect that our capital expenditures will exceed $200,000. 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 25 28 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 $762,101 for the six months ended June 30, 1999 compared with net cash provided by operations of $75,618 for the comparable 1998 period. The difference is due primarily to the net loss from operations in the six month period ended June 30, 1999 compared to net income in the comparable 1998 period and expenditures connected with this offering. Net cash used in investing activities increased to $276,874 in the period ended June 30, 1999 compared with $12,573 in the comparable period of 1998 resulting from the purchase and development of computer equipment and related infrastructure for our Web-based system. Net cash provided by financing activities was $1,061,851 during the six month period ended June 30, 1999 compared to $12,678 used in financing in the comparable period of 1998. The activity in 1999 primarily reflects the issuance of $1,050,000 of our 12% convertible notes payable. In March and April 1999, we sold $1,050,000 of our 12% convertible notes in a private placement. These notes will automatically convert to common stock upon consummation of this offering. In July 1999, we borrowed $850,000 from InterEquity Capital Partners, L.P. 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 and is prepayable on the consummation of this offering. 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. 26 29 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, for example, "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. 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 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 this type 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 consisting of a data network, workstations, and telephone systems have been assessed for year 2000 readiness. Most of these items are 27 30 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. The only concern in this area is that some third party providers may possibly have problems. In any and all events we do not anticipate any significant interruption or disruption of our business. We believe, the worst case scenario to be a reduction or interruption in the business that is derived from or provided by a third party provider that is not Year 2000 compliant. 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. 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 the SEC staff issues interpretative guidance, it is unclear what, if any, impact any interpretative guidance will have on our current accounting practices. 28 31 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 system; - 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 information viewed by the user for all publishers is the same, so users don't have to learn a different system for each publisher. 29 32 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 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. While one or two single customers may account for more than 10% of our revenue in a single year, no customer has accounted for more than 10% in successive years. In 1997 the L.A. Times accounted for 13% of our revenues, and in 1998 the Chicago Tribune accounted for 12% of our revenues. Our license and support fees are circulation based. License fees range from $25,000 to $100,000 for the first year and from $6,000 to $18,000 for years two through ten. User support fees generally range between $6,000 to $30,000 per year during the life of a contract. Implementation fees usually are between $15,000 and $30,000, excluding hardware costs. 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. Fax management license fees are circulation based. License fees range from $20,000 to $80,000 for the first year and from $6,000 to $16,500 for years two through ten. Implementation fees generally range from $15,000 to $30,000, excluding hardware costs. Our 43 current newspaper customers account for approximately 25% of the total 1998 Sunday newspaper circulation in the United States. These newspapers include major metropolitan newspapers including 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 as well as smaller suburban and regional newspapers like the Ventura County (CA) Star, The (Lancaster PA) Reporter and (NJ) Courier Post. In 1998, more than 1,400 advertiser locations, including advertising agencies like Bernard Hodes Advertising, TMP Worldwide, Shaker Advertising, Nationwide Advertising, and Austin Knight Advertising and large direct advertisers like 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 1,500 daily and 7,200 weekly newspapers in the United States which are not among the 43 AdStar licensees. Additionally, the AdStar system does not provide for 30 33 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 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; - 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. 31 34 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 these 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 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 32 35 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 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 service 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 the ability to enable 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 service is being made available to users of the AdOne and PowerAdz Web sites. We have begun installing our ad entry software 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 services 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. 33 36 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. 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. 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 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. Fees for ads placed in print publications paid for by credit cards will generally be 10% of the cost of the ad, but may change as a result of changing market conditions. We expect those paid for by advertisers under contracts with publishers 34 37 will carry a per ad charge of $.25. For those ads placed in existing AdStar newspapers there is no charge to the publisher for use of Advertise123.com by contract advertisers. We expect that fees on ads which originate on the publisher's Web site which flow through our system will be subject to annual caps ranging from $6,000 to $33,000 per publisher. There are no caps for revenues on ads originating on Advertise123.com. Existing fees for on-line publications will range between 5% to 10% of the cost of the ad if originated on their Web site and 10% to 35% of the cost of the ad if originated on Advertise123.com. 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) FEES FROM ADVERTISEMENTS ON OUR WEB SITE. Additional revenues should be provided by premium positioning and promotional advertising sold to media and advertising companies and carried on our Web site. Initially we may provide an opportunity to these prospective advertisers to advertise on our Web site without fee. As we develop activity on our site, we will adopt a rate schedule for these advertisers based on the number of "hits" each 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 rights. We do not currently own any patents. We have established trademark rights in the mark AD-STAR, based on our use of this mark since 1985 and our ownership of the incontestible United States trademark registration No. 1,497,387 for AD-STAR issued in 1988. While this registration covers computer programs for preparation, editing and electronic transmission of classified advertisements, we have expanded our use of the trademark AD-STAR to Internet-related advertising services and we will be filing a new trademark application to cover these services. Our trademark search, along with our 35 38 longstanding use of the mark AD-STAR and our ownership of the U.S. Registration for AD-STAR, should entitle us to further registration, although we cannot guarantee how the Trademark Office will view our proposed application or whether our expanded use of the mark will encounter any opposition in the marketplace. We have also recently begun to use the trademark and Internet domain name Advertise123.com but have not yet applied for registration. We seek to protect our proprietary rights through the use of confidentiality agreements with employees, consultants, advisors and others. We cannot guarantee that these 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 proprietary information, or that 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 our business partners, we cannot guarantee that these 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 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. In order to implement our business plan for building our Web based service we expect over a relatively short period of time beginning with the completion of this offering to significantly increase our work force. We will be looking to add approximately 49 people to our staff during the next 12-18 months as follows: 4 persons to our administrative staff 22 persons to assemble and input information about publishers into our data base 3 persons to staff our "Help Desk" to provide support and assistance at our Web site to prospective advertisers 13 persons for marketing 7 persons for product development LEGAL PROCEEDINGS We are not currently a party to any legal proceeding. 36 39 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. 37 40 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 Chris A. Karkenny.................... 31 Director
- --------------- Ms. Bernhard and Mr. Rousso have served as directors since the Company was formed in 1991. Mr. Douek was elected director in July 1999. Mr. Posner and Mr. Karkenny were elected directors in September 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. 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 38 41 Ladenberg Thalmann & Co., Inc. (1997-1998), Vice Chairman for Coleman & Company (1996-1997) and Managing Director for Bankers Trust Company (1992-1994). 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. 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. CHRIS A. KARKENNY has been Chief Executive Officer of Technologz.com LLC, an incubator and venture catalyst company, since January 1999. Prior to January 1999 and since February 1998 Mr. Karkenny was a private consultant in corporate finance. From September 1995 to February 1998 he was Treasurer of Quarterdeck Corporation, a technology and software company and prior to September 1995 Mr. Karkenny was a consultant for CDK Industries, a consulting firm specializing in mergers and acquisitions. COMMITTEES OF THE BOARD OF DIRECTORS Our Board of Directors has established Compensation and Audit committees, whose initial members will be Messrs. Posner and Karkenny. 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. 39 42 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. 40 43 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 $3.10. 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. 41 44 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 29,268 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. In July, 1999 we issued to Ronald S. Posner, a director of the Company, three year warrants to purchase 30,000 shares of common stock at the initial public offering price of the shares in this offering. 42 45 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 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: - prior to the offering, 3,000,000 shares of common stock outstanding, 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, the acquisition on July 28, 1999 by certain stockholders and us of an aggregate of 506,060 shares from a former officer and director of the Company. See "Certain Transactions", 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 - after the offering, 6,000,000 shares of common stock outstanding. The address of each party 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; Mr. Posner, 820 Stony Hill Road, Tiburon, California 94920; Mr. Karkenny, 11670 Chenault St., Los Angeles, California 90049; William Harris Profit Sharing Trust and Couderay Partners 2 North La Salle, suite 400, Chicago, Illinois 60602 and Rolling Oaks Enterprises, LLC, 1501 Main St. Venice California 90291.
