1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 15, 2000
REGISTRATION NO. 333-45010
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
UPROAR INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7375 52-2192125
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER)
CODE NUMBER)
------------------------
240 WEST 35TH STREET
NEW YORK, NEW YORK 10001
(212) 714-9500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
KENNETH D. CRON
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
240 WEST 35TH STREET
NEW YORK, NEW YORK 10001
(212) 714-9500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
BABAK YAGHMAIE, ESQ. DAVID J. JOHNSON, JR., ESQ.
ADAM M. DINOW, ESQ. DAVID L. ORLIC, ESQ.
GUNDERSON DETTMER STOUGH VILLENEUVE O'MELVENY & MYERS LLP
FRANKLIN & HACHIGIAN, LLP 400 SOUTH HOPE STREET
733 THIRD AVENUE LOS ANGELES, CA 90071
NEW YORK, NY 10017
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective time of the merger described in this
Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
[UPROAR LOGO] [IRWIN LOGO]
To the stockholders of Uproar and iwin:
The boards of directors of Uproar and of iwin have approved an agreement
and plan of reorganization that will result in iwin becoming a wholly owned
subsidiary of Uproar through the merger of a wholly owned subsidiary of Uproar
with and into iwin. If the merger is completed:
- Uproar stockholders will continue to own their existing shares of Uproar
common stock;
- each outstanding share of iwin common stock and preferred stock will be
exchanged for approximately 0.83 of a share of Uproar common stock;
- the size of the board of directors of Uproar will be increased from eight
(8) to ten (10) members; and
- Richard Janssen, Gary Loveman and Frederick Krueger will become members
of the board of directors of Uproar.
It is estimated that iwin stockholders will hold, in the aggregate,
approximately 31% of the issued and outstanding shares of Uproar common stock
following the merger. The outstanding options and warrants to purchase iwin
common stock will be assumed by Uproar following the merger, and it is estimated
that these options and warrants will be converted into options and warrants to
purchase approximately 1,835,000 shares of Uproar common stock. A vote in favor
of the merger and the agreement and plan of reorganization or the related
issuance of Uproar common stock will be effective whether or not the actual
exchange ratio differs from the estimated exchange ratio set forth above.
Uproar's common stock is quoted on the Nasdaq National Market under the symbol
"UPRO" and on the European Association of Securities Dealers' Automated
Quotation System, or EASDAQ, under the symbols "UPRO" and "UPROrs". On August
23, 2000, the closing price for Uproar common stock reported on the Nasdaq
National Market was $6.75 per share and on EASDAQ under the symbol "UPROrs" was
E7.80, or $6.994, per share. On August 23, 2000, Uproar had 29,386,788 shares of
common stock outstanding.
AFTER CAREFUL CONSIDERATION, THE BOARDS OF DIRECTORS OF UPROAR AND IWIN
HAVE DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS OF THEIR RESPECTIVE
STOCKHOLDERS, AND EACH BOARD UNANIMOUSLY RECOMMENDS VOTING FOR APPROVAL OF THE
MERGER AND THE RELATED TRANSACTIONS.
This document provides you with detailed information about the proposed
merger. We encourage you to read this entire document carefully. IN PARTICULAR,
PLEASE SEE THE SECTION ENTITLED "RISK FACTORS" ON PAGE 14 OF THIS DOCUMENT FOR A
DISCUSSION OF RISKS ASSOCIATED WITH THE MERGER. The merger cannot be completed
unless iwin's stockholders approve the merger and the agreement and plan of
reorganization and Uproar's stockholders approve the issuance of Uproar common
stock pursuant to the agreement and plan of reorganization. We have scheduled
special meetings for you to vote on the merger and the agreement and plan of
reorganization and the related issuance of shares of Uproar common stock. At the
special meeting, Uproar's stockholders will also be asked to approve an
amendment and restatement of the Uproar Inc. 2000 Stock Incentive Plan which
increases the number of shares of Uproar common stock reserved for issuance
under the plan. The dates, times and places of the special meetings are as
follows:
For Uproar stockholders:
October 18, 2000
10:00 a.m. New York time, at
Uproar Inc.
240 West 35th Street
New York, New York 10001
For iwin stockholders:
October 18, 2000
10:00 a.m. California time, at
iwin.com, Inc.
10940 Wilshire Boulevard
Los Angeles, California 90024
Whether or not you plan to attend a special meeting, please take the time
to vote by completing and mailing the enclosed proxy card to us. YOUR VOTE IS
VERY IMPORTANT.
KENNETH D. CRON
Chairman of the Board and
Chief Executive Officer
Uproar Inc.
FREDERICK R. KRUEGER
Chief Executive Officer
iwin.com, Inc.
NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE UPROAR COMMON STOCK TO
BE ISSUED IN THE MERGER OR DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS
IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
3
This joint proxy statement/prospectus is dated and was first mailed to
stockholders on or about September 18, 2000.
4
UPROAR INC.
240 WEST 35TH STREET
NEW YORK, NEW YORK 10001
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 18, 2000
A special meeting of stockholders of Uproar Inc., a Delaware corporation,
will be held on October 18, 2000, at 10:00 a.m., New York time, at 240 West 35th
Street, New York, New York, to consider and act upon the following proposals:
1. To approve the issuance of up to an estimated maximum of 14,008,303 shares of
Uproar common stock to the stockholders of iwin.com, Inc., a Delaware
corporation, and the assumption of all outstanding options and warrants of
iwin as contemplated by the agreement and plan of reorganization, dated as of
July 25, 2000, by and among Uproar, iwin Acquisition Corporation, a Delaware
corporation and a wholly owned subsidiary of Uproar, iwin, Frederick Krueger,
as stockholders' agent, and the stockholders of iwin listed on the signature
pages thereof. Under the agreement and plan of reorganization, iwin
Acquisition Corporation will be merged with and into iwin, with iwin being
the surviving corporation. If this proposal is approved, outstanding iwin
stock options and warrants will be assumed by Uproar and will convert into
options and warrants to purchase up to an additional estimated 1,835,000
shares of Uproar common stock at various exercise prices.
2. To approve the amendment and restatement of the Uproar Inc. 2000 Stock
Incentive Plan to increase the number of shares of Uproar common stock
reserved for issuance under the plan from 6,750,000 to 9,000,000 shares.
3. To transact such other business as may properly come before the Uproar
special meeting or any adjournment or postponement of the meeting.
The close of business on September 11, 2000 has been fixed as the record
date for the determination of stockholders entitled to notice of, and to vote
at, the Uproar special meeting or any adjournment or postponement of the
meeting. Only holders of record of Uproar common stock at the close of business
on the record date may vote at the Uproar special meeting.
All holders of Uproar common stock are cordially invited to attend the
Uproar special meeting in person. HOWEVER, TO ENSURE YOUR REPRESENTATION AT THE
UPROAR SPECIAL MEETING, YOU ARE URGED TO FOLLOW THESE STEPS: IF YOUR SHARES ARE
TRADED ON NASDAQ, PLEASE COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY CARD AS
PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE; IF YOUR SHARES
ARE TRADED ON EASDAQ, PLEASE CONTACT YOUR INTERMEDIARY BANK OR BROKER, OR
CONTACT EUROCLEAR OR CLEARSTREAM BANKING, AS PROMPTLY AS POSSIBLE FOR
INSTRUCTIONS ON HOW TO VOTE YOUR SHARES OR TO ATTEND THE MEETING. YOUR VOTE IS
VERY IMPORTANT.
By Order of the Uproar Board of
Directors,
--------------------------------------
Robert D. Marafioti
Secretary
New York, New York
September 18, 2000
5
IWIN.COM, INC.
10940 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90024
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 18, 2000
A special meeting in lieu of the annual meeting of stockholders of
iwin.com, Inc., a Delaware corporation, will be held on October 18, 2000 at
10:00 a.m., California time, at 10940 Wilshire Boulevard, Los Angeles,
California, to consider and act upon the following proposals:
1. To approve and adopt the merger and the agreement and plan of reorganization,
dated as of July 25, 2000, among Uproar Inc., a Delaware corporation, iwin
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary
of Uproar, iwin, Frederick Krueger, as stockholders' agent, and the
stockholders of iwin listed on the signature pages thereof, that will result
in iwin becoming a wholly owned subsidiary of Uproar.
2. To approve the appointment of Frederick Krueger, currently iwin's Chief
Executive Officer, as the indemnification representative to act on behalf of
the iwin stockholders in connection with the merger and the escrow agreement
referred to in the agreement and plan of reorganization.
3. To approve the grant made to Scott Kaufman, Vice President of Product
Management, of an option to purchase 480,420 shares of iwin common stock at a
price of $5.46 per share conditioned on the merger closing.
4. To transact such other business as may properly come before the iwin special
meeting or any adjournment or postponement of the meeting.
The close of business on September 11, 2000 has been fixed as the record
date for the determination of stockholders entitled to notice of, and to vote
at, the iwin special meeting or any adjournment or postponement of the meeting.
Only holders of record of iwin common stock, Series A preferred stock, Series B
preferred stock and Series C preferred stock at the close of business on the
record date may vote at the iwin special meeting.
All holders of iwin common stock, Series A preferred stock, Series B
preferred stock, and Series C preferred stock are cordially invited to attend
the iwin special meeting in person. HOWEVER, TO ENSURE YOUR REPRESENTATION AT
THE IWIN SPECIAL MEETING, YOU ARE URGED TO COMPLETE, SIGN AND RETURN THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE-PREPAID
ENVELOPE. YOUR VOTE IS VERY IMPORTANT.
By Order of the iwin Board of
Directors,
--------------------------------------
Frederick Krueger
Chief Executive Officer
Los Angeles, California
September 18, 2000
6
QUESTIONS AND ANSWERS ABOUT THE UPROAR/IWIN MERGER
Q: WHY ARE THE COMPANIES PROPOSING THE MERGER?
A: We believe that iwin's strengths and capabilities complement Uproar's
business and that the merger will enhance the combined company's ability to more
effectively compete in the online entertainment market.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: If the merger is completed, we estimate that each iwin stockholder will
receive approximately 0.83 of a share of Uproar common stock for each share of
iwin stock owned. Uproar will not issue fractional shares of common stock.
Instead of any fractional shares, iwin stockholders will receive cash based on
the market price of Uproar common stock as quoted on the Nasdaq National Market
on the closing date of the merger. Uproar common stock is traded on the Nasdaq
National Market under the symbol "UPRO," and on August 23, 2000, the Uproar
common stock closed at $6.75 per share. Because the exchange ratio will be fixed
but the market price of Uproar common stock is subject to fluctuation, the
market value of the shares of Uproar common stock that iwin stockholders will
receive in the merger may increase or decrease prior to and following the
merger. We urge you to obtain current market quotations for Uproar common stock.
The current stockholders of Uproar will continue to own their existing shares of
Uproar common stock.
Q: WHEN WILL THE MERGER BE COMPLETED?
A: We hope to complete the merger by the end of October 2000.
Q: SHOULD IWIN STOCKHOLDERS SEND IN THEIR STOCK CERTIFICATES NOW?
A: No. After we complete the merger, iwin will send you instructions explaining
how to exchange your shares of iwin stock for the appropriate number of shares
of Uproar common stock.
Q: SHOULD UPROAR STOCKHOLDERS SEND IN THEIR STOCK CERTIFICATES?
A: No. Uproar stockholders will continue to own their shares of Uproar common
stock after the merger and should continue to hold their stock certificates.
Q: HOW DO I VOTE?
A: If you hold Uproar shares traded on Nasdaq or iwin shares, mail your signed
proxy card in the enclosed return envelope as soon as possible. If you hold
Uproar shares traded on EASDAQ, please contact your intermediary bank or broker,
or contact Euroclear or Clearstream Banking, as soon as possible for
instructions on how to vote your shares. You may also attend the meeting for the
company of which you are a stockholder in person instead of submitting a proxy.
However, if you hold Uproar shares traded on EASDAQ, you must comply with
Euroclear or Clearstream Banking System guidelines in order to attend. In the
case of Uproar's stockholders, if your shares are held in "street name" by your
broker, your broker will vote your shares only if you provide instructions on
how to vote. You should follow the directions provided by your broker regarding
how to instruct your broker to vote your shares. Without instructions, your
shares will not be voted at the special meeting.
Q: HOW CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY PROXY?
A: You may change your vote by delivering a signed revocation or a subsequently
dated, signed proxy card to Uproar's or iwin's corporate secretary, as
applicable, before the stockholder meeting, or by attending the stockholder
meeting and voting in person.
Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE MERGER?
A: Yes. We have set out under the heading "Risk Factors" beginning on page 14
of this joint proxy statement/prospectus a number of risk factors that you
should carefully consider prior to voting.
Q: WHOM CAN I CALL WITH QUESTIONS?
A: If you are an Uproar stockholder, please call Uproar Investor Relations at
(212) 714-9500. If you are an iwin stockholder, please call iwin Investor
Relations at (310) 264-4300.
7
TABLE OF CONTENTS
PAGE
----
SUMMARY..................................................... 1
SELECTED CONSOLIDATED FINANCIAL DATA OF UPROAR INC. ........ 7
SELECTED FINANCIAL DATA OF IWIN.COM, INC. .................. 9
SELECTED UPROAR INC. AND IWIN.COM, INC. UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA............................... 10
MARKET PRICE INFORMATION.................................... 11
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS................................................ 13
RISK FACTORS................................................ 14
Risks Relating to the Merger.............................. 14
Risks Relating to Uproar.................................. 17
Risks Relating to iwin.................................... 23
Risks Related to the Business and Industry of Both Uproar
and iwin............................................... 24
THE UPROAR SPECIAL MEETING.................................. 30
THE IWIN SPECIAL MEETING.................................... 32
THE MERGER.................................................. 35
Background of the Merger.................................. 35
Joint Reasons for the Merger.............................. 36
Recommendation of the Board of Directors of Uproar;
Uproar's Reasons for the Merger........................ 37
Recommendation of the Board of Directors of iwin; iwin's
Reasons for the Merger................................. 37
Opinion of Bear Stearns................................... 38
Interests of Executive Officers and Directors of Uproar
and iwin in the Merger................................. 42
Treatment of iwin Common Stock, Preferred Stock, Options,
and Warrants........................................... 43
Escrow Arrangements....................................... 44
Composition of Uproar Board of Directors.................. 44
Accounting Treatment of the Merger........................ 44
Regulatory Approvals...................................... 44
Material Federal Income Tax Considerations................ 45
Appraisal Rights.......................................... 48
Nasdaq National Market and EASDAQ Quotations.............. 50
Resales of Uproar Common Stock Issued in Connection with
the Merger; Affiliate Agreements, Lock-up Agreements... 50
Operations Following the Merger........................... 50
THE AGREEMENT AND PLAN OF REORGANIZATION.................... 51
General................................................... 51
Exchange of Shares........................................ 51
Creation of Escrow Fund................................... 51
Treatment of iwin Stock Options and Warrants.............. 52
Exchange of Stock Certificates............................ 52
Appraisal Rights.......................................... 52
Representations and Warranties............................ 53
Covenants................................................. 53
Related Matters After the Merger.......................... 55
Indemnification of Uproar by iwin Stockholders............ 55
Indemnification of iwin By Uproar......................... 56
Conditions to Obligations to Effect Merger................ 56
Termination; Expenses..................................... 58
Amendment and Waiver...................................... 59
i
8
PAGE
----
OTHER AGREEMENTS............................................ 60
Voting Agreements......................................... 60
Affiliate Agreements...................................... 60
Escrow Agreement.......................................... 60
Lock-Up Agreements........................................ 60
PROPOSAL TO APPROVE AMENDMENT AND RESTATEMENT OF UPROAR INC.
2000 STOCK INCENTIVE PLAN................................. 61
Discretionary Option Grant Program........................ 62
Stock Issuance Program.................................... 63
Automatic Option Grant Program............................ 63
General Provisions........................................ 63
New Plan Benefits......................................... 65
Federal Income Tax Consequences of Options Granted under
the Incentive Plan..................................... 65
Recommendation of the Board of Directors.................. 66
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS................................................ 67
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS...................................... 71
DESCRIPTION OF UPROAR....................................... 72
Business.................................................. 72
Overview............................................... 72
Industry Background.................................... 72
The Uproar Opportunity................................. 72
The Uproar Network..................................... 73
Our Strategy........................................... 74
Alliances and Strategic Relationships.................. 76
Game and Game Show Programming......................... 78
Advertising Sales...................................... 80
Sales Organization..................................... 80
Advertising Programs and Products...................... 80
Advertisers............................................ 80
Marketing and Brand Awareness.......................... 81
Technology and Infrastructure.......................... 81
Competition............................................ 81
Government Regulation and Legal Environment............ 82
Privacy Concerns....................................... 84
Intellectual Property and Proprietary Rights........... 85
Employees.............................................. 86
Facilities............................................. 86
Legal Proceedings...................................... 86
UPROAR MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 87
Overview.................................................. 87
Results of Operations..................................... 91
Six Months Ended June 30, 2000 and 1999................... 91
Year Ended December 31, 1999 and 1998..................... 93
Year Ended December 31, 1998 and 1997..................... 94
Liquidity and Capital Resources........................... 94
Impact of Recently Issued Accounting Pronouncements....... 95
Quantitative and Qualitative Disclosures About Market
Risk................................................... 95
ii
9
PAGE
----
DESCRIPTION OF IWIN......................................... 96
IWIN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 97
Overview.................................................. 97
Results of Operations..................................... 97
Three Months Ended June 30, 2000 Compared to Three Months
Ended March 31, 2000................................... 97
Liquidity and Capital Resources........................... 99
MANAGEMENT OF UPROAR........................................ 101
Directors and Executive Officers.......................... 101
Composition of the Board of Directors..................... 103
Director Compensation..................................... 103
Executive Compensation.................................... 104
Option/SAR Grants in Last Fiscal Year..................... 105
Aggregate Option Exercises and Year-End Option Values..... 105
Employment Agreements and Change of Control
Arrangements........................................... 106
Stock Incentive Plan...................................... 106
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS RELATING TO
UPROAR.................................................... 107
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF UPROAR...................................... 109
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF IWIN........................................ 111
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF UPROAR FOLLOWING THE MERGER................. 112
DESCRIPTION OF UPROAR CAPITAL STOCK......................... 113
COMPARISON OF STOCKHOLDER RIGHTS............................ 117
STOCK PERFORMANCE GRAPH..................................... 122
LEGAL MATTERS............................................... 123
EXPERTS..................................................... 123
CHANGE IN UPROAR INDEPENDENT ACCOUNTANTS.................... 123
WHERE YOU CAN FIND MORE INFORMATION......................... 124
INDEX TO FINANCIAL STATEMENTS............................... F-1
ANNEX A: AGREEMENT AND PLAN OF REORGANIZATION............... A-1
ANNEX B: OPINION OF BEAR, STEARNS & CO. INC. ............... B-1
ANNEX C: DELAWARE GENERAL CORPORATION LAW................... C-1
ANNEX D: EASDAQ SUPPLEMENTAL INFORMATION.................... D-1
iii
10
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire document and the documents to
which we have referred you. See "Where You Can Find More Information" on page
124. We have included page references parenthetically to direct you to a more
complete description of the topics in this summary.
THE COMPANIES (PAGE 72)
Uproar Inc.
240 West 35th Street
New York, New York 10001
(212) 714-9500
Uproar is a leading online entertainment destination. Through its network
of Web sites, Uproar provides online game shows and interactive single and
multi-player games that appeal to a broad audience. Its registered users have
grown to 8.3 million through June 2000. Its unique user audience has similarly
grown to 5.8 million in June 2000. Uproar's sites are "sticky", which means that
users consistently spend significantly more time per visit on its sites than the
industry average. According to Media Metrix, Uproar ranked among the top ten
stickiest consolidated networks of Web sites in June 2000, as measured by
average minutes spent per usage day.
Uproar derives substantially all of its revenues from the sale of
advertising on its network of Web sites. Uproar believes that its large user
base and the stickiness of its sites provide advertisers with a highly
attractive platform to reach their target audience. As a result, the number of
advertisers and sponsors on the Uproar network has grown from 99 as of December
31, 1998 to 247 as of June 30, 2000. Similarly, the number of advertising
impressions served over the Uproar Web sites increased from 70.7 million in
December 1998 to 563 million in June 2000.
iwin.com, Inc.
10940 Wilshire Boulevard, Suite 1100
Los Angeles, California 90024
(310) 264-4300
iwin is an online entertainment network focused on incubating
entertainment-themed and incentives marketing-oriented applications. iwin offers
an array of free classic interactive games and is in the process of developing
additional free custom games. To date, iwin has launched two leading Web
sites -- iwin.com and eXtremelotto.com. In March 2000, eXtremelotto.com was
incorporated into the iwin.com Web site. The iwin.com Web site offers a diverse
selection of online games and other activities that allow visitors to enter
contests, win sweepstakes and accumulate reward currency, known as "icoins", at
no cost to the user. Once acquired, icoins can be used to purchase sweepstakes
tickets for a variety of cash, sponsorship and other prizes. eXtremelotto.com
offers three free lotteries that award winners prizes, including the opportunity
for a $20,000,000 jackpot. iwin's strategy is to develop Web sites that will
appeal to broad user audiences from whom iwin can capture, collect, aggregate
and categorize data. This data can then be used to build demographic and
psychographic profiles for use in generating highly-targeted leads for iwin's
advertisers.
THE MERGER (PAGE 35)
Uproar and iwin have entered into an agreement and plan of reorganization
that provides for the merger of iwin and a wholly owned subsidiary of Uproar. As
a result of the merger, iwin will become a wholly owned subsidiary of Uproar.
iwin stockholders will receive approximately 0.83 of a share of Uproar common
stock in exchange for each share of iwin common stock and preferred stock they
own. The agreement and plan of reorganization is attached to this joint proxy
statement/prospectus as Annex A. We encourage you to read the agreement and plan
of reorganization as it is the legal document that governs the merger.
1
11
THE UPROAR SPECIAL MEETING (PAGE 30)
Uproar will hold a special meeting of its stockholders to:
- approve the issuance of Uproar common stock pursuant to the agreement and
plan of reorganization;
- approve the amendment and restatement of the Uproar Inc. 2000 Stock
Incentive Plan to increase the number of shares of common stock reserved
for issuance under the plan; and
- transact such other business as may properly come before the Uproar
special meeting.
Pursuant to applicable rules of the Nasdaq National Market and EASDAQ, the
proposed issuance of Uproar common stock in connection with the merger requires
stockholder approval because the number of shares of Uproar common stock to be
issued in the merger will be equal to approximately forty four percent (44%) of
the number of shares of Uproar common stock outstanding before the merger.
Stockholder approval is also required under applicable rules of the Nasdaq
National Market for the increase in the number of shares of common stock
reserved for issuance under the Stock Incentive Plan. The affirmative vote of a
majority of the shares of Uproar common stock present in person or represented
by proxy at the Uproar special meeting and entitled to vote is required to
approve the issuance of the shares of Uproar common stock in the merger and the
amendment and restatement of the Stock Incentive Plan.
As of August 23, 2000, directors, executive officers and stockholders of
Uproar, and their affiliates, who collectively beneficially own approximately
24.5% of the outstanding voting power of Uproar have agreed to vote their shares
in favor of the issuance of the Uproar common stock in connection with the
merger.
THE IWIN SPECIAL MEETING (PAGE 32)
iwin will hold a special meeting of its stockholders to:
- approve and adopt the merger and the agreement and plan of
reorganization;
- approve the appointment of Frederick Krueger as the indemnification
representative under the agreement and plan of reorganization and the
escrow agreement;
- approve the grant made to Scott Kaufman, Vice President of Product
Management, of an option to purchase 480,420 shares of iwin common stock
at a price of $5.46 per share conditioned on the merger closing; and
- transact such other business as may properly come before the iwin special
meeting.
The approval and adoption of the merger and the agreement and plan of
reorganization will require the affirmative vote of the holders of:
- a majority of the votes represented by the outstanding shares of iwin
common stock and Series A preferred stock, voting as a single class;
- a majority of the votes represented by the outstanding shares of iwin
Series B preferred stock, voting as a single class; and
- a majority of the votes represented by the outstanding shares of iwin
Series C preferred stock, voting as a single class.
The appointment of Frederick Krueger as the indemnification representative
and the approval of the option grant to Scott Kaufman will require the
affirmative vote of the holders of a majority of the votes represented by the
outstanding shares of iwin common stock, Series A preferred stock, Series B
preferred stock and Series C preferred stock, voting together as a single class.
As of August 23, 2000, directors, executive officers and stockholders of
iwin, and their affiliates, who collectively beneficially own approximately
85.6% of the outstanding voting power of iwin have agreed to vote their shares
in favor of the approval and adoption of the merger and the agreement and plan
of reorganization.
2
12
OUR RECOMMENDATIONS TO STOCKHOLDERS (PAGE 37)
To Uproar stockholders:
The Uproar board of directors has unanimously approved the merger and the
agreement and plan of reorganization and the proposed issuance of Uproar common
stock in connection with the merger. The Uproar board believes that the merger
is advisable and in your best interests and unanimously recommends that you vote
FOR the proposed issuance of Uproar common stock in the merger.
The Uproar board of directors has unanimously approved the amendment and
restatement of the Uproar Inc. 2000 Stock Incentive Plan to increase the number
of shares of Uproar common stock reserved for issuance under the plan from
6,750,000 to 9,000,000 shares. The Uproar board believes that this increase is
advisable and in your best interests and unanimously recommends that you vote
FOR approval of the amendment and restatement of the 2000 Stock Incentive Plan.
To iwin stockholders:
The iwin board of directors has unanimously approved the merger and the
agreement and plan of reorganization and the related transactions, the
appointment of Frederick Krueger as indemnification representative thereunder
and the grant of the stock option to Mr. Kaufman in respect of the merger. The
iwin board believes that the merger is advisable and in your best interests and
unanimously recommends that you vote FOR the proposal to approve the merger and
the agreement and plan of reorganization and the related transactions, the
appointment of Frederick Krueger as indemnification representative thereunder
and the grant of the stock option to Mr. Kaufman in respect of the merger.
WHAT HOLDERS OF IWIN STOCK OPTIONS AND WARRANTS WILL RECEIVE (PAGE 43)
Each unexpired and unexercised outstanding option and warrant to purchase
shares of iwin common stock, whether vested or unvested, will be assumed by
Uproar and converted into an option or warrant, as the case may be, to purchase
approximately 0.83 of a share of Uproar common stock. Other than for specified
iwin officers, unvested options will continue to vest in accordance with their
terms. The exercise price of each converted option and warrant will equal the
exercise price per share of iwin common stock under the original option or
warrant, divided by the exchange ratio.
CHANGE IN UPROAR BOARD OF DIRECTORS (PAGE 44)
Under the agreement and plan of reorganization, Uproar has agreed that it
will take all reasonable actions to increase the number of its directors to ten
(10) at the time of the merger and iwin will then have the right to nominate
three (3) directors to the Uproar board. Uproar's certificate of incorporation
and bylaws allow the board of directors to increase the number of directors to
not more than fifteen (15) and to fill vacancies and new directorships resulting
from any increase in the authorized number of directors. The Uproar board of
directors has unanimously approved the increase in the number of directors to
ten (10), effective upon the closing of the merger. At that time, Uproar
director Thompson B. Barnhardt will resign from the Uproar board and iwin's
three nominees will become members of the Uproar board. iwin's three nominees to
the Uproar board are Richard Janssen, Gary Loveman and Frederick Krueger. Mr.
Krueger will also serve as the Vice-Chairman of the board.
LOCK-UP AGREEMENTS (PAGE 50)
The agreement and plan of reorganization provides that each stockholder,
director, officer and selected optionholders of iwin will enter into a lock-up
agreement with Uproar prior to the consummation of the merger. The lock-up
agreements provide that for a period of 180 days after the closing of the
merger, the former iwin holder will not sell, transfer or otherwise dispose of
the shares of Uproar common stock the holder receives in the merger. It is
within the sole discretion of Uproar whether to release any of iwin's
stockholders, officers, directors or optionholders from the lock-up agreement
prior to the expiration of the 180 day period.
3
13
CONDITIONS TO THE MERGER (PAGE 56)
Uproar's and iwin's obligations under the agreement and plan of
reorganization are subject to the prior satisfaction or waiver of a number of
conditions, including the following:
- the agreement and plan of reorganization must be approved by iwin's
stockholders, and the issuance of Uproar common stock must be approved by
Uproar's stockholders;
- no law, statute, rule, regulation or order which makes the merger illegal
may be enacted or issued;
- the applicable waiting periods under the U.S. antitrust laws must expire
or be terminated, and all other necessary governmental approvals must be
obtained;
- no injunction or order preventing the completion of the merger may be in
effect;
- no material adverse change to the condition, business, operations or
prospects of iwin or Uproar may have occurred; and
- Scott Kaufman, iwin's Vice President of Product Management, must have
entered into an employment agreement with Uproar, and all stockholders of
iwin must have entered into lock-up agreements with Uproar.
INDEMNIFICATION (PAGE 55)
The agreement and plan of reorganization provides that, once a damage
trigger of $500,000 has been exceeded, the iwin stockholders will indemnify
Uproar for any and all damages Uproar suffers as a result of a misrepresentation
or breach by iwin of any representation, warranty or covenant contained in the
agreement and plan of reorganization and of any of iwin's litigation matters
specified in the agreement. The indemnification obligations of each of the iwin
stockholders is limited to ten percent (10%) of the total number of shares of
Uproar common stock otherwise deliverable to the iwin stockholders under the
agreement.
The agreement and plan of reorganization also provides that, once a damage
trigger of $500,000 has been exceeded, Uproar and the surviving company in the
merger will indemnify the iwin stockholders for any and all damages the iwin
stockholders suffer as a result of a misrepresentation or breach by Uproar of
any representation, warranty or covenant contained in the agreement and plan of
reorganization, up to an amount equal to an aggregate of 1,206,747 multiplied by
the closing market price as quoted on the Nasdaq National Market of the Uproar
common stock on the closing date of the merger.
THE ESCROW FUND AND THE ESCROW AGREEMENT (PAGE 51)
Under the agreement and plan of reorganization, ten percent (10%) of the
total number of shares of Uproar common stock otherwise deliverable in the
merger to each iwin stockholder will be placed in escrow and will be available
to compensate Uproar in accordance with the indemnification obligations of the
stockholders of iwin. Accordingly, as a result of the indemnification provisions
in the agreement, iwin stockholders might not receive up to ten percent (10%) of
the merger consideration to which they would otherwise be entitled. The shares
deposited in the escrow fund will remain available to compensate Uproar for one
year from the date of the closing of the merger. However, if a claim is asserted
prior to the one year anniversary of the closing and the claim has not been
resolved by the one year anniversary, shares will remain in the escrow fund in
an amount sufficient to satisfy the claim until the claim has been resolved,
notwithstanding that the one-year period has elapsed. The escrow fund will serve
as Uproar's exclusive remedy for damages for which Uproar is entitled to
indemnification under the agreement, other than damages arising from fraudulent
or intentional acts. The escrow agreement is attached as an exhibit to the
merger agreement attached as Annex A to this joint proxy statement/prospectus.
4
14
TERMINATION OF THE AGREEMENT AND PLAN OF REORGANIZATION (PAGE 58)
The agreement and plan of reorganization may be terminated before the
completion of the merger by our mutual consent or by either Uproar or iwin if:
- the closing has not occurred, without the fault of the terminating party,
on or prior to November 30, 2000;
- the other party breaches any representation, warranty or obligation under
the agreement, and such breach is not cured within ten days;
- the board of directors of the other party has withdrawn its
recommendation of the agreement;
- the other party fails to call and hold its stockholder meeting to obtain
the necessary consent to consummate the merger or the necessary
stockholder vote is not obtained; or
- a permanent injunction or other court order prohibiting the merger has
become final and nonappealable.