PERCENTAGE OF SHARES BENEFICIALLY OWNED SHARES --------------------- BENEFICIALLY PRIOR TO AFTER NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING - ------------------------ ------------ --------- --------- Leslie Bernhard............................... 1,317,000(1)(2)(6) 44% 22% Eli Rousso.................................... 1,317,000(1)(2)(6) 44% 22% Benjamin J. Douek............................. 31,007(1)(3) 1% * Ronald S. Posner.............................. 30,000(1)(4) 1% * Chris A. Karkenny............................. --(1) -- -- William Harris Employee Profit Sharing Trust....................................... 198,097(6)(7) 7% 3% Couderay Partners............................. 158,852(8) 5% 3% Rolling Oaks Enterprises, LLC................. 200,811(6)(9) 7% 3% All directors and officers as a group (eight persons).................................... 2,553,581(2)(5)(6) 69% 36%
- ------------------------- * Less than 1%. (1) Denotes a director of the Company. (2) Includes an aggregate of 366,894 shares, as to which Ms. Bernhard and Mr. Rousso have voting power. (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 this date. (6) Does not reflect sale of up to 450,000 shares owned in the aggregate by Leslie Bernhard, Eli Rousso, William Harris Employee Profit Sharing Trust and Rolling Oaks Enterprises to the underwriters upon exercise of the underwriter's over-allotment option. See "Underwriting." 43 46 (7) A trust for the benefit of several persons including Irving Harris who has a beneficial economic interest in the trust in excess of 50%. The trustees are Jerome Kahn and Wesley Saul. (8) A partnership consisting of grandchildren, great grandchildren and trusts for their benefit in which Jerome Kahn and Michael S. Resnick are managing agents. (9) A private investment firm in which Brian Sullivan, its chief executive officer, holds a beneficial interest in excess of 75%. 44 47 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 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. 45 48 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 $ [50% 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 a date determined by the Company within 30 days of the effective date of this offering. 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 67% of 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 declare any stock dividend to stockholders, or 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 this 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. 46 49 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. 47 50 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 6,000,000 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 these 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. We have the following shares subject to issuance upon exercise of options and warrants and conversion of convertible notes: 381,780 shares subject to options held by key employees 115,000 shares subject to warrants granted to two investors and one consultant 410,970 shares issuable upon conversion on the consummation of this offering of $1,050,000 of our 12% convertible notes There are 13 holders of record of our outstanding common stock not including three holders of our 12% convertible notes who are not currently stockholders but will become stockholders when their notes automatically convert to shares upon the consummation of this offering. There are eight holders of our 12% convertible notes. 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 for the benefit of the transferring stockholders or members of their families. 48 51 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 the sale. 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 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, some of our employees, consultants or advisors who purchases shares from us in connection with a compensatory stock plan or other written agreement may be eligible to resell these shares. Resales under Rule 701 must be effected 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with many of the 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 with respect to an aggregate of 60,000 shares subject to warrants held by them. 49 52 UNDERWRITING We and the underwriters named below have entered into an underwriting agreement with respect to the units being offered. Subject to conditions customary in agreements of this kind, 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 150,000 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 150,000 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 225,000 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 41,770 and 12,969 shares respectively to the underwriter and the number of shares sold by Ms. Bernhard and Mr. Rousso shall each be reduced by up to 27,369 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 $17, Adstar will receive gross proceeds of $.60 and the selling stockholders gross proceeds of $16.40 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 50 53 discretion and that the underwriters and selected dealers may reallow a concession to other 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. A copy of the registration statement is available from Web sites maintained by the underwriters' representative and IPO.com (www.IPO.com) and may be available on other Web sites. However, the underwriters do not intend to make any part of the distribution of the units electronically or over the Internet. 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. The underwriters will purchase the units at a discount of % from the initial public offering price of the units. The difference between the price payable to us by the underwriters and the price at which the underwriters resell the units to the public will constitute compensation to the underwriters. We have agreed to pay the underwriters' representative an expense allowance equal to two percent of the aggregate initial public offering price of the units offered by this prospectus, of which $35,000 has already been paid. The amount of the expense allowance is not dependent on the representative's actual out-of-pocket expense and the representative will not provide an accounting for these expenses to us. 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 51 54 year from the date this registration statement becomes effective. These warrants may not be sold, transferred, pledged or hypothecated for one year from the date of issuance, except by transfer 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. In summary, compensation payable by us to the underwriters consists of: - The underwriting discount - The representative's expense allowance - The underwriters' warrants 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 without the consent of Paulson, as representative of the underwriters, which consent will not be unreasonably withheld. Intra-family transfers or transfers to trusts for estate planning purposes are exempt from these restrictions. They have also agreed that for the two-year period beginning on the date this registration statement becomes effective 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, 148,200 shares of our common stock. Legal matters relating to this offering will be passed upon for the underwriters by Stoel Rives LLP, Portland, Oregon 97204. 52 55 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 and reference is hereby made to such omitted information. Statements made in this registration statement are summaries of the terms of these referenced contracts, agreements or documents and are not necessarily complete. Reference is made to each exhibit for a more complete description of the matters involved and these statements shall be deemed qualified in their entirety by the reference. The registration statement and the exhibits and schedules filed with the Securities and Exchange Commission may be inspected by you at 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. 53 56 INDEX TO FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1999 IS UNAUDITED)
PAGE ---- Report of Independent Accountants........................... F-2 Financial Statements: Balance Sheets as of December 31, 1998 and June 30, 1999................................................... F-3 Statements of Operations for each of the two years in the period ended December 31, 1998 and the six-month periods ended June 30, 1998 and 1999................... F-4 Statements of Stockholders' Deficit for each of the two years in the period ended December 31, 1998 and the six-month period ended June 30, 1999................... F-5 Statements of Cash Flows for each of the two years in the period ended December 31, 1998 and the six-month periods ended June 30, 1998 and 1999................... F-6 Notes to Financial Statements............................. F-7
F-1 57 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. PricewaterhouseCoopers LLP 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 September 1, 1999 F-2 58 ADSTAR.COM, INC. BALANCE SHEETS (INFORMATION WITH RESPECT TO JUNE 30, 1999 IS UNAUDITED)
JUNE 30, DECEMBER 31, JUNE 30, 1999 1998 1999 (PRO FORMA) ------------ ---------- ----------- ASSETS Current assets: Cash and cash equivalents.......................... $ 90,007 $ 112,883 Accounts receivable................................ 125,313 280,643 Receivable from the sale of stock.................. 26,300 -- Other current assets............................... 16,763 44,543 --------- ---------- Total current assets............................ 258,383 438,069 Property and equipment, net.......................... 77,561 339,026 Intangible assets, net............................... -- 182,319 Deferred offering costs.............................. -- 328,449 Other assets......................................... 3,203 9,378 --------- ---------- Total assets.................................... $ 339,147 $1,297,241 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable................................... $ 177,929 $ 350,987 Accrued expenses................................... 275,019 168,451 Deferred revenue................................... 34,656 4,533 Dividends payable.................................. 20,750 20,750 Notes payable...................................... 15,000 41,658 Capital lease obligations.......................... 6,833 7,403 --------- ---------- Total current liabilities....................... 530,187 593,782 Notes payable........................................ -- 1,768,792 Capital lease obligations............................ 4,964 978 --------- ---------- Total liabilities............................... 535,151 2,363,552 --------- ---------- 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 June 30, 1999 and 3,067,614 at June 30, 1999 on a pro forma basis........................................... 28,300 28,300 307 Additional paid-in capital......................... -- -- 3,349 Accumulated deficit................................ (224,304) (1,094,611) -- --------- ---------- ------ Total stockholders' deficit..................... (196,004) (1,066,311) 3,656 --------- ---------- ------ Total liabilities and stockholders' deficit..... $ 339,147 $1,297,241 ========= ==========
The accompanying notes are an integral part of these financial statements. F-3 59 ADSTAR.COM, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 (INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1999 IS UNAUDITED)
SIX-MONTH PERIODS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ------------------------ ------------------------ 1997 1998 1998 1999 ---------- ---------- ---------- ---------- Revenues............................. $1,148,233 $1,559,361 $ 761,908 $ 781,043 Cost of revenues..................... 565,329 800,532 371,545 489,817 ---------- ---------- ---------- ---------- Gross profit....................... 582,904 758,829 390,363 291,226 Sales, general and administrative expenses........................... 634,029 820,574 341,580 661,645 ---------- ---------- ---------- ---------- Income (loss) from operations...... (51,125) (61,745) 48,783 (370,419) Interest expense..................... (7,873) (4,518) (2,644) (45,800) ---------- ---------- ---------- ---------- Income (loss) before taxes......... (58,998) (66,263) 46,139 (416,219) Provision for taxes.................. 823 2,760 1,380 1,380 ---------- ---------- ---------- ---------- Net income (loss).................. $ (59,821) $ (69,023) $ 44,759 $ (417,599) ========== ========== ========== ========== Pro forma information (unaudited) Historical income (loss) before income taxes.................... $ (58,998) $ (66,263) $ 46,139 $ (416,219) Pro forma income tax expense....... 800 800 400 400 ---------- ---------- ---------- ---------- Pro forma net income (loss)........ $ (59,798) $ (67,063) $ 45,739 $ (416,619) ========== ========== ========== ========== Pro forma earnings (loss) per share-- basic and diluted.................. $ (0.03) $ (0.15) Pro forma weighted average number of shares -- basic and diluted........ 2,625,107 2,727,431
The accompanying notes are an integral part of these financial statements. F-4 60 ADSTAR.COM, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 (INFORMATION WITH RESPECT TO JUNE 30, 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..................... -- -- -- (417,599) (417,599) Dividends.................... -- -- -- (4,773) (4,773) --------- ----------- ----------- ----------- ----------- Balance, June 30, 1999....... 2,663,395 28,300 -- (1,094,611) (1,066,311) Conversion of convertible note and accrued interest (unaudited)................ 404,219 1,069,967 -- -- 1,069,967 Reincorporation in Delaware and change in par value (unaudited)................ -- (1,097,960) 1,097,960 -- -- Reclassification of deficit due to termination of S corporation election (unaudited)....... -- -- (1,094,611) 1,094,611 -- --------- ----------- ----------- ----------- ----------- Balance, June 30, 1999 pro forma (unaudited).......... 3,067,614 $ 307 $ 3,349 $ -- $ 3,656 ========= =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements F-5 61 ADSTAR.COM, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 (INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1999 IS UNAUDITED)
YEAR ENDED SIX-MONTH PERIOD DECEMBER 31, ENDED JUNE 30, ------------------- -------------------- 1997 1998 1998 1999 -------- -------- -------- --------- Cash flows from operating activities Net income (loss)......................................... $(59,821) $(69,023) $ 44,759 $(417,599) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization........................... 23,523 21,032 9,857 28,433 Changes in assets and liabilities Accounts receivable................................... (25,567) (20,913) (20,269) (155,330) Other assets and deferred offering costs.............. 612 1,522 (4,337) (362,404) Accounts payable...................................... 20,505 104,371 37,549 173,058 Accrued expenses...................................... (21,578) 78,248 5,316 1,864 Deferred revenue...................................... 49,500 (16,634) 2,743 (30,123) -------- -------- -------- --------- Net cash provided by (used in) operating activities....... (12,826) 98,603 75,618 (762,101) -------- -------- -------- --------- Cash flows from investing activities Purchase of property and equipment...................... (12,902) (25,532) (12,573) (276,874) -------- -------- -------- --------- Net cash used in investing activities..................... (12,902) (25,532) (12,573) (276,874) -------- -------- -------- --------- Cash flows from financing activities Proceeds from issuance from convertible notes payable... -- -- -- 1,050,000 Proceeds from issuance of note payable.................. 2,500 -- -- -- Proceeds from sales of stock............................ -- -- -- 26,300 Repayment of note payable............................... -- (22,500) (12,500) (6,260) Principal repayments on capital leases.................. -- (3,203) (178) (3,416) Dividends paid.......................................... (1,000) (4,849) -- (4,773) -------- -------- -------- --------- Net cash from (used in) financing activities.............. 1,500 (30,552) (12,678) 1,061,851 -------- -------- -------- --------- Net increase (decrease) in cash and cash equivalents...... (24,228) 42,519 50,367 22,876 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 $ 97,855 $ 112,883 ======== ======== ======== ========= Supplemental cash flow disclosure: Taxes paid.............................................. $ 9,138 $ 6,052 $ 5,981 $ 2,588 Interest paid........................................... $ 7,873 $ 4,518 $ 2,644 $ 15,639 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 $ 26,300 -- Property and equipment leases........................... -- 15,000 5,600 -- Dividends declared...................................... -- 20,750 -- --
The accompanying notes are an integral part of these financial statements F-6 62 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO JUNE 30, 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 August 31, 1999 the Company reincorporated 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. Effective July 1, 1999 the Company converted from an S-Corporation to a C-Corporation. The accompanying statements of operations reflect a pro forma tax provision for all periods presented, based upon pre tax income (loss), as if the Company has been subject to C-Corporation federal and state income taxes. 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 $1,050,000 of convertible notes outstanding at June 30, 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 June 30, 1999. UNAUDITED INTERIM FINANCIAL STATEMENTS The interim financial statements of the Company for the six months ended June 30, 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 F-7 63 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1999 IS UNAUDITED) present fairly the financial position of the Company as of June 30, 1999 and the results of its operations and its cash flows for the six-month periods ended June 30, 1998 and 1999. 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 different customers accounted for 9% and 12% of the Company's revenues, respectively. 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. F-8 64 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1999 IS UNAUDITED) 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. 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 the sale of its software 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 extent that customers make advance payments for installation fees, license fees, user support or maintenance fees, the amount received is deferred until the revenue has been earned. Revenues are recorded net of any discounts. 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 six-month periods ended June 30, 1998 and 1999 totaled approximately $22,400 and $88,300, respectively. In June 1999 the Company introduced a Web-based product which permits advertisers to plan, schedule, compose and purchase advertising from many print and on-line publishers. The Company recognizes revenues on a per transaction basis. The manner F-9 65 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1999 IS UNAUDITED) in which these transaction revenues are recognized depends on the service sold. With respect to ads composed directly on the Company's web-site, and where the advertiser does not have a contract with the publisher, the amount billed to the customer by the Company is recognized if, and when, the Company accepts the customer's ad and charges the customer's credit card. In these transactions, the Company is responsible for the resulting credit risk. Credit card and debit card processing fees and amount remitted to the publisher on these transactions are recognized as a cost of sale. With respect to ads placed through the Company's Web site, where the customer has a contract with the publisher, the publisher collects the revenues and remits the transaction fee to the Company. In these instances, these transaction fees are recognized when the ad is placed through the Company's system and the collection from a publisher of the resulting receivable is probable. The Company also recognizes revenue from banner advertising as the impressions are displayed; carriage revenues are recognized as the services are performed. To date, revenues from these services have been immaterial. RESEARCH AND DEVELOPMENT COSTS Costs incurred in the research and development of products are expensed as incurred. To date research and development costs have been immaterial. INCOME TAXES The Company utilizes the liability method of accounting for income taxes. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce the deferred tax assets to the amounts expected to be realized. Effective July 1, 1999 the Company is taxed as a C-Corporation. The Company had elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code through June 30, 1999. 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. F-10 66 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1999 IS UNAUDITED) 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. Pro forma earnings (loss) per share reflects adjustments for income taxes had the Company been a C-Corporation for all periods presented. The income tax provision represents the minimum state tax payable. For the six-month periods ended June 30, 1998 and 1999, diluted earnings (loss) per share does not include 0 and 404,219 shares issuable upon conversion of the convertible debt and accrued interest on an "as-if-converted" basis, and 0 and 255,135 options to purchase common stock, as their inclusion is antidilutive. Pro forma earnings (loss) per share for the year ended December 31, 1998 and the six-month period June 30, 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. 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 F-11 67 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1999 IS UNAUDITED) 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 annum. In April 1999, the Company received the proceeds in full on the note receivable plus the then outstanding interest. F-12 68 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1999 IS UNAUDITED) 4. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following at December 31, 1998 and June 30, 1999:
DECEMBER 31, JUNE 30, 1998 1999 ------------ --------- Computer equipment and software....................... $ 164,752 $ 437,595 Furniture and fixtures................................ 26,752 30,783 Leasehold improvements................................ 2,854 2,854 --------- --------- 194,358 471,232 Less: Accumulated depreciation and amortization....... (116,797) (132,206) --------- --------- Net property and equipment.......................... $ 77,561 $ 339,026 ========= =========
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 June 30, 1999, intangible assets are comprised of:
JUNE 30, 1999 -------- Cost........................................................ $195,343 Less: Accumulated amortization.............................. (13,024) -------- $182,319 ========
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-13 69 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1999 IS UNAUDITED) 6. NOTES PAYABLE: At December 31, 1998 and June 30, 1999, notes payable consisted of the following:
DECEMBER 31, JUNE 30, 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........... -- 745,450 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........................................... -- 1,050,000 -------- ---------- 15,000 1,810,450 Less: short term portion............................. (15,000) (41,658) -------- ---------- Notes payable, net of current portion................ $ -- $1,768,792 ======== ==========
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 F-14 70 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1999 IS UNAUDITED) 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 agreement also contains restrictions on the payment of dividends. 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 June 30, 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 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 F-15 71 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1999 IS UNAUDITED) 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 no stock options to purchase shares of the Company's common stock have been granted. In April 1999, the Company granted, at fair value, 255,135 options to purchase common stock to officers and key employees at an exercise price of $2.65 per share. The fair value was determined by management based on the conversion price of the convertible notes issued in March/April 1999. 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 126,645 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 of approximately $97,000, 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-16 72 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 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, LEASES LEASES - ------------------------- --------- ------- 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. For the year ended December 31, 1997 and 1998 and for the six month period ended June 30, 1999, the Company paid royalties of approximately $50,000, $140,000 and $9,000, respectively. F-17 73 ADSTAR.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1999 IS UNAUDITED) DISTRIBUTION AGREEMENTS In November 1998 and February 1999, the Company entered into two distribution agreements whereby the Company has agreed to pay the other parties a percentage of the transaction fees 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. Through June 30, 1999 no amounts have been paid under these agreements. 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. Pursuant to this agreement, the stockholder agreed to provide technical services to the Company for one year for $100,000. F-18 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........................ 8 Use of Proceeds..................... 16 Dividend Policy..................... 17 Capitalization...................... 18 Dilution............................ 20 Selected Financial Data............. 21 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 23 Business............................ 29 Management.......................... 38 Certain Transactions................ 42 Principal Stockholders.............. 43 Description of Securities........... 45 Shares Eligible for Future Sale..... 48 Underwriting........................ 50 Legal Matters....................... 52 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 these 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 this limitation of liability may not 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. 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, this type of indemnification is against public policy as expressed in the Securities Act and is therefore 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 these 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..... $ 12,610.08 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........................................ $515,291.12
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. In March 1998 we purchased the technology, intellectual property and software rights related to the AdStar technology for $751,710 by the issuance of our 10% note payable in monthly installments of $8,333 and prepayable on the consummation of this offering. 2. 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 to purchase an aggregate of 410,792 shares of Common Stock. The notes will convert on the effective date of the offering. 3. On April 15, 1998 Registrant issued 133,094 shares to Adam Leff, an officer of the Company, for a purchase price of $26,300. 4. 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. 5. On July 15, 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) and 4(6) as transactions not involving a public offering. In addition, we also relied on Regulation 701 as exempting the issuance of shares described in Item 3 above, from registration. The Registrant made a determination that each of the purchasers was a sophisticated investor. The purchasers in these private offerings represented their intention to acquire the securities for investment only and not with a view to their distribution. Appropriate legends were affixed to the stock certificates and warrants issued in these transactions. All purchasers had adequate access, 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* 4.4 Form of Warrant Agreement 5.1 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* 10.16 Employment Agreement dated July 20, 1998 between Adam Leff and the Company and amendment dated July 15, 1999 10.17 Employment Agreement dated as of April 12, 1999 between Michael Kline and the Company 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).
- ------------------------- * Previously filed. ITEM 28. UNDERTAKINGS. The undersigned Registrant hereby undertakes to: II-3 78 (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) 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 then being offered, and the offering of such securities at that time shall be deemed to be the initial bona fide offering of such securities. (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 September 29, 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 September 29, 1999.
SIGNATURE TITLE --------- ----- LESLIE BERNHARD* President, Chief Executive Officer - --------------------------------------------------- and Director Leslie Bernhard ELI ROUSSO* Executive Vice President and - --------------------------------------------------- Director Eli Rousso BENJAMIN J. DOUEK* Senior Vice President, Chief - --------------------------------------------------- Financial Officer and Director Benjamin J. Douek *by /s/ HOWARD L. WEINREICH ----------------------------------------- Howard L. Weinreich attorney-in-fact
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* 4.4 Form of Warrant Agreement 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* 10.16 Employment Agreement dated July 20, 1998 between Adam Leff and the Company and amendment dated July 15, 1999 10.17 Employment Agreement dated as of April 12, 1999 between Michael Kline and the Company 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).