OPINION OF FINANCIAL ADVISOR (PAGE 38)
Bear, Stearns & Co. Inc., Uproar's financial advisor, has delivered an
opinion to the Uproar board of directors that, as of the date of the opinion and
based on the procedures followed, factors considered and assumptions made by
Bear Stearns, and subject to the limitations set forth in the opinion, the
aggregate consideration to be issued in the merger by Uproar will be fair to
Uproar from a financial point of view. The complete opinion of Bear Stearns is
attached as Annex B. We urge you to read it in its entirety.
NO OTHER TAKE-OVER NEGOTIATIONS INVOLVING IWIN (PAGE 53)
Until the merger is completed or the agreement and plan of reorganization
is terminated, iwin has agreed to not directly or indirectly take any of the
following actions:
- solicit, initiate or encourage any takeover proposals;
- engage in negotiations concerning or provide non-public information to
any person or entity relating to any takeover proposal; or
- agree to, approve or recommend any takeover proposal.
iwin has agreed to provide Uproar with detailed information about any
takeover proposals it receives.
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS OF UPROAR AND IWIN IN THE MERGER
(PAGE 42)
When considering the recommendation of the Uproar and iwin boards of
directors, you should be aware that some directors have interests in the merger
that are different from yours. These interests include the following:
- as of August 23, 2000, directors and executive officers of Uproar and
their affiliates beneficially owned approximately 28.2% of the
outstanding shares of Uproar common stock, and directors and executive
officers of iwin and their affiliates beneficially owned approximately
37% of the outstanding shares of iwin capital stock;
- upon closing of the merger, the vesting of options to purchase an
aggregate of 313,200 shares of iwin common stock held by specified
directors and officers of iwin will accelerate;
- upon closing of the merger, Uproar will enter into an employment
agreement with Scott Kaufman, iwin's Vice President of Product
Management, to become Uproar's Executive Vice President of Product
Development, and Mr. Kaufman's option to purchase 480,420 shares of iwin
common stock at a purchase price $5.46 per share will be converted into
an option to purchase shares of Uproar common stock based on the exchange
ratio;
5
15
- upon closing of the merger, Richard Janssen, Gary Loveman and Frederick
Krueger will become members of Uproar's board of directors, and Mr.
Krueger will become Vice Chairman of the board; and
- upon closing of the merger, iwin's director and officer indemnification
arrangements in place prior to the merger will continue or be assumed by
Uproar.
ACCOUNTING TREATMENT (PAGE 44)
Uproar expects the merger to qualify as a purchase under U.S. generally
accepted accounting principles, which means that Uproar will treat iwin as a
separate entity for periods prior to the closing and, thereafter, as a wholly
owned subsidiary of Uproar. iwin's operating results will be included with
Uproar's beginning at the closing of the merger, causing Uproar to include
additional amortization of goodwill and other intangible assets and compensation
expense.
REGULATORY APPROVALS (PAGE 44)
The merger is subject to U.S. antitrust laws. We made the required filings
with the U.S. Department of Justice and the Federal Trade Commission, and our
request for early termination of the applicable waiting period was granted by
the Federal Trade Commission on September 6, 2000. However the Department of
Justice or the Federal Trade Commission, as well as any state or private person,
may challenge the merger at any time before completion.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS (PAGE 45)
We have structured the merger so that no gain or loss generally will be
recognized by iwin stockholders for federal income tax purposes on the exchange
of shares of iwin common stock, Series A preferred stock, Series B preferred
stock, or Series C preferred stock for shares of Uproar common stock.
TAX MATTERS CAN BE VERY COMPLICATED, AND THE TAX CONSEQUENCES OF THE MERGER
TO YOU WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR
TAX ADVISOR FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF THE MERGER TO
YOU.
IWIN STOCKHOLDERS' RIGHT OF APPRAISAL (PAGE 48)
Under Delaware law, iwin stockholders who vote against the merger and
comply with notice requirements and other procedures will have the right to
receive the "fair value" of their shares in cash rather than the Uproar common
stock specified in the agreement and plan of reorganization. "Fair value" will
be determined by a Delaware court and may be more than, the same as, or less
than the value of the consideration to be paid to other iwin stockholders. In
addition to reading "Appraisal Rights," see Annex C which sets forth Section 262
of the Delaware General Corporation Law.
HOW THE RIGHTS OF IWIN STOCKHOLDERS WILL DIFFER AS UPROAR STOCKHOLDERS (PAGE 51)
When iwin stockholders become Uproar stockholders after the merger, their
rights will be governed by Uproar's certificate of incorporation and bylaws.
Those rights differ from current rights of iwin stockholders under iwin's
certificate of incorporation and bylaws.
6
16
SELECTED CONSOLIDATED FINANCIAL DATA OF UPROAR INC.
The following information is being provided to assist you in analyzing the
financial aspects of the merger. The following selected consolidated financial
data should be read in conjunction with the consolidated financial statements
and the notes to the financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Uproar" included in
this joint proxy statement/prospectus.
Selected consolidated statement of operations data for the years ended
December 31, 1997 and 1998 and the consolidated balance sheet data as of
December 31, 1998 are derived from Uproar's consolidated financial statements,
which have been audited by KPMG Hungaria Kft., independent accountants, and the
selected consolidated statement of operations data for the year ended December
31, 1999 and the consolidated balance sheet data as of December 31, 1999 are
derived from Uproar's consolidated financial statements, which have been audited
by KPMG LLP, independent accountants. The report of KPMG Hungaria Kft. includes
a statement indicating that they did not audit the financial statements of
PrizePoint Entertainment Corporation. The selected consolidated statement of
operations data for the period from February 5, 1995 (date of inception) through
December 31, 1995 and for the year ended December 31, 1996 and the consolidated
balance sheet data as of December 31, 1995, 1996 and 1997 are derived from
Uproar's consolidated audited financial statements not included in this filing.
The financial data for the six months ended June 30, 2000 and 1999 and as of
June 30, 2000 have been derived from Uproar's unaudited financial statements
and, in the opinion of Uproar's management, include all adjustments (consisting
only of normal recurring adjustments) which are necessary to present fairly the
results of operations and financial position of Uproar for these periods in
accordance with generally accepted accounting principles. The reports of KPMG
Hungaria Kft. and KPMG LLP are both included in this filing.
SIX MONTHS ENDED
PERIOD ENDED YEAR ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ---------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
------------ -------- --------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND
PER SHARE AMOUNTS) (UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
Revenues................. $ 43 $ 60 $ 349 $ 1,633 $ 10,391 $ 2,509 $ 12,769
Cost of revenues......... -- (41) (217) (760) (2,533) (848) (4,264)
--------- -------- --------- ---------- ---------- ---------- ----------
Gross profit............. 43 19 132 873 7,858 1,661 8,505
Operating expenses:
Sales and marketing.... -- 167 1,087 3,771 28,066 5,813 18,131
Product and technology
development......... 33 389 773 850 3,702 1,527 3,970
General and
administrative...... 70 187 2,092 2,327 8,919 3,611 7,539
Amortization of
intangible assets... -- -- -- 9 6,086 3,036 3,037
--------- -------- --------- ---------- ---------- ---------- ----------
Loss from operations... (60) (724) (3,820) (6,084) (38,915) (12,326) (24,172)
Foreign exchange gain
(loss).............. (2) 50 (85) 56 (120) (149) (78)
Other income (expense),
net................. 4 (28) 82 206 338 143 1,715
Provision for income
taxes............... -- (5) (6) (9) (28) (45) (22)
--------- -------- --------- ---------- ---------- ---------- ----------
Net loss............... $ 58 $ (707) $ (3,829) $ (5,831) $ (38,725) $ 12,377 $ (22,557)
========= ======== ========= ========== ========== ========== ==========
Basic and diluted net
loss per share...... $ (0.05) $ (0.17) $ (0.42) $ (0.40) $ (1.77) $ (0.61) $ (0.85)
Weighted average number
of common shares
outstanding......... 1,138,356 4,258,084 9,034,928 14,697,112 21,909,456 20,346,202 26,622,856
7
17
DECEMBER 31,
-------------------------------------------- JUNE 30,
1995 1996 1997 1998 1999 2000
---- ----- ------ ------ ------- -----------
(IN THOUSANDS) (UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 48 $ 268 $2,342 $7,036 $15,136 $ 9,253
Short-term investments.................... -- -- -- -- -- 85,377
Working capital........................... 82 (261) 2,465 6,444 18,555 99,517
Total assets.............................. 122 422 3,071 9,111 42,816 124,728
Total indebtedness, including current
maturities.............................. -- 512 -- 41 154 378
Total stockholders' equity................ 95 (163) 2,782 7,727 37,204 117,525
8
18
SELECTED FINANCIAL DATA OF IWIN.COM, INC.
The following information is being provided to assist you in analyzing the
financial aspects of the merger. The following selected financial data should be
read in conjunction with the financial statements and the notes to the financial
statements and "iwin Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in this joint proxy statement/prospectus.
The following selected financial data as of December 31, 1999 and for the
period from July 8, 1999 (date of inception) through December 31, 1999 are
derived from iwin's financial statements, which have been audited by Ernst &
Young LLP, independent auditors. Ernst & Young LLP's report on the financial
statements for the period from July 8, 1999 (date of inception) through December
31, 1999, which appears elsewhere in this joint proxy statement/prospectus,
includes an explanatory paragraph which describes an uncertainty about iwin's
ability to continue as a going concern. The financial data as of and for the six
months ended June 30, 2000 are derived from iwin's unaudited financial
statements and, in the opinion of iwin's management, include all adjustments
(consisting only of normal recurring adjustments) which are necessary to present
fairly the results of operations and financial position of iwin for the period
in accordance with generally accepted accounting principles. This data should be
read in conjunction with the financial statements, related notes and other
financial information included herein.
PERIOD ENDED SIX MONTHS
DECEMBER 31, ENDED
1999 JUNE 30, 2000
------------- --------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT SHARE
AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues.............................................. $ 176 $ 8,181
Cost of revenues.......................................... (536) (4,764)
--------- ---------
Gross profit (Loss)....................................... (360) 3,417
Operating expenses:
Sales and marketing.................................... 1,512 12,428
Product and technology development..................... 440 1,574
General and administrative............................. 1,422 5,334
--------- ---------
Total operating expenses.......................... 3,374 19,336
--------- ---------
Operating loss............................................ (3,734) (15,919)
Interest income, net................................... 103 585
Loss from disposal of property and equipment........... (227) (64)
Other income........................................... -- 42
Provision for income taxes............................. (1) (9)
--------- ---------
Net loss............................................... $ (3,859) $ (15,365)
========= =========
Basic and diluted net loss per share................... $ (0.58) (2.25)
Weighted average number of common shares outstanding... 6,604,119 6,826,734
DECEMBER 31,
1999 JUNE 30, 2000
------------ -------------
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 27,009 $ 8,284
Working capital........................................... 25,908 9,299
Total assets.............................................. 27,965 19,967
Total indebtedness, including current maturities.......... -- 1,432
Total stockholders' equity................................ 26,641 13,765
9
19
SELECTED UPROAR INC. AND IWIN.COM, INC. UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL DATA
The pro forma consolidated statement of operations data for the year ended
December 31, 1999 gives effect to the merger as if it occurred on January 1,
1999. The pro forma consolidated statement of operations data for the six months
ended June 30, 2000 gives effect to the merger as if it occurred on January 1,
2000. The pro forma consolidated balance sheet data as of June 30, 2000 gives
effect to the merger as if it occurred on that date.
We have included this unaudited pro forma condensed summary financial
information only for the purposes of illustration, and it does not necessarily
indicate what the operating results or financial position would have been if the
merger between Uproar and iwin had been completed at the dates indicated.
Moreover, this information does not necessarily indicate what the future
operating results or financial position of the combined enterprise will be. You
should read this unaudited pro forma summary financial information in
conjunction with the "Unaudited Pro Forma Condensed Consolidated Financial
Statements" included in this joint proxy statement/prospectus at page 67.
The allocation of the purchase price of iwin is preliminary and does not
reflect the fair value adjustments to its assets and liabilities, since those
amounts have not been finalized and have been estimated at this time. The fair
value of iwin's assets and liabilities will be determined as of the date of
consummation of the merger.
TWELVE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, 1999 JUNE 30, 2000
------------------ --------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
Statement of Operations Data:
Revenues.................................................... $ 10,567 $ 20,949
Cost of revenues............................................ (3,069) (9,028)
Gross profit................................................ 7,498 11,921
Operating expenses:
Sales and marketing....................................... 30,065 30,802
Product and technology development........................ 4,141 5,544
General and administrative................................ 10,341 12,873
Amortization of intangible assets......................... 6,086 3,037
Amortization of goodwill and other intangibles............ 27,418 13,709
Loss from operations...................................... (70,553) (54,044)
Litigation settlement..................................... -- (350)
Foreign exchange gain (loss).............................. (120) (78)
Interest income........................................... 638 2,701
Interest expense.......................................... (7) (54)
Other income (expense).................................... (418) (19)
Provision for income taxes................................ (29) (31)
---------- ----------
Net loss.................................................. $ (70,489) $ (51,875)
========== ==========
Basic and diluted net loss per common share............... $ (2.02) $ (1.31)
Weighted average number of common shares outstanding...... 34,968,247 39,681,647
JUNE 30, 2000
--------------
(IN THOUSANDS)
Balance Sheet Data:
Cash and cash equivalents................................. $ 18,019
Short term investments.................................... 85,377
Working capital........................................... 108,199
Total assets.............................................. 227,433
Total indebtedness, including current maturities.......... 1,810
Total stockholders' equity................................ 212,927
10
20
MARKET PRICE INFORMATION
Uproar
Uproar common stock trades on the Nasdaq National Market under the symbol
"UPRO", and it trades on EASDAQ under the symbols "UPRO" and "UPROrs". The
shares of Uproar common stock that trade on EASDAQ under the symbol "UPROrs" are
not registered in the U.S.
The table below sets forth, for the periods indicated, the reported high
and low sale prices of Uproar common stock on the Nasdaq National Market since
its initial public offering. The quotations represent interdealer quotations,
without adjustments for retail mark ups, mark downs, or commissions, and may not
necessarily represent actual transactions.
UPROAR
COMMON STOCK
-------------------
NASDAQ HIGH LOW
------ ------- --------
(CURRENCY OF THE
EUROPEAN MONETARY
UNION)
CALENDAR 2000
March 16, 2000 through March 31, 2000....................... $26.857 $ 17.625
April 1, 2000 through June 30, 2000......................... $ 22.25 $ 7.3125
July 1, 2000 through August 23, 2000........................ $ 7.50 $ 4.875
The table below sets forth, for the periods indicated, the reported high
and low sale prices of the Uproar common stock as originally reported by EASDAQ
in Euros (currency of the European Monetary Union) and as converted into United
States dollars. All prices are the last reported sale price for any particular
day within the specified time periods and have been adjusted to reflect a
2-for-1 split of our common stock effected February 18, 2000. In this joint
proxy statement/prospectus, all references to EASDAQ prices after March 16, 2000
reflect the shares of Uproar common stock traded under the symbol "UPROrs",
which prices may differ from the prices at which the "UPRO" common stock trades.
Conversions into United States dollars are calculated using the noon buying rate
(depicted as the amount of United States dollars purchased by one Euro) for
cable transfers in foreign currencies as certified by the Federal Reserve Bank
of New York on the date each relevant price was quoted.
UPROAR
COMMON STOCK
---------------------------------------------------------------------
HIGH LOW
--------------------------------- ---------------------------------
AS AS CONVERSION AS AS CONVERSION
EASDAQ REPORTED CONVERTED RATE REPORTED CONVERTED RATE
------ -------- --------- ---------- -------- --------- ----------
CALENDAR 1999
July 8, 1999 through September 30,
1999............................... E13.5875 $13.863 1.0203 E 9.00 $ 9.523 1.0581
October 1, 1999 through December 31,
1999............................... E24.8875 $25.087 1.0080 E10.25 $11.159 1.0887
CALENDAR 2000
January 1, 2000 through March 31,
2000............................... E 47.75 $45.854 0.9603 E18.25 $17.546 0.9614
April 1 through June 30, 2000........ E 23.70 $22.657 0.9560 E 6.75 $ 6.423 0.9515
July 1, 2000 through August 23,
2000............................... E 7.50 $ 6.994 0.8967 E 4.60 $ 4.324 0.9401
The liquidity and trading patterns of securities quoted on EASDAQ may be
substantially different from those of securities quoted on the Nasdaq National
Market. EASDAQ is a relatively new quotation system and we are one of only a
small number of issuers that quote their shares on EASDAQ. Historical trading
prices, therefore, may not be indicative of the prices at which our common stock
will trade in the future.
On July 25, 2000, the last full trading day prior to the public
announcement of the proposed merger, the last reported sale prices of Uproar
common stock on the Nasdaq National Market and EASDAQ were $6.00
11
21
per share and E6.575, or $6.1746 per share, respectively. On August 23, 2000,
the most recent practicable date prior to the printing of this joint proxy
statement/prospectus, the last reported sale prices of Uproar common stock on
the Nasdaq National Market and EASDAQ were $6.75 per share and E7.80, or $6.994
per share, respectively. Sale prices of Uproar common stock on EASDAQ were
reported in Euros and have been converted to United States dollars using the
method described in this section.
Because the market prices of Uproar common stock may fluctuate, the market
prices per share of the shares of Uproar common stock that holders of iwin stock
will receive in the merger, as reported on the Nasdaq National Market and
EASDAQ, may increase or decrease prior to the merger. We urge iwin stockholders
to obtain current market quotations for Uproar common stock.
Uproar has not paid any cash dividends on its common stock and currently
intends to retain any future earnings for use in its business. Uproar does not
anticipate that any cash dividends will be declared or paid on the common stock
in the foreseeable future. As of September 11, 2000, there were 93 record owners
of Uproar common stock.
iwin
The common stock of iwin is not presently traded on an established public
trading market. As of August 23, 2000, there were 7,193,189 shares of common
stock outstanding, held by 21 holders. In addition, as of August 23, 2000 there
were 2,250,000 shares of Series A preferred stock outstanding held by 24
holders, 5,177,865 shares of Series B preferred stock outstanding held by 82
holders, and 1,097,827 shares of Series C preferred stock outstanding held by 4
holders. All shares of common stock and preferred stock are entitled to one
vote.
iwin has never declared or paid any cash dividends on its capital stock.
iwin currently intends to retain any future earnings to finance the growth and
development of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the board of directors and will be
dependent upon iwin's financial condition, results of operations, capital
requirements, general business conditions, and other factors that the board of
directors may deem relevant.
iwin is not aware of any restrictions that currently materially limit its
ability to pay dividends or that are reasonably likely to materially limit
future dividends, other than the sufficiency of current or future earnings.
12
22
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Uproar and iwin believe this document contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties and are based on the
beliefs and assumptions of management of Uproar and iwin, based on information
currently available to each company's management. When we use words such as
"believes," "expects," "anticipates," "intends," "plans," "estimates," "should,"
"likely" or similar expressions, we are making forward-looking statements.
Forward-looking statements include the information concerning possible or
assumed future results of operations of Uproar set forth:
- under "Summary," "Selected Consolidated Financial Data of Uproar and
iwin," "Risk Factors," "-- Background of the Merger," "-- Recommendation
of the Board of Directors of Uproar; Uproar's Reasons for the Merger,"
"-- Recommendation of the Board of Directors of iwin; iwin's Reasons for
the Merger," "-- Opinion of Financial Advisor to Uproar," "Business" of
Uproar and iwin, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of Uproar and iwin and "Unaudited
Pro Forma Combined Condensed Financial Statements."
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and stockholder values
of Uproar or iwin may differ materially from those expressed in the
forward-looking statements. Many of the factors that will determine these
results and values are beyond our ability to control or predict. Stockholders
are cautioned not to put undue reliance on any forward-looking statements. For
those statements, we claim the protection of the safe harbor for forward-
looking statements contained in the Private Securities Litigation Reform Act of
1995.
For a discussion of some of the factors that may cause actual results to
differ materially from those suggested by the forward-looking statements, please
read carefully the information under "Risk Factors" beginning on page 14. In
addition to the risk factors and other important factors discussed elsewhere in
the documents which are incorporated by reference into this joint proxy
statement/prospectus, you should understand that the following important factors
could affect the future results of Uproar and could cause results to differ
materially from those suggested by the forward-looking statements:
- increased competitive pressures, both domestically and internationally,
which may affect use of Uproar's and iwin's services and impede Uproar's
ability to maintain its market share and pricing goals;
- changes in user attitude towards the services provided by Uproar and
iwin;
- Uproar's ability to integrate the operations of iwin into its operations;
- technical failures in the network, software or hardware systems of Uproar
or iwin that cause interruptions of service or a decease in
responsiveness to our Web sites;
- changes in United States and global financial and equity markets,
including significant interest rate fluctuations, which may increase the
cost of external financing for Uproar's operations;
- changes in laws or regulations, third party relations and approvals,
decisions of courts, regulators and governmental bodies which may
adversely affect Uproar's and iwin's business or ability to compete; and
- other risks and uncertainties as may be detailed from time to time in
Uproar's public announcements and Securities and Exchange Commission
filings.
This list of factors that may affect future performance and the accuracy of
forward-looking statements is illustrative but by no means exhaustive.
Accordingly, all forward-looking statements should be evaluated with the
understanding of their inherent uncertainty.
13
23
RISK FACTORS
By voting in favor of the merger, iwin stockholders will be choosing to
invest in Uproar. An investment in Uproar common stock involves a high degree of
risk. You should carefully consider the following risk factors relating to the
merger before you decide whether to vote to approve and adopt the agreement and
plan of reorganization and the proposed issuance of Uproar common stock in
connection with the merger. You should also consider the other information in
this joint proxy statement/prospectus and the additional information in Uproar's
other reports on file with the SEC. See "Where You Can Find More Information" on
page 124.
RISKS RELATING TO THE MERGER
IF UPROAR AND IWIN DO NOT INTEGRATE THEIR OPERATIONS QUICKLY AND EFFECTIVELY,
SOME OR ALL OF THE POTENTIAL BENEFITS OF THE MERGER MAY NOT BE REALIZED.
In order to achieve the benefits of the merger, Uproar must successfully
combine its business with iwin's business and make iwin's technologies, products
and services operate together with Uproar's technologies, products and services.
This integration may require the partial or wholesale conversion or redesign of
some or all of the technologies, products and services of either Uproar or iwin.
We may not be able to integrate our technologies and operations quickly or
smoothly, in which case serious harm to the combined company's business,
financial condition and prospects may result. Integrating the two businesses
will entail significant diversion of management's time and attention. In
addition, Uproar may be required to spend additional money and resources on
integration issues that would otherwise be spent on developing its business and
services or other matters.
THE SUCCESS OF THE COMBINED COMPANY DEPENDS IN PART ON OUR ABILITY TO RETAIN KEY
PERSONNEL OF IWIN AFTER THE MERGER, AND WE MAY NOT BE ABLE TO DO SO.
The success of the combined company after the merger depends in part on the
continued service of key iwin and Uproar personnel. Despite Uproar's efforts to
hire and retain quality employees, the combined company might lose some of
iwin's and Uproar's key employees following the merger. Although similar, Uproar
and iwin have different corporate cultures. Some iwin employees may be unwilling
to work for a larger company, and some Uproar employees may be unwilling to work
for the combined company. Competitors may also recruit iwin or Uproar employees
prior to the merger and during integration, as is common in high technology
mergers. In addition, some iwin employees will acquire significant amounts of
Uproar common stock or vested stock options in the merger. As a result, we will
be required to provide significant incentives for many of iwin's employees to
remain with the combined company.
Similarly, the future performance of the combined company depends on its
continuing ability to attract and retain highly qualified technical and
managerial personnel following the merger. Competition for qualified management,
engineering, technical, sales and marketing employees is intense. If iwin or
Uproar employees leave as a result of the merger or if the combined company
cannot attract and retain qualified personnel, the combined company's business
would be harmed.
UPROAR'S STOCK PRICE IS VOLATILE AND THE VALUE OF THE UPROAR COMMON STOCK ISSUED
IN THE MERGER WILL DEPEND ON ITS MARKET PRICE AT THE TIME OF THE MERGER.
Under the agreement and plan of reorganization, the exchange ratio used to
determine the number of shares of Uproar's common stock that iwin stockholders
will receive is unaffected by the share price of Uproar's common stock as
reflected on the Nasdaq National Market or EASDAQ. Increases in the value of
Uproar's common stock will result in a higher price being paid by Uproar for
iwin and more value received by iwin stockholders in the merger. Decreases in
the value of Uproar's common stock will result in a lower price being paid by
Uproar for iwin and less value received by iwin's stockholders in the merger. It
is likely that you will not know the value of Uproar's common stock to be issued
in the merger at the time of either the Uproar special meeting of stockholders
or the iwin special meeting of stockholders. Under the agreement and plan of
reorganization, neither Uproar nor iwin will have the right to terminate or
renegotiate the agreement and plan of reorganization or to resolicit proxies as
a result of any increase or decrease in the value of Uproar's common
14
24
stock. The market price of Uproar's common stock, like that of the stock of many
other Internet-related companies, has been and may continue to be volatile.
Recently, the stock market in general and the shares of Internet-related
companies in particular have experienced significant price fluctuations. The
market price may continue to fluctuate significantly in response to various
factors, including without limitation:
- quarterly variations in operating results;
- the announcement of technological innovations;
- the announcement of management changes;
- the introduction of new services by Uproar and its competitors;
- changes in estimates by securities analysts;
- market conditions in the industry;
- announcements and actions by competitors;
- limited trading volume of our securities on the Nasdaq National Market
and EASDAQ;
- regulatory and judicial actions; and
- general economic conditions.
IWIN STOCKHOLDERS WILL BE PROHIBITED FROM SELLING UPROAR STOCK RECEIVED IN THE
MERGER FOR A PERIOD OF 180 DAYS.
Stockholders, warrantholders and the significant optionholders of iwin have
contractually agreed, except under limited circumstances, not to sell their
shares of Uproar common stock acquired in the merger for a period of 180 days
following the merger. During this period, the price of Uproar common stock may
fluctuate significantly. These holders will be prohibited from selling their
Uproar common stock at a time they may consider appropriate, resulting in
reduced liquidity and selling opportunities for a period of 180 days following
the merger. After the expiration of this lock-up period however, these holders'
shares of Uproar common stock will be eligible for sale to the public. The sale
of a large amount of shares in the public market after the lock-up period, or
the appearance that a large number of shares are available for sale, may cause
the market price of the Uproar common stock to decline.
FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY AFFECT UPROAR'S AND IWIN'S
OPERATING RESULTS AND THEIR ABILITY TO ENTER INTO ALTERNATIVE TRANSACTIONS.
If the merger is not completed for any reason, Uproar and iwin may
experience a number of adverse consequences, including the following:
- the price of Uproar common stock may decline to the extent that the
current market price of Uproar common stock reflects a market assumption
that the merger will be completed;
- an adverse reaction from investors and potential investors of both
companies may reduce future financing opportunities; and
- the parties' costs related to the merger, including legal and accounting
fees, must be paid even if the merger is not completed, and Uproar has
agreed, in specified instances, to pay a portion of iwin's expenses.
If the merger is terminated and iwin or Uproar determines to seek another
merger or business combination, there can be no assurance that it will be able
to find a partner at an attractive price. In addition, while the agreement and
plan of reorganization is in effect, iwin is prohibited from soliciting,
initiating or encouraging or entering into extraordinary transactions, such as a
merger, sale of assets or other business combination, with any party other than
Uproar. As a result of this prohibition, iwin will be precluded from discussing
potential transactions should the merger not occur, and may lose an opportunity
for a transaction with another potential partner at a favorable price if the
merger is not completed.
15
25
THE MERGER COULD HARM KEY THIRD PARTY RELATIONSHIPS.
The present and potential relationships of Uproar and iwin with customers
and other third parties with whom they have relationships may be harmed by the
proposed merger. Uncertainties following the merger may cause these parties to
delay decisions regarding these relationships. Any changes in these
relationships could harm the combined company's business. In addition, iwin
customers may, in response to the announcement of the merger, delay or defer
decisions concerning iwin. iwin could experience a decrease in expected revenue
as a consequence of customers' uncertainties associated with the merger. Any
delay or deferral in those decisions by iwin customers could have a material
adverse effect on iwin's and Uproar's business.
OFFICERS AND DIRECTORS OF IWIN HAVE DIFFERENT INTERESTS FROM YOURS THAT MAY
INFLUENCE THEM TO SUPPORT OR APPROVE THE MERGER.
Officers and directors of iwin have interests in the merger and participate
in arrangements that are different from, or are in addition to, those of iwin
stockholders generally. These include the following interests that will arise if
the merger occurs:
- the acceleration of the vesting of options to purchase an aggregate of
313,200 shares of iwin common stock held by certain directors and
officers of iwin;
- the entering into of an employment agreement with Scott Kaufman, iwin's
Vice President of Product Management, to become Uproar's Executive Vice
President of Product Development and the grant made to Mr. Kaufman of an
option to purchase 480,420 shares of iwin common stock conditioned on the
merger closing;
- the appointment to the Uproar board of three directors nominated by iwin,
including Frederick Krueger as Vice Chairman of the board; and
- the continuation or assumption by Uproar of iwin's director and officer
indemnification arrangements in place prior to the merger.
As a result, these officers and directors could be more likely to vote to
approve the agreement and plan of reorganization and the merger than if they did
not hold these interests. iwin stockholders should consider whether these
interests may have influenced these officers and directors to support or
recommend the merger.
UPROAR'S PRO FORMA ACCOUNTING FOR THE MERGER MAY CHANGE.
Unaudited pro forma combined financial information is presented for
illustrative purposes only and is not necessarily indicative of the combined
financial position or results of operations of future periods or the results
that actually would have been realized had the entities been a single entity
during this period. Uproar has allocated the total estimated purchase price for
the merger on a preliminary basis to assets and liabilities based on Uproar's
best estimates of the fair value of these assets and liabilities, with the
excess costs over the net tangible assets acquired allocated to goodwill and
other intangible assets. This allocation and the estimated lives are subject to
change pending a final analysis of the fair values of the assets acquired and
liabilities assumed and the estimated lives of the assets. The impact of these
changes could be material and negative to Uproar's future results of operations.
THE ACCOUNTING TREATMENT OF THE MERGER WILL RESULT IN SIGNIFICANT CHARGES TO
UPROAR'S OPERATIONS AND MAY DELAY UPROAR'S PROFITABILITY UNDER GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES.
We intend to account for the merger as a purchase for financial reporting
and accounting purposes, under generally accepted accounting principles. After
the completion of the merger, the results of operations of iwin will be included
in the consolidated financial statements of Uproar. The purchase price will be
allocated to iwin's assets and liabilities based on the fair values of the
assets acquired and the liabilities assumed. Any excess of cost over the fair
value of the net tangible assets of iwin acquired will be recorded as goodwill
and other intangible assets and will be amortized by charges to operations under
generally accepted accounting
16
26
principles. We anticipate this amount of goodwill and other intangible assets to
be significant and it will therefore have a significant negative impact on our
operating results, which could cause Uproar's stock price to decline. In
addition, the combined company's profitability may be delayed beyond the time
frame in which Uproar or iwin, as independent entities, may have otherwise
achieved profitability because of the use of the purchase method of accounting.
A PORTION OF THE UPROAR COMMON STOCK TO BE RECEIVED BY THE IWIN STOCKHOLDERS
WILL BE PLACED IN ESCROW AND MIGHT NOT BE DELIVERED TO THE IWIN STOCKHOLDERS.
The agreement and plan of reorganization provides that ten percent (10%) of
the Uproar common stock each holder of iwin stock is otherwise entitled to
receive pursuant to the merger will be deposited in an escrow account to
indemnify Uproar against breaches of representations, warranties and covenants
of iwin under the agreement and for specified litigation matters of iwin
existing prior to the signing of the agreement. In the event Uproar incurs
damages in excess of $500,000 as a result of these items, Uproar would be
entitled to reimbursement from the escrow fund in an amount equal to such
damages, up to the amount held in the escrow fund. Accordingly, the iwin
stockholders might not receive up to ten percent (10%) of the merger
consideration to which they would otherwise be entitled as a result of the
indemnification provisions in the agreement.
ISSUANCE OF ADDITIONAL SHARES OF UPROAR COMMON STOCK MAY REDUCE THE UPROAR SHARE
PRICE.
At the closing of the merger, Uproar estimates that approximately
13,059,000 newly issued shares of Uproar common stock will be issued to current
iwin stockholders. The issuance of this additional Uproar common stock in the
merger will reduce Uproar's earnings per share, if any. This dilution could
reduce the market price of Uproar common stock unless and until the combined
company achieves revenue growth or cost savings and other business economies
sufficient to offset the effect of this issuance. There can be no assurance that
Uproar will achieve revenue growth, cost savings or other business economies or
that you will achieve greater returns as an Uproar stockholder than as an iwin
stockholder.
IWIN STOCKHOLDERS MAY EXERCISE DISSENTERS' RIGHTS
Under Delaware law regarding dissenting stockholders' appraisal rights,
holders of iwin common stock and preferred stock who do not vote in favor of the
merger may be entitled to exercise dissenting stockholders' appraisal rights. If
the merger occurs, then iwin stockholders who do not vote their iwin shares in
favor of the merger may become entitled to be paid cash for their iwin shares
instead of receiving Uproar common stock in the merger. The amount of cash that
could be paid to such dissenting iwin stockholders could be significant, and
payment of these amounts could have a material adverse effect on the combined
company's financial position. The payment to dissenting stockholders may require
Uproar to raise additional capital, which may not be available.
RISKS RELATING TO UPROAR
FINANCIAL RISKS
WE HAVE A HISTORY OF LOSSES SINCE OUR INCEPTION, WE EXPECT FUTURE LOSSES AND WE
MAY NOT BE PROFITABLE IN THE FUTURE.
Since our inception in February 1995, we have not been profitable. If our
revenues do not increase substantially, we may never become profitable. We have
not generated enough revenues to exceed the substantial amounts we have spent to
create, launch and enhance our Web sites, to promote awareness of our Web sites
and to develop our business generally. At June 30, 2000, our accumulated deficit
was approximately $71.7 million. Even if we do achieve profitability, we may not
sustain profitability on a quarterly or annual basis in the future.
17
27
BECAUSE WE HAVE ONLY RECENTLY INTRODUCED MANY OF OUR PRODUCTS AND SERVICES, YOU
HAVE LIMITED INFORMATION UPON WHICH YOU CAN EVALUATE OUR BUSINESS.
Uproar was founded in February 1995 and we launched our flagship
entertainment site, uproar.com, in September 1997. We launched the other sites
that comprise our network throughout 1998, 1999, and 2000. Accordingly, you can
only evaluate our business based on our limited operating history. Our operating
results for any particular quarter may not be indicative of future operating
results. You should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of our future performance. As a young company in the
new and rapidly evolving online entertainment market, we face risks and
uncertainties relating to our ability to successfully implement our business
plan. These risks include our ability to:
- expand our content and services;
- attract a larger audience to our Web sites;
- maintain our current, and develop new, strategic relationships; and
- continue to develop and upgrade our technology.
If we are unsuccessful in addressing these risks and uncertainties, we will
not be able to successfully implement our business plan and our stock price will
decline.
WE MAY FAIL TO MEET MARKET EXPECTATIONS BECAUSE OF FLUCTUATIONS IN OUR QUARTERLY
OPERATING RESULTS, WHICH WOULD CAUSE OUR STOCK PRICE TO DECLINE.
Although we intend to steadily increase our spending and investment to
support our planned growth, our revenues, and some of our costs, will be much
less predictable. This is likely to result in significant fluctuations in our
quarterly results. Because of our limited operating history and the emerging
nature of our industry, we anticipate that securities analysts and investors
will have difficulty in accurately forecasting our results. It is possible that
our operating results in some quarters will be below market expectations. In
this event, the price of our common stock is likely to decline.
The following are among the factors that could cause significant
fluctuations in our operating results:
- the number of users on, and the frequency of their use of, our Web sites;
- our ability to attract and retain advertisers;
- the expiration or termination of our strategic relationships, including
our relationships with Pearson Television and Cable & Wireless;
- the expiration or termination of partnerships with Web sites and Internet
service providers, or ISPs, which can result from mergers or other
strategic combinations as Internet businesses continue to consolidate;
- system outages, delays in obtaining new equipment or problems with
planned upgrades;
- our ability to successfully expand our online entertainment offerings
beyond the games and game show sector;
- the introduction of new or enhanced services by us or our competitors;
- changes in our advertising rates or advertising rates in general, both on
and off the Internet; and
- changes in general economic and market conditions, including seasonal
trends, that have an impact on the demand for Internet advertising.
WE HAVE DERIVED A PORTION OF OUR REVENUES FROM RECIPROCAL ADVERTISING
AGREEMENTS, OR BARTER, WHICH DO NOT GENERATE CASH REVENUE.
We derive a portion of our revenues from reciprocal advertising
arrangements, or barter, under which we provide advertising space on our Web
sites, or game content or other services for third-party Web sites,
18
28
predominantly in exchange for advertising space on other Web sites rather than
for cash payments. In the three months ended June 30, 2000 and June 30, 1999, we
derived approximately $497,000, or 7.2%, and $170,000, or 11.2%, of our
revenues, from these arrangements. In the six months ended June 30, 2000 and
June 30, 1999, we derived approximately $966,000, or 7.6%, and $403,000, or
16.1%, of our revenues, respectively, from these arrangements. We expect that
barter will continue to account for some of our revenues in the foreseeable
future. The Financial Accounting Standards Board (FASB) recently issued EITF
99-17 prescribing limitations on recognizing revenues for barter advertising
transactions. If our barter transactions increase and our revenues are limited
our financial results may suffer.
WE MUST INCREASE OUR ADVERTISING SALES DEPARTMENT TO SUPPORT OUR GROWTH.
We need to increase substantially our advertising sales department in the
near future to support our planned growth. On June 30, 2000, our advertising
sales department had 36 members. In October 1999, we hired an executive vice
president to manage our enhanced sales and marketing efforts and it can take a
relatively long time for a sales and marketing manager to begin to achieve
desired results. Our ability to increase our sales department and improve its
results involves a number of risks and uncertainties, including:
- strong competition in hiring and retaining advertising sales personnel;
- our ability to efficiently integrate, train and motivate additional
advertising sales and support personnel;
- our ability to manage an advertising sales organization with offices
throughout the United States and in Europe; and
- the length of time it takes new advertising sales personnel to become
productive.
If we do not successfully increase our advertising sales department, our
ability to support our planned growth could be impeded.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS.
We currently operate in the United States, Hungary, Germany, Norway and the
United Kingdom. We plan to continue to expand into additional international
markets and we anticipate spending significant financial and managerial
resources to support these expansions.
Our business internationally is subject to a number of risks. These
include:
- linguistic and cultural differences;
- inconsistent regulations and laws and unexpected changes in regulatory
and legal requirements;
- differing technology standards that would affect the quality of the
presentation of our games to our users;
- potentially adverse tax consequences;
- wage and price controls;
- political instability and social unrest;
- uncertain protection of our intellectual property rights; and
- imposition of trade barriers.
We have no control over many of these matters and any of them may adversely
affect our ability to conduct our business internationally.
CURRENCY FLUCTUATIONS AND EXCHANGE CONTROL REGULATIONS MAY ADVERSELY AFFECT OUR
BUSINESS.
Our reporting currency is the United States dollar. Our customers outside
the United States, however, are generally billed in local currencies. Our
accounts receivable from these customers and overhead assets will decline in
value if the local currencies depreciate relative to the United States dollar.
To date, we have not
19
29
tried to reduce our exposure to exchange rate fluctuations by using hedging
transactions. Although we may enter into hedging transactions in the future, we
may not be able to do so effectively. In addition, any currency exchange losses
that we suffer may be magnified if we become subject to exchange control
regulations restricting our ability to convert local currencies into United
States dollars.
RISKS ASSOCIATED WITH OUR ADVERTISERS AND STRATEGIC PARTNERS
WE DEPEND ON A SMALL GROUP OF ADVERTISING CUSTOMERS.
In the three and six months ended June 30, 2000, one customer, MyPoints,
accounted for approximately 15.0% and 21.0% of our revenues, respectively, and
in the year ended December 31, 1999, one customer, MyPoints, accounted for 14.2%
of our revenues. No other customer accounted for more than 10.0% of our revenues
during these periods. Our top five customers, in the aggregate, accounted for
approximately 33.0% and 38.0% of our revenues during the three and six months
ended June 30, 2000, respectively, and 40.0% of our revenues during 1999. If we
lose one or more of our top customers and do not attract additional customers,
we may not generate sufficient revenues to offset this loss of revenues.
OUR RELATIONSHIP WITH PEARSON TELEVISION MAY NOT BE SUCCESSFUL.
In January 1999, we entered into an agreement with Pearson Television under
which we were granted exclusive rights to provide Internet games in the English
language based on some of the television games owned by Pearson. In July 2000,
we amended and restated the agreement to extend the term through June 2005.
Under the amended and restated agreement, the games licensed by Uproar include
Family Feud, Match Game, 100% and To Tell the Truth. Pearson retains the
trademark rights for these shows. The termination of this relationship would
have a material adverse effect on our business, results of operations and
financial condition. As part of our agreement with Pearson, we have guaranteed
minimum royalty payments per broadcast year for each of these Internet games,
ranging from $150,000 for certain games in the year ending June 30, 2001 to
$900,000 for certain games in the year ending June 30, 2005. In the event that
one or more of these games is not financially successful for us, we are still
obligated to make minimum royalty payments to Pearson, and these payments may
increase if we fail to reach milestones for launching specified Pearson games.
OUR PLANS TO EXPAND OUR ENTERTAINMENT BUSINESS BEYOND OUR CORE GAME SHOW SITES
MAY NOT BE SUCCESSFUL.
Almost all of our experience to date is with online games and game shows.
Because we have only limited experience with businesses beyond our core gaming
sites, we cannot predict whether we will be able to successfully expand into
other online entertainment businesses. Expanding our business will require us to
expend significant amounts of capital to be able to contend with competitors
that have more experience than we do in these businesses and may also have
greater resources to devote to these businesses. Also, our management may have
to divert a disproportionate amount of its attention away from our day-to-day
core business and devote a substantial amount of time expanding into new areas.
If we are unable to effectively expand our business or manage any such
expansion, our financial results will suffer and our stock price will decline.
For example, we commenced selling merchandise through our Web site in December
1999 and have recognized related revenues of approximately $15,000 and $34,000
for the year ended December 31, 1999 and the six months ended June 30, 2000,
respectively. In June 2000, however, we made a strategic decision to focus on
our core strength of online entertainment, and we terminated our electronic
commerce efforts.
OTHER RISKS IMPACTING UPROAR'S BUSINESS
WE MAY NOT EFFECTIVELY MANAGE OUR GROWTH.
In order to execute our business plan, we must grow significantly. This
growth will place a significant strain on our personnel, management systems and
resources. We expect that the number of our employees, including
management-level employees, will continue to increase for the foreseeable
future.
20
30
We must continue to improve our operational and financial systems and
managerial controls and procedures. We will need to continue to expand, train
and manage our workforce. We must also maintain close coordination among our
technical, accounting, finance, marketing, sales and programming organizations.
If we do not effectively manage this growth, we will not be successful in
executing our business plan. In addition, we recently acquired ibetcha.com, a
Web site where users can predict the outcome of real-world events for a chance
to win prizes. Any failure to integrate the technology, operations or employees
of ibetcha.com with those of Uproar may have an adverse effect on our business.
THE LOSS OF OUR KEY PERSONNEL WOULD IMPEDE OUR FUTURE SUCCESS, AND WE MAY HAVE
DIFFICULTY ATTRACTING AND RETAINING HIGHLY-SKILLED EMPLOYEES.
Our future success depends, in part, on the continued service of our key
management personnel. Our future success also depends on our ability to attract,
retain and motivate highly-skilled employees. Competition for employees in our
industry is intense. We may be unable to attract, assimilate or retain other
highly qualified employees in the future. We have from time to time in the past
experienced, and we expect to continue to experience in the future, difficulty
in hiring and retaining highly-skilled employees with appropriate
qualifications. The employment agreements that we have with our key management
personnel provide for at-will employment and any of our management personnel can
terminate their employment with us at any time. The loss of the services of
these individuals or other key employees, and the failure to attract and retain
other highly qualified employees, would have a material adverse effect on our
ability to continue to develop and effectively manage our business. We do not
maintain key person life insurance policies on any of our key management
personnel.
THE TECHNICAL PERFORMANCE OF OUR WEB SITES IS CRITICAL TO OUR BUSINESS AND TO
OUR REPUTATION.
The computer systems that support our Web sites are largely designed and
maintained by us at significant expense. We may not be able to successfully
design and maintain our systems in the future. We also license communications
infrastructure software which is maintained by the licensor. If the licensor
fails to maintain the software, we may suffer a disruption in our business and a
replacement system could be difficult to identify and obtain. Any system
failure, including network, software or hardware failure, that causes an
interruption in our service or a decrease in responsiveness of our Web sites,
could result in reduced user traffic and reduced revenue. We have in the past
experienced slower response times and interruptions in service because of
equipment or software down time related to the high volume of traffic on our Web
sites and our need to deliver frequently updated information to our users. We
cannot assure you that we will be able to expand our systems to adequately
accommodate our growing user base. We could also be affected by computer
viruses, electronic break-ins from unauthorized users, or other similar
disruptions or attempts to penetrate our online security systems. Any secure
provider system disruption or failure, security breach or other damage that
interrupts or delays our operations could harm our reputation and cause us to
lose users, advertisers and sponsors and adversely affect our business and
operations.
We currently maintain production servers in Boston, New York City and
London. Our domestic data centers are operated at facilities provided by Level 3
Communications and Digital Telemedia. Our London data center is operated by PSI
Net. Our operations depend on these facilities' ability to protect their and our
systems against damage from fire, power loss, water, telecommunications
failures, vandalism and other malicious acts, and similar unexpected adverse
events. Any disruption in the Internet access provided by our servers could have
a material adverse effect on our ability to deliver high-quality content to, and
produce fast response times for, our users.
Our users depend on Internet service providers, online service providers
and other Web site operators for access to our Web sites. These providers have
had interruptions in their services for hours and, in some cases, days, due to
system failures unrelated to our systems. Any future interruptions would be
beyond our control to prevent and could harm our reputation and adversely affect
our business.
21
31
OUR STOCK PRICE HAS EXPERIENCED, AND IS LIKELY TO CONTINUE TO EXPERIENCE,
EXTREME PRICE AND VOLUME FLUCTUATIONS.
Our common stock has been highly volatile. Stock markets have from time to
time experienced significant price and volume fluctuations that have affected
the market prices for the securities of technology companies, particularly
Internet companies. Because the trading volumes of our common stock on the
Nasdaq National Market and EASDAQ are low, the price of our common stock is
particularly susceptible to significant fluctuations. Any large sale of stock
may have a negative effect on our stock price, regardless of whether we have
experienced any change in our prospects. We cannot predict the extent to which
investor interest will lead to the development of an active trading market on
the Nasdaq National Market or on EASDAQ or how liquid the markets might become.
To date, trading volumes in our common stock have been fairly limited.
The liquidity and trading patterns of our shares of common stock traded on
EASDAQ may be substantially different from those of our shares of common stock
that are traded on the Nasdaq National Market and may adversely affect the price
of our common stock. We are one of an extremely small number of issuers that
quotes its shares on both EASDAQ and the Nasdaq National Market. We have had
shares of common stock listed on EASDAQ since July 8, 1999. The shares that were
offered in our initial public offering in the United States on March 17, 2000
were listed on both the Nasdaq National Market and EASDAQ. Our shares of common
stock listed on EASDAQ prior to the United States public offering were not
registered in the United States and are restricted securities in the United
States. To be sold in the United States, these shares must either be registered
with the Securities and Exchange Commission or must be qualified for sale under
an exemption from registration under United States securities laws. EASDAQ is a
relatively new quotation system and has relatively low trading volumes for its
stocks. As a result, the price at which our common stock will trade on EASDAQ
may be subject to significant price fluctuations that will also affect the price
of our common stock trading on the Nasdaq National Market. Historical trading
prices on EASDAQ also are not indicative of the prices at which our common stock
will trade on either EASDAQ or the Nasdaq National Market in the future.
Moreover, EASDAQ may experience delays in settlement and clearance as trading
develops, which could adversely affect the price of our common stock.
IF OUR STOCK PRICE IS VOLATILE, WE MAY BECOME SUBJECT TO SECURITIES LITIGATION
WHICH IS EXPENSIVE AND COULD RESULT IN A DIVERSION OF RESOURCES.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been brought
against that company. Many companies in the Internet industry have been subject
to this type of litigation in the past. We may also become involved in this type
of litigation. Litigation is often expensive and diverts management's attention
and resources.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER THAT STOCKHOLDERS
MAY CONSIDER FAVORABLE.
Provisions in our certificate of incorporation and bylaws may have the
effect of delaying or preventing a change of control or changes in our
management that stockholders consider favorable or beneficial. If a change of
control or change in management is delayed or prevented, the market price of our
common stock could decline.
WE DO NOT PLAN TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE AND, AS A RESULT,
STOCKHOLDERS WILL NEED TO SELL SHARES TO REALIZE A RETURN ON THEIR INVESTMENT.
We have not declared or paid any cash dividends on our capital stock since
inception. We intend to retain any future earnings to finance the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Consequently, you will need to sell your shares of common
stock in order to realize a return on your investment and you may not be able to
sell your shares at or above the price you paid for them.
22
32
RISKS RELATING TO IWIN
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT IS DIFFICULT TO EVALUATE OUR
BUSINESS AND PROSPECTS.
We were founded in July 1999 and launched an incentivized game site,
iwin.com, in October 1999 and a free lottery site, eXtremelotto.com, in December
1999. Consequently, the financial information in this joint proxy
statement/prospectus may not be indicative of our future performance. Our
business and business prospects must be considered in light of the risks,
expenses, and uncertainties frequently encountered by all companies in the
initial stages of development, and particularly by companies entering new and
rapidly developing markets like the Internet. These risks include our ability
to:
- expand our content and services;
- implement our new and relatively unproven business model;
- anticipate and adapt to a developing market;
- maintain our current, and develop new, strategic relationships;
- maintain our network infrastructure to efficiently handle our Internet
traffic;
- manage effectively our rapidly expanding operations;
- attract, retain, and motivate qualified personnel; and
- attract and retain strategic partners.
We may not be successful in addressing these risks, and any failure to do
so could have a material adverse effect on our business, results of operations,
and financial condition.
WE HAVE A HISTORY OF OPERATING LOSSES AND ANTICIPATE LOSSES AND NEGATIVE CASH
FLOW FOR THE FORESEEABLE FUTURE.
To date, we have not been profitable and our accumulated deficit was
approximately $19.2 million as of June 30, 2000. For the year ended December 31,
1999 and the six months ended June 30, 2000, we incurred a net loss of
approximately $3.9 million and $15.4 million, respectively. In order to increase
our revenues and generate profits, we must, among other things:
- continue to attract traffic to our Web site;
- continue to attract and retain strategic partners; and
- develop and enhance the iwin.com brand, as well as the awareness of our
Web sites.
If we are unable to accomplish these objectives, our revenues may not grow
as we anticipate, if at all, and our business, financial condition and operating
results will be negatively affected. In addition, we have invested heavily in
sales and marketing, technology infrastructure, and research and development,
and we expect to do so increasingly in the future. As a result of these
potential costs and expenses, it is possible that we may never achieve
profitability, and even if we do achieve profitability, we may not achieve or
increase profitability on a quarterly or annual basis in the near future. If we
do not achieve or sustain profitability in the future, then we will be unable to
continue our operations.
Our auditors, Ernst & Young LLP, have indicated substantial doubt about our
ability to continue as a going concern. For more information, we refer you to
our financial statements and notes to our financial statements included in this
joint proxy statement/prospectus.
WE MAY BE SUBJECT TO EMPLOYMENT RELATED LAWSUITS STEMMING FROM A REORGANIZATION
OF OUR WORKFORCE IN MAY OF 2000 AND THE MERGER WITH UPROAR.
A number of iwin employees have been discharged or have left voluntarily in
connection with a reorganization of our work force in May 2000. In addition, a
number of employees have voluntarily resigned from their employment with iwin in
anticipation of the merger with Uproar. A few of the employees who were
discharged as a result of the May 2000 reorganization have asserted claims
against iwin. Although several of
23
33
these claims have been settled, it is possible that other former iwin employees
may also bring or file claims against iwin alleging, among other things,
wrongful termination. If any such claim or litigation is commenced, whether or
not the allegations have merit, the settlement or other disposition of such
claim could have a material adverse effect on iwin's results of operations or
financial condition.
THE FAILURE OF OUR SYSTEMS COULD RESULT IN FINANCIAL LOSSES OR IMPAIR OUR
REPUTATION.
The performance, reliability and availability of our Web sites and network
infrastructure are critical to our reputation and ability to attract and retain
users and advertisers. A large portion of our network infrastructure is located
at a single, leased facility in El Segundo, California. Our systems and
operations are vulnerable to damage or interruption from fire, power loss,
telecommunications failure, Internet breakdowns, break-ins, floods and other
natural disasters. We do not presently have redundant facilities or systems or a
formal disaster recovery plan, and our El Segundo facility does not carry
sufficient business interruption insurance to compensate us for losses that may
occur. Services based on sophisticated software and computer systems often
encounter development delays, and the underlying software may contain undetected
errors that could cause system failures when introduced. Any system error or
failure that causes interruption in availability of content or an increase in
response time could result in a loss of potential or existing users or
advertisers and, if sustained or repeated, could reduce the attractiveness of
our Internet sites to such entities or individuals. In addition, because our Web
advertising revenues are directly related to the number of advertisements
delivered by us to users, system interruptions that result in the unavailability
of our Internet sites or slower response times for users would reduce the number
of advertisements delivered and reduce revenues. Any of these system or
operational failures, interruptions or other incidents could have a material
adverse effect on our business, financial condition and results of operations.
WE OPERATE IN AN EMERGING, HIGH RISK INDUSTRY, AND ARE SUBJECT TO MANY, IF NOT
ALL, OF THE RISKS TO WHICH UPROAR IS SUBJECT.
The market for Internet products and services has only recently begun to
develop, is rapidly evolving and is characterized by an increasing number of
market entrants. To that end, we experience many, if not all, of the same
challenges and risks identified by Uproar. For this reason, you should review
the section of this joint proxy statement/prospectus entitled "Risk
Factors -- Risks Relating to Uproar" and carefully consider the risk factors
relating to Uproar as they may apply to iwin.
RISKS RELATED TO THE BUSINESS AND INDUSTRY OF BOTH UPROAR AND IWIN
OUR ADVERTISING PRICING MODEL, WHICH IS BASED ON THE NUMBER OF ADVERTISEMENTS
DELIVERED TO OUR USERS, MAY NOT BE SUCCESSFUL.
Different pricing models are used to sell advertising on the Internet. The
models we adopt may prove not to be the most profitable. Currently, advertising
based on impressions, or the number of times an advertisement is displayed on
our Web sites, comprises substantially all of our revenues. To the extent that
we do not meet the minimum guaranteed impressions that we are required to
deliver to users under many of our advertising contracts, we defer recognition
of the corresponding revenues until we achieve the guaranteed impression levels.
To the extent that minimum guaranteed impression levels are not achieved, we may
be required to provide additional impressions after the contract term, which
would reduce our advertising inventory in subsequent periods.
In addition, since advertising impressions may be delivered to a user's Web
browser without regard to user activity, advertisers may decide that a pricing
model based on user activity is preferable. We cannot predict which pricing
model, if any, will emerge as the industry standard. As a result, we cannot
accurately project our future advertising rates and revenues. If we are unable
to adapt to new forms of Internet advertising or we do not adopt the most
profitable form, our advertising revenues could be adversely affected.
24
34
OUR BUSINESS MAY SUFFER IF WE HAVE DIFFICULTY RETAINING USERS ON OUR WEB SITES.
Our business and financial results are also dependent on our ability to
retain users on our Web sites. In any particular month, many of the visitors to
our sites are not registered users and many of our registered users do not visit
our sites. We believe that intense competition has caused, and will continue to
cause, some of our registered users to seek online entertainment on other sites
and spend less time on our sites. It is relatively easy for our users to go to
competing sites and we cannot be certain that any steps we take will maintain or
improve our retention of users. In addition, some new users may decide to visit
our Web sites out of curiosity regarding the Internet and may later discontinue
using Internet entertainment services. If we are unable to retain our user base,
the demand for advertising on our Web sites may decrease and our revenues may
decline.
WE MAY NOT BE ABLE TO TRACK THE DELIVERY OF ADVERTISEMENTS ON OUR NETWORK IN A
WAY THAT MEETS THE NEEDS OF OUR ADVERTISERS.
It is important to our advertisers that we accurately measure the delivery
of advertisements on our network and the demographics of our user base.
Presently, no single measurement standard has been widely accepted to measure
the effectiveness of Internet-based advertising. Companies may choose not to
advertise on our Web sites or may pay less for advertising if they do not
perceive our ability to track and measure the delivery of advertisements to be
reliable. We depend on third parties to provide us with many of these
measurement services. If they are unable to provide these services in the
future, we would need to perform them ourselves or obtain them from another
provider. We could incur significant costs or experience interruptions in our
business during the time we are replacing these services. In addition, if
successful, legal initiatives related to privacy concerns could also prevent or
limit our ability to track advertisements.
WE MAY NOT BE ABLE TO ADJUST OUR OPERATING EXPENSES IN ORDER TO OFFSET ANY
UNEXPECTED REVENUE SHORTFALLS.
Our operating expenses are based on our expectations of our future
revenues. These expenses are relatively fixed, at least in the short term. We
intend to expend significant amounts in the short term, particularly to expand
our advertising sales and to build brand awareness. We may be unable to adjust
spending quickly enough to offset any unexpected revenue shortfall. If we fail
to substantially increase our revenues, then our financial condition and results
of operations would be materially adversely affected.
COMPETITION IN THE ONLINE ENTERTAINMENT INDUSTRY IS INTENSE AND A FAILURE TO
ADEQUATELY RESPOND TO COMPETITIVE PRESSURE COULD RESULT IN LOWER REVENUES.
There are many companies that provide Web sites and online destinations
targeted to audiences seeking various forms of entertainment content. All of
these companies compete with us for visitor traffic and advertising dollars.
This competition is intense and is expected to increase significantly in the
future as the number of entertainment-oriented Web sites continues to grow. Our
success will be largely dependent upon the perceived value of our content
relative to other available entertainment alternatives, both online and
elsewhere.
Increased competition could result in:
- price reductions and lower profit margins;
- lower advertising rates;
- loss of visitors or visitors spending less time on our sites;
- reduced page views or advertising impressions; and
- loss of market share.
Many of our existing and potential competitors, in comparison to us, have:
- longer operating histories;
- greater name recognition in some markets;
25
35
- larger customer bases; and
- significantly greater financial, technical and marketing resources.
These competitors may also be able to:
- undertake more extensive marketing campaigns for their brands and
services;
- adopt more aggressive advertising pricing policies;
- use superior technology platforms to deliver their products and services;
and
- make more attractive offers to potential employees, distribution
partners, product manufacturers, inventory suppliers, advertisers and
third-party content providers.
Our competitors may develop content that is better than ours or that
achieves greater market acceptance. Sony Station, for example, currently has the
exclusive right to the online versions of the television game shows Jeopardy and
Wheel of Fortune and the board game Trivial Pursuit. In addition, new
competitors may emerge and acquire significant market share.
We also compete with traditional forms of media, like newspapers,
magazines, radio and television for advertisers and advertising revenue. If
advertisers perceive the Internet or our Web sites to be a limited or an
ineffective advertising medium, they may be reluctant to devote a portion of
their advertising budgets to our Web sites.
IF WE DO NOT CONTINUE TO DEVELOP AND ENHANCE OUR BRANDS, WE WILL NOT BE ABLE TO
MAINTAIN OR INCREASE OUR CUSTOMER BASE OR OUR REVENUES.
Enhancing the Uproar and iwin brands is critical to our ability to expand
our user base and our revenues. We believe that the importance of brand
recognition will increase as the number of entertainment Web sites grows. In
order to attract and retain users and advertisers, we intend to increase our
expenditures for creating and maintaining brand loyalty. We use a combination of
print and Web-based advertising to promote our brand. If we fail to advertise
and market our brands effectively, we will lose users and our revenues will
decline.
Our success in promoting and enhancing the Uproar and iwin brands will also
depend on our success in providing high quality content, features and functions
that are attractive and entertaining to users of online game shows and
multi-player games. If visitors to our Web sites or advertisers do not perceive
our services to be of high quality, the value of the Uproar or iwin brands could
be diminished, we will lose users and our revenues will decline.
OUR REVENUES DEPEND ON THE CONTINUING GROWTH OF THE INTERNET.
Our future success is dependent on the increased use of the Internet. We
cannot assure you that the market for Internet services will continue to grow or
become sustainable.
The Internet may not continue as a viable commercial marketplace because of
many factors, including:
- the inadequate development of the necessary infrastructure;
- a lack of development of complementary products such as high speed modems
and high speed communication lines; and
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and volume of traffic. We cannot
assure you that the Internet infrastructure will be able to support the demands
placed on it by this continued growth. In addition to the Internet's uncertain
ability to expand to accommodate increasing traffic, critical issues concerning
the use of the Internet, including security, reliability, cost, ease of
deployment and administration and quality of service, remain unresolved. A
number of
26
36
states, for example, have recently permitted telephone companies to charge
increased rates for consumers connecting to the Internet. Concerns regarding
these issues may affect the growth of the use of Internet. If the Internet fails
to continue as a viable marketplace, or develops more slowly than expected, our
growth will slow or stop and our business and financial results will suffer.
WE WILL BE ABLE TO EXECUTE OUR BUSINESS PLAN ONLY IF INTERNET ADVERTISING
INCREASES.
Consumer usage of the Internet is relatively new and the success of the
Internet as an advertising medium will depend on its widespread adoption. The
adoption of Internet advertising, particularly by those entities that have
historically relied on traditional media for advertising, requires the
acceptance of a new way of conducting business, exchanging information and
advertising products and services. Advertisers that have traditionally relied on
other advertising media may be reluctant to advertise on the Internet. These
businesses may find Internet advertising to be less effective than traditional
advertising media for promoting their products and services. Many potential
advertising partners have little or no experience using the Internet for
advertising purposes. Consequently, they may allocate only limited portions of
their advertising budgets to Internet advertising. We expect that Internet
advertising will constitute the majority of our revenues for the foreseeable
future. If the Internet advertising market develops more slowly than we expect
or does not develop, if we are unsuccessful in increasing our advertising
revenues or if we are unsuccessful in finding alternative revenue sources, our
revenues will not grow as we expect and our business will suffer.
IF WE ARE NOT ABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CUSTOMER DEMANDS
CONTINUE TO EVOLVE, WE MAY BECOME LESS COMPETITIVE AND OUR BUSINESS WILL SUFFER.
We must adapt to rapidly evolving Internet technologies by continually
enhancing our existing services and introducing new services to address our
customers' changing demands. We expect to incur substantial costs in modifying
our services and infrastructure and in recruiting and hiring experienced
technology personnel to adapt to changing technology affecting providers of
Internet services. If we cannot hire the necessary personnel or adapt to these
changes in a timely manner or at all, we will not be able to meet our users'
demands for increasingly sophisticated entertainment and we will become less
competitive. As a result, our revenues would decline and our business will
suffer.
CHANGES IN GOVERNMENT REGULATION COULD ADVERSELY AFFECT OUR BUSINESS.
Changes in the legal and regulatory environment that pertains to the
Internet could result in a decrease in our revenues and an increase in our
costs. New laws and regulations may be adopted. Existing laws may be applied to
the Internet. New and existing laws may cover issues like:
- sales and other taxes;
- pricing controls;
- characteristics and quality of products and services;
- consumer protection;
- libel and defamation; and
- copyright, trademark and patent infringement.