- ------------------------- * Previously filed. EX-4.1 2 SPECIMEN STOCK CERTIFICATE 1 EXHIBIT 4.1 ADSTAR.COM, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE CUSIP: This certifies that is the owner of Fully paid and non-assessable shares of Common Stock of the par value of $.0001 per share of AdStar.com, Inc., transferable on the books of the Corporation by the holder hereof in person or by duly authorized Attorney, upon surrender of this Certificate, properly endorsed. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. IN WITNESS WHEREOF, the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: Secretary: President: EX-4.4 3 WARRANT AGREEMENT 1 WARRANT AGREEMENT between ADSTAR.COM, INC. and ---------------------- Dated as of , 1999 ----------- 2 This Agreement, dated as of __________, 1999, is between AdStar.com, Inc., a ______ 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, 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 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. 3 4 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 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. 4 5 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 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 5 6 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 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 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 6 7 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 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 8 9 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 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 9 10 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: 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 10 11 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 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 11 12 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 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. 12 13 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 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: 13 14 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. 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 14 15 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 __________________ ("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 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 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-5.1 4 FORM OF OPINION OF MORSE ZELNICK ROSE AND LANDER 1 Exhibit 5.1 [MORSE, ZELNICK, ROSE & LANDER, LLP LETTERHEAD] (212) 838-1177 September 29, 1999 AdStar.com, Inc. 4553 Glencoe Avenue Suite 325 Marina del Rey California 90292 Dear Sirs: We have acted as counsel to AdStar.com, Inc., a Delaware corporation (the "Company") in connection with the preparation of a registration statement on Form SB-2, (the "Registration Statement") filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), to register the offering by (a) the Company of (i) 1,000,000 Units, each Unit consisting of three shares of Common Stock and two Warrants, each to purchase a share of Common Stock (the "Warrants")(and the offering of an additional 150,000 Units if the over-allotment option is exercised); (ii) 3,000,000 shares of Common Stock included in the Units (and an additional 450,000 shares if the over allotment Option is exercised), (iii) 2,000,000 Warrants included in the Units (and an additional 300,000 Warrants if the over-allotment option is exercised), (iv) 2,000,000 shares of Common Stock issuable upon exercise of the Warrants included in the Units (and an additional 300,000 shares if the over-allotment option is exercised), (v) an option (the "Underwriter's Option") to purchase 100,000 Units, (vi) 100,000 Units issuable on exercise of the Underwriter's Option, (vii) 300,000 shares of Common Stock included in the Units underlying the Underwriter's Option, (viii) 200,000 Warrants included in Units underlying Underwriter's Option, (ix) 200,000 shares of Common Stock issuable upon exercise of the Warrants included in the Units underlying the Underwriter's Option, and any and all amendments to the Registration Statement, and any Registration Statements for any additional Units, shares of Common Stock, Warrants, Common Stock underlying the Units, Warrants underlying the Units, Common Stock underlying the Warrants, Underwriter's Option, Units underlying the Underwriter's Option, Common Stock underlying such Units, Warrants underlying such Units and Common Stock underlying such Warrants, pursuant to Rule 462(b) of the Act. 2 AdStar.Com, Inc. September 20, 1996 Page 2 of 2 In this regard, we have reviewed the Certificate of Incorporation of the Company, as amended, resolutions adopted by the Company's Board of Directors, the Registration Statement, the proposed form of the Warrants and the Underwriter's Option, and other exhibits to the Registration Statement and such other records, documents, statutes and decisions as we have deemed relevant in rendering this opinion. Based upon the foregoing, we are of the opinion that: 1. Each Unit, each share of Common Stock included in the Units being offered, each Warrant included in the Units being offered, each share of Common Stock underlying such Warrants, (and as for any over-allotment option each Unit issued upon the exercise of such option, share of Common Stock included in such Units, each Warrant included in the Units being offered, and each share of Common Stock underlying such Warrants) the Underwriter's Option, the Units issuable upon exercise of the Underwriter's option, the Common Stock underlying those Units, the Warrants underlying those Units, and the Common Stock underlying those Warrants being offered pursuant to the Registration Statement and all amendments thereto and any Registration Statements pursuant to Rule 462(b) of the Act for additional Units, shares of Common Stock underlying such Units, Warrants underlying such Units, shares of Common Stock underlying such Warrants, the Underwriter's Option, the Units issuable upon the exercise of such option, the Common Stock underlying those Units, the Warrants underlying those Units, and the Common Stock underlying those Warrants have been duly and validly authorized for issuance and when issued as contemplated by the Registration Statement or upon exercise of the Warrants or the Underwriter's Option, will be legally issued, fully paid and non-assessable. 2. The warrants are binding obligations under New York contract law governing the warrant agreement. We hereby consent to the use of this opinion as Exhibit 5.1 to the Registration Statement and any and all amendments thereto, and any Registration Statements pursuant to Rule 462(b) of the Act for any additional Units, shares of Common Stock, Warrants, shares of Common Stock underlying the Warrants and Underwriter's Option (including the Units issuable upon the exercise of the Underwriter's Option, the Common Stock underlying these Units, the Warrants underlying these Units and the shares of Common Stock underlying these Warrants. In giving such opinion, we do not thereby admit that we are acting within the category of persons whose consent is required under Section 7 of the Act or the rules or regulations of the Securities and Exchange Commission thereunder. Members of this firm or their affiliates own an aggregate of 148,200 shares of Common Stock of the Company. Very truly yours, /s/ MORSE, ZELNICK, ROSE & LANDER MORSE, ZELNICK, ROSE & LANDER, LLP EX-10.16 5 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.16 EMPLOYMENT AGREEMENT THIS AGREEMENT made this 20 day of July, 1998, between Adam Leff (the "Executive") and Ad-Star Services, Inc., a New York Corporation (the "Company"). W I T N E S S E T H: WHEREAS, the Company desires to employ the Executive as Vice President/Chief Operating Officer of the Company on the terms and conditions set forth herein; and WHEREAS, the Executive desires to be so employed. NOW, THEREFORE, in consideration of the foregoing and of the respective convenants and agreement herein contained, the parties, intending to be legally bound, agree as follows: 1. EMPLOYMENT The Company hereby agrees to employ the Executive, and the Executive hereby agrees to serve as Vice President/Chief Operating Officer ("COO") of the Company subject only to policy directives from the Board of Directors of the Company (the "Board of Directors"), the President of the Company (the "President") and/or the Executive Vice President of the Company (the "Executive Vice President"). The Executive agrees to use reasonable efforts to perform specific services for the development and execution of a business plan ("the Business Plan") to add to the existing business of the Company additional business based upon revenue opportunities on the World Wide Web, such new business to be referred to heretofore as "AdStar-Net". In addition, the Executive shall use reasonable efforts to raise necessary funding to execute the Business Plan, which funding is estimated to be five hundred thousand dollars ($500,000) in private funding and 8 million dollars ($8,000,000) in venture capital under terms that are satisfactory to and approved by the Board of Directors. In addition the Executive agrees to perform such services that are customary to the office of Vice President/Chief Operating Officer as shall from time to time be assigned to him in the discretion of either the President, the Executive Vice President or the Board of Directors. The Executive further agrees to devote his full business time and energies to the business and affairs of the Company. 2. TERM OF EMPLOYMENT The term of this Agreement shall be for four (4) years commencing on __________, 199__ (the "Commencement Date") and ending on ____________, 200__, unless terminated earlier pursuant to Paragraph 3 of this Agreement. This Agreement shall automatically be renewed for successive terms of one (1) year (each, a "Renewal Term") commencing on anniversaries of the Commencement Date, unless such renewal is objected to by either party upon ninety (90) days prior written notice before the expiration of the initial term or any Renewal Term. Any non-renewal is subject to Paragraph 3. Page 1 2 3. TERMINATION 3.1 INTENTIONALLY OMITTED 3.2 RESIGNATION. The Executive may resign his employment with the Company upon thirty (30) days' prior written notice. In the event of the Executive's resignation pursuant to this Paragraph 3.2, the Company shall pay to the Executive the salary provided for in Paragraph 4.1 (at the annual rate then in effect) accrued to the date of such termination and not therefore paid to the Executive and neither the Executive nor the Company shall have any further rights or obligations under this Agreement, except as provided Paragraphs 5, 6 and 7 hereof. Rights and benefits of the Executive, the Executive's estate or other legal representative under the employee benefit plans and programs of the Company, if any, will be determined in accordance with the terms and provisions of such plans and programs. 