Customer uncertainty and new regulations could increase our costs and
prevent us from delivering our products and services over the Internet. It could
also slow the growth of the Internet significantly. This could delay growth in
demand for our products and limit the growth of our revenues.
OUR GAMES AND GAME SHOWS ARE SUBJECT TO GAMING REGULATIONS THAT ARE SUBJECT TO
DIFFERING INTERPRETATIONS AND LEGISLATIVE AND REGULATORY CHANGES THAT COULD
ADVERSELY AFFECT OUR ABILITY TO GROW OUR BUSINESS.
We operate online games of skill and chance that are regulated in many
jurisdictions and, in some instances, we award prizes to the participants. The
selection of prize winners is sometimes based on chance,
27
37
although none of our games requires any form of monetary payment. The laws and
regulations that govern our games, however, are subject to differing
interpretations in each jurisdiction and are subject to legislative and
regulatory change in any of the jurisdictions in which we offer our games. If
such changes were to happen, we may find it necessary to eliminate, modify or
cancel components of our products that could result in additional development
costs and the possible loss of revenue.
USER CONCERNS AND GOVERNMENT REGULATIONS REGARDING PRIVACY MAY RESULT IN A
REDUCTION IN OUR USER TRAFFIC.
Web sites sometimes place identifying data, or cookies, on a user's hard
drive without the user's knowledge or consent. We and many other Internet
companies use cookies for a variety of different reasons, including the
collection of data derived from the user's Internet activity. Any reduction or
limitation in the use of cookies could limit the effectiveness of our sales and
marketing efforts. Most currently available Web browsers allow users to remove
cookies at any time or to prevent cookies from being stored on their hard drive.
In addition, some privacy advocates and governmental bodies have suggested
limiting or eliminating the use of cookies. For example, the European Union
recently adopted a privacy directive that limits the collection and use of
information regarding Internet users. These efforts may limit our ability to
target advertising or collect and use information regarding the use of our Web
sites, which would reduce our revenues. Fears relating to a lack of privacy
could also result in a reduction in the number of our users.
IF CONGRESS ADOPTS LEGISLATION THAT BANS ONLINE OFFSHORE CASINO GAMBLING, WE
WILL LOSE REVENUES DERIVED FROM SOME OF OUR ADVERTISERS AND, IF WE DO NOT TAKE
APPROPRIATE MEASURES TO COMPLY WITH THE LAW, MAY BE SUBJECT TO LEGAL PENALTIES.
The Congress of the United States is considering legislation that would
render unlawful offshore casino gambling offered online in the United States. If
this legislation is enacted in a form similar to the bill pending in Congress,
we would need to terminate or modify our current agreements with offshore casino
site advertisers, which would result in a loss of revenue.
In addition, such legislation could impose penalties on United States-based
companies that are deemed to aid in the operation of offshore online casinos or
encourage the use of those sites by United States residents. Accordingly, it is
possible that we could be liable for criminal or civil penalties if we did not
take proper measures to terminate or modify our agreements with online casino
sites.
WE MAY BE LIABLE FOR THE CONTENT WE MAKE AVAILABLE ON THE INTERNET.
We make content available on our Web sites and on the Web sites of our
advertisers and distribution partners. The availability of this content could
result in claims against us based on a variety of theories, including
defamation, obscenity, negligence, copyright or trademark infringement. We could
also be exposed to liability for third-party content accessed through the links
from our sites to other Web sites. We may incur costs to defend ourselves
against even baseless claims and our financial condition could be materially
adversely affected if we are found liable for information that we make
available. Implementing measures to reduce our exposure to this liability may
require us to spend substantial resources and limit the attractiveness of our
service to users.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
We do not currently maintain patents on our technology and others may be
able to develop similar technologies in the future. We regard our copyrights,
service marks, trademarks, trade secrets and other intellectual property as
critical to our success. We rely on trademark and copyright law, trade secret
protection and confidentiality and license agreements with our employees,
customers, partners and others to protect our intellectual property rights.
Unauthorized use of our intellectual property by third parties may adversely
affect our business and our reputation. It may be possible for third parties to
obtain and use our intellectual property without authorization. Furthermore, the
validity, enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. Our multi-user
games run on proprietary software
28
38
systems developed by us at significant expense. Nonetheless, we do not maintain
patents on our technology and others may be able to develop similar technologies
in the future.
We cannot be certain that our products do not or will not infringe valid
patents, copyrights, trademarks or other intellectual property rights held by
third parties. We may be subject to legal proceedings and claims from time to
time relating to the intellectual property of others in the ordinary course of
our business. Disputes concerning the ownership of rights to use intellectual
property could be costly and time consuming to litigate, may distract management
from other tasks of operating our business, and may result in our loss of
significant rights and the loss of our ability to effectively operate our
business.
ANY JOINT VENTURES, ACQUISITIONS AND ALLIANCES WE MAKE COULD BE DISRUPTIVE TO
OUR BUSINESS AND BE DILUTIVE TO OUR INVESTORS.
As part of our business strategy, we will continue to pursue alliances or
joint ventures with, and may attempt to acquire, complementary businesses,
technologies, services or products, some of which may be significant. In
addition to entering into the agreement and plan of reorganization with iwin,
Uproar recently acquired Take Aim Holdings Ltd., the parent company of
ibetcha.com Inc., which operates the Web site ibechta.com. These relationships
may require significant management attention and additional working capital. If
we form a joint venture with or acquire other companies, we could have
difficulty in assimilating their operations and assimilating or retaining their
key personnel. These difficulties could disrupt our business and disrupt our
management and employees.
It may also be necessary for us to raise additional funds to finance future
transactions. Any equity or debt financings, if available at all, may adversely
impact our operations and, in the case of equity financings, may result in
dilution to existing stockholders.
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING.
We may need to raise additional funds in the future. Any required
additional financing may not be available on terms favorable to us, or at all.
If adequate funds are not available on acceptable terms, we may be unable to:
- fund our expansion;
- successfully promote our brand;
- develop or enhance our services;
- respond to competitive pressures; or
- take advantage of acquisition opportunities.
If additional funds are raised by our issuing additional equity securities,
stockholders may experience dilution of their ownership interest and, if
approved by our stockholders, the newly issued securities could have rights
superior to those of the shares of common stock sold in this offering. If
additional funds are raised by our issuing debt, we may be subject to
limitations on our operations.
29
39
THE UPROAR SPECIAL MEETING
GENERAL
This joint proxy statement/prospectus is being furnished to stockholders of
Uproar Inc., a Delaware corporation, as part of the solicitation of proxies by
the Uproar board of directors for use at a special meeting of stockholders of
Uproar to be held on October 18, 2000, at 10:00 a.m., local time, at 240 West
35th Street, New York, NY 10001, and at any adjournment or postponement of such
meeting. This joint proxy statement/prospectus and the enclosed form of proxy
are first being mailed to stockholders of Uproar on or about September 18, 2000.
MATTERS TO BE CONSIDERED
The purpose of the Uproar special meeting is:
1. To approve the issuance of up to an estimated maximum of 14,008,303
shares of Uproar common stock to the stockholders of iwin.com,
Inc., a Delaware corporation, and the assumption of all outstanding
options and warrants of iwin as contemplated by the agreement and
plan of reorganization, dated as of July 25, 2000, by and among
Uproar, iwin Acquisition Corporation, a Delaware corporation and a
wholly owned subsidiary of Uproar, iwin, Frederick Krueger, as
stockholders' agent, and the stockholders of iwin listed on the
signature pages thereof. Under the agreement and plan of
reorganization, iwin Acquisition Corporation will be merged with
and into iwin, with iwin being the surviving corporation. If this
proposal is approved, outstanding iwin stock options and warrants
will be assumed by Uproar and will convert into options and
warrants to purchase up to an additional estimated 1,835,000 shares
of Uproar common stock at various exercise prices.
2. To approve the amendment and restatement of the Uproar Inc. 2000
Stock Incentive Plan to increase the number of shares of Uproar
common stock reserved for issuance under the plan from 6,750,000 to
9,000,000 shares.
3. To transact such other business as may properly come before the
Uproar special meeting or any adjournment or postponement of the
meeting.
UPROAR BOARD OF DIRECTORS' RECOMMENDATION
The Uproar board of directors, after careful consideration, has unanimously
approved the merger and the agreement and plan of reorganization and the
proposed issuance of Uproar common stock in connection with the merger. The
Uproar board believes that the merger is advisable and in your best interests
and unanimously recommends that you vote FOR the proposed issuance of Uproar
common stock in connection with the merger.
The Uproar board of directors has unanimously approved the amendment and
restatement of the Uproar Inc. 2000 Stock Incentive Plan to increase the number
of shares of Uproar common stock reserved for issuance under the plan from
6,750,000 to 9,000,000 shares. The Uproar board believes that this increase is
advisable and in your best interests and unanimously recommends that you vote
FOR approval of the amendment and restatement of the Stock Incentive Plan.
RECORD DATE AND VOTING
Holders of record of shares of Uproar common stock at the close of business
on September 11, 2000, referred to in this joint proxy statement/prospectus as
the Uproar record date, are entitled to notice of and to vote at the Uproar
special meeting. On the record date, there were outstanding 29,386,788 shares of
Uproar common stock, each of which will be entitled to one vote. One-third of
the shares of Uproar common stock entitled to vote must be present in person or
represented by proxy at the Uproar special meeting to constitute a quorum.
Pursuant to applicable rules of the Nasdaq National Market and EASDAQ, the
proposed issuance of Uproar common stock in connection with the merger requires
stockholder approval because the number of
30
40
shares of Uproar common stock to be issued in the merger will be equal to
approximately forty-four percent (44%) of the number of shares of Uproar common
stock outstanding before issuance of the stock in the merger. Stockholder
approval is also required under applicable rules of the Nasdaq National Market
for the increase in the number of shares of common stock reserved for issuance
under the Stock Incentive Plan. The affirmative vote of a majority of the shares
of Uproar common stock present in person or represented by proxy at the Uproar
special meeting and entitled to vote is required to approve the issuance of the
shares of Uproar common stock in the merger and the amendment and restatement of
the Stock Incentive Plan.
Shares of Uproar common stock present in person or represented by proxy at
the Uproar special meeting and entitled to vote will be counted for the purposes
of determining whether a quorum is present. Abstentions and broker "non-votes"
will be counted as present or represented and entitled to vote at the Uproar
special meeting for purposes of determining whether a quorum is present. A
broker "non-vote" occurs when a broker holding shares for a beneficial owner
does not vote on a proposal because the broker does not have discretionary
voting power and has not received instructions from the beneficial owner with
respect to the proposal. Abstentions will be included in the number of shares
present or represented and voting on each matter. Broker "non-votes" will not be
considered voted for the particular matter and have the effect of reducing the
number of affirmative votes required to achieve a majority for such matter by
reducing the total number of shares from which the majority is calculated.
As of August 23, 2000, directors, executive officers and stockholders of
Uproar, and their affiliates, who collectively beneficially own approximately
24.5% of the outstanding shares of Uproar common stock have agreed to vote their
shares in favor of the issuance of Uproar common stock in connection with the
merger.
VOTING AND REVOCATION OF PROXIES
All shares of Uproar common stock which are entitled to vote and are
represented at the Uproar special meeting by properly executed proxies received
by Uproar prior to or at the meeting, and not revoked, will be voted at the
meeting or any adjournment thereof in accordance with the instructions indicated
on the proxies. If no instructions are indicated (other than broker non-votes),
the proxies will be voted FOR approval of the proposed issuance of Uproar common
stock in connection with the merger and FOR approval of the amendment and
restatement of the Uproar Inc. 2000 Stock Incentive Plan, all as proposed in
this joint proxy statement/prospectus.
The Uproar board of directors does not know of any matters other than those
described in the notice of the Uproar special meeting that are to be presented
for action at such meeting. If any other matters are properly presented at the
Uproar special meeting for consideration, the persons appointed as proxies
(Kenneth D. Cron and Robert D. Marafioti) generally will have discretion to vote
on such matters in accordance with their judgment. Any person giving a proxy may
revoke it at any time before its exercise by delivering to the Secretary of
Uproar an instrument of revocation or a duly executed proxy bearing a later
date. Although attendance at the Uproar special meeting will not in itself
constitute revocation of a proxy, a stockholder attending the Uproar special
meeting may withdraw the proxy and vote in person. Stockholders that have
instructed a broker to vote their shares must follow directions received from
such broker in order to change their vote at the Uproar special meeting.
Uproar has retained Georgeson Shareholder Communications Inc. for the
purpose of soliciting Uproar stockholders in connection with the merger. All
expenses of Uproar's solicitation of proxies for the Uproar special meeting will
be borne by Uproar. In addition to solicitation by use of the mails, proxies may
be solicited from Uproar stockholders by directors, officers and employees of
Uproar in person or by telephone, facsimile, electronic mail or other means of
communication. These directors, officers and employees will not be additionally
compensated, but may be reimbursed for reasonable out-of-pocket expenses in
connection with the solicitation. Arrangements will also be made with brokerage
houses, custodians, nominees and fiduciaries for forwarding of proxy
solicitation materials to beneficial owners of shares held of record by such
brokerage houses, custodians, nominees and fiduciaries, and Uproar will
reimburse these brokerage houses, custodians, nominees and fiduciaries for their
reasonable expenses incurred in connection therewith.
31
41
THE IWIN SPECIAL MEETING
GENERAL
This joint proxy statement/prospectus is being furnished to stockholders of
iwin.com, Inc., a Delaware corporation, as part of the solicitation of proxies
by the iwin board of directors for use at a special meeting of stockholders of
iwin to be held on October 18, 2000, at 10:00 a.m., local time, at 10940
Wilshire Boulevard in Los Angeles, California, and at any adjournment or
postponement of such meeting. This joint proxy statement/prospectus and the
enclosed form of proxy are first being mailed to stockholders of iwin on or
about September 18, 2000.
MATTERS TO BE CONSIDERED
The purpose of the iwin special meeting is:
1. To approve and adopt the merger and the agreement and plan of
reorganization, dated as of July 25, 2000, among Uproar Inc., a
Delaware corporation, iwin Acquisition Corporation, a Delaware
corporation and a wholly owned subsidiary of Uproar, iwin,
Frederick Krueger, as stockholders' agent, and the stockholders of
iwin listed on the signature pages thereof, that will result in
iwin becoming a wholly owned subsidiary of Uproar.
2. To approve the appointment of Frederick Krueger, currently iwin's
Chief Executive Officer, as the indemnification representative to
act on behalf of the iwin stockholders in connection with the
merger and the escrow agreement referred to in the agreement and
plan of reorganization.
3. To approve the grant made to Scott Kaufman, iwin's Vice President
of Product Management, of an option to purchase 480,420 shares of
iwin common stock at a price of $5.46 per share conditioned on the
closing of the merger.
4. To transact such other business as may properly come before the
iwin special meeting or any adjournment or postponement of the
meeting.
IWIN BOARD OF DIRECTORS' RECOMMENDATION
The iwin board of directors, after careful consideration, has unanimously
approved the merger and the agreement and plan of reorganization, the
appointment of the indemnification representative and the grant of an option to
Mr. Kaufman and has determined that the merger and the agreement and plan of
reorganization are advisable and in the best interests of iwin and its
stockholders. The iwin board of directors unanimously recommends a vote FOR the
approval and adoption of the merger and the agreement and plan of
reorganization, a vote FOR the approval of the grant of options to Scott Kaufman
and a vote FOR the approval of the related appointment of Frederick Krueger as
the indemnification representative under the escrow agreement referred to in the
agreement and plan of reorganization.
RECORD DATE AND VOTING
Holders of record of shares of iwin common stock, Series A preferred stock,
Series B preferred stock, and Series C preferred stock at the close of business
on September 11, 2000, referred to in this joint proxy statement/prospectus as
the iwin record date, are entitled to notice of and to vote at the iwin special
meeting. At the iwin record date, there were 7,193,189, 2,250,000, 5,177,865 and
1,097,827 outstanding shares of iwin common stock, Series A preferred stock,
Series B preferred stock, and Series C preferred stock, respectively. Each share
of iwin common stock, Series A preferred stock, Series B preferred stock and
Series C preferred stock will entitle the holder to one vote per share. The
representation, in person or by properly executed proxy, of the holders of a
majority in voting power of all of the outstanding shares of common stock,
Series A preferred stock, Series B preferred stock and Series C preferred stock
entitled to vote at the iwin special meeting is necessary to constitute a quorum
at the iwin special meeting.
32
42
The approval and adoption of the merger and the agreement and plan of
reorganization will require the affirmative vote of the holders of:
- a majority of the votes represented by the outstanding shares of iwin
common stock and Series A preferred stock, voting as a single class,
- a majority of the votes represented by the outstanding shares of iwin
Series B preferred stock, voting as a single class, and
- a majority of the votes represented by the outstanding shares of iwin
Series C preferred stock, voting as a single class.
The appointment of Frederick Krueger as the indemnification representative
and the approval of the grant of the option to Scott Kaufman will require the
affirmative vote of the holders of a majority of the votes represented by the
outstanding shares of iwin common stock, Series A preferred stock, Series B
preferred stock and Series C preferred stock voting together as a single class.
Shares of iwin common stock, Series A preferred stock, Series B preferred
stock and Series C preferred stock represented in person or by proxy will be
counted for the purposes of determining whether a quorum is present at the iwin
special meeting. All shares with respect to which holders abstain from voting as
to the proposal to adopt the agreement and plan of reorganization will be
treated as shares that are present and entitled to vote at the iwin special
meeting for the purposes of determining whether a quorum exists, but abstentions
will have the same effect as votes against approval of the merger and the
agreement and plan of reorganization.
As of August 23, 2000, directors, executive officers and stockholders of
iwin, and their affiliates, who collectively beneficially own approximately
85.6% of the outstanding shares of iwin common stock, Series A preferred stock,
Series B preferred stock and Series C preferred stock have agreed to vote their
shares in favor of the approval and adoption of the merger and the agreement and
plan of reorganization.
VOTING AND REVOCATION OF PROXIES
All shares of iwin common stock, Series A preferred stock, Series B
preferred stock and Series C preferred stock which are entitled to vote and are
represented at the iwin special meeting by properly executed proxies received
prior to or at such meeting, and not revoked, will be voted at the meeting in
accordance with the instructions indicated on such proxies. If no instructions
are indicated, the proxies will be voted FOR each proposal.
The iwin board does not know of any matters other than those described in
the notice of the iwin special meeting that are to come before the meeting. If
any other matters are properly presented at the iwin special meeting for
consideration, including, among other things, consideration of a motion to
adjourn or postpone the meeting to another time and/or place, the persons named
in the enclosed forms of proxy generally will have discretion to vote on such
matters in accordance with their best judgment. However, proxies voting against
a specific proposal may not be used by the persons named in the proxies to vote
for adjournment or postponement of the meeting for the purpose of giving
management additional time to solicit votes to approve such proposal.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by:
- filing with the Secretary of iwin, at or before the taking of the vote at
the iwin special meeting, a written notice of revocation bearing a later
date than the proxy;
- duly executing a later dated proxy relating to the same shares and
delivering it to the Secretary of iwin before the taking of the vote at
the iwin special meeting; or
- attending the iwin special meeting and voting in person although
attendance at the iwin special meeting will not in and of itself
constitute a revocation of a proxy.
33
43
Any written notice of revocation or subsequent proxy should be sent to
iwin.com, Inc., 10940 Wilshire Boulevard, Los Angeles, California 90024,
Attention: Secretary, or hand delivered to the Secretary of iwin at or before
the taking of the vote at the iwin special meeting.
All expenses of iwin's solicitation of proxies for the iwin special meeting
will be borne by iwin. In addition to solicitation by use of the mails, proxies
may be solicited from iwin stockholders by directors, officers and employees of
iwin in person or by telephone, facsimile or other means of communication. These
directors, officers and employees will not be additionally compensated, but may
be reimbursed for reasonable out-of-pocket expenses in connection with the
solicitation.
34
44
THE MERGER
This section of the joint proxy statement/prospectus describes material
aspects of the proposed merger, including the agreement and plan of
reorganization. While we believe that the description covers the material terms
of the merger and the related transactions, this summary may not contain all of
the information that is important to Uproar stockholders and iwin stockholders.
You should read the agreement and plan of reorganization and the other documents
we refer to carefully and in their entirety for a more complete understanding of
the merger.
BACKGROUND OF THE MERGER
On July 5, 2000, Frederick Krueger, Chief Executive Officer of iwin,
telephoned Joel Wilhite, Chief Financial Officer of Uproar, and proposed that
the parties meet. Kenneth Cron, Chairman of the Board and Chief Executive
Officer of Uproar, called Mr. Krueger back, and they discussed the possibility
of Uproar and iwin pursuing joint business opportunities or entering into a
strategic partnership or business combination. They agreed to meet at Uproar's
offices the following week to continue discussions.
On July 13, 2000, Mr. Krueger and Scott Kaufman, Vice President, Product
Management of iwin, met with Mr. Cron, Mr. Wilhite and Christopher Hassett,
President and Chief Operating Officer of Uproar, at Uproar's headquarters in New
York City. At that meeting, both parties presented overviews of their respective
businesses, discussed overall trends in the online entertainment market and
explored the potential benefits of a combination of the two companies. The
parties also discussed the relative financial value of their two businesses.
Because Uproar had, in recent months, been engaged in exploratory discussions
regarding strategic alternatives with a number of online entertainment
companies, its management was familiar with the range and method of current
valuations for such companies and was able to reach tentative agreement with
iwin on the relative financial value of the two companies in an expeditious
manner.
On July 14, 2000, the parties met again at Uproar's offices and signed a
non-binding letter of intent which contemplated a transaction in which Uproar
would acquire all the outstanding shares of iwin capital stock in a
stock-for-stock merger. The letter included a binding mutual nondisclosure
provision and a limited-duration exclusivity provision to protect the parties
during due-diligence investigations and the negotiation of definitive
agreements. At that meeting, the parties planned a schedule for their
due-diligence investigations, shared some preliminary due-diligence information
and discussed various operational issues involved in combining the companies.
Simultaneously with these discussions, a draft merger agreement and related
transaction documents were prepared by Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, Uproar's outside legal advisor, and were delivered to
the parties on July 14, 2000. During the period from July 17, 2000 through July
19, 2000, members of Uproar's management team held a series of meetings with
members of iwin's management team in Los Angeles. During those days and for the
remainder of that week, representatives of Uproar and iwin conducted a business,
legal and financial due-diligence investigation of each other and held extensive
negotiations regarding the terms and conditions of the merger agreement and the
related agreements. During this same period, representatives of Uproar and iwin
also discussed the possible organization of the combined companies and began to
develop plans for integrating the companies after the proposed merger.
On July 19, 2000, Mr. Krueger traveled to Las Vegas in order to discuss the
proposed merger with Gary Loveman and Chuck Atwood, Chief Operating Officer and
Treasurer, respectively, of Harrah's Entertainment, Inc., a large institutional
investor of iwin, and also to deliver a presentation. After the presentation,
Harrah's agreed to vote in favor of the merger. On July 20, 2000, a special
meeting of iwin's board of directors was held, during which Mr. Krueger again
discussed the proposed merger and delivered the same presentation that was
delivered to Harrah's. The board also reviewed the draft merger agreement.
Afterwards, the board voted unanimously in favor of the merger.
On the evening of July 20, 2000, a special meeting of iwin investors was
called in order to inform the investors of the recent merger negotiations and to
urge the investors to analyze the potential benefits of the merger in a timely
and responsive manner, given the proposed timing of the transaction. By the
evening of
35
45
July 21, 2000, stockholders representing at least a majority of each class of
iwin's capital stock had delivered voting agreements in favor of the merger to
the management of iwin.
On July 21, 2000, a special meeting of the board of directors of Uproar was
held and the directors reviewed the proposed terms of the merger including the
proposed share exchange ratio, the results of Uproar's due-diligence
investigation and the expected benefits of the transaction to Uproar and its
stockholders. After discussion, the board authorized management to continue to
pursue the proposed business combination of Uproar and iwin.
During the period July 22 through July 24, 2000, the parties continued to
negotiate the terms of the merger agreement and other agreements relating to the
proposed transaction.
On July 24, 2000, a special meeting of iwin's board of directors was held,
during which the board members reviewed the substantially final merger agreement
and the certificate of merger, and again approved the merger.
On July 25, 2000, at a regular meeting of the board of directors of Uproar,
the directors reviewed the principal terms of the merger agreement and related
agreements as negotiated to date, the accounting treatment of the proposed
merger and the strategic benefits of the combination of the two businesses.
After discussion, the Uproar board unanimously approved the merger agreement and
related agreements and the issuance of Uproar common stock in the merger,
subject to satisfactory resolution of terms that remained open to final
negotiation in such agreements. The board also determined to recommend to
Uproar's stockholders that they approve the issuance of shares of Uproar common
stock in the merger.
Following the meeting of the Uproar board, the management teams of Uproar
and iwin and their respective legal advisors negotiated all remaining open terms
and finalized the merger agreement and related agreements. The definitive
document and voting agreements were executed and delivered by all parties during
the evening of July 25, 2000. On July 26, 2000, Uproar and iwin issued a joint
press release announcing the proposed merger.
JOINT REASONS FOR THE MERGER
The Uproar board of directors and the iwin board of directors each believe
that the combined company will have potential for greater financial strength,
market power and growth than either Uproar or iwin would have on its own. The
Uproar board of directors and the iwin board of directors identified a number of
potential benefits to the merger which they believe could contribute to the
success of the combined company and thus benefit stockholders of both companies,
including the following:
- the merger may enhance the opportunity for the potential realization of
the strategic objective of the combined company to expand its market
share and increase the combined company's ability to compete effectively
in the online entertainment market;
- the merger may provide the combined company with the financial resources
and expanded offerings to increase its user base and to obtain advantages
and efficiencies in the marketing, selling and pricing of its products
and to achieve profitability;
- the combined experience, financial resources, size, and breadth of
offerings of the combined company may allow it to respond more quickly
and effectively to technological change, increased competition, and
market demands in an industry experiencing rapid innovation and change;
- the increased capitalization of the combined company may allow increased
access to capital markets and potentially reduce the cost of capital; and
- the combined company will have an experienced management team that has
the breadth and depth to effectively lead and manage the combined
company's growth.
36
46
RECOMMENDATION OF THE BOARD OF DIRECTORS OF UPROAR; UPROAR'S REASONS FOR THE
MERGER
THE UPROAR BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND AGREEMENT AND PLAN
OF REORGANIZATION AND THE TRANSACTIONS CONTEMPLATED THEREBY AND BELIEVES THAT
THE TERMS OF THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, UPROAR AND
ITS STOCKHOLDERS. THE UPROAR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
PROPOSED ISSUANCE OF UPROAR COMMON STOCK IN CONNECTION WITH THE MERGER.
In reaching its conclusion to approve the merger and agreement and plan of
reorganization, the Uproar board of directors considered the factors described
above under "Joint Reasons for the Merger," as well as the opportunity of the
Uproar stockholders to participate in the potential growth of the combined
company after the merger.
The Uproar board of directors also considered and reviewed with management
the additional reasons listed below in reaching its decision to approve the
merger and the agreement and plan of reorganization and to recommend that
Uproar's stockholders vote to approve the proposed issuance of Uproar common
stock in connection with the merger:
- acquiring iwin will increase Uproar's visitor traffic and enable Uproar
to gain advantages and efficiencies in selling its products to its
customers;
- acquiring iwin may enable Uproar to strengthen its industry leadership
position and global presence by capitalizing on iwin's offerings, thereby
enhancing the products and services available to Uproar's customers;
- in light of consolidation throughout the industry, acquiring iwin may
strengthen Uproar's position as a dominant participant in the industry;
and
- owning iwin will enhance Uproar's technical and sales staff with
experienced iwin technical and sales personnel.
In addition, the Uproar board of directors has reviewed the opinion of
Bear, Stearns & Co. Inc. that, as of the date of its opinion and subject to the
assumptions made, matters considered and limitations of the review undertaken in
connection with the opinion, as set forth in the opinion, the consideration to
be paid in the merger is fair to Uproar from a financial point of view.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF IWIN; IWIN'S REASONS FOR THE MERGER
THE IWIN BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND THE AGREEMENT AND
PLAN OF REORGANIZATION AND THE TRANSACTIONS CONTEMPLATED THEREBY AND BELIEVES
THAT THE TERMS OF THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, IWIN AND
ITS STOCKHOLDERS. THE IWIN BOARD RECOMMENDS A VOTE FOR THE APPROVAL AND ADOPTION
OF THE MERGER AND THE AGREEMENT AND PLAN OF REORGANIZATION.
In addition to the anticipated joint benefits described above under "Joint
Reasons for the Merger", the iwin board believes that the following are
additional reasons the merger will be beneficial to iwin and its stockholders:
- the merger may enable iwin to attain industry leadership, strengthen the
company's presence and capitalize on Uproar's sales and marketing
expertise and personnel resources;
- the combined company should be better able to accelerate its product and
service implementation activities;
- the merger should provide iwin with immediate access to additional
financial resources to accelerate its growth; and
- the consideration to be paid to iwin stockholders in the merger will be
shares of Uproar common stock, securities that are traded on the Nasdaq
National Market and EASDAQ and are more readily marketable than shares of
iwin stock.
37
47
OPINION OF BEAR STEARNS
Bear Stearns delivered its oral opinion to the Uproar board of directors on
August 30, 2000, and subsequently confirmed in writing, that, as of such date,
the consideration to be paid in the merger is fair, from a financial point of
view, to Uproar. The opinion is based on and subject to several assumptions,
limitations and qualifications.
THE FULL TEXT OF BEAR STEARNS' OPINION IS ATTACHED AS ANNEX B TO THIS JOINT
PROXY STATEMENT/PROSPECTUS. UPROAR STOCKHOLDERS SHOULD READ THE ENTIRE BEAR
STEARNS OPINION. THE SUMMARY OF THE BEAR STEARNS OPINION SET FORTH HEREIN IS
SUBJECT TO THE FULL TEXT OF THE OPINION.
In reading the discussion of the fairness opinion provided below, Uproar's
stockholders should be aware that Bear Stearns' opinion:
- is intended for the benefit and use of Uproar's board of directors;
- does not constitute a recommendation to the board of directors as to how
to vote in connection with the merger;
- does not constitute a recommendation to any holders of Uproar's common
stock as to how to vote in connection with the merger; and
- does not address Uproar's underlying business decision to pursue the
merger.
In arriving at its opinion, Bear Stearns has, among other things:
- reviewed the agreement and plan of reorganization;
- reviewed Uproar's Registration Statement on Form S-1 dated March 16,
2000, and its Quarterly Reports on Form 10-Q for the periods ended March
31 and June 30, 2000;
- reviewed certain internal operating and financial information relating to
Uproar's business and prospects provided to Bear Stearns by Uproar
management, including income statement, cash flow, and balance sheet
projections for Uproar for the two year period ending December 31, 2001;
- reviewed estimates of cost savings and other combination benefits
expected to result from the merger, prepared and provided to Bear Stearns
by Uproar's management;
- met with certain members of Uproar's senior management to discuss
Uproar's business, operations, historical and projected financial results
and future prospects;
- reviewed operating and financial information relating to iwin's business
and prospects including audited financial statements for the year ended
December 31, 1999, provided to Bear Stearns by iwin management, and
income statement and cash flow projections for the two year period ending
December 31, 2001 provided to Bear Stearns by iwin management (and as
further adjusted downward by senior management of Uproar);
- met with members of iwin's senior management to discuss iwin's business,
operations, historical and projected financial results and future
prospects;
- reviewed the historical prices, trading multiples and trading volume of
the common stock of Uproar;
- reviewed publicly available financial data, stock market performance data
and trading multiples of companies which Bear Stearns deemed generally
comparable to iwin;
- reviewed the terms of recent mergers and acquisitions of companies which
Bear Stearns deemed generally comparable to Uproar, iwin and the merger;
- reviewed the pro forma financial results, financial condition and
capitalization of Uproar, giving effect to the merger; and
38
48
- conducted such other studies, analyses, inquiries and investigations as
Bear Stearns deemed appropriate.
In preparing its opinion, Bear Stearns did not independently verify any
information, whether publicly available or furnished to it, concerning Uproar or
iwin, including, without limitation, any financial information, forecasts or
projections, considered in connection with the rendering of its opinion. Bear
Stearns assumed and relied upon the accuracy and completeness of all such
information.
In arriving at its opinion, Bear Stearns did not conduct a physical
inspection of the properties or assets, and did not prepare or obtain any
independent evaluation or appraisal of any of the assets or liabilities of
Uproar or iwin. With respect to the financial forecasts and synergy estimates
made available to Bear Stearns and used in its analysis, Bear Stearns has
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of Uproar's management as to the
matters covered thereby. In rendering its opinion, Bear Stearns expressed no
view as to the reasonableness of the forecasts and projections or the
assumptions on which they are based.
Bear Stearns did not express any opinion as to the price or range of prices
at which the common stock of Uproar might trade subsequent to the announcement
of the merger or as to the price or range of prices at which the shares of
common stock may trade subsequent to the consummation of the merger. The opinion
of Bear Stearns was necessarily based on economic, market and other conditions,
and the information made available to Bear Stearns, as of the date of the
opinion. Although subsequent developments may affect its opinion, Bear Stearns
does not intend to update, revise or reaffirm it.
Bear Stearns assumed, for all purposes material to its analysis, the
accuracy and completeness of the representations and warranties, performance of
all covenants and satisfaction of all conditions contained in the agreement and
plan of reorganization.
Bear Stearns assumed that the merger will qualify as a tax-free
reorganization within the meaning of the Internal Revenue Code.
Set forth below is a brief summary of some of the valuation and financial
and comparative analyses considered by Bear Stearns in connection with the
rendering of the Bear Stearns opinion and reviewed with the board of directors
of Uproar on August 30, 2000. In order to understand fully the financial
analyses used by Bear Stearns, the tables must be read with the text of each
summary because the tables alone are not a complete description of the financial
analysis. This summary does not purport to be a complete description of the
analyses underlying the Bear Stearns opinion. You are strongly urged to review
the full text of the Bear Stearns' opinion, which is included as Annex B.
The following summary describes the analyses and factors that Bear Stearns
deemed material in its presentation to the Uproar board of directors and in
preparing its opinion, but is not a comprehensive description of all analyses
performed and factors considered by Bear Stearns in connection with preparing
its opinion. The preparation of a fairness opinion is a complex process
involving the application of subjective business judgment in determining the
most appropriate and relevant methods of financial analysis and the application
of those methods to the particular circumstances and, therefore, is not readily
susceptible to summary description. Bear Stearns believes that its analyses must
be considered as a whole and that considering any portion of such analyses and
of the factors considered without considering all analyses and factors could
create a misleading view of the process underlying the opinion. In arriving at
its fairness determination, Bear Stearns did not assign specific weight to any
particular analysis.
In conducting its analyses and arriving at its opinions, Bear Stearns used
a variety of generally accepted valuation methods. The analyses were prepared
solely for the purpose of enabling Bear Stearns to provide its opinion to the
Uproar board of directors as to the fairness of the merger consideration to be
paid, from a financial point of view, to Uproar and do not purport to be
appraisals of or necessarily reflect the prices at which businesses or
securities actually may be sold, which are inherently subject to uncertainty. In
connection with its analyses, Bear Stearns made, and was provided by Uproar's
management with, numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond Uproar's control. Analyses based on estimates or forecasts of future
results are not
39
49
necessarily indicative of actual, past, or future values or results, which may
be significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of Uproar, neither Uproar, Bear Stearns,
nor any other person assumes responsibility if future results or actual values
are materially different from these forecasts or assumptions.
Historical Stock Price Analysis. Bear Stearns reviewed and analyzed recent
and historical market prices and trading volumes for Uproar's common stock and
compared such market prices to the Nasdaq Composite Index since March 17, 2000,
the date of Uproar's initial public offering of common stock on the Nasdaq
National Market. Bear Stearns observed that Uproar's closing stock price was
$6.00 on July 25, 2000, the day prior to announcement of the merger. The 10-day
and 30-day average stock price prior to Bear Stearns rendering its fairness
opinion was $6.88 and $6.72, respectively.
Comparable Public Company Trading Analysis. Bear Stearns calculated the
implied ratios of equity values to estimated calendar year 2000 and 2001 revenue
projections for the companies Bear Stearns deemed generally comparable to iwin.
Bear Stearns then compared these ratios to the implied ratio of the
consideration to be paid in the merger to the estimated calendar year 2000 and
2001 revenue projections of iwin, as adjusted downward by Uproar management. The
comparable companies were:
- FreeShop.com;
- LifeMinders.com;
- MyPoints.com;
- Promotions.com; and
- Uproar.
The following table summarizes the analysis.
COMPARABLE COMPANIES
IWIN MEAN HARMONIC MEAN
---- ---- -------------
Fully Diluted Equity Value to
Calendar Year 2000E Revenue.......................... 3.7x 6.1x 3.8x
Calendar Year 2001E Revenue.......................... 2.2x 3.4x 2.0x
None of the comparable companies is identical to iwin. Accordingly, Bear
Stearns believes the analysis of publicly traded comparable companies is not
simply mathematical. Rather, it involves complex considerations and qualitative
judgments, reflected in Bear Stearns' opinion, concerning differences in
financial and operating characteristics of iwin and other factors that could
affect the public trading value of the comparable companies.
Comparable M&A Transactions Analysis. Bear Stearns analyzed mergers and
acquisitions that it deemed comparable to the merger. The comparable
transactions considered by Bear Stearns were:
- the acquisition of Total Sports by Quokka Sports, announced on July 21,
2000;
- the acquisition of CyberGold by MyPoints, announced on April 17, 2000;
- the acquisition of YesMail by CMGI, announced on December 15, 1999;
- the acquisition of Gamesville by Lycos, announced on November 23, 1999;
- the acquisition of Market Guide by Multex.com, announced on June 23,
1999;
- the acquisition of Xoom.com by NBCi, announced on May 10, 1999;
- the acquisition of Broadcast.com by Yahoo!, announced on April 1, 1999;
- the acquisition of Moviefone by AOL, announced on February 1, 1999;
- the acquisition of GeoCities by Yahoo!, announced on January 28, 1999;
and
- the acquisition of Web21 by Go2Net, announced on January 4, 1999.
Bear Stearns calculated ratios of equity value of the targets as of the
announcement date to latest twelve months ("LTM") revenue and last quarter
annualized ("LQA") revenue. Bear Stearns then compared these
40
50
ratios to the implied ratio of the consideration to be paid in the merger to the
LTM and LQA revenue of iwin. In its evaluation, Bear Stearns considered the fact
that iwin commenced generating revenue in December 1999.
The following table summarizes the analysis.
COMPARABLE TRANSACTIONS
IWIN MEAN HARMONIC MEAN
---- ----- -------------
Fully Diluted Equity Value to
Latest Twelve Months Revenue........................ 8.7x 78.8x 21.1x
Last Quarter Annualized Revenue..................... 3.9x 46.4x 15.0x
All the multiples for the comparable transactions listed above were based
on public information available at the time of the announcement of these
transactions, without taking into account differing market and other conditions
during the period which the comparable transactions occurred.
Because the reasons for, and circumstances surrounding, each of the
comparable transactions were so diverse, and due to the inherent differences
between the operations and financial conditions of iwin and the companies
involved in the comparable transactions, Bear Stearns believes that a comparable
transactions analysis is not simply mathematical. Rather, it involves complex
considerations and qualitative judgments, reflected in Bear Stearns' opinion,
concerning differences between the characteristics of the comparable
transactions and the merger that could affect the value of iwin.
Relative Contribution Analysis. Bear Stearns compared the relative equity
values and enterprise values of Uproar and iwin to the relative contributions of
each party to combined projected revenue. Uproar stockholders would represent
68.3% and 57.7% of the combined company's fully diluted equity value and
enterprise value, respectively, and Uproar would contribute, during the quarters
ending December 31, 2000, March 31, 2001, June 30, 2001, September 30, 2001, and
December 31, 2001, 53.8%, 58.2%, 58.1%, 63.9%, and 65.9%, respectively, of the
combined company's projected revenue.
Pro Forma Merger Consequences Analysis. Bear Stearns analyzed certain pro
forma effects of the merger. Bear Stearns noted that the merger would increase
Uproar's pro forma revenue per fully diluted share for the quarters ending
December 31, 2000, March 31, 2001, June 30, 2001, September 30, 2001, and
December 31, 2001, by 26.9%, 17.3%, 17.4%, 6.8%, and 3.6%, respectively. Bear
Stearns noted that the merger would increase Uproar's pro forma earnings per
fully diluted share for the quarters ending December 31, 2000, March 31, 2001,
June 30, 2001, September 30, 2001, and December 31, 2001, by 10.1%, 12.3%,
15.6%, 10.9%, and 2.9%, respectively, including the effect of anticipated
synergies. Bear Stearns noted that the merger would increase Uproar's pro forma
cash earnings per fully diluted share for the quarters ending December 31, 2000,
March 31, 2001, June 30, 2001, September 30, 2001, and December 31, 2001, by
57.5%, 66.1%, 71.2%, 73.8%, and 277.3%, respectively, including the effect of
anticipated synergies.
The terms of the merger were determined through negotiations between Uproar
and iwin and were approved by Uproar's board of directors. The decision to enter
into the merger was solely that of the board of directors. Bear Stearns' opinion
does not constitute a recommendation to the board of directors of Uproar or any
holder of Uproar's common stock as to how to vote with respect to the merger.
INTERESTS OF BEAR STEARNS IN THE MERGER
Uproar retained Bear Stearns to render its fairness opinion based on Bear
Stearns' experience and expertise in transactions similar to the merger. Bear
Stearns, as part of its investment banking business, is continuously engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. Pursuant to the terms of its engagement letter with Bear Stearns,
dated August 16, 2000, Uproar has agreed to pay Bear Stearns a fee of $400,000
payable upon delivery of the fairness opinion. In addition, Uproar has agreed to
reimburse Bear Stearns for reasonable out-of-pocket fees, expenses and costs in
connection with the performance of its activities under the engagement letter,
including the fees and expenses of its accountants and legal counsel, if any,
and any other advisor retained by Bear
41
51
Stearns. Uproar has also agreed to indemnify Bear Stearns and certain related
persons against certain liabilities in connection with the engagement of Bear
Stearns, including certain liabilities under the federal and state securities
laws.
Bear Stearns is an internationally recognized investment banking firm that
has substantial experience in transactions similar to the merger. Bear Stearns
has been previously engaged by Uproar to provide certain investment banking and
financial advisory services in connection with its initial public offering. Bear
Stearns may provide financial advisory and financing services to the combined
company and/or its affiliates and may receive fees for the rendering of these
services. Bear Stearns publishes research reports regarding the Internet
industry and the businesses and services of publicly owned companies in the
Internet industry. In the ordinary course of its business, Bear Stearns may
actively trade the securities of Uproar and/or its affiliates for its own
account and for the accounts of its customers and, accordingly, Bear Stearns may
at any time hold a long or short position in such securities.
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS OF UPROAR AND IWIN IN THE MERGER
You should be aware of the interests that various executive officers and
directors of Uproar and iwin have in the merger. The boards of directors of
Uproar and iwin were aware of the material conflicts and considered them when
approving the merger. These interests are different from and in addition to your
and their interests as stockholders. These include:
Significant Holdings
For information on the holdings of executive officers and directors of
Uproar and iwin, see "Securities Ownership of Certain Beneficial Owners and
Management of Uproar and iwin" on pages 109 to 112.
Acceleration of iwin Stock Options for Specified iwin Officers
At the closing of the merger, vesting for options to purchase iwin common
stock held by the iwin officers listed below will accelerate and become vested
automatically without any action on the part of the holder as set forth in the
table below. These options will be assumed by Uproar in the merger.
NO. OF SHARES
UNDERLYING OPTIONS
SUBJECT TO
NAME POSITION WITH IWIN EXERCISE PRICE ACCELERATION
---- ------------------ -------------- ------------------
Scott Kaufman............... Vice President of Product Management $0.75 143,200
Jason Yardi................. Vice President of Engineering $0.75 55,000
Dennis Cho.................. Vice President of Business and Legal
Affairs and General Counsel $2.00 35,000
Daniel Hahn................. Director of East Coast Sales $2.00 30,000
Derrick Morton.............. Vice President, Executive Producer $2.00 30,000
Jin Brown................... Controller $2.00 20,000
-------
Total: 313,200
Employment Agreement, Option, Etc.
Scott Kaufman, iwin's Vice President of Product Management, will enter into
an employment agreement with Uproar at the closing of the merger with a two (2)
year term. Pursuant to the agreement, Mr. Kaufman will become Uproar's Executive
Vice President of Product Development. The agreement provides for the following:
- annual salary of not less than $200,000 per year;
- severance payments equal to the base salary otherwise payable to Mr.
Kaufman for the remainder of the term, unless Mr. Kaufman's termination
is for cause or due to permanent disability; and
- participation in the employee benefit plans and programs of Uproar.
42
52
The agreement also provides that the vesting of Mr. Kaufman's options which
are being assumed by Uproar in the merger will accelerate by one (1) year if his
employment is terminated due to permanent disability or by Uproar without cause
or by Mr. Kaufman for good reason. In addition, the agreement provides that
during the term of Mr. Kaufman's employment and for one year thereafter, Mr.
Kaufman will not solicit for employment any of Uproar's or its affiliates'
employees or solicit the business of Uproar's or its affiliates' customers with
whom he had contact during his employment.
In addition if the merger is completed, Mr. Kaufman will receive an option
to purchase 480,420 shares of iwin common stock with an exercise price of $5.46
per share. This option will be assumed by Uproar at the closing of the merger in
accordance with the formula described in "Treatment of iwin Common Stock,
Preferred Stock, Options and Warrants" below.
A corporation controlled by Mr. Kaufman's parents sold approximately
$148,125 worth of jewelry to iwin, to be used for promotional purposes in
connection with iwin's online operations.
Indemnification
The agreement and plan of reorganization provides that all rights to
indemnification and all limitations on liability in effect for the benefit of
present and former officers and directors of iwin with respect to actions taken
in such official capacities will continue in effect after the merger.
New Directors of Uproar
The agreement and plan of reorganization provides that Uproar will take all
reasonable action to increase the size of its board of directors to ten (10)
members at the time of the merger. iwin will have the right to nominate three
(3) members to the board, who will be Richard Janssen, Gary Loveman and
Frederick Krueger.
TREATMENT OF IWIN COMMON STOCK, PREFERRED STOCK, OPTIONS AND WARRANTS
Treatment of iwin Common Stock, Series A Preferred Stock, Series B
Preferred Stock And Series C Preferred Stock. With the exception of dissenting
shares, each issued and outstanding share of iwin common stock will be canceled
and extinguished and be converted automatically into the right to receive a
fraction of a share of Uproar common stock. The numerator of this fraction will
be fourteen million eight thousand three hundred three (14,008,303), and the
denominator will be equal to the sum of:
- the aggregate number of shares of iwin common stock outstanding as of the
effective time of the merger, including each share of iwin common stock
into which shares of iwin preferred stock will be converted prior to the
effective time, plus
- the aggregate number of shares of iwin common stock issuable upon
exercise of all options of iwin outstanding and vested (which means they
are no longer subject to iwin's right of repurchase) as of the effective
time, including options the vesting of which will accelerate as a result
of the consummation of the merger; plus
- the aggregate number of shares of iwin common stock issuable upon
exercise of all warrants of iwin outstanding as of the effective time.
In the transaction, Uproar will also assume all outstanding stock options
and warrants previously issued by iwin as described below.
As of August 23, 2000, iwin had outstanding 7,193,189 shares of common
stock, 8,525,692 shares of preferred stock, 2,148,848 shares of common stock
subject to outstanding options and 60,000 shares of common stock subject to
outstanding warrants. All shares of Series A preferred stock, Series B preferred
stock and Series C preferred stock will be converted into an equal number of
shares of iwin common stock immediately prior to the effective time of the
merger. At the effective time, we estimate that options to purchase
approximately 1,083,000 shares of iwin common stock will be vested. Given this
information, we estimate that each share of iwin stock will be converted into
0.83 of a share of Uproar common stock in the merger.
43
53
Treatment of iwin Options and Warrants. At the effective time of the
merger, each unexpired and unexercised outstanding option to purchase shares of
iwin common stock, whether vested or unvested, will be assumed by Uproar and
converted into an option to purchase approximately 0.83 of a share of Uproar
common stock. At the effective time, each unexpired and unexercised outstanding
warrant to purchase shares of iwin common stock, whether currently exercisable
or not, will be assumed by Uproar and will also become exercisable to purchase
approximately 0.83 of a share of Uproar common stock. The number of shares of
Uproar common stock subject to the assumed iwin stock options and warrants will
be determined in accordance with the formula described above. Other than as set
forth above under "Interests of Executive Officers and Directors of Uproar and
iwin in the Merger," no iwin options will accelerate as a result of the merger.
Any fractional shares of Uproar common stock resulting from the adjustment will
be rounded down to the nearest share. The exercise price per share of Uproar
common stock under the iwin stock options and warrants will equal the exercise
price per share of the iwin common stock under the original stock options or
warrants, as the case may be, divided by the exchange ratio.
ESCROW ARRANGEMENTS
By approving the agreement and plan of reorganization and its related
transactions, the iwin stockholders will authorize the creation of the escrow
fund, the terms of the escrow agreement and the appointment of Frederick Krueger
as their representative with respect to indemnification matters. The purpose of
the escrow fund is to indemnify Uproar in the event of a breach of the
representations and warranties of iwin in the agreement and plan of
reorganization and upon the occurrence of certain other events. A total of ten
percent (10%) of the Uproar common stock otherwise deliverable to the iwin
stockholders in the merger will be deposited in the escrow fund. The escrow fund
will serve as Uproar's exclusive remedy for damages for which Uproar is entitled
to indemnification under the agreement, other than damages arising from
fraudulent or intentional acts.
COMPOSITION OF UPROAR BOARD OF DIRECTORS
Under the agreement and plan of reorganization, Uproar has agreed that it
will take all reasonable action at the time of the merger to increase the number
of its directors to ten (10) and that iwin will have the right to nominate three
(3) directors to the Uproar board. Uproar's certificate of incorporation and
bylaws allow the board of directors to increase the number of the directors to
not more than fifteen (15) and to fill vacancies and new directorships resulting
from any increase in the authorized number of directors. The Uproar board of
directors has unanimously approved the increase in the number of directors to
ten (10), effective upon the closing of the merger. At that time, Uproar
director Thompson B. Barnhardt will resign from the Uproar board and iwin's
three nominees will become members of the Uproar board. iwin's three nominees to
the Uproar board are Richard Janssen, Gary Loveman and Frederick Krueger. Mr.
Krueger will also serve as the Vice Chairman of the board.
ACCOUNTING TREATMENT OF THE MERGER
The parties intend to account for the merger as a purchase for financial
reporting and accounting purposes, under generally accepted accounting
principles. After the completion of the merger, the results of operations of
iwin will be included in the consolidated financial statements of Uproar. The
purchase price will be allocated to iwin's assets and liabilities based on the
fair values of the assets acquired and the liabilities assumed. Any excess of
cost over the fair value of the net tangible assets of iwin acquired will be
recorded as goodwill and other intangible assets and will be amortized by
charges to operations under generally accepted accounting principles. These
allocations will be made based upon valuations and other studies that have not
yet been finalized. It is anticipated that the amount of goodwill and other
intangible assets will be significant and will therefore have a significant
negative impact on Uproar's operating results.
REGULATORY APPROVALS
The merger is subject to United States antitrust laws. We made the required
filings with the Department of Justice and the Federal Trade Commission, and our
request for early termination of the applicable waiting
44
54
period was granted by the Federal Trade Commission on September 6, 2000. The
Department of Justice or the Federal Trade Commission, as well as a state or
private person, may challenge the merger at any time before or after its
completion. Neither Uproar nor iwin is aware of any other material governmental
or regulatory approval required for completion of the merger, other than
compliance with applicable corporate law of Delaware.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
In the opinions of O'Melveny & Myers LLP, counsel to iwin, and Gunderson
Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel to Uproar, the
following discussion addresses the material federal income tax considerations
relevant to the merger that may be applicable to iwin stockholders. These
opinions and the following discussion are based on currently existing provisions
of the Internal Revenue Code of 1986, as amended ("Internal Revenue Code"),
existing treasury regulations and current administrative rulings and court
decisions, all of which are subject to change. Any such change, which may or may
not be retroactive, could alter the tax consequences to Uproar, iwin or iwin
stockholders.
iwin stockholders should be aware that this discussion does not deal with
all federal income tax considerations that may be relevant to particular iwin
stockholders who are subject to special rules or that may be important in light
of such stockholders' individual circumstances, such as stockholders who:
- Are dealers in securities or foreign currency;
- Are subject to the alternative minimum tax provisions of the Internal
Revenue Code;
- Are foreign persons or entities;
- Are financial institutions or insurance companies;
- Do not hold their iwin shares as capital assets;
- Acquired their shares in connection with stock option or stock purchase
plans or in other compensatory transactions; or
- Hold iwin capital stock as part of an integrated investment (including a
"straddle," pledge against currency risk, "constructive" sale or
"conversion" transaction) comprised of shares of iwin capital stock and
one or more other positions.
In addition, the following discussion does not address:
- Tax consequences of the merger under foreign, state or local tax laws;
- Tax consequences of transactions effectuated before, after or
concurrently with the merger (whether or not any such transactions are
undertaken in connection with the merger) including any transaction in
which iwin shares are acquired or Uproar shares are disposed of; or
- Tax consequences to holders of options, warrants or similar rights to
acquire iwin capital stock, including the assumption by Uproar of
outstanding options and subscriptions to acquire iwin capital stock.
Accordingly, iwin stockholders are urged to consult their own tax advisors
as to the specific tax consequences of the merger, including the applicable
federal, state, local and foreign tax consequences of the merger.
Completion of the merger is conditioned on receipt of tax opinions by iwin
and Uproar from their respective counsel, O'Melveny & Myers LLP and Gunderson
Dettmer Stough Villeneuve Franklin & Hachigian, LLP, to the effect that the
merger will constitute a "reorganization" within the meaning of the Internal
Revenue Code. The tax opinions will be based on representations of Uproar, iwin
and the merger subsidiary, and, as explained more fully below, are subject to
certain assumptions, limitations and qualifications. In the event that this
opinion requirement is waived as a result of a material change in the tax
45
55
consequences of the merger from those expressed here, revised disclosure will be
prepared and distributed to iwin stockholders as part of a revised joint proxy
statement/prospectus for the merger.
The following material federal income tax consequences will generally
result from the merger constituting a reorganization within the meaning of the
Internal Revenue Code:
- iwin stockholders should not recognize any gain or loss solely upon
receipt in the merger of Uproar common stock in exchange for iwin capital
stock, except to the extent of cash received in lieu of fractional shares
of Uproar common stock.
- The aggregate tax basis of the Uproar common stock received by an iwin
stockholder in the merger, including any fractional shares of Uproar
common stock not actually received and any Uproar common stock to be
placed in escrow, should be the same as the aggregate tax basis of the
surrendered iwin capital stock.
- The holding period of the Uproar common stock received by an iwin
stockholder in the merger should include the period for which the
surrendered iwin capital stock was considered to be held, provided that
the iwin capital stock so surrendered is held as a capital asset at the
time of the merger.
- Cash payments received by an iwin stockholder in lieu of fractional
shares of Uproar common stock should be treated as if fractional shares
of Uproar common stock had been issued in the merger and then redeemed by
Uproar. An iwin stockholder receiving cash in lieu of a fractional share
will recognize gain or loss with respect to such payment measured by the
difference (if any) between the amount of cash received and the basis in
the fractional share.
- Under the merger agreement, ten percent (10%) of the aggregate number of
shares of Uproar common stock issuable to each iwin stockholder in the
merger will be placed in escrow. The return of any escrow shares to
Uproar in satisfaction of an indemnification claim is not expected to
result in the recognition of gain or loss but is instead expected to be
treated as an adjustment to the exchange terms of the merger agreement.
Accordingly, the basis of such shares of Uproar common stock received in
the merger by holders of escrow shares would be adjusted. Stockholders of
iwin are urged to consult their tax advisors regarding the specific tax
consequences to them of the transfer of the escrow shares.
- An iwin stockholder who exercises dissenters' rights will generally
recognize gain or loss for federal income tax purposes, measured by the
difference between the amount of cash received and the holder's basis in
such shares, provided that the stockholder exercising dissenters' rights
owns no shares of Uproar common stock (either actually or constructively
within the meaning of Section 318 of the Internal Revenue Code)
immediately after the merger. If, however, an iwin stockholder owned or
was treated as owning Uproar common stock immediately after the merger,
then such stockholder may recognize ordinary income for federal income
tax purposes in an amount equal to the entire amount of cash so received.
- Neither Uproar, the merger subsidiary nor iwin should recognize gain or
loss solely as a result of the merger.
Although Uproar and iwin will receive tax opinions that will provide that
the merger will constitute a reorganization, a recipient of shares of Uproar
common stock could recognize gain to the extent that those shares were
considered to be received in exchange for services or property other than solely
iwin capital stock. All or a portion of such a gain may be taxable as ordinary
income. An iwin stockholder could also have to recognize gain to the extent such
stockholder was treated as receiving (directly or indirectly) consideration
other than Uproar common stock in exchange for iwin capital stock.
Uproar and iwin will not request a ruling from the Internal Revenue Service
("IRS") in connection with the merger, and the tax opinions will not be binding
upon the IRS. The IRS is therefore not precluded from
46
56
successfully asserting a contrary opinion. In addition, the tax opinions will be
subject to certain assumptions, limitations and qualifications, including the
following assumptions.
- Original documents (including signatures) are authentic, documents
submitted to counsel as copies conform to the original documents, and
there has been (or will be by the effective time of the merger) due
execution and delivery of all documents where due execution and delivery
are prerequisites to the effectiveness of such documents.
- All statements, covenants, representations and warranties in the merger
agreement, in the representations received from Uproar, the merger
subsidiary and iwin to support the opinions, and in other documents
related to Uproar, the merger subsidiary and iwin and relied upon by
counsel to support the opinions are, in each case, true and accurate. Any
such representation or statement made "to the knowledge of" or otherwise
similarly qualified is correct without such qualification and all such
statements and representations, whether or not qualified, will remain
true through the effective time of the merger. In addition, as to all
matters in which a person or entity making such a representation has
represented that such person or entity either is not a party to, does not
have, or is not aware of any plan, intention, understanding or agreement
to take an action, there is in fact no plan, intention, understanding or
agreement and such action will not be taken.
- The merger will be consummated pursuant to the merger agreement and will
be effective under the laws of the state of Delaware.
- No iwin stockholder has guaranteed or will guarantee any iwin
indebtedness outstanding during the period immediately prior to the
merger, and at all relevant times, including as of the effective time of
the merger, (i) no outstanding indebtedness of iwin, Uproar or the merger
subsidiary has or will represent equity for tax purposes, (ii) no
outstanding equity of Uproar, iwin or the merger subsidiary has or will
represent indebtedness for tax purposes, and (iii) no outstanding
security, instrument, agreement or arrangement that provides for,
contains, or represents either a right to acquire iwin stock or to share
in the appreciation thereof constitutes or will constitute "stock" for
purposes of the Internal Revenue Code.
- After the merger, iwin will hold "substantially all" of its and the
merger subsidiary's properties and will continue its historic business or
use a significant portion of its historic assets in a business.
- Uproar, iwin and the merger subsidiary will report the merger on their
respective U.S. federal income tax returns in a manner consistent with
the qualification of the merger as a reorganization.
- In the merger, shares of iwin capital stock representing "control" of
iwin within the meaning of the Internal Revenue Code will be exchanged
solely for voting common stock of Uproar.
- Uproar has no current plan or intention to redeem or reacquire any shares
of the Uproar common stock issued in the merger, except that Uproar may
from time to time repurchase its common stock if (i) any such repurchases
are undertaken for a corporate business purpose and (ii) the repurchases
of the Uproar common stock are a small percentage of its total common
stock and are made on the open market through a broker for the prevailing
market price.
- Uproar has no plan or intention to liquidate iwin, to merge iwin with or
into another corporation, to cause iwin to issue additional shares of the
iwin stock to persons other than Uproar, or to sell or otherwise dispose
of the stock of iwin, and Uproar has no plan or intention to cause iwin
to sell or otherwise dispose of any of its assets, except for
dispositions made in the ordinary course of business.
- Immediately prior to the merger, Uproar will not own any shares of iwin
capital stock.
- No extraordinary distribution with respect to shares of iwin capital
stock or redemption of such shares has been or will be made prior to and
in connection with the merger, and no person related to iwin has acquired
or will acquire iwin capital stock prior to and in connection with the
merger.
- Representations made by Uproar, its subsidiary and iwin in certain
certificates to be delivered to counsel by the respective management of
Uproar, its subsidiary and iwin will be true and accurate.
47
57
A successful IRS challenge to the reorganization status of the merger as a
result of a failure to meet any of the requirements of a reorganization would
result in iwin stockholders recognizing taxable gain or loss with respect to
each share of iwin capital stock surrendered equal to the difference between
their bases in such shares and the fair market value, as of the date the merger
is completed, of the Uproar common stock received in exchange therefor. In such
event, a stockholder's aggregate basis in the Uproar common stock so received
would equal its fair market value as of the date the merger is completed and the
stockholder's holding period for such stock would begin the day after the
merger.
Backup withholding with respect to cash paid instead of fractional shares
of Uproar common stock. Certain non-corporate iwin stockholders may be subject
to backup withholding at a 31% rate on cash payments received instead of
fractional shares of Uproar common stock. Backup withholding will not apply,
however, to an iwin stockholder who (a) furnishes a correct taxpayer
identification number and certifies that he, she or it is not subject to backup
withholding on the substitute Form W-9 or successor form included in the letter
of transmittal to be delivered to iwin stockholders following the date of the
merger, (b) provides a certification of foreign status on Form W-8 or successor
form or (c) is otherwise exempt from backup withholding.
APPRAISAL RIGHTS
If the merger is consummated, a holder of record of iwin stock on the date
of making a demand for appraisal, as described below, who:
- continues to hold those shares through the time of the merger;
- strictly complies with the procedures set forth under Section 262 of the
Delaware General Corporation Law; and
- has not voted in favor of the merger
will be entitled to have those shares appraised by the Delaware Court of
Chancery under Section 262 and to receive payment for the "fair value" of these
shares in lieu of the consideration provided for in the agreement and plan of
reorganization. This joint proxy statement/prospectus is being sent to all
holders of record of iwin stock on the record date for the iwin special meeting
and constitutes notice of the appraisal rights available to those holders under
Section 262. THE STATUTORY RIGHT OF APPRAISAL GRANTED BY SECTION 262 REQUIRES
STRICT COMPLIANCE WITH THE PROCEDURES SET FORTH IN SECTION 262. FAILURE TO
FOLLOW ANY OF SUCH PROCEDURES MAY RESULT IN A TERMINATION OR WAIVER OF APPRAISAL
RIGHTS UNDER SECTION 262. THE FOLLOWING IS A SUMMARY OF THE PRINCIPAL PROVISIONS
OF SECTION 262. The following summary is not a complete statement of Section 262
of the Delaware General Corporation Law, and is qualified in its entirety by
reference to Section 262 which is incorporated herein by reference, together
with any amendments to the statute that may be adopted after the date of this
joint proxy statement/prospectus. A copy of Section 262 is attached as Annex C
to this joint proxy statement/prospectus.
A holder of iwin stock electing to exercise appraisal rights under Section
262 must deliver a written demand for appraisal of such stockholder's shares of
iwin prior to the vote on the merger. The written demand must identify the
stockholder of record and state the stockholder's intention to demand appraisal
of his or her shares. All demands should be delivered to iwin, Attention:
Secretary, iwin.com, Inc., 10940 Wilshire Boulevard, Los Angeles, California
90024, telephone: (310) 264-4300.