3.3 TERMINATION WITH DUE CAUSE. The Company may terminate the Executive's employment hereunder at any time for Due Cause (as hereinafter defined). Except as set forth below, in the event of the Executive's termination pursuant to this Paragraph 3.3, the Company shall pay to the Executive the salary provided for in Paragraph 4.1 (at the annual rate then in effect) accrued to the date of such termination and not theretofore paid to the Executive and neither the Executive nor the Company shall have any further rights or obligations under this Agreement, except as provided in Paragraph 5, 6 and 7 hereof. Rights and benefits of the Executive, the Executive's estate or other legal representative under the employee benefit plans and programs of the Company, if any, will be determined in accordance with the terms and provisions of such plans and programs. For purposes hereof, "DUE CAUSE" shall mean (a) a material breach of any of the Executive's obligations hereunder (it being understood that any breach of the provisions of Paragraphs 1, 5, 6, or 7 hereof shall be considered material) or the Executive's failure to perform his duties hereunder as determined in the good faith judgment by a unanimous vote of the Board of Directors; or (b) that the Executive, in carrying out the Executive's duties hereunder, has been guilty of (i) willful or gross neglect or (ii) willful or gross misconduct, resulting in either case in harm to the Company; or (c) that the Executive has been convicted of or pleads nolo contendere to (i) a felony, excepting any changes in the laws after the Commencement Date relating to electronic publishing, or (ii) any crime or offense involving moral turpitude. In the event that the Executive is charged with a felony which is potentially injurious to the Company, monetarily or otherwise (each , a "charge"), the Company shall be entitled to suspend the Executive immediately without pay and the Company shall pay the Executive his salary (at the annual rate then in effect) through the date of suspension. Notwithstanding anything else contained in this Paragraph 3.3 to the contrary, in the event that the Executive is not exonerated of the charge, upon termination of the Executive's employment with the Company, the Company shall have no further obligation to pay the Executive his salary and neither the Executive nor the Company shall have any further rights or obligations under this Agreement, except as provided in Paragraphs 5, 6 and 7 hereof. In the event that the Executive is exonerated of the charge, the Company shall immediately reinstate the Executive and pay him the salary (at the annual rate then in effect) for the period of time during which the Executive was suspended. 3.4 DEATH. In the event of the death of the Executive during the term of this Agreement, the Company shall pay to the estate or other legal representative of the Executive the salary provided for in Paragraph 4.1 Page 2 3 accrued to the Executive's date of death and not theretofore paid, and the rights of the Employee's estate or other legal representative under the employee benefit plans and programs of the Company, if any, will be determined in accordance with the terms and provisions of such plans and programs. 3.5 DISABILITY. If the executive shall become incapacitated by reason of sickness, accident or other physical or mental disability and shall for a period of ninety (90) consecutive days (the "Disability Period") be unable to perform the Executive's normal duties hereunder with a reasonable accommodation, the employment of the Executive hereunder may be terminated without cause by the Company immediately upon the expiration of the Disability Period. Within thirty (30) days after such termination, the Company shall pay to the Executive the salary provided for in Paragraph 4.1 (at the annual rate then in effect) accrued to the date of such termination and not theretofore paid. Rights and benefits of the Executive, the Executive's estate or other legal representative under the employee benefit plans and programs of the Company, if any, will be determined in accordance with the terms and provisions of such plans and programs. Neither the Executive nor the Company shall have further rights or obligations under this Agreement, except as provided in Paragraphs 5, 6 and 7 hereof. 3.6 REPURCHASE RIGHT. Notwithstanding anything contained herein to the contrary, in the event Employee's employment is terminated pursuant to either Paragraph 3.2 or Paragraph 3.3 hereof, the Company shall have an option, exercisable within 15 days of the date of termination of employment, to purchase up to one-third of the shares of the Company's common stock then owned by Employee for an aggregate purchase price of $8,766.67. 4. COMPENSATION AND OTHER RELATED MATTERS. 4.1 BASE SALARY. As compensation for services rendered hereunder, the Executive shall receive an annual salary in the amount of Ninety Six Thousand Dollars ($ 96,000.00), less all applicable withholding taxes, such salary to be paid in accordance with the Company's normal procedures. 4.2 BONUS. The Company agrees to pay the Executive an annual bonus at the end of each Company fiscal year (which coincides with the calendar year, subject to change) while the Executive is employed pursuant to this Agreement. The amount of such annual bonus shall be determined as follows: AdStar-Net Revenues from 0 to $500,000 - 1% of revenues AdStar-Net Revenues from $500,001 to $1,000,000 - 2% of revenues AdStar-Net Revenues from $1,000,001 to $1,500,000 -3 % of revenues "AdStar-Net Revenues" are defined as gross revenues derived from AdStar-Net, and the percentage will be applied on the total revenue and not the tiered revenues. The maximum amount of bonus will be capped at $45,000 per fiscal year. The Board of Directors of the Company will have the sole discretion to award an arbitrary bonus, in addition to the above amounts. In addition, the Company agrees to pay the Executive a one time bonus from the initial private funding provided for in Paragraph 1 hereof. The bonus shall be in the amount of fifteen thousand dollars ($15,000) if the Company receives four hundred thousand dollars ($400,000) or more from the private funding, or ten thousand dollars ($10,000) if the Company receives less than four hundred thousand dollars ($400,000). Payment shall be made within 30 days after the receipt of the funds. Page 3 4 4.3 EXPENSES. During the term of this Agreement, the Company shall pay, or the Executive shall be entitled to receive prompt reimbursement from the Company of, all reasonable and necessary expenses incurred by him in performing services hereunder, provided he properly accounts therefor in accordance with Company policy as in effect from time to time. The Executive's reasonable moving expenses from New York to Los Angeles will be reimbursed, up to a maximum of $4000, within 30 days of receipt by the Company of suitable documentation of such moving expenses. 4.4 VACATION. The Executive shall receive three (3) weeks of paid vacation per year. 4.5 OTHER BENEFITS. The fringe benefits, perquisites and other benefits of employment to be provided to the Executive shall be equivalent to those the Company normally provides to employees of the Company plus any additional benefits and perquisites as shall be provided to future senior executives of the Company. The Company shall provide the Executive with computer equipment that has the power reasonably necessary for the performance of the services hereunder. 5. CONFIDENTIALITY. (a) The Executive acknowledges that as a stockholder and an employee of the Company he has had access, and may have access, to confidential information which relates to the business of the Company. The Executive shall, during the Executive's employment with the Company and at all times thereafter, treat all confidential material (as hereinafter defined) of the Company confidentially. The Executive shall not, without the prior written consent of the President, disclose such confidential material, directly or indirectly, to any party or remove from the Company's premises any notes or records relating thereto, copies or facsimiles thereof (whether made by electronic, electrical, magnetic, optical, laser, acoustic or other means), or any other property of the Company. The Executive agrees that all confidential material, together with all notes and records of the Executive relating thereto, and all computer disks, copies or facsimiles thereof in the possession of the Executive (whether made by the foregoing or other means) are the exclusive property of the Company. The Executive shall not in any manner use any confidential material of the Company, or any other property of the Company, in any manner not specifically directed by the Company or in any way which is detrimental to the Company, as determined by the President in his sole discretion. (b) For the purposes of this Agreement, the "business of the Company" shall mean the nature of the Company's current business or as may be described in the Company's business plans from time to time in effect, or such other projects as may be dictated or formulated by the Board of Directors of the Company during the term of this Agreement. (c) For the purposes of this Agreement, the term "confidential material" shall mean all information in any way concerning the activities, business or affairs of the Company or any of the customers and clients of the Company, including, without limitation, information concerning trade secrets, together with all software and sales and financial information concerning projects in research and development or marketing plans for any products or projects of the Company, and all information concerning the practices, customers and clients of the Company, and all information in any way concerning the Page 4 5 activities, business or affairs of any of such customers or clients, as such, which is furnished to the Executive by the Company or any of its agents, customers or clients, as such, or otherwise acquired by the Executive in the course of the Executive's employment with the Company. 6. RESTRICTIVE COVENANTS. 6.1 NON-COMPETITION. The Executive acknowledges that the services to be rendered by the Executive to the Company are of a special and unique character. The Executive agrees that, in consideration of the Executive's employment hereunder, the Executive will not directly or indirectly, own, manage, operate, control or participate in the ownership, management or control of, or act as an officer, employee, partner, director of or otherwise with, or have any financial interest in, or aid or assist anyone else in the conduct of, any entity or business which competes with the business conducted by the Company (other than the Executive's ownership of securities of a public company engaged in competition with the Company not in excess of 2% of any class of such securities, anywhere in the United States), prior to two (2) years (the "Restricted Period") from the date of termination of the Executive's employment by the Company until the end of term as defined in Paragraph 2 or 12 months whichever is greater, so long as the Executive is paid a salary by the Company as outlined in Paragraph 4.1 during this period of non-competition. 