Only a holder of shares of iwin stock on the date of making a written
demand for appraisal who continuously holds those shares through the time of the
merger is entitled to seek appraisal. Demand for appraisal must be executed by
or for the holder of record, fully and correctly, as that holder's name appears
on the holder's stock certificates representing shares of iwin stock. If iwin
stock is owned of record in a fiduciary capacity, such as by a trustee, guardian
or custodian, the demand should be made in that capacity, and if iwin stock is
owned of record by more than one person, as in a joint tenancy or tenancy in
common, the demand must be made by or for all owners of record. An authorized
agent, including one or more joint owners, may execute the demand for appraisal
for a holder of record; that agent, however, must identify the record owner or
48
58
owners and expressly disclose in the demand that the agent is acting as agent
for the record owner or owners of the shares.
A record holder such as a broker who holds shares of iwin stock as a
nominee for beneficial owners, some of whom desire to demand appraisal, must
exercise appraisal rights on behalf of those beneficial owners with respect to
the shares of iwin stock held for those beneficial owners. In that case, the
written demand for appraisal should set forth the number of shares of iwin stock
covered by it. Unless a demand for appraisal specifies a number of shares, the
demand will be presumed to cover all shares of iwin stock held in the name of
the record owner.
BENEFICIAL OWNERS WHO ARE NOT RECORD OWNERS AND WHO INTEND TO EXERCISE
APPRAISAL RIGHTS SHOULD INSTRUCT THE RECORD OWNER TO COMPLY WITH THE STATUTORY
REQUIREMENTS WITH RESPECT TO THE EXERCISE OF APPRAISAL RIGHTS BEFORE THE DATE OF
THE IWIN SPECIAL MEETING.
Within 10 days after the time of the merger, the surviving corporation is
required to send notice of the effectiveness of the merger to each stockholder
who prior to the time of the merger complies with the requirements of Section
262.
Within 120 days after the time of the merger, the surviving corporation or
any stockholder who has complied with the requirements of Section 262 may file a
petition in the Delaware Court of Chancery demanding a determination of the fair
value of the shares of iwin stock held by all stockholders seeking appraisal. A
dissenting stockholder must serve a copy of the petition on the surviving
corporation. If no petition is filed by either the surviving corporation or any
dissenting stockholder within the 120-day period, the rights of all dissenting
stockholders to appraisal will cease. Stockholders seeking to exercise appraisal
rights should not assume that the surviving corporation will file a petition
with respect to the appraisal of the fair value of their shares or that the
surviving corporation will initiate any negotiations with respect to the fair
value of those shares. The surviving corporation is under no obligation to and
has no present intention to take any action in this regard. Accordingly,
stockholders who wish to seek appraisal of their shares should initiate all
necessary action with respect to the perfection of their appraisal rights within
the time periods and in the manner prescribed in Section 262. FAILURE TO FILE
THE PETITION ON A TIMELY BASIS WILL CAUSE THE STOCKHOLDER'S RIGHT TO AN
APPRAISAL TO CEASE.
Any stockholder who has complied with subsections (a) and (d) of Section
262 is entitled, upon written request, to receive from the surviving corporation
a statement setting forth the aggregate number of shares of iwin stock not voted
in favor of the merger with respect to which demands for appraisal have been
received by iwin and the number of holders of those shares. The surviving
corporation must mail the statement within 10 days after the written request has
been received by iwin or within 10 days after expiration of the time for
delivery of demands for appraisal under subsection (d) of Section 262, whichever
is later.
If a petition for an appraisal is filed in a timely manner, at the hearing
on the petition, the Delaware Court of Chancery will determine which
stockholders are entitled to appraisal rights and will appraise the shares of
iwin stock owned by those stockholders, determining the fair value of those
shares, exclusive of any element of value arising from the accomplishment or
expectation of the merger, together with a fair rate of interest, to be paid, if
any, upon the amount determined to be the fair value.
Stockholders considering seeking appraisal should consider that the fair
value of their shares determined under Section 262 could be more than, the same
as, or less than, the value of the consideration provided for in the agreement
and plan of reorganization without the exercise of appraisal rights. The cost of
the appraisal proceeding may be determined by the Court of Chancery and assessed
against the parties as the Court deems equitable in the circumstances. Upon
application of a dissenting stockholder, the Court may order that all or a
portion of the expenses incurred by any dissenting stockholder in connection
with the appraisal proceeding (including, without limitation, reasonable
attorney's fees and the fees and expenses of experts) be charged pro rata
against the value of all shares of iwin stock entitled to appraisal. In the
absence of such a determination or assessment, each party bears its own
expenses.
Any stockholder who has demanded appraisal in compliance with Section 262
will not, after the time of the merger, be entitled to vote such stock for any
purpose or receive payment of dividends or other
49
59
distributions, if any, on the iwin stock, except for dividends or distributions,
if any, payable to stockholders of record at a date prior to the merger.
A stockholder may withdraw a demand for appraisal and accept the Uproar
common stock at any time within 60 days after the time of the merger, or
thereafter may withdraw such a demand with the written approval of the surviving
corporation. If an appraisal proceeding is properly instituted, such proceeding
may not be dismissed as to any stockholder without the approval of the Delaware
Court of Chancery, and any such approval may be conditioned upon such terms as
the Court of Chancery deems just. If, after the merger, a holder of iwin stock
who had demanded appraisal for the holder's shares fails to perfect or loses his
right to appraisal, those shares will be treated under the agreement and plan of
reorganization as if they had been converted as of the time of the merger into
Uproar common stock.
IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF THE DELAWARE CORPORATE
LAW, ANY IWIN STOCKHOLDER WHO IS CONSIDERING EXERCISING APPRAISAL RIGHTS SHOULD
CONSULT A LEGAL ADVISOR.
NASDAQ NATIONAL MARKET AND EASDAQ QUOTATIONS
It is a condition to the closing of the merger that the shares of Uproar
common stock to be issued pursuant to the agreement and plan of reorganization
be listed on the Nasdaq National Market and on EASDAQ.
RESALES OF UPROAR COMMON STOCK ISSUED IN CONNECTION WITH THE MERGER; AFFILIATE
AGREEMENTS, LOCK-UP AGREEMENTS
Holders of iwin stock, specified optionholders and iwin's directors and
officers are required to execute lock-up agreements with Uproar prior to the
merger. Pursuant to the lock-up agreements, each of such holders agrees that for
180 days following the merger, the holder will not sell, transfer or otherwise
dispose of shares of Uproar common stock received in the merger without the
prior consent of Uproar. After this 180 day period, the Uproar common stock
issued in connection with the merger will be freely transferable, except that
shares of Uproar common stock received by persons who are deemed to be
"affiliates," as such term is defined by Rule 144 under the Securities Act of
1933, of iwin at the effective time of the merger may be resold by them only in
transactions permitted by the resale provisions of Rule 145 under the Securities
Act of 1933 or as otherwise permitted under the Securities Act of 1933. The
executive officers, directors and persons who may be affiliates of iwin have
each executed a written affiliate agreement providing, among other things, that
such person will comply with the Securities Act of 1933 in their disposition of
Uproar common stock received in connection with the merger.
OPERATIONS FOLLOWING THE MERGER
Following the merger, iwin will operate as a subsidiary of Uproar. The
Uproar board of directors will be expanded to ten members, and Uproar director
Thompson B. Barnhardt will resign from the Uproar board. Three individuals
designated by iwin, Richard Janssen, Gary Loveman and Frederick Krueger, will be
elected to serve on the board. The Uproar board will elect Frederick Krueger as
Vice Chairman of the board. The stockholders of iwin will become stockholders of
Uproar, and their rights as stockholders will be governed by Uproar's
certificate of incorporation and Uproar's bylaws.
50
60
THE AGREEMENT AND PLAN OF REORGANIZATION
The following is a brief summary of the material provisions of the
agreement and plan of reorganization, a copy of which is attached as Annex A to
this joint proxy statement/prospectus and is incorporated by reference into this
summary. The summary is not complete and is qualified in its entirety by
reference to the agreement and plan of reorganization. We urge all stockholders
of Uproar and iwin to read the agreement and plan of reorganization in its
entirety for a more complete description of the terms and conditions of the
merger.
GENERAL
Following the adoption of the agreement and plan of reorganization and its
related transactions by the stockholders of iwin, the approval of the issuance
of shares of Uproar common stock by the stockholders of Uproar, and the
satisfaction or waiver of the other conditions to the merger, a wholly owned
subsidiary of Uproar named iwin Acquisition Corporation, will be merged with and
into iwin. iwin will survive the merger as a wholly owned subsidiary of Uproar.
If all conditions to the merger are satisfied or waived, the merger will become
effective at the time of the filing by the surviving corporation of a duly
executed certificate of merger with the Secretary of State of the State of
Delaware, referred to herein as the effective time.
EXCHANGE OF SHARES
With the exception of dissenting shares, each issued and outstanding share
of iwin common stock will be canceled and extinguished and be converted
automatically into the right to receive a fraction of a share of Uproar common
stock. The numerator of the fraction will be fourteen million eight thousand
three hundred three (14,008,303), and the denominator will be equal to the sum
of:
- the aggregate number of shares of iwin common stock outstanding as of the
effective time, including each share of iwin common stock into which
shares of iwin preferred stock will be converted prior to the effective
time, plus
- the aggregate number of shares of iwin common stock issuable upon
exercise of all options of iwin outstanding and vested as of the
effective time, including options the vesting of which will accelerate as
a result of the consummation of the merger, plus
- the aggregate number of shares of iwin common stock issuable upon
exercise of all warrants of iwin outstanding as of the effective time.
In the transaction, Uproar will also assume all outstanding stock options
and warrants previously issued by iwin as discussed below.
As of August 23, 2000, iwin had outstanding 7,193,189 shares of common
stock, 8,525,692 shares of preferred stock, 2,148,848 shares of common stock
subject to outstanding options, and 60,000 shares of common stock subject to
outstanding warrants. All shares of iwin Series A preferred stock, Series B
preferred stock and Series C preferred stock will be converted into shares of
iwin common stock immediately prior to the effective time on a one to one basis.
At the effective time, we estimate that options to purchase approximately
1,083,000 shares of iwin common stock will be vested. Given this information, we
estimate that at the effective time each share of iwin stock will be converted
into 0.83 of a share of Uproar common stock.
CREATION OF ESCROW FUND
By approving the agreement and plan of reorganization and its related
transactions, the iwin stockholders will authorize the creation of the escrow
fund, the terms of the escrow agreement and the appointment of Frederick Krueger
as their agent with respect to indemnification matters. The purpose of the
escrow fund is to indemnify Uproar in the event of a breach of the
representations and warranties of iwin in the agreement and plan of
reorganization and upon the occurrence of certain other events. A total of ten
percent (10%) of the Uproar common stock otherwise deliverable to the iwin
stockholders will be deposited in the escrow fund. The escrow fund will serve as
Uproar's exclusive remedy for damages for which Uproar is entitled to
indemnification under the agreement, other than damages arising from fraudulent
or intentional acts.
51
61
TREATMENT OF IWIN STOCK OPTIONS AND WARRANTS
At the effective time of the merger, each unexpired and unexercised
outstanding option to purchase shares of iwin common stock, whether vested or
unvested, will be assumed by Uproar and converted into an option to purchase
approximately 0.83 of a share of Uproar common stock. At the effective time,
each unexpired and unexercised outstanding warrant to purchase shares of iwin
common stock, whether currently exercisable or not, will be assumed by Uproar
and will also become exercisable to purchase 0.83 of a share of Uproar common
stock. Other than as described under "Interests of Executive Officers and
Directors of Uproar and iwin in the Merger", no iwin options will accelerate as
a result of the merger. The exact number of shares of Uproar common stock
subject to the assumed iwin stock options and warrants will be determined in
accordance with the formula set forth above in "Exchange of Shares" at the
effective time. Any fractional shares of Uproar common stock resulting from this
adjustment will be rounded down to the nearest share. The exercise price per
share of Uproar common stock under the iwin stock options and warrants will
equal the exercise price per share of the iwin common stock under the original
stock options or warrants, as the case may be, divided by the exchange ratio.
The exercise prices will be rounded down to the next highest whole cent.
EXCHANGE OF STOCK CERTIFICATES
Fractional Shares. Uproar will not issue any fractional shares of Uproar
common stock in the merger. Instead, each holder of shares of iwin common stock
exchanged pursuant to the merger who would otherwise have been entitled to
receive a fraction of a share of Uproar common stock will be entitled to receive
cash in an amount equal to the product of the fractional part of Uproar common
stock multiplied by the closing market price of Uproar common stock at the
effective time.
Surrender of Shares Of iwin Stock; Stock Transfer Books. Promptly after
the effective time, iwin will mail to each record holder of certificate(s)
representing iwin capital stock a letter of transmittal containing instructions
for surrendering the certificates in exchange for Uproar common stock and for
obtaining cash payment instead of fractional shares. Holders of certificates who
properly surrender their certificates in accordance with these instructions will
receive certificates representing their shares of Uproar common stock, other
than the shares placed in the escrow fund, and cash instead of any fractional
shares of Uproar common stock. The surrendered certificates will be canceled.
Holders of iwin common stock should not send in their certificates until they
receive a letter of transmittal from iwin.
No Further Registration or Transfer of iwin Common Stock. At the effective
time, the stock transfer books of iwin will be closed and there will be no
further transfers of shares of iwin common stock on the records of iwin. After
the effective time, the holders of iwin stock certificates will cease to have
any rights with respect to such shares of iwin common stock except as otherwise
provided for in the agreement and plan of reorganization or by applicable law.
Lost Certificates. If any iwin certificate has been lost, stolen or
destroyed, the owner of the certificate must provide an appropriate affidavit of
that fact. Uproar may require the owner of such lost, stolen or destroyed iwin
certificates to deliver a bond as indemnity against any claim that may be made
against Uproar with respect to the iwin certificates alleged to have been lost,
stolen or destroyed.
APPRAISAL RIGHTS
Holders of iwin stock that have exercised their appraisal rights pursuant
to Section 262 of the Delaware General Corporation Law will not have their
shares of iwin stock converted into Uproar common stock but instead will have
their shares converted into the right to receive the consideration determined in
accordance with Section 262 of the Delaware General Corporation Law.
52
62
REPRESENTATIONS AND WARRANTIES
The agreement and plan of reorganization contains representations and
warranties of Uproar, iwin and iwin Acquisition Corporation. Most of these
relate to:
- their organization, standing and power;
- their capitalization;
- their authority to enter into the agreement and plan of reorganization
and related agreements and to consummate the merger;
- the absence of certain changes in their business;
- litigation, arbitration, or judgments pending or threatened against them
or to which they are a party;
- the accuracy and completeness of their financial statements; and
- the accuracy and completeness of information provided for inclusion in
Uproar's registration statement on Form S-4 and this proxy
statement/prospectus.
In the agreement and plan of reorganization, iwin made certain
representations and warranties, including:
- the absence of undisclosed liabilities in its business;
- its accounts receivable;
- restrictions on its business activities;
- governmental and third-party consents required prior to consummation of
the merger;
- its title to property;
- various aspects of its intellectual property;
- environmental matters;
- its taxes;
- its employee benefit plans;
- its employees and consultants;
- transactions with its affiliates;
- its compliance with laws;
- its customers and suppliers;
- its material contracts and compliance with them;
- its minute books;
- the completeness of materials and documents it provided for Uproar's
review; and
- the completeness of the foregoing representations and warranties.
Uproar has also represented and warranted as to the validity of the shares
of common stock to be issued in connection with the merger and as to the
accuracy and completeness of documents and reports filed by Uproar with the SEC.
COVENANTS
Conduct Prior To The Effective Time
Except to the extent expressly contemplated by the agreement and plan of
reorganization or as consented to in writing by the other, each of iwin and
Uproar agreed to carry on its and its subsidiaries' business in the
53
63
ordinary course in substantially the same manner as conducted prior to execution
of the agreement and plan of reorganization. Each of iwin and Uproar further
agreed to:
- pay and to cause its subsidiaries to pay debts and taxes when due;
- to preserve intact its and its subsidiaries' present business
organizations;
- to keep available the services of its present officers and key employees;
and
- to preserve its and its subsidiaries' relationships with customers,
suppliers, distributors and others having business dealings with it or
its subsidiaries so that its and its subsidiaries' goodwill and ongoing
businesses shall be unimpaired at the effective time.
iwin and Uproar have agreed to notify the other of any event or occurrence
not in the ordinary course of its or its subsidiaries' business or which could
have a Material Adverse Effect.
Except to the extent expressly contemplated by the agreement and plan of
reorganization or as consented to in writing by the other, iwin and Uproar have
each agreed not to take or permit its subsidiaries to take, any of the following
actions:
- amend its certificate of incorporation or bylaws;
- declare or pay any dividends on or make any other distributions on its
capital stock;
- split, combine or reclassify its capital stock;
- issue or authorize the issuance of any other securities in substitution
for shares of its capital stock; or
- with certain exceptions, repurchase directly or indirectly its capital
stock.
The agreement and plan of reorganization restricts iwin's ability, without
Uproar's prior written consent, to:
- enter into any material contract, agreement, license or commitment, or
violate, amend or otherwise modify or waive any of the terms of any of
its material contracts, agreements or licenses other than in the ordinary
course of business consistent with past practice;
- accelerate, amend or change the period of exercisability or vesting of
options or other rights granted under its stock plans or authorize cash
payments in exchange for any options or other rights granted under any
such plans;
- with certain exceptions, issue, deliver or sell, authorize or propose the
issuance, delivery or sale of, or purchase or propose the purchase of,
its capital stock or securities convertible into or exercisable for any
shares of its capital stock;
- transfer, license, extend, amend or modify any rights to its intellectual
property other than the grant of non-exclusive licenses in the ordinary
course of business consistent with past practice;
- enter into or amend any agreements pursuant to which any other party is
granted exclusive marketing, manufacturing or other exclusive rights with
respect to its products or technology;
- sell, lease, license or otherwise dispose of or encumber any of its
properties or assets which are material to its and its subsidiaries'
business;
- borrow or commit to borrow money, guarantee any such indebtedness or
issue or sell any debt securities or guarantee any debt securities of
others;
- pay, discharge or satisfy claims, liabilities and obligations exceeding
certain amounts;
- terminate or waive any right of substantial value other than in the
ordinary course of business;
- increase compensation payable to its officers or employees, or grant any
additional severance or termination pay to, or enter into any employment
or severance agreements with, any officer or employee;
54
64
- enter into any collective bargaining agreement or establish or amend in
any material respect any bonus, profit sharing, stock option or other
plan;
- commence a lawsuit or arbitration proceedings;
- acquire or agree to acquire by merging or consolidating with any business
or any corporation, partnership, association or other business
organization, or otherwise acquire or agree to acquire any assets which
are material, individually or in the aggregate, to its and its
subsidiaries' business, taken as a whole;
- make any material tax election or amend any tax returns; or
- take or agree to take any of the actions described above.
iwin has also agreed that it will not directly or indirectly,
- solicit, initiate, or encourage any inquiries or proposals that could
reasonably be expected to lead to a proposal or offer for a merger,
consolidation, business combination, sale of all or substantially all of
its assets, sale of shares of capital stock (including by way of a tender
offer) or similar transactions involving iwin, other than the
transactions contemplated by the agreement and plan of reorganization;
- engage in negotiations or discussions concerning, or provide any
non-public information to any person or entity relating to, the foregoing
inquiries or proposals; or
- agree to, approve or recommend any of the foregoing inquiries or
proposals.
iwin has agreed that it will immediately notify Uproar about inquiries,
discussions or negotiations in connection with the type of transactions
described above.
Uproar has agreed that it will give notice to iwin prior to the
consummation of any acquisition of a third party involving consideration in
excess of $5,000,000.
Director and Officer Indemnification. Uproar has agreed that all rights to
indemnification existing on the date of the agreement and plan of
reorganization, in favor of the present officers and directors of iwin to the
extent permitted by applicable law and as provided for in iwin's certificate of
incorporation or bylaws will continue in full force and effect.
Third-Party Approvals. iwin and Uproar have agreed to use their reasonable
best efforts to obtain all consents, and make all filings with governmental
entities, which are necessary to be obtained by them to consummate the merger.
They have also agreed to notify each other regarding material events.
Directors. Uproar has agreed that it will take all reasonable action to
increase the number of directors to ten (10) and that iwin will have the right
to nominate three (3) members to the board of directors.
RELATED MATTERS AFTER THE MERGER
The certificate of incorporation of iwin Acquisition Corporation as in
effect immediately prior to the effective time will become the certificate of
incorporation of the surviving corporation, except that the name shall be
changed to the name of "iwin.com, Inc." The bylaws of iwin Acquisition
Corporation will become the bylaws of the surviving corporation.
INDEMNIFICATION OF UPROAR BY IWIN STOCKHOLDERS
The agreement and plan of reorganization provides that, subject to the
limitations described below, the iwin stockholders who receive Uproar common
stock in the merger will indemnify Uproar for any and all damages Uproar may
suffer as a result of a misrepresentation or breach by iwin of any
representation, warranty or covenant contained in the agreement and plan of
reorganization. The iwin stockholders' obligations to indemnify will also extend
to any matter listed on Schedule 2.8 of the agreement and plan of
reorganization. These matters relate to actual or potential litigation or
arbitration to which iwin or its officers or directors are or may become
parties.
55
65
To secure the indemnification obligations of the iwin stockholders in the
agreement and plan of reorganization, ten percent (10%) of the Uproar common
stock that would otherwise be issuable at the closing will be held in escrow.
Pursuant to the agreement and plan of reorganization, Frederick Krueger has been
designated as the agent of the iwin stockholders with respect to indemnification
matters. The escrow will terminate one year after the effective time; provided,
however, that a portion of the shares held in escrow, which are necessary to
satisfy any unsatisfied claims made prior to termination of the escrow period
with respect to facts and circumstances existing prior to expiration of the
escrow period, will remain in escrow until these claims have been finally
resolved, including without limitation any claims relating to items set forth on
Schedule 2.8 of the agreement and plan of reorganization.
Except for indemnification obligations arising out of fraudulent breaches
of iwin's representations and warranties and intentional breaches of iwin's
covenants under the agreement and plan of reorganization, the total liability of
the iwin stockholders for their indemnification obligations will not exceed the
value of the shares held in escrow which will be valued at the closing market
price of Uproar common stock at the effective time. Further, iwin stockholders
will not be liable until the aggregate claim for damages exceeds $500,000, but
after this trigger is met, will be liable for all damages incurred.
INDEMNIFICATION OF IWIN BY UPROAR
The agreement and plan of reorganization provides that, subject to the
limitations described below, after the effective time, Uproar and iwin will
indemnify former stockholders of iwin for any and all damages such stockholders
may suffer as a result of a misrepresentation or breach by Uproar or iwin
Acquisition Corporation of any covenant contained in the agreement and plan of
reorganization. Uproar's obligation to indemnify the former iwin stockholders
will terminate one year after the effective time.
Except for indemnification obligations arising out of fraudulent breaches
of Uproar's representations and warranties and intentional breaches of Uproar's
covenants under the agreement and plan of reorganization, the total liability of
Uproar for its indemnification obligations will not exceed the value of nine
percent (9%) multiplied by 14,008,305 multiplied by the closing market price of
Uproar common stock at the effective time. Uproar will not be obligated to
indemnify former stockholders of iwin until the aggregate claim for damages
exceeds $500,000, but after this trigger is met, will be liable for all damages
incurred.
CONDITIONS TO OBLIGATIONS TO EFFECT MERGER
The respective obligations of Uproar and iwin to consummate the merger are
subject to the satisfaction or waiver by them of the following conditions before
completion of the merger:
- the agreement and plan of reorganization and the merger must have been
approved and adopted by the requisite vote of iwin capital stock and
Uproar common stock, and any agreements or arrangements that may result
in the payment of any amount that would not be deductible by reason of
Section 280G of the Internal Revenue Code of 1986, as amended, including
the option granted to Mr. Kaufman in connection with the merger, must
have been approved by the number of stockholders of iwin required by the
terms of Section 280G(b)(5)(B);
- no temporary restraining order, preliminary or permanent injunction or
other court order preventing the consummation of the merger may be in
effect, and no proceeding brought by an administrative agency or
commission or other governmental authority seeking a restraint or
prohibition of the merger may be pending;
- Uproar and iwin and their respective subsidiaries must have timely
obtained from the relevant governmental entities all approvals, waivers
and consents, if any, necessary for consummation of or in connection with
the merger and the transactions contemplated by the agreement and plan of
reorganization;
- Each of Uproar and iwin must have received a written opinion from their
respective counsel to the effect that the merger will constitute a
reorganization within the meaning of Section 368 of the Internal Revenue
Code;
56
66
- Uproar must have filed with the Nasdaq National Market a Notification
Form for Listing of Additional Shares and with EASDAQ a Notification Form
for Request for Admission to Listing on EASDAQ of Additional Financial
Instruments with respect to the shares of Uproar common stock issuable in
exchange for iwin common stock in the merger and upon exercise of the
options under the iwin stock option plans assumed by Uproar; and
- the SEC must have declared the registration statement on Form S-4
effective. No stop order suspending in whole or in part the effectiveness
of the registration statement on Form S-4 may have been issued and no
proceeding for that purpose shall have been initiated or threatened in
writing by the SEC.
iwin's obligations to consummate the merger are subject to the satisfaction
or waiver by it of the following conditions before completion of the merger:
- the representations and warranties of Uproar and iwin Acquisition
Corporation in the agreement and plan of reorganization must be true and
correct in all material respects as of the effective time and Uproar and
iwin Acquisition Corporation must have performed and complied in all
material respects with all covenants, obligations and conditions of the
agreement and plan of reorganization required to be performed and
complied with by them as of the effective time;
- there may not have occurred any material adverse change in the condition
of Uproar and its subsidiaries, except for such as are directly or
indirectly attributable to or arise out of general market or industry
conditions; provided, that, a decline in the market price of the Uproar
common stock will not by itself be deemed a material adverse change;
- Uproar must have entered into an employment agreement with Scott Kaufman;
- iwin must receive satisfactory evidence of the consent or approval of
those persons whose consent or approval is required in connection with
the merger under the material contracts of Uproar filed as exhibits to
documents filed with the SEC by Uproar; and
- no temporary restraining order, preliminary or permanent injunction or
other order issued by any court or other legal or regulatory restraint
provision limiting or restricting Uproar's conduct or operation of its
business may be in effect, and no proceeding related to the foregoing may
be pending.
In addition, Uproar's and iwin.com Acquisition Corporation's obligations to
consummate the merger are subject to the satisfaction or waiver by it of the
following conditions before completion of the merger:
- the representations and warranties of iwin in the agreement and plan of
reorganization shall be true and correct in all material respects as of
the effective time and iwin shall have performed and complied in all
material respects with all covenants, obligations and conditions of the
agreement and plan of reorganization required to be performed and
complied with by it as of the effective time;
- Uproar shall have received satisfactory evidence of the consent or
approval of those persons whose consent or approval shall be required in
connection with the merger under certain contracts of iwin;
- no temporary restraining order, preliminary or permanent injunction or
other order issued by any court or other legal or regulatory restraint
preventing the consummation of the merger shall be in effect, and no
proceeding related to the foregoing shall be pending;
- all stockholders, officers, directors and holders of options to purchase
more that 10,000 shares of iwin common stock shall have entered into a
lock-up agreement with Uproar;
- Scott Kaufman shall have entered into an employment agreement with
Uproar;
- there shall not have occurred any material adverse change in the
condition of iwin and its subsidiaries, except for such as are directly
or indirectly attributable to or arise out of general market or industry
conditions; and
57
67
- all of iwin's outstanding preferred stock shall have been converted into
iwin common stock in accordance with the certificate of incorporation of
iwin.
TERMINATION; EXPENSES
At any time prior to the effective time, whether before or after approval
of the matters presented in connection with the merger by the stockholders of
iwin or Uproar, the agreement and plan of reorganization may be terminated:
- by mutual consent duly authorized by the boards of directors of Uproar
and iwin;
- by either Uproar or iwin, if, without fault of the terminating party, the
closing of the transactions contemplated by the agreement and plan of
reorganization shall not have occurred on or before November 30, 2000
(provided, that such right to terminate the agreement and plan of
reorganization will not be available to any party whose action or failure
to act constitutes a breach of the agreement and plan of reorganization
and has been the cause or resulted in the failure of the merger to occur
on or before such date);
- by Uproar (i) if iwin breaches any representation, warranty, obligation
or agreement hereunder and such breach has not been cured within a
certain time period, provided that such termination right will not be
available to Uproar where Uproar is at that time in willful breach of the
agreement and plan of reorganization, (ii) if the board of directors of
iwin withdraws or modifies its recommendation of the agreement and plan
of reorganization or the merger in a manner adverse to Uproar or shall
have resolved to do any of the foregoing, provided that such termination
right will not be available to Uproar where Uproar is at that time in
willful breach of the agreement and plan of reorganization, or (iii) if
for any reason iwin fails to call and hold the iwin stockholders meeting
or commence solicitation of stockholder consents by November 15, 2000,
provided that such termination right will not be available to Uproar
where Uproar is at that time in material breach of the agreement and plan
of reorganization;
- by iwin (i) if Uproar breaches any representation, warranty, obligation
or agreement hereunder and such breach has not been cured within a
certain time period, provided that such termination right shall not be
available to iwin where iwin is at that time in material breach of the
agreement and plan of reorganization, (ii) if the board of directors of
Uproar withdraws or modifies its recommendation of the agreement and plan
of reorganization or the merger in a manner adverse to iwin or resolves
to do any of the foregoing, provided that such termination right will not
be available to iwin where iwin is at that time in willful breach of the
agreement and plan of reorganization, or (iii) if for any reason Uproar
fails to call and hold the Uproar stockholders meeting or commence
solicitation of stockholder consents by November 15, 2000, provided that
such termination right will not be available to iwin where iwin is at
that time in material breach of the agreement and plan of reorganization;
- by Uproar (i) if any permanent injunction or other court order preventing
the consummation of the merger becomes final and nonappealable or (ii) if
any required approval of the stockholders of iwin shall not have been
obtained; or
- by iwin (i) if any permanent injunction or other court order preventing
the consummation of the merger becomes final and nonappealable or (ii) if
any required approval of the stockholders of Uproar is not obtained.
In the event of termination of the agreement and plan of reorganization,
the agreement and plan of reorganization will be canceled and there will be no
liability or obligation on the part of Uproar or iwin or their respective
officers, directors, stockholders or affiliates, except to the extent that such
termination results from the breach of any representations, warranties or
covenants set forth in the agreement and plan of reorganization, provided that
specified provisions of the agreement and plan of reorganization will remain in
full force and effect and survive any termination of the agreement and plan of
reorganization.
Except as described below, whether or not the merger is consummated, all
costs and expenses incurred in connection with the agreement and plan of
reorganization and its related transactions (including, the fees and
58
68
expenses of its advisers, accountants and legal counsel) will be paid by the
party incurring such expense; provided, however, that one-half (1/2) of any
out-of-pocket expenses incurred by iwin in excess of $500,000 for fees and
expenses (but excluding costs associated with SEC filing fees of the
registration statement on Form S-4 and printing and mailing the proxy
statement/prospectus, which shall be the obligation of Uproar), will remain an
obligation of iwin's stockholders. Payment made by Uproar or iwin in excess of
this limit will constitute damages recoverable from the escrow fund and these
damages will not be subject to any minimum threshold.
In the event that iwin terminates the agreement and plan of reorganization
due to a failure by the stockholders of Uproar to approve the agreement and plan
of reorganization, then Uproar will reimburse iwin for all of the out-of-pocket
costs and expenses incurred by iwin in connection with the agreement and plan of
reorganization and its related transactions (including, without limitation, the
fees and expenses of its advisors, accountants and legal counsel) up to an
aggregate of $500,000.
AMENDMENT AND WAIVER
The boards of directors of Uproar and iwin may amend the agreement and plan
of reorganization at any time by execution of an instrument in writing signed on
behalf of each of the parties and in accordance with applicable law.
At any time prior to the effective time, any party to the agreement and
plan of reorganization may:
- extend the time for the performance of any of the obligations or other
acts of the other parties;
- waive any inaccuracies in the representations and warranties made to such
party in the agreement and plan of reorganization or in any document
delivered pursuant to the agreement and plan of reorganization; and
- waive compliance with any of the agreements or conditions for the benefit
of such party in the agreement and plan of reorganization.
59
69
OTHER AGREEMENTS
VOTING AGREEMENTS
Prior to the execution of the agreement and plan of reorganization, holders
of Uproar common stock and iwin capital stock, as well as directors and
executive officers of Uproar and iwin, executed voting agreements pursuant to
which they agreed to vote their respective stock in Uproar and iwin in favor of
the merger and for other various matters. As of August 23, 2000, holders of
24.5% of the outstanding Uproar common stock and holders of approximately 89.5%
of the outstanding iwin common stock, 88.9% of the outstanding iwin Series A
preferred stock, 77.9% of the outstanding iwin Series B Preferred Stock and
91.4% of the outstanding iwin Series C preferred stock have executed voting
agreements.
Under the voting agreements, the Uproar stockholders and officers and
directors who executed these agreements agreed to vote in favor of the merger
and any matter that could reasonably be expected to facilitate the merger,
including the issuance of the shares of Uproar common stock pursuant to the
merger. Each of such holders has agreed to not sell or otherwise dispose of its
Uproar common stock prior to the earlier of the termination of the agreement and
plan of reorganization and the closing of the merger.
Under the voting agreements, the iwin stockholders and officers and
directors who executed these agreements agreed to vote in favor of the merger
and any matter that could reasonably be expected to facilitate the merger. Each
of such holders has agreed to not sell or otherwise dispose of its Uproar common
stock and to not initiate or solicit, directly or indirectly, any proposal or
plan to acquire all or any substantial part of the business of iwin by any third
person, in both cases prior to the earlier of the termination of the agreement
and plan of reorganization and the closing of the merger.
AFFILIATE AGREEMENTS
Prior to the closing of the merger, Uproar will enter into affiliate
agreements with those directors, officers and stockholders of iwin who are
"affiliates" within the meaning of the Securities and Exchange Commission rules.
Pursuant to these affiliate agreements, each iwin affiliate will agree not to
dispose of his, her or its shares of Uproar common stock received in the merger
unless the disposition is permitted under the rules and regulations of the
federal securities laws.
ESCROW AGREEMENT
Under the agreement and plan of reorganization, ten percent (10%) of the
total number of shares of Uproar common stock deliverable in the merger to each
iwin stockholder will be placed in escrow and shall be available to compensate
Uproar in accordance with the indemnification obligations of the stockholders of
iwin. The shares deposited in the escrow fund shall remain available to
compensate Uproar for damages for a period of one year from the date of the
closing of the merger. However, if a claim is asserted prior to the one year
anniversary of the closing and the claim has not been resolved by the one year
anniversary, shares will remain in the escrow fund in an amount sufficient to
satisfy such claim until such claim has been resolved, notwithstanding that the
one year period has elapsed. The escrow agreement is attached as an exhibit to
the merger agreement attached as Annex A to this joint proxy
statement/prospectus.
LOCK-UP AGREEMENTS
Each iwin stockholder, officer, director and holder of options to purchase
more than 10,000 shares of iwin common stock will enter into a lock-up agreement
with Uproar prior to the closing of the merger. Pursuant to the lock-up
agreement, each of such persons will agree not to, for a period of 180 days
beginning on the closing date of the merger, among other things, offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, any
Uproar common stock it shall have received in the merger, without the prior
consent of Uproar. Any shares of Uproar common stock any of such persons acquire
in the open market will not be subject to this restriction.
60
70
PROPOSAL TO APPROVE AMENDMENT AND RESTATEMENT OF
UPROAR INC. 2000 STOCK INCENTIVE PLAN
The stockholders of Uproar are being asked to approve an amendment and
restatement of the Uproar Inc. 2000 Stock Incentive Plan. The board of directors
of Uproar amended and restated the Incentive Plan on July 25, 2000 to increase
the share reserve by 2,250,000 shares to an aggregate of 9,000,000 shares, as
discussed below. The board believes that equity awards under the Incentive Plan
play an important role in Uproar's efforts to attract, employ and retain
employees, directors and consultants of outstanding ability. The board also
believes that, as the company pursues strategic acquisitions such as the merger
with iwin, the ability to grant equity awards to the employees of acquired
companies will assist Uproar in successfully negotiating such transactions and
retaining the employees for the benefit of the company and its stockholders.
Uproar established the Incentive Plan on February 23, 2000 as a successor
to the Uproar Ltd. 1999 Share Option/Share Issuance Plan to provide a means
whereby eligible individuals may be given an opportunity to acquire shares of
Uproar common stock and to benefit from increases in the value of Uproar common
stock. The Incentive Plan was approved by the stockholders of Uproar on June 30,
2000.
The principal terms and provisions of the Incentive Plan are summarized
below. The summary, however, is not intended to be a complete description of all
the terms of the Incentive Plan. A copy of the Incentive Plan will be furnished
to any stockholder upon written request to Uproar's corporate Secretary.
Structure. The Incentive Plan is divided into three separate components:
- the Discretionary Option Grant Program, under which eligible individuals
may, at the discretion of the plan administrator, be granted options to
purchase shares of Uproar common stock at an exercise price of less than,
equal to, or greater than the fair market value on the grant date, and
stock appreciation rights, or SARs, at a price that varies in accordance
with a predetermined formula while the SAR is outstanding;
- the Stock Issuance Program, under which such persons may, in the plan
administrator's discretion, be issued shares of Uproar common stock
directly through the purchase of such shares at a price less than, equal
to, or greater than their fair market value at the time of their issuance
or as a bonus tied to the performance of services; and
- the Automatic Option Grant Program, under which non-employee directors
receive periodic option grants at a price less than, equal to, or greater
than the fair market value on the date of grant.
Administration. The compensation committee of the board of directors,
which is comprised of three independent, non-employee board members, administers
the Discretionary Option Grant Program and the Stock Issuance Program. Committee
members serve for such period of time as the board may determine. The Incentive
Plan may also be administered with respect to optionees who are not executive
officers subject to the short-swing profit rules of the federal securities laws,
by the board or a secondary committee comprised of one or more board members.
Neither the committee nor the board exercises any administrative discretion with
respect to the Automatic Option Grant Program.
The committee or board or secondary committee, to the extent acting as plan
administrator, has full authority to determine:
- the eligible individuals who are to receive awards under the
Discretionary Option Grant Program and the Stock Issuance Program;
- the number of shares to be covered by each granted option or other award;
- the date or dates on which the option is to become exercisable or the
award is to vest;
- the maximum term for which the option or award is to remain outstanding;
61
71
- whether the granted option will be an incentive stock option that
satisfies the requirements of Section 422 of the Internal Revenue Code or
a non-statutory option not intended to meet such requirements; and
- the remaining provisions of the option grant or award.
Eligibility. Employees and consultants who render services to Uproar or
its subsidiary corporations are eligible to receive option grants and SARs under
the Discretionary Option Grant Program and share issuances under the Stock
Issuance Program. A non-employee member of the board or of the board of
directors of any parent or subsidiary corporation of Uproar is also eligible for
option grants or SARs under the Discretionary Option Grant Program and share
issuances under the Stock Issuance Program, as well as option grants under the
Automatic Option Grant Program.
As of July 31, 2000, approximately 221 persons were eligible to participate
in the Incentive Plan.
Securities Subject to Incentive Plan. The maximum number of shares of
Uproar common stock that may be issued over the term of the Incentive Plan may
not exceed 9,000,000 shares, assuming approval of this proposal by the
stockholders. The number of shares of Uproar common stock available for issuance
under the Incentive Plan automatically increases on the first trading day of
each calendar year during the term of the Incentive Plan by an amount equal to
one percent (1%) of the shares of Uproar common stock outstanding on December 31
of the immediately preceding calendar year, not to exceed 400,000 shares in any
calendar year.
No one person participating in the Incentive Plan may receive options,
separately exercisable SARs, and direct stock issuances for more than 2,000,000
shares of Uproar common stock per calendar year.
Should an option expire or terminate for any reason prior to exercise in
full, including options incorporated from the predecessor plan, the shares
subject to the portion of the option not so exercised will be available for
subsequent option grants under the Incentive Plan.
DISCRETIONARY OPTION GRANT PROGRAM
Price and Exercisability. The option exercise price per share in the case
of an incentive stock option may not be less than one hundred percent (100%) of
the fair market value of a share of the Uproar common stock on the grant date
and, in the case of a non-statutory option, the exercise price may be less than,
equal to, or greater than the fair market value of a share of Uproar common
stock on the grant date. Options granted under the Discretionary Option Grant
Program become exercisable at such time or times and during such period as the
committee may determine and as set forth in the instrument evidencing the option
grant.
The exercise price may be paid in cash or in shares of Uproar common stock
held more than 6 months. Options may also be exercised through a same-day sale
program, pursuant to which a designated brokerage firm may effect the immediate
sale of the shares purchased under the option and pay over to Uproar, out of the
sale proceeds on the settlement date, sufficient funds to cover the exercise
price for the purchased shares plus all applicable withholding taxes. The
committee has the discretionary authority to reprice options through the
cancellation of options and the grant of replacement options with an exercise
price based on the fair market value of the option shares on the regrant date.
No optionee has any stockholder rights with respect to the option shares
until the optionee has exercised the option, paid the exercise price and become
a holder of record of the shares. Options are not assignable or transferable
other than by will or the laws of descent and distribution and, during the
optionee's lifetime, the option may be exercised only by the optionee.
Stock Appreciation Rights. One or more eligible individuals may, at the
discretion of the committee, be granted stock appreciation rights either in
tandem with or independent of their option grants under the Incentive Plan. Upon
exercise of an independent stock appreciation right, the individual will be
entitled to a cash distribution from Uproar in an amount per share equal to the
excess of the fair market value per share of Uproar common stock over the
exercise or base price. An appreciation distribution may, at the discretion of
the committee, be made in cash or in shares of Uproar common stock.
62
72
Termination of Service. Any option held by an optionee at the time of
cessation of service will not remain exercisable beyond the designated
post-service exercise period. Under no circumstances, however, may any option be
exercised after the specified expiration date of the option term. Each option
will normally, during this limited period, be exercisable only to the extent of
the number of shares of Uproar common stock in which the optionee is vested at
the time of cessation of service. The committee has complete discretion to
extend the period following the optionee's cessation of service during which his
or her outstanding options may be exercised and/or to accelerate the
exercisability of such options in whole or in part. This discretion may be
exercised at any time while the options remain outstanding, whether before or
after the optionee's actual cessation of service.
The shares of Uproar common stock acquired upon the exercise of one or more
options may be subject to repurchase by Uproar at the original exercise price
paid per share upon the optionee's cessation of service prior to vesting in such
shares. The committee has complete discretion in establishing the vesting
schedule to be in effect for any such unvested shares and may cancel Uproar's
outstanding repurchase rights with respect to those shares at any time, thereby
accelerating the vesting of the shares subject to the canceled rights.
Incentive Stock Options. Incentive stock options may only be granted to
individuals who are employees of Uproar or its subsidiary corporations. During
any calendar year, the aggregate fair market value, determined as of the grant
date(s), of the Uproar common stock for which one or more options granted to any
employee under the Incentive Plan may for the first time become exercisable as
incentive stock options under Section 422 of the Code will not exceed $100,000.
STOCK ISSUANCE PROGRAM
Shares of Uproar common stock may be sold under the Stock Issuance Program
of the Incentive Plan at a price per share less than, equal to, or greater than
their fair market value, payable in cash or as a bonus for past services.
The issued shares may either be immediately vested upon issuance or subject
to a vesting schedule tied to the performance of service or the attainment of
performance goals. The committee has, however, the discretionary authority at
any time to accelerate the vesting of any and all unvested shares outstanding
under the Incentive Plan.
AUTOMATIC OPTION GRANT PROGRAM
Under the Automatic Option Grant Program of the Incentive Plan, each
individual who first joins the board of directors as a non-employee director
receives an option grant for 30,000 shares of Uproar common stock at the time of
his or her commencement of service on the board. Each of these options vests in
a series of 3 annual installments upon the optionee's completion of each year of
service over the 3-year period measured from the grant date. In addition, at
each annual meeting of stockholders, each individual who has served as a
non-employee director for at least 6 months and is to continue to serve as such
is granted an option to purchase 5,000 shares of Uproar's common stock. Each of
these options vests in a series of 4 equal quarterly installments upon the
optionee's completion of each quarter of service over the 1-year period measured
from the grant date. Each option under the Automatic Option Grant Program has an
exercise price equal to the fair market value per share of Uproar's common stock
on the grant date and has a maximum term of 10 years, subject to earlier
termination following the optionee's cessation of board service.
GENERAL PROVISIONS
Acceleration of Options/Termination of Repurchase Rights. Upon the
occurrence of a "change in control" or "hostile take-over," each outstanding
option under the Incentive Plan will, immediately prior to the effective date of
the change in control or hostile take-over, become fully exercisable for all of
the shares at the time subject to such option. However, an outstanding option
shall not accelerate if and to the extent such option is, in connection with the
change in control or hostile take-over, either to be assumed by the successor
corporation (or parent) or to be replaced with a comparable option to purchase
shares of the capital stock of the successor corporation (or parent).
Immediately following the consummation of the change in control or
63
73
hostile take-over, all outstanding options will terminate and cease to be
exercisable, except to the extent assumed by the successor corporation. A change
in control includes:
- a merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of Uproar's outstanding
securities are transferred to a person or persons different from the
persons holding those immediately prior to such transaction, or a merger
of Uproar after which our own stockholders own fifty percent (50%) or
less of the surviving corporation, or its parent company;
- a sale of all or substantially all of Uproar's assets;
- a proxy contest that results in the replacement of more than one-half of
Uproar's board of directors over a 24-month period; or
- an acquisition of fifty percent (50%) or more of Uproar's outstanding
stock by any person or group, other than a person related to Uproar, such
as a holding company owned by Uproar's stockholders.
A hostile take-over includes:
- the acquisition, directly or indirectly, by any person or related group
of persons (other than Uproar or a person that directly or indirectly
controls, is controlled by, or is under common control with, Uproar) of
beneficial ownership of securities possessing more than fifty percent
(50%) of the total combined voting power of Uproar's outstanding
securities pursuant to a tender or exchange offer made directly to
Uproar's stockholders which the board does not recommend such
stockholders to accept; or
- a change in the composition of the board over a period of 36 months or
less that results in the replacement of more than one-half of Uproar's
board of directors;
Also upon a change in control or hostile take-over, Uproar's outstanding
repurchase rights applicable to options or shares issued directly will terminate
automatically unless assigned to the successor corporation.
The committee has the discretion to accelerate outstanding options after
they have been assumed or replaced in a change in control or hostile take-over
and have not otherwise accelerated at that time. Options will automatically
accelerate in the event the optionee's service subsequently terminates by reason
of an involuntary termination within eighteen (18) months following the
effective date of a change in control or hostile take-over. Involuntary
termination includes discharge without cause and certain voluntary resignations
following a reduction in compensation or responsibility or a relocation.
The committee also has the discretion to accelerate outstanding options
and/or terminate Uproar's outstanding repurchase rights upon a change in control
or hostile take-over, which acceleration or termination may or may not be
conditioned upon the subsequent termination of the optionee's service within a
specified period following the transaction. The acceleration of options in the
event of a change in control or a hostile take-over may be seen as anti-takeover
provisions and may have the effect of discouraging a merger proposal, a takeover
attempt, or other efforts to gain control of Uproar.
Valuation. For purposes of establishing the exercise price and for all
other valuation purposes under the Incentive Plan, the fair market value of a
share of Uproar common stock on any relevant date will be the closing price per
share of Uproar common stock on that date, as such price is reported on the
Nasdaq National Market. The market value of the Uproar common stock as reported
on the Nasdaq National Market as of August 23, 2000 was $6.75 per share.
Changes in Capitalization. In the event any change is made to the Uproar
common stock issuable under the Incentive Plan by reason of any stock split,
stock dividend, combination of shares, exchange of shares, or other change
affecting the outstanding Uproar common stock as a class without Uproar's
receipt of consideration, appropriate adjustments will be made to:
- the maximum number and/or class of securities issuable under the
Incentive Plan;
- the maximum number and/or class of securities for which any one person
may be granted options and direct stock issuances per calendar year;
64
74
- the maximum number and/or class of securities for which the share reserve
is to increase automatically each year; and
- the number and/or class of securities and the exercise price per share in
effect under each outstanding option (including any option incorporated
from the predecessor plan) in order to prevent the dilution or
enlargement of benefits thereunder.
Each outstanding option that is assumed in connection with a change in
control will be appropriately adjusted to apply and pertain to the number and
class of securities that would otherwise have been issued, in consummation of
such change in control, to the option holder had the option been exercised
immediately prior to the change in control. Appropriate adjustments will also be
made to the option price payable per share and to the class and number of
securities available for future issuance under the Incentive Plan on both an
aggregate and a per-participant basis.
Incentive Plan Amendments. The board may amend or modify the Incentive
Plan in any and all respects whatsoever. The approval of Uproar's stockholders
will be sought to the extent required by applicable law or the Incentive Plan.
The board may, at any time and for any reason, terminate the Incentive
Plan. Any options outstanding at the time of such termination will remain in
force in accordance with the provisions of the instruments evidencing such
grants.
As of July 31, 2000, options covering 7,870,279 shares were outstanding
under the Incentive Plan and 766,157 shares remained available for future option
grant after giving effect to the increase which is the subject of this proposal.
No shares had been issued under the Incentive Plan or the predecessor plan as of
July 31, 2000. The expiration dates for all such options range from September 8,
2009 to July 30, 2010.
NEW PLAN BENEFITS
Awards under the Incentive Plan are discretionary. Therefore, it is not
possible to determine the benefits that will be received in the future by
participants in the plan. As of August 23, 2000, grants had been made under the
Incentive Plan with respect to 1,479,343 of the additional 2,250,000 shares that
are subject to the approval of the stockholders. For such grants, if the fair
market value of the Uproar common stock on the date of stockholder approval of
the increased share reserve exceeds the exercise price of the options, Uproar
will be required to recognize compensation expense over the vesting period equal
to the difference multiplied by the number of options granted.
FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS GRANTED UNDER THE INCENTIVE PLAN
Options granted under the Incentive Plan may be either incentive stock
options that satisfy the requirements of Section 422 of the Code or
non-statutory options that are not intended to meet such requirements. The
federal income tax treatment for the two types of options differs as follows:
Incentive Stock Options. No taxable income is recognized by the optionee
at the time of the option grant, and no taxable income is generally recognized
at the time the option is exercised. However, the excess of the fair market
value of the purchased shares on the exercise date over the exercise price paid
for the shares generally is includable in alternative minimum taxable income.
The optionee will recognize taxable income in the year in which the purchased
shares are sold or otherwise made the subject of disposition.
For federal tax purposes, dispositions are divided into two
categories -- qualifying and disqualifying. The optionee will make a qualifying
disposition of the purchased shares if the sale or other disposition of such
shares is made after the optionee has held the shares for more than two (2)
years after the grant date of the option and more than one (1) year after the
exercise date. If the optionee fails to satisfy either of these two holding
periods prior to the sale or other disposition of the purchased shares, then a
disqualifying disposition will result.
Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the excess of the amount realized
upon the sale or other disposition of the purchased shares over the exercise
price paid for such shares. If there is a disqualifying disposition of the
shares, then the excess
65
75
of the fair market value of those shares on the date the option was exercised
over the exercise price paid for the shares will be taxable as ordinary income.
Any additional gain recognized upon the disposition will be a capital gain.
If the optionee makes a disqualifying disposition of the purchased shares,
then Uproar will be entitled to an income tax deduction for the taxable year in
which such disposition occurs equal to the excess of the fair market value of
the shares on the date the option was exercised over the exercise price paid for
the shares. In no other instance will Uproar be allowed a deduction with respect
to the optionee's disposition of the purchased shares. Uproar anticipates that
any compensation deemed paid by Uproar upon one or more disqualifying
dispositions of incentive stock option shares by Uproar's executive officers
will remain deductible by Uproar and will not have to be taken into account for
purposes of the $1 million limitation per covered individual on the
deductibility of the compensation paid to certain executive officers of Uproar.
Non-Statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income in the year in which the option is exercised equal to the excess
of the fair market value of the purchased shares on the exercise date over the
exercise price paid for the shares, and the optionee will be required to satisfy
the tax withholding requirements applicable to this income.
Special provisions of the Internal Revenue Code apply to the acquisition of
Uproar common stock under a non-statutory option if the purchased shares are
subject to repurchase by Uproar. These special provisions may be summarized as
follows:
- If the shares acquired upon exercise of the non-statutory option are
subject to repurchase by Uproar at the original exercise price in the
event of the optionee's termination of service prior to vesting in such
shares, the optionee will not recognize any taxable income at the time of
exercise but will have to report as ordinary income, as and when Uproar's
repurchase right lapses, an amount equal to the excess of the fair market
value of the shares on the date such repurchase right lapses with respect
to such shares over the exercise price paid for the shares.
- The optionee may, however, elect under Section 83(b) of the Internal
Revenue Code to include as ordinary income in the year of exercise of the
non-statutory option an amount equal to the excess of the fair market
value of the purchased shares on the exercise date (determined as if the
shares were not subject to Uproar's repurchase right) over the exercise
price paid for such shares. If the Section 83(b) election is made, the
optionee will not recognize any additional income as and when the
repurchase right lapses.
Uproar will be entitled to a business expense deduction equal to the amount
of ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year of Uproar in which such ordinary income is recognized by the optionee.
Uproar anticipates that the compensation deemed paid by Uproar upon the exercise
of non-statutory options with exercise prices equal to the fair market value of
the option shares on the grant date will remain deductible by Uproar and will
not have to be taken into account for purposes of the $1 million limitation per
covered individual on the deductibility of the compensation paid to certain
executive officers of Uproar.
Stock Appreciation Rights. An optionee who is granted a stock appreciation
right will recognize ordinary income in the year of exercise equal to the amount
of the appreciation distribution. Uproar will be entitled to a business expense
deduction equal to the appreciation distribution for the taxable year of Uproar
in which the ordinary income is recognized by the optionee.
Stock Issuances. The tax principles applicable to direct stock issuances
under the Incentive Plan will be substantially the same as those summarized
above for the exercise of non-statutory option grants.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE UPROAR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE
AMENDMENT AND RESTATEMENT OF THE UPROAR INC. 2000 STOCK INCENTIVE PLAN.
66
76
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
On July 25, 2000, Uproar and iwin entered into an agreement and plan of
reorganization. Under the agreement, Uproar is to issue 13.06 million shares of
Uproar common stock to the stockholders of iwin in exchange for all shares of
iwin capital stock outstanding at the closing and assume outstanding options and
warrants of iwin, as of the date of completion of the merger. The merger is
subject to, among other things, regulatory approval and the approval by
stockholders of both Uproar and iwin. The transaction will be accounted for as a
purchase transaction. The share price used to determine the acquisition cost was
derived from taking the average of the closing price of Uproar's common stock on
the Nasdaq National Market for the two days prior to and subsequent to the
announcement of the proposed merger, which was on July 26, 2000.
The following unaudited pro forma condensed consolidated financial
information gives effect to the merger using the purchase method of accounting,
after giving effect to the pro forma adjustments described in the accompanying
notes. The unaudited pro forma condensed consolidated financial information is
based on, and should be read in conjunction with the audited historical
consolidated financial statements of Uproar for the year ended December 31,
1999, the unaudited historical consolidated financial statements of Uproar as of
and for the six months ended June 30, 2000, the audited historical financial
statements of iwin for the period from July 8, 1999 (inception) through December
31, 1999 and the unaudited historical financial statements of iwin as of and for
the six months ended June 30, 2000, all of which are included in this joint
proxy statement/ prospectus.
The unaudited pro forma condensed consolidated balance sheet as of June 30,
2000 gives effect to the merger of Uproar and iwin as if it had occurred on June
30, 2000.
The unaudited pro forma condensed consolidated statement of operations for
the six months ended June 30, 2000 gives effect to the merger of Uproar and iwin
as if it occurred on January 1, 2000. The unaudited pro forma condensed
consolidated statement of operations for the year ended December 31, 1999 gives
effect to the merger of Uproar and iwin as if it occurred on January 1, 1999.
Uproar expects to incur merger-related costs estimated to aggregate
approximately $1.1 million, primarily consisting of fees to legal counsel,
independent accountants, financial advisors, and printing and other fees and
expenses relating to holding a meeting of stockholders and preparing this joint
proxy statement/prospectus. However, additional unanticipated expenses may be
incurred in connection with this transaction.
The unaudited pro forma condensed consolidated financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the results of operations or financial position that would have been achieved if
the merger had been consummated at the dates indicated, nor are they necessarily
indicative of future results of operations or financial position of the combined
company.
The allocation of the purchase price of iwin is preliminary and does not
reflect the fair value adjustments to its assets and liabilities, since those
amounts have not been finalized and have been estimated at this time. The fair
value of iwin's assets and liabilities will be determined as of the date of
consummation of the merger.
67
77
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
UPROAR IWIN PRO FORMA
HISTORICAL HISTORICAL ------------------------------
JUNE 30, JUNE 30, ACQUISITION
2000 2000 ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Assets
Current assets:
Cash and cash equivalents.......................... $ 9,253 $ 8,284 $ 482(6) $ 18,019
Short term investments............................. 85,377 -- 85,377
Restricted cash.................................... 604 -- 604
Accounts receivable, net........................... 6,233 4,532 10,765
Prepaid advertising................................ 3,796 -- 3,796
Other current assets............................... 1,274 1,684 2,958
-------- ------- ------- --------
Total current assets............................. 106,537 14,500 482 121,519
-------- ------- ------- --------
Property and equipment, net.......................... 9,205 4,427 13,632
Intangible assets, net............................... 7,625 -- 7,625
Goodwill and other intangibles....................... -- -- $82,256(1) 82,256
Prepaid advertising, long term portion............... 949 -- 949
Other long term assets............................... 412 1,040 1,452
-------- ------- ------- --------
Total assets..................................... $124,728 $19,967 $82,738 $227,433
======== ======= ======= ========
Liabilities and stockholders' equity
Current liabilities:
Current portion of capital lease obligations....... $ 195 $ 430 $ 625
Trade accounts payable............................. 2,251 2,093 4,344
Accrued expenses and other current liabilities..... 4,574 2,678 1,100(1) 8,352
-------- ------- ------- --------
Total current liabilities........................ 7,020 5,201 1,100 13,321
-------- ------- ------- --------
Long term portion of capital lease obligations....... 183 931 1,114
Note payable......................................... -- 71 71
Stockholders' equity:
Preferred stock.................................... -- 7 (7)(1) --
Common stock....................................... 280 7 124(1) 411
Additional paid-in capital......................... 189,009 37,754 59,465(1) 286,228
Receivable from stockholders....................... -- (482) 482(6) --
Deferred compensation.............................. -- (4,297) 2,349(1) (1,948)
Accumulated deficit................................ (71,706) (19,225) 19,225(1) (71,706)
Accumulated other comprehensive (loss)............. (58) -- (58)
-------- ------- ------- --------
Total stockholders' equity....................... 117,525 13,764 81,638 212,927
-------- ------- ------- --------
Total liabilities and stockholders' equity....... $124,728 $19,967 $82,738 $227,433
======== ======= ======= ========
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
68
78
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
SIX MONTHS ENDED
JUNE 30, 2000
UPROAR IWIN ------------------------------
HISTORICAL HISTORICAL PRO FORMA
SIX MONTHS ENDED SIX MONTHS ENDED ------------------------------
JUNE 30, 2000 JUNE 30, 2000 ADJUSTMENTS COMBINED
---------------- ---------------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues........................... $ 12,769 $ 8,180 $ 20,949
Cost of revenues................... (4,264) (4,764) (9,028)
------------ ------------ ------------
Gross profit....................... 8,505 3,416 11,921
------------ ------------ ------------
Sales and marketing................ 18,130 12,428 244(2) 30,802
Product and technology
development...................... 3,970 1,574 5,544
General and administrative......... 7,539 5,334 12,873
Amortization of intangible
assets........................... 3,037 -- 3,037
Amortization of goodwill and other
intangibles...................... -- -- 13,709(4) 13,709
------------ ------------ ------------
Total operating expenses........... 32,676 19,336 13,953 65,965
------------ ------------ ------------
Loss from operations............... (24,171) (15,920) (13,953) (54,044)
Other income (expense):
Litigation settlement............ (350) -- (350)
Foreign exchange (loss).......... (78) -- (78)
Interest income.................. 2,091 610 2,701
Interest expense................. (30) (24) (54)
Other income (expense)........... 3 (22) (19)
------------ ------------ ----------- ------------
Loss before income taxes........... (22,535) (15,356) (13,953) (51,844)
Provision for income taxes......... 22 9 31
------------ ------------ ----------- ------------
Net loss........................... $ (22,557) $ (15,365) (13,953) $ (51,875)
============ ============ =========== ============
HISTORICAL HISTORICAL PRO FORMA
------------ ------------ ------------
Basic and diluted net loss per
common share..................... $ (0.85) $ (2.25) $ (1.31)
Weighted average number of common
shares outstanding............... 26,622,856 6,826,734 39,681,647
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
69
79
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
TWELVE MONTHS ENDED
IWIN DECEMBER 31, 1999
UPROAR HISTORICAL ---------------------------
HISTORICAL JULY 8, 1999 PRO FORMA
TWELVE MONTHS ENDED (INCEPTION) THROUGH ---------------------------
DECEMBER 31, 1999 DECEMBER 31, 1999 ADJUSTMENTS COMBINED
------------------- ------------------- ----------- ------------
Revenues........................ $ 10,391 $ 176 $ 10,567
Cost of revenues................ (2,533) (536) (3,069)
------------ ----------- ------------
Gross profit.................... 7,858 (360) 7,498
------------ ----------- ------------
Sales and marketing............. 28,066 1,512 487(3) 30,065
Product and technology
development................... 3,701 440 4,141
General and administrative...... 8,919 1,422 10,341
Amortization of intangible
assets........................ 6,086 -- 6,086
Amortization of goodwill and
other intangibles............. -- -- 27,418(5) 27,418
------------ ----------- ------------
Total operating expenses........ 46,772 3,374 27,905 78,051
------------ ----------- ----------- ------------
Loss from operations............ (38,914) (3,734) (27,905) (70,553)
Other income (expense):
Foreign exchange (loss)....... (120) -- (120)
Interest income............... 535 103 638
Interest expense.............. (7) -- (7)
Other income (expense)........ (191) (227) (418)
------------ ----------- ----------- ------------
Loss before income taxes........ (38,697) (3,858) (27,905) (70,460)
Provision for income taxes...... 28 1 29
------------ ----------- ----------- ------------
Net loss........................ $ (38,725) $ (3,859) (27,905) $ (70,489)
============ =========== =========== ============
HISTORICAL HISTORICAL PRO FORMA
------------ ----------- ------------
Basic and diluted net loss per
common share.................. $ (1.77) $ (0.58) $ (2.02)
Weighted average number of
common shares outstanding..... 21,909,456 6,604,119 34,968,247
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
70
80
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) To record the issuance of 13,058,791 shares of common stock of Uproar
in exchange for iwin's common stock and preferred stock, as if the
merger occurred on June 30, 2000. The actual adjustment will be
determined at the effective date of the merger based on the actual
number of shares of iwin's common stock and preferred stock outstanding
at such date. As of June 30, 2000 Uproar had 28,020,609 shares of
common stock outstanding. As of August 23, 2000 iwin had 7,193,189 and
8,525,692 shares of common and preferred stock outstanding,
respectively. Each share of iwin preferred stock automatically converts
into one share of iwin common stock immediately prior to the merger.