6.2 NON-SOLICITATION. For a period of two (2) years following the date of termination of the Executive's employment hereunder for any reason, the executive will not, directly or indirectly, take any of the following actions, and, to the extent the Executive directly or indirectly owns, manages, operates, controls, is employed by or participates in the ownership, management, operation or control of, or is connected in any manner with, any business of the type and character engaged in and competitive with that conducted by the Company during the period of the Executive's employment, the Executive will use his best efforts to ensure that such business does not take any of the following actions: (i) persuade or attempt to persuade any client of the Company to cease doing business with the Company, or to reduce the amount of business it does with the Company; (ii) persuade or attempt to persuade any potential client to which the Company has made a presentation, or with which the Company has been having discussions, not to hire the Company; (iii) solicit, for himself or any person other than the Company, any business that is the same as, similar to or is a replacement for that of the Company, from any person which is a client of the Company, or was its client within (6) months prior to the termination of the Executive's employment; notwithstanding the above, this section (iii) does not apply after the period that Company pays the Executive's salary if the Executive is terminated without cause as provided for in paragraph 3.1; or (iv) persuade or attempt to persuade any employee of the Company or any individual who was its employee during the one (1) year prior to the Executive's termination of employment, to leave the Company's employ or to become employed by any person other than the Company. The obligations of the Executive under this paragraph 6 shall survive any Page 5 6 termination of this Agreement. 7. INVENTIONS. (a) Any and all intellectual property, and inventions or software made, developed or created by the Executive during the term of this Agreement which reasonably relate to the business of the Company or which reasonably relate to any business conducted by the Company during the term of the Executive's employment by the Company (each, an "Invention"), whether at the request or suggestion of the Company or otherwise, whether alone or in conjunction with others, and whether during regular working hours of work or otherwise, shall be promptly and fully disclosed by the Executive to the President and/or the Board of Directors of the Company and shall be the Company's exclusive property as against the Executive, and the Executive shall promptly deliver to the President and/or the Board of Directors all papers, drawings, models, data and other material relating to any Invention made, developed or created by him as aforesaid. In addition, the Executive during the term of this Agreement, whether or not such Invention relates to the business being conducted by the Company at the time of development or creation of such Invention. (b) The Executive hereby expressly acknowledges and agrees that any Invention developed or created by the Executive during the term of this Agreement which reasonably relates to the business of the Company or which reasonably relates to the business conducted by the Company during the Executive's employment by the Company shall be considered "works made for hire" within the meaning of the Copyright Act of 1976, as amended (17 U.S.C. S 101). Each such Invention as well as all copies of such Invention in whatever medium fixed or embodied, shall be owned exclusively by the Company as of the date of creation. (c) The Executive shall, upon the Company's request and without any payment therefor, execute any documents necessary or advisable in the opinion of the Company's counsel to direct issuance of patents or copyrights of the Company with respect to such Invention as are to be in the Company's exclusive property as against the Executive under this Paragraph 7 or to vest in the Company title to such inventions as against the Executive, the expense of securing any such patent or copyright, to be borne by the Company. In addition, the Executive agrees not to file any patent, copyright or trademark applications related to such Invention. 8. MISCELLANEOUS. 8.1 SUCCESSORS; BINDING AGREEMENT. This Agreement and the obligations of the Company hereunder and all rights of the Executive hereunder shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns; provided, however, that the duties of the Executive hereunder are personal to the Executive and may not be delegated or assigned by him. 8.2 NOTICES. All notices, requests or instructions hereunder shall be in writing and delivered personally, sent by telecopier or sent by registered or certified mail, postage prepaid, as follows: IF TO THE EXECUTIVE: Mr. Adam Leff 66 West 88th Street, Apt 1-D New York, NY 10024 Page 6 7 Telephone: (212) 724-8602 IF TO THE COMPANY: Ad-Star Services, Inc. 4553 Glencoe Avenue, Suite 325 Marina del Rey, California 90292 Telephone: (310) 577-8255 Facsimile: (310) 577-8266 Attention: Leslie Bernhard Either of the above addresses may be changed at any time by notice given as provided above; provided, however, that any such notice of change of address shall be effective only upon receipt. All notices, requests or instructions given in accordance herewith shall be deemed received on the date of delivery, if hand delivered or telecopied, and two business days after the date of mailing, if mailed. 8.3 GOVERNING LAW. This Agreement shall be governed by and in accordance with the laws of the State of New York without regard to conflict of laws rules thereof. 8.4 WAIVERS. The waiver of either party hereto of any right hereunder or of any failure to perform or breach by the other party hereto shall not be deemed a waiver of any other right hereunder or of any other failure or breach by the other party hereto, whether of the same or a similar nature or otherwise. No waiver shall be deemed to have occurred unless set forth in writing executed by or on behalf of the waiving party. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 8.5 VALIDITY. The invalidity or enforceability of any provision of this Agreement shall not affect the validity or enforceability of any provision of this Agreement, which shall otherwise remain in full force and effect. Moreover, if any one or more of the provisions contained in this Agreement is held to be excessively broad as to duration, scope, activity or other, in lieu, such provisions shall be construed by limiting and reducing them so as to be enforceable to the maximum extent compatible with applicable law. 8.6 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 8.7 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding of the parties in respect of the subject matter contained herein, and supersedes all prior agreements, promises, convenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of either party in respect of said subject matter. 8.8 HEADING DESCRIPTIVE. The headings of the several paragraphs of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any of this Agreement. 8.9 INDEMNIFICATION. As an officer of the Company, the Executive will Page 7 8 have the same indemnification as the other officers have, according to the Articles of Incorporation. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above. EXECUTIVE ------------------------------------- AD-STAR SERVICES, INC. By: ---------------------------------- Name: Title: Page 8 9 AD-STAR SERVICES, INCORPORATED 4553 GLENCOE AVENUE, SUITE 325 MARINA DEL REY, CALIFORNIA 90292 July 15, 1999 Mr. Adam Leff 7037 Sunny Bare Avenue Winnetka, California 91306 RE: Ad-Star Services, Incorporated Dear Adam: This is to confirm our understanding with respect to our agreement amending your Employment Agreement with the Company dated July 20, 1998 (the "Employment Agreement") in the following respects: 1. Effective June 1, 1999 (i) your base compensation as set forth in Section 4.1 of the Employment Agreement shall be raised from $96,000 per annum to $118,000 per annum, (ii) you shall be entitled to a monthly car allowance of $650 and (iii) your title shall be Senior Vice President/Business Development and Corporate Communications in place and instead of Vice President/Chief Operating Officer and the new title shall be used to replace Vice President/Chief Operating Officer wherever it appears in Section 1 or elsewhere in the Employment Agreement. 2. If during the next twelve months the Company has an initial public offering in which stockholders of the Company sell shares owned by them to the Underwriter pursuant to its exercise of its over-allotment option, within five days after the closing of such offering the Company will purchase and you shall sell to the Company so many shares of your stock which when valued at the initial public offering ("IPO") price most nearly equals $160,000. 3. In all other respects the Employment Agreement is ratified and approved. Please indicate your approval of the foregoing changes by signing this letter where indicated and returning it to me. Very truly yours, Leslie Bernhard APPROVED AND RATIFIED: - -------------------------- Adam Leff Page 9 EX-10.17 6 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.17 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of April 12, 1999 between MICHAEL KLINE (the "Executive") and AD-STAR SERVICES, INC., a New York corporation (the "Company"). 1. Term of Agreement. Subject to the terms and conditions hereof, the term of employment of the Executive under this Employment Agreement shall be for the period commencing on April 12, 1999 and terminating on April 11, 2001, unless sooner terminated as provided in accordance with the provisions of Section 6 hereof. Such term of employment is herein sometimes called the "Employment Term." 2. Duties and Responsibilities. With respect to his duties and responsibilities as Senior Vice President - Strategy the Executive shall report to the Chief Executive Officer and with respect to his duties and responsibilities as Senior Vice President - Products, the Executive shall report to the Executive Vice President.. In both capacities the Executive shall perform such duties consistent with his titles and position as may be assigned to him from time to time by the Chief Executive Officer, and the Board of Directors. During the Employment Term, Executive shall devote his full time, skill, energy and attention to the business of the Company and shall perform his duties in a diligent, trustworthy, loyal and businesslike manner. 3. Compensation. The Company shall pay to Executive a salary at the rate of $102,000 per year payable in such manner as it shall determine, but in no event any less often than monthly, less withholding required by law and other deductions agreed to by Executive. 2 4. Incentive Stock Options. As of the date hereof, the Company and Executive shall enter into a Stock Option Agreement (the "Stock Option Agreement"), pursuant to which the Company shall grant to Executive options to acquire 5.26 shares of the common stock, without par value, of the Company (the "Common Stock") at a price equal to $66,977 per share and upon such terms and conditions as are set forth in its 1999 Stock Option Plan (the "Plan"). The options are intended to constitute Incentive Stock Options (the "Incentive Stock Options") as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). One-third of such Incentive Stock Options shall vest and become exercisable on each of April 12, 1999, 2000 and 2001, provided, however, that in the event of a change of control, as defined in the Plan, the Company terminates Executive's employment without cause or the Executive terminates his employment with good reason, all options granted to Executive which have not yet vested shall then vest and become exercisable and if the Company has an initial public offering of its securities within twelve months from the date hereof, the vesting of the outstanding invested options shall be accelerated by twelve months. All options shall expire five years from the date of grant. 5. Expenses and Benefits. (a) The Company shall, consistent with its policy of reporting and reimbursement of business expenses, reimburse Executive for such ordinary and necessary business related expenses as shall be incurred by Executive in the course of the performance of his duties under this Agreement including, but not limited to, the expenses associated with the use of a cellular telephone and internet access at Executive's home provided by a local cable service. 2 3 (b) Executive shall be eligible to participate to the extent that he qualifies in all benefit plans, including without limitation, pension, term life insurance, hospitalization, medical insurance and disability plans as are made available from time-to time to executives of the Company. (c) Executive shall be entitled to two weeks of paid vacation annually, which shall be taken in accordance with the procedures of the Company in effect from time-to-time. 6. Termination. (a) The Company shall have the right to terminate the employment of the Executive under this Agreement for disability in the event Executive suffers an injury, illness or incapacity of such character as to substantially disable him from performing his duties hereunder for a period of more one hundred eighty (180) consecutive days upon the Company giving at last thirty (30) days' written notice of termination. (b) This Agreement shall terminate upon the death of Executive. (c) The Company may terminate this Agreement at any time because of (i) Executive's material breach of any term of this Agreement, (ii) Executive's disloyalty or (iii) the willful engaging by the Executive in misconduct which is materially injurious to the Company, monetarily or otherwise. (d) The Executive may terminate this agreement for good reason, consisting of the material breach of this agreement by the Company including effecting a material change in the Executive's title, reporting relationships or responsibilities; provided, however, that relieving the Executive of one of his two titles cited in Section 2 herein shall not justify Executive's termination under this subsection. 3 4 (e) In the event the Company terminates Executive's employment without cause or the Executive terminates his employment with good reason pursuant to Section 6(d) the Company shall pay the Executive for the balance of what would have been the Employment Term but for its early termination as described in this Section 6(e) one half of the monthly compensation payable to him under Section 3 hereof or three full months of compensation under Section 3, whichever is higher, provided, however, that no payment shall be made hereunder for any month in which the Company makes a payment to the Executive pursuant to Section 8 hereof. If the amount payable under this section exceeds two months compensation, the Company may at its option pay the Executive a lump sum payment equal to two months compensation and the balance in 10 equal monthly installments with interest thereon at the rate of 8% per annum. 7. Revealing of Trade Secrets, etc. Executive acknowledges the interest of the Company in maintaining the confidentiality of information related to its business and shall not at any time during the Employment Term or thereafter, directly or indirectly, reveal or cause to be revealed to any person or entity the supplier lists, customer lists or other confidential business information of the Company; provided, however, that the parties acknowledge that it is not the intention of this paragraph to include within its subject matter (a) information not proprietary to the Company, (b) information which is then in the public domain, or (c) information required to be disclosed by law. 8. Covenants Not to Compete. During the Employment Term and, subject to the last sentence of this paragraph, for a period of one year thereafter, the Executive shall not, directly or indirectly: (i) in any manner, engage in any business which competes with any business conduced by the Company and will not directly or indirectly own, manage, operate, 4 5 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 or business that is so engaged, (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 or (iii) persuade or attempt to persuade any current client or former client with, or to reduce the amount of business it does or intends or anticipates doing with the Company. If the Executive is terminated without cause or if he terminates his employment with good reason prior to the end of the Employment Term, the covenant not to compete shall terminate unless the Company agrees to continue to pay Executive his compensation as set forth in Section 3 for one year subsequent to termination in which event the Executive shall be bound by the non-competition covenant for such one year period. 9. Opportunities. During his employment with the Company, and for one year thereafter, Executive shall not take any action which might divert from the Company any opportunity learned about by him during his employment with the Company (including without limitation during the Employment Term) which would be within the scope of any of the businesses then engaged in or planned to be engaged in by the Company. 10. Survival. In the event that this Agreement shall be terminated, then notwithstanding such termination, the obligations of Executive pursuant to Sections 7 and 8 of this Agreement shall survive such termination. 11. Contents of Agreement, Parties in Interest, Assignment, etc. This Agreement sets forth the entire understanding of the parties hereto with respect to the subject matter 5 6 hereof. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of Executive hereunder which are of a personal nature shall neither be assigned nor transferred in whole or in part by Executive. This Agreement shall not be amended except by a written instrument duly executed by the parties. 12. Severability. If any term or provision of this Agreement shall be held to be invalid or unenforceable for any reason, such term or provision shall be ineffective to the extent of such invalidity or unenforceability without invalidating the remaining terms and provisions hereof, and this Agreement shall be construed as if such invalid or unenforceable term or provision had not been contained herein. 13. Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other 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, Inc. 4553 Glencoe Avenue Marina del Rey, CA 90292 with a copy to: Morse, Zelnick, Rose & Lander, LLP 450 Park Avenue New York, New York 10022 If to Executive addressed to: Michael Kline 2815 Ocean Avenue Venice, California 90291 6 7 or to such other address as the one party shall specify to the other party in writing. 14. Indemnification. The Company shall amend its Certificate of Incorporation to provide its officers with the maximum indemnification permitted under New York law. 15. Adjusted Cash Credit Payment. The Consultant Service Agreement between the Company and the Executive dated January 4, 1999 (the "Consultant Agreement") shall, except as indicated below, in all respects be deemed terminated as of April 12, 1999. The Company shall account to the Executive for an accumulated cash credit of $14,000 earned by him under the Consultant Agreement as follows: If the Company consummates an initial public offering (an "IPO") of its securities within 365 days from the date of this agreement and the over allotment option of the Underwriter is exercised, the Executive shall be entitled to receive in cash the Adjusted Cash Credit, as defined below, multiplied by a fraction in which the numerator shall be the market capitalization value of the Company as of the date of the IPO based on the IPO price and the denominator of which shall be $7,000,000 (the agreed upon value of the Company as of April 30, 1999). The Adjusted Cash Credit shall mean $14,000 less whatever portion of such amount the Executive elects to take prior to the IPO. In the event that an IPO does not take place or in the event an IPO takes place in which the over allotment option is not exercised, within the 365 day period the Executive shall have the right to be paid the balance of the accumulated cash credit at any time upon 30 days written notice. 16. Counterparts and Headings. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all which together shall constitute one and the same instrument. All headings are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Agreement. 7 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. AD-STAR SERVICES, INC. By: -------------------------------- ----------------------------------- MICHAEL KLINE 8 EX-23.1 7 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form SB-2 of our report dated July 21, 1999 except for the effects of the reincorporation in Delaware described in Note 1, as to which the date is September 1, 1999, relating to the financial statements of AdStar.com, Inc., which appear in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Registration Statement. PricewaterhouseCoopers, LLP Woodland Hills, California September 28, 1999 -----END PRIVACY-ENHANCED MESSAGE-----