Based on the estimated exchange ratio of 0.83 Uproar shares of common
stock for each iwin share of common stock, it is estimated that
13,058,791 share of Uproar common stock will be issued in the merger.
Accordingly, on a pro forma basis, Uproar will have 41,079,400 shares
of common stock outstanding. The calculation of the purchase price and
preliminary allocation to the net assets of iwin were determined as
follows and are used for illustrative pro forma purposes only:
Calculation of estimated purchase price:
Shares of common stock of Uproar to be issued in exchange
for iwin shares........................................... 13,058,791
Average share price of Uproar common stock at the time of
the merger announcement................................... $ 6.6375
-----------
Fair value of estimated common stock to be issued........... $86,677,725
Fair value of iwin options to be assumed (see note 7)....... 10,672,510
Intrinsic value of unvested options (recorded as deferred
compensation)............................................. (1,947,985)
Estimated merger costs...................................... 1,100,000
-----------
Estimated purchase price.................................... $96,502,250
-----------
Preliminary allocation of purchase price:
Net book value of iwin's pro forma net assets............... $14,246,744
-----------
Goodwill and other intangibles.............................. 82,255,506
-----------
$96,502,250
===========
(2) To record amortization of deferred compensation of $243,498 for the six
months ended June 30, 2000.
(3) To record amortization of deferred compensation of $486,996 for the
year ended December 31, 1999.
(4) To record amortization of goodwill and other intangibles related to the
merger of $82,255,506 over three years ($13,709,251 for six months).
(5) To record amortization of goodwill and other intangibles related to the
merger of $82,255,506 over three years ($27,418,502 per year).
(6) To record the payment of receivables from stockholders in accordance
with the acquisition agreement.
(7) Upon the closing of the merger, the outstanding options and warrants to
purchase iwin common stock will be assumed by Uproar. As of August 23,
2000, iwin had 2,208,848 options and warrants outstanding which, based
on the estimated exchange ratio of .8308, will be converted into
options and warrants to purchase approximately 1,835,000 shares of
Uproar common stock. The estimated fair value of these options and
warrants has been included as part of the purchase price, excluding the
intrinsic value of the non-vested portion of the options allocated to
deferred compensation.
71
81
DESCRIPTION OF UPROAR
BUSINESS
OVERVIEW
Uproar is a leading online entertainment destination. Through our network
of Web sites, we provide online game shows and interactive single and
multi-player games that appeal to a broad audience. Our registered users have
grown to 8.3 million in June 2000. Our unique user audience has similarly grown
to 5.8 million in June 2000. Our sites are "sticky", which means that our users
consistently spend significantly more time per visit on our sites than the
industry average. According to Media Metrix, an Internet audience measurement
service, we ranked among the top ten stickiest consolidated networks of Web
sites in June 2000, as measured by average minutes spent per usage day.
We derive substantially all of our revenues from the sale of advertising on
our network of Web sites. We believe that our large user base and the stickiness
of our sites provide advertisers with a highly attractive platform to reach
their target audience. As a result, the number of advertisers and sponsors on
our network has grown from 99 as of December 1998 to 247 as of June 30, 2000.
Similarly, the number of advertising impressions served over our Web sites
increased from 70.7 million in December 1998 to 563 million in June 2000.
INDUSTRY BACKGROUND
THE INTERNET
The Internet has emerged as a mass communications and commerce medium that
millions of people worldwide use to share information, communicate and conduct
business electronically. IDC, a market research firm, estimates that the number
of Internet users worldwide will grow from 159 million in 1998 to 502 million by
the end of 2003. The relatively lower costs of publishing content on the
Internet and the availability of powerful new tools for the development and
distribution of content have led to its rapid growth.
INTERNET ADVERTISING
The Internet has also become an attractive medium for advertisers.
According to Forrester Research, Internet advertising spending worldwide will
increase from $3.3 billion in 1999 to $33.0 billion by 2004.
The unique interactive nature of the Internet allows advertisers to:
- reach broad global audiences from anywhere in the world;
- gather demographic information and target their messages to specific
groups of consumers;
- change their advertisements frequently in response to market factors,
current events and consumer feedback; and
- more accurately track the effectiveness of their advertising messages.
THE UPROAR OPPORTUNITY
As a result of the growing popularity of the Internet, an increasing number
of users are looking beyond traditional media, such as radio and television, to
the Internet as a source of entertainment.
Game shows are among the most popular and long-lived programs on television
in both the United States and worldwide. They were among the first entertainment
formats to be successfully adapted to television from radio. Moreover, new game
shows are frequently developed and introduced in order to capitalize on the
popularity of the format and to draw larger audiences to television. We believe
that television game shows consistently are among the most popular syndicated
television programs.
Games and game shows are particularly well suited for online entertainment
content, especially with the development of higher bandwidth distribution
channels, and can be easily adapted to the Internet. We believe
72
82
that online games and game shows are a compelling entertainment medium for a
mass user audience because they:
- provide users with an opportunity to win prizes;
- allow users to access entertaining content according to their own
schedule from any location; and
- enable users to participate interactively in the games and game shows and
to compete against other users.
Despite the opportunity presented by the widespread adoption of the
Internet as a medium for delivering entertainment content to a growing user
base, only a limited number of Web sites are currently dedicated to providing a
broad array of fun and challenging interactive entertainment. We believe that we
can grow our revenues by leveraging our large audience and our engaging content
through targeting our advertising placement to specific demographics within our
audience in order to attract more advertisers to our network and derive higher
impression-based, click-based and opt-in email-based revenues.
THE UPROAR NETWORK
We are a leading online entertainment destination. Through our network of
Web sites, we provide online game shows and interactive single- and multi-player
games that appeal to a broad audience, as well as a free lottery. With our
recent acquisition of ibetcha.com, we also offer users the opportunity to
predict the outcome of real-world events for a chance to win prizes. As a
result, our registered users have grown to 8.3 million in December 1999. Our
unique user audience has similarly grown to 5.8 million in June 2000. Due to the
engaging nature of our game shows and interactive games, our sites are "sticky",
which means that our users consistently spend significantly more time per visit
on our sites than the industry average. According to Media Metrix, we ranked
among the top ten stickiest consolidated networks of Web sites in June 2000, as
measured by average minutes spent per usage day. Our network consists of the
following Web sites:
- - uproar.com - uproar.co.uk - gamescene.com
- - UproarLotto.com - uproar.de - amused.com
- - ibetcha.com - euro.uproar.com
We believe that our success in attracting users and advertisers to date has
been due to a number of factors, including the following:
OUR ENGAGING ONLINE GAME SHOWS AND INTERACTIVE GAMES
We are committed to providing our user audience with a variety of engaging
game shows and interactive games. We are focused on creating formats that we
believe will have lasting appeal to a broad-based audience and on adapting to
the Internet formats which have proven appeal in other media. We currently
provide our audience with 9 multi-user games, 36 single-user arcade games and 6
daily puzzles. We recently launched UproarLotto.com, our free online lottery
offering users a daily chance to win $1,000,000. Pursuant to our agreement with
Pearson Television, a leading provider of syndicated television game shows, we
have exclusive English-language rights to create online versions of Pearson
properties, including Family Feud, Match Game, 100% and To Tell the Truth. Both
Family Feud and 100% are already available on the Uproar network and have proven
to be popular. Our users frequently spend more time on our sites than on a
typical Web site. We believe the length of time spent by users on our site is
evidence of the engaging nature of our game and game show formats and is highly
appealing to our advertising customers.
OUR LARGE AUDIENCE OF REGISTERED USERS WITH TARGETABLE DEMOGRAPHICS
As a result of the mass appeal of our games and game shows, our database of
registered users has grown to approximately 8.3 million people as of June 30,
2000. We believe that our broad user base is comprised of a cross section of the
general population visiting the Web. We design our Web properties to attract
specific demographic profiles desired by online advertisers. For example, our
ibetcha.com site attracts an audience that is primarily male, whereas Picture
This attracts a predominately female audience. We expend a substantial
73
83
amount of time and resources to better understand the demographics of our
audience. For example, to receive prizes, contestants must register and provide
us with detailed demographic information. We are able to use this registration
information to select which advertising will be shown to each individual player
during a game. We believe these are important factors in attracting advertisers
to our Web sites and improving our ability to generate advertising revenues.
OUR COST-EFFECTIVE CUSTOMER ACQUISITION STRATEGY AND BROAD DISTRIBUTION CHANNEL
We have developed a cost-effective channel for the distribution of our game
shows and games. Our distribution channel consists of:
- promotional agreements with prominent, high-traffic Web sites;
- affiliate arrangements with other Web sites; and
- our relationships with Pearson and Cable & Wireless.
We have entered into promotional agreements with high-traffic Web sites in
order to expand and diversify our user base. Currently, we have an agreement
with Excite, Inc. whereby Excite promotes Uproar properties in the game and
entertainment area of Excite's Web site for a fee. We also promote the Uproar
network by purchasing significant amounts of online advertising on other leading
Web sites.
We also distribute our single player game content to a variety of Web sites
through our affiliate program in order to reach as wide an audience as possible.
Under this program, Uproar-branded games are delivered to third-party affiliates
and made available on their Web sites free of charge. We typically pay a small
referral fee to affiliate sites for each registered user we obtain through their
sites. This arrangement provides us with a cost-efficient means of increasing
our registered user base by expanding our reach across the Internet. Our
affiliate network has grown from approximately 15,200 members as of December 31,
1998 to approximately 40,500 members as of June 30, 2000.
As part of our strategic relationship with Pearson, our site uproar.com is
actively promoted to Pearson's television audience through promotional spots and
in-show exposure. We have also entered into a relationship with Cable & Wireless
under which we will provide content for its developing digital television cable
network in the United Kingdom.
OUR TECHNOLOGY PLATFORM
We believe that our technology platform is integral to providing our
audience with a rich and engaging entertainment experience. As a result, we have
made and expect to continue to make significant investments in developing and
implementing a technology platform to support our interactive multi-user game
shows and games. We believe that our Web sites are among the few in the world
that enable very large numbers of users to simultaneously play interactive
multi-player games and game shows. We believe that our technology platform is
critical to maintaining the entertaining and engaging nature of our content.
Moreover, we have designed our technology platform to accommodate our growing
base of users and to take advantage of emerging technology trends such as
alternative access devices, interactive television platforms and broadband
distribution services.
OUR STRATEGY
Our objective is to be the leading online entertainment destination. We
believe we can achieve this objective through the following strategies:
ENHANCING OUR CONTENT
We will seek to enhance our network by adding other entertainment formats
in addition to games and game shows that have proven their appeal to a broad
audience in traditional media. We believe that providing our users with a richer
and more compelling entertainment experience is critical to our future success
as more people turn to the Internet as a medium for entertainment. For example,
the "lottery" concept has a
74
84
demonstrated mass-audience appeal, and in July 2000, we added UproarLotto.com, a
free online lottery site, to our network. Users of UproarLotto.com are offered a
daily chance to win $1,000,000 by successfully picking seven numbers out of a
randomly selected set of fifty. Although the site is free to users, we generate
performance-based cost-per-click advertising revenue from each entry made. In
August 2000, we acquired ibetcha.com, a site where users predict the outcome of
real-world events for a chance to win prizes. ibetcha.com attracts a primarily
male demographic and represents a further expansion of our overall content base.
In addition, we intend to continue to enhance our content by improving our
existing, and creating new, games and game shows. For example, in 1999 we
introduced online versions of two popular television game shows, Family Feud and
100%. We recently added Video Poker, a multiplayer game that mimics the play of
video poker commonly found in casinos but is free to play. In 2000, we intend to
launch an online version of another popular game show, To Tell the Truth. We
believe that by enhancing our game and game show content, we will:
- further differentiate our brand from competing sites;
- provide users with a more comprehensive and satisfying entertainment
experience;
- attract a broader audience to our Web sites; and
- induce our users to visit our sites more often and remain there longer.
AGGRESSIVELY EXPANDING OUR USER AUDIENCE
We intend to continue to aggressively expand our user base by promoting our
brand name. We believe that establishing a readily recognizable brand name is
critical to attracting a larger user base and deriving additional advertising
revenues. We intend to continue to build our brand through:
- extensive Internet advertising;
- additional promotional and syndication opportunities;
- public relations programs; and
- new strategic alliances.
We also intend to continue to pursue additional affiliate opportunities to
further expand our user base more cost-effectively. We have developed a number
of our games for distribution through our affiliate program. We intend to seek
similar opportunities continually in order to enlarge the community of Internet
users that visit our Web site for entertainment and to increase our revenue
opportunities.
FURTHER MONETIZING OUR AUDIENCE AND BUILDING ADDITIONAL REVENUE STREAMS
Our large and growing user base provides us with a platform from which we
can derive additional revenues. We intend to capitalize on our ability to target
our advertising placement to specific demographics within our large audience of
users in order to attract more advertisers to our network and to derive higher
costs per thousand impressions, or CPMs, and, consequently, higher revenues. We
also intend to emphasize cost-per-click advertising revenues derived from
certain Uproar properties such as UproarLotto.com and to generate revenues
through opt-in email campaigns. In addition, we intend to significantly expand
our sales and marketing efforts by hiring additional sales and marketing
personnel to reach a larger base of advertisers and sponsors.
CAPITALIZING ON THE POPULARITY OF OUR PRIZEPOINT REWARDS PROGRAM
Our PrizePoint program rewards our users with points earned by playing
online games. Our users can enter their points into a drawing for prizes. The
more points a player enters into a drawing, the greater his or her chances of
winning a prize. We believe that the PrizePoint and similar programs
significantly enhance the entertainment value of our games and game shows by
enabling our users to compete to win points. Moreover,
75
85
in order to be eligible to receive prizes awarded under the program, our users
must complete an online registration form that allows us to better measure the
demographics of our user audience and to provide our advertisers with targeted
advertising opportunities.
CONTINUING TO EXPAND INTERNATIONALLY
We believe that our games and game shows will be popular in international
markets. In December 1998, we launched our local Web site in Germany in
cooperation with Bertelsmann, a leading German media company, which features
game shows and puzzles in German. We also own and operate a Web site designed
for the United Kingdom market. In February 1998, we launched our
euro.uproar.com, which provides game content in 14 languages. Combined, these
sites provide local language content in a number of European countries,
including Austria, Belgium, Denmark, Holland, Finland, France, Germany, Italy,
Luxembourg, Norway, Portugal, Spain, Switzerland and Sweden.
We are party to an exclusive distribution and co-branding agreement with
Telefonica Interactiva, a leading provider of Internet access and local content
and services in the Spanish- and Portuguese-speaking world. Under the agreement,
our co-branded site is the exclusive game content provider of the Telefonica
site, including the Terra Network sites. The agreement runs through September
29, 2002 and provides for the payment of certain minimum fees to us. We believe
that our relationship with Telefonica provides us with a unique opportunity to
expand into the Spanish- and Portuguese-speaking markets, including Spain,
Brazil, Mexico, Chile and Peru.
We believe that introducing localized versions of our games and game shows
will provide us with many of the same opportunities for revenue as those in the
United States. We intend to continue to create localized games and game shows in
international markets.
PURSUING STRATEGIC ACQUISITIONS
We plan to continue to expand our user base, revenues and competitive
position through strategic acquisitions. In 1999, we acquired PrizePoint
Entertainment Corporation, which offers single-player games of skill and chance
in which players compete to win points that can be entered into drawings for
prizes. In July 2000, we signed a definitive agreement to acquire iwin.com,
Inc., a leading game and prize site on the Internet. In August 2000, we
completed the acquisition of Take Aim Holdings Ltd., the parent company of
ibetcha.com Inc., which operates ibetcha.com, a Web site that allows users to
predict the outcome of real-world events for a chance to win prizes. We issued
approximately 1.33 million shares of common stock in the acquisition of Take Aim
Holdings.
We believe that these acquisitions significantly enhanced our presence in
our markets and enable us to reach a broader base of users and advertisers. We
intend to aggressively seek other opportunities to acquire companies that will
complement our network.
ALLIANCES AND STRATEGIC RELATIONSHIPS
We have entered into a number of contracts that forge alliances and
strategic relationships designed to enhance and expand our brand name, promote
our Web sites, provide us with high quality, brand-identified new content and
create new revenue opportunities. These agreements are summarized below.
Pearson Television, Inc. We entered an agreement with Pearson Television
in January 1999 that provided us with exclusive rights to create and produce
English-language online versions of certain game shows owned by Pearson. In July
2000, we amended and restated the agreement to extend the term through June
2005. Under the amended and restated agreement, the games licensed by Uproar
include Family Feud, Match Game, 100% and To Tell the Truth. For the term of the
agreement, Pearson will provide advertising and promotion for uproar.com on the
United States syndicated versions of these games, consisting of:
- inclusion of a 10-second commercial at the end of each of the television
game shows;
- mention of uproar.com at the close of each television program;
76
86
- inclusion of uproar.com in the closing credits of each of the television
programs; and
- inclusion of uproar.com in all written sales materials, press
advertising, press kits and media guides.
In 1999, we introduced online versions of Family Feud and 100%. In 2000, we
intend to launch an online version of To Tell the Truth.
We issued Pearson 2,000,000 shares in January 1999 in exchange for the
rights to its online games, $8.0 million in advertising services and $124,599 in
cash. The value of the shares we issued to Pearson was $24.8 million. We
recorded the $16.7 million difference between the market value of the shares
issued and the fair value of the advertising services and cash received as an
intangible asset on our balance sheet which will be amortized over the 33-month
life of the agreement. As part of our agreement with Pearson, we have guaranteed
minimum royalty payments per broadcast year for each of the Internet games,
ranging from $150,000 for certain games in the year ending June 30, 2001 to
$900,000 for certain games in the year ending June 30, 2005. In the event that
one or more of these games is not financially successful for us, we still are
obligated to make these minimum royalty payments to Pearson.
Telefonica Interactiva. In September 1999, we entered into an exclusive
distribution and co-branding agreement with Telefonica Interactiva, a leading
provider of Internet access and local-language content and services in the
Spanish- and Portuguese-speaking world. Under the agreement, a co-branded
Spanish and Portuguese site will be the exclusive game content provider on the
Telefonica Web site including the Terra Network sites. In addition, Telefonica
plans to incorporate our PrizePoint rewards program into our co-branded site, as
well as its offline activities. We believe that our agreement with Telefonica
significantly enhances our international presence by expanding our reach into
the Spanish- and Portuguese-speaking markets served by Telefonica, including
Spain, Brazil, Mexico, Chile and Peru.
To date, revenues generated in connection with the Telefonica deal consist
of fees paid to us by Telefonica for our obligation to work exclusively with
Telefonica in the Spanish- and Portuguese-language markets, and for Telefonica's
right to use our name in connection with the launch of its portal services.
These fees will total $2.9 million over 3 years to be paid quarterly, including
an aggregate of $500,000 in the first year, $800,000 in the second year and
$1,600,000 in the final year. Telefonica is also required to pay a portion of
the net advertising and sponsorship revenue generated by our products
distributed within their service during the term of the agreement. Advertising
revenue will be recognized for Uproar's share of advertising and sponsorship
revenue during the period in which the advertising is delivered.
Cable & Wireless Communications. Pursuant to an agreement with Cable &
Wireless Communications, we developed custom multi-player games for the Cable &
Wireless interactive digital television network that was launched in the United
Kingdom in October 1999. The agreement was signed in December 1998 and is in
effect for a period of three years. We expect to create a number of new games
during the term of this agreement. We share the net revenues generated by the
games with Cable & Wireless.
We pay an annual subscription fee to Cable & Wireless for this service. In
addition, we will pay Cable & Wireless a percentage of the net advertising
revenue our products generate on its service.
CNN. In September 1998, we entered an agreement with CNN to produce
co-branded trivia games that are distributed on cnn.com. We update the games
daily with questions based on current news and events. CNN promotes the games
with links from its home page, and receives a small referral fee from Uproar for
each new registered user the games generate. The agreement is currently on a
month-to-month basis.
Trans Cosmos USA, Inc. In February 2000, we sold 1,265,372 shares of our
common stock to Trans Cosmos USA, Inc. for approximately $25.0 million.
Approximately $63,000 of the net proceeds was allocated to common stock and the
remainder, or approximately $24,937,000, was added to additional paid-in
capital. We intend to establish a joint venture with Trans Cosmos to produce a
local language version of Uproar properties in Japan. Under the proposed terms
of the agreement, we would contribute our intellectual property to the joint
venture along with $500,000 in cash, and Trans Cosmos would contribute $4.5
million in cash. In addition, we would receive an annual license fee from the
joint venture.
77
87
GAME AND GAME SHOW PROGRAMMING
We launched uproar.com, our flagship entertainment site for the United
States market in September 1997. Since then, we have been focused on expanding
the offerings available on our site with programming designed to appeal to broad
audiences and encourage them to remain on the site for longer periods of time
than users typically spend on other Internet sites. We believe that our site
provides an attractive platform for our advertisers to reach their desired
target demographics. Media Metrix reported that approximately 5.8 million unique
users visited our consolidated network of Web sites in June 2000. The median age
of these visitors was 37, of whom 42.5% were male and 57.5% were female.
In December 1999, we began introducing our PrizePoint incentive currency.
We believe PrizePoints improve our ability to attract, retain and monetize a
growing Internet audience. The following is a description of some of the
available programming on our network of Web sites.
MULTI PLAYER GAMES
Family Feud is a game produced by us under license from Pearson Television
and is designed to replicate many of the elements of the popular television game
show bearing the same name. We launched Family Feud in December 1999. The game
integrates graphics and sounds that are reminiscent of the television show.
Players are given the opportunity to match their responses to questions against
those provided by survey respondents. Players compete to be listed on a leader
board and are ultimately rewarded for accurate responses with PrizePoints.
100% is another game produced by Uproar under license from Pearson
Television and is also designed to replicate many of the elements of the
television game show. We launched 100% in April 1999. Players answer as many
trivia questions correctly as possible in three rounds of 10 questions. In each
game, players are divided into groups of up to 10 players each. The player who
gets the highest percentage of correct answers in his or her group earns an
entry into the hourly prize drawing. Additionally, the top 10 players overall
for each game earn a bonus entry into the hourly drawing.
Bingo Blitz is our version of the classic bingo game. Bingo Blitz allows
participants to compete against thousands of other players for prizes. Each
player is provided with three bingo cards to mark. The first player to submit a
card with the correct pattern covered wins a prize. Prizes range in value from
$2.00 to $25.00. We believe that the game's animated graphics and the user's
ability to earn prizes further enhance its entertainment value.
Blow Out Bingo is a variation of bingo in which the prize offered is
progressively increased after each game that does not have a winner. As the
prize grows, it tends to attract additional players. Once we award a winner, the
prize is returned to its starting amount and the process starts again.
Premier Bingo is another variation of bingo in which different prizes are
offered depending on the ball in the sequence in which a winner achieves bingo.
The earlier in the game a player achieves bingo, the more valuable the prize.
There are five variations of Premier Bingo with prizes falling in specific
categories: finance, home and family, computers, travel and consumer
electronics. We believe that each form of Premier Bingo attracts a different
user demographic. We therefore target advertising based on the type of Premier
Bingo a user is playing.
Puzzle A-Go-Go is a version of the popular game, "hangman," which has been
enhanced for multi-player competition. This game show format was launched in
December 1997. Players compete in groups of three in real time to guess letters
in a hidden phrase. The first player to identify the phrase wins the game.
Winners are eligible for prizes that are typically given away each hour.
Picture This is a game combining popular culture trivia and images of
celebrities. Participants compete against one another in groups of five within a
virtual living room. As players answer questions, portions of a celebrity's
image are gradually revealed. The first player to correctly identify the name of
the celebrity wins. Picture This was originally launched in December 1997 as a
co-branded and co-promoted product with People Magazine. Currently, we
exclusively own and operate the game show for an unlimited duration.
78
88
Trivia Free For All is a simple trivia game and was launched in August 1996
under the original name of Cosmo's Conundrum. The object of Trivia Free For All
is to get more trivia questions right than the other players in the game. The
faster a player answers, the more points he gets. The more points a player
earns, the better his or her chances of winning an hourly cash drawing. There
are 10 trivia questions per game. The questions are selected from seven
categories -- Entertainment, Sports, Geography, Culture, Science & Technology,
History, Fine Arts -- and are assigned random point values from 500 to 5000
points.
Team Trivia is a variation on Trivia Free For All in which players are on
one of two teams and all the questions relate to sports. Answering questions
correctly earns points for the players and their teams. The more points, the
more passes the player has for hourly drawings of $5.00.
Video Poker is a multiplayer game that mimics the play of video poker
commonly found in casinos but is free to play. Depending on the poker hand that
you are dealt, you have the chance to win from $25 to $5,000. Video Poker has
proven to be very popular among our users.
SINGLE PLAYER GAMES
We publish a wide selection of single-user games designed to provide an
alternative to our multi-user games and enhance the overall scope of
entertainment that we provide to our users. As of June 30, 2000, there were 36
different single-user and arcade games and 6 daily puzzles available on our Web
sites. We create, develop, and own most of these games, while we license others
from third parties. We license 12 games from the Clevermedia Network that we
publish on our site gamescene.com.
HUMOR
Amused.com is a site featuring humor, entertainment and links to
third-party Web sites. Subtitled the Center for the Easily Amused, CNN has
referred to it as the "ultimate guide to wasting time." Amused.com features chat
rooms, trivia, and online anecdotes, some of which are contributed by the
visitors to the site. This site is designed to attract a younger audience than
our other sites, and we believe it offers advertisers an opportunity to target
teens and college students.
AFFILIATE PROGRAMMING
We launched Trivia Blitz in August 1997 as a game to be distributed by
third-party Web sites. Approximately 40,500 sites have joined our affiliate
network. Trivia Blitz promotes the Uproar brand and attracts new players to our
sites. We publish a variety of Trivia Blitz games with editorial content in
subjects including general trivia, sports, popular music, and current news and
events. We also publish Trivia Blitz games in Spanish, German, Danish, and
Italian to serve some of our international markets. Players that do well in the
Trivia Blitz games are encouraged to register with us in order to qualify for
prize drawings. If a player registers, we pay the affiliate partner a small
referral fee, which serves as a revenue source for the partner. We believe our
affiliate program offers third-party Web sites an attractive combination of
engaging content and a revenue opportunity, while providing us with registered
users at low cost.
PRIZEPOINTS
Players earn points called "PrizePoints" on our uproar.com sites. Players
can accumulate PrizePoints over time and use them to enter drawings to win
prizes and cash. The larger the number of PrizePoints that a player enters into
a particular drawing, the greater the player's chances of winning the drawing.
We consider PrizePoints an incentive currency in a manner that is similar to
airline frequent flyer points. Uproar players have an incentive to earn, collect
and accumulate PrizePoints. We believe that our users consistently return to our
sites to try to accumulate additional PrizePoints. In addition, we can alter the
rate at which PrizePoints are awarded to encourage behavior on our sites that
improves the commercial performance of the site.
79
89
INTERNATIONAL PROGRAMMING
Uproar.co.uk is our Web site for the United Kingdom market. Launched in
September 1997, the Web site offers sites that are essentially the same as our
United States site, but the content is selected with consideration for United
Kingdom cultural and language differences. As in the United States, players
compete in a variety of game shows for fun and cash prizes.
Uproar.de, our German language site, was launched in December 1998 in
cooperation with Bertelsmann. This relationship allowed us to expand rapidly
into the German market. Today, we independently own and operate uproar.de.
Uproar.de features the multi-player game shows Mission Brain Attack and Berd's
Burd plus three versions of the Trivia Blitz application. The games are designed
to match the cultural and language requirements of the German-language audience.
Euro.uproar.com offers Bingo Blitz in 11 languages and offers our audience
the opportunity to play against a worldwide player base.
ADVERTISING SALES
As of June 30, 2000, we had a sales organization of 42 professionals in the
United States and 2 professionals in the United Kingdom.
SALES ORGANIZATION
Our sales organization is dedicated to maintaining close relationships with
top advertisers and leading advertising agencies. It is structured on a regional
basis and is focused solely on selling advertising on our Web sites. Our sales
organization consults regularly with advertisers and agencies on design and
placement of their Web-based advertising, provides customers with advertising
measurement analysis and focuses on providing a high level of customer service
satisfaction.
ADVERTISING PROGRAMS AND PRODUCTS
Currently, we enter into agreements with our advertisers and advertising
agencies under which they pay for a guaranteed number of impressions for a fixed
fee. These agreements range from one month to one year. Advertising on our Web
sites currently consists primarily of banner-style advertisements, buttons and
sponsorships from which viewers can connect directly to the advertiser's own Web
site. Our standard cost per thousand impressions, or CPMs, for banner
advertisements varies depending on the location of the advertisements on the
site and the extent to which the advertisements are targeted to a particular
audience.
We also offer our advertising customers other direct marketing and
advertising solutions in order to build brand awareness, generate leads and
drive traffic to an advertiser's site. These include newsletter sponsorships,
opt-in electronic mail programs under which users must affirmatively check a box
to indicate interest, and fixed-fee game sponsorships.
ADVERTISERS
We had 247 advertisers and sponsors on our Web sites during the six months
ended June 30, 2000. The following is a selected list of our current advertising
customers, which are representative of our customer base:
MyPoints Zing Sears
Forward Slash LuckySurf Proctor & Gamble
Casino-on-Net WebMD United Airlines
These advertisers, in the aggregate, accounted for approximately 37.8% of
our total revenues in the six months ended June 30, 2000.
80
90
MARKETING AND BRAND AWARENESS
We use print and Web-based advertising in order to:
- build our brand;
- increase traffic to our Internet properties; and
- raise our profile among potential advertisers.
TECHNOLOGY AND INFRASTRUCTURE
We maintain a 56-member technical staff in New York. This technical staff
is responsible for developing our Web sites and game programming and for
managing the distribution of our content through our domestic Web sites. We also
maintain a 37-member technical staff in Budapest, Hungary. The Budapest
technical team is responsible for providing international support for our
content, as well as developing country-specific content and managing the
technical infrastructure for our U.S. and international Web sites. As a result
of our acquisition of ibetcha.com, we also maintain a 41-member staff in Tel
Aviv, Israel. In addition, we contract development and operational functions
associated with the UproarLotto.com site to Mainstream, Inc., a development
consulting firm in Manchester, New Hampshire.
Our technical staff strives to create a comfortable and compelling user
experience for as large an audience of visitors as possible. This involves
developing reliable, secure, and scalable Web sites using industry-standard
technologies. Our game content and certain elements of our server systems use
the Java programming language. We also make extensive use of Microsoft Web
server technology, as well as the Windows NT Server operating system.
Some of our most popular interactive games involve simultaneous,
multi-player activity. In order to create a seamless user experience in this
type of environment, we have developed a highly scalable, distributed server
system capable of delivering real time interactivity between a large number of
simultaneous users in a multi-player environment.
Our business is based on the delivery of banner advertising within pages
viewed by users of our Web sites and our advertising customers require timely
and accurate reporting of actual advertising delivered on our sites. We have
contracted with DoubleClick, Inc. to serve our advertising and provide the
corresponding reporting.
We distribute our programming from data centers in Boston, New York City
and London. We are currently expanding our data center operations to include a
facility in California. Our domestic data centers are operated at facilities
provided by Level 3 Communications, Digital Telemedia and Verio Inc. Our data
center in London is operated at facilities provided by PSI Net.
COMPETITION
Many companies provide Web sites targeted to audiences seeking various
forms of entertainment content. We compete with all of these companies for
visitor traffic and advertising dollars. This competition is intense and is
expected to increase significantly in the future as the number of
entertainment-orientated Web sites continues to grow. We believe that our
competitive advantage to date has been largely dependent upon:
- the perceived value of our content relative to other available
entertainment alternatives, both online and elsewhere; and
- the fact that we are one of the few online entertainment properties
capable of delivering real time interactivity between a large number of
simultaneous users.
We continue to pursue developing advantages over our competition based on
the quality of our products, the effectiveness of our marketing programs and the
continuous development of the Uproar brand.
81
91
Our primary direct competitors for online game shows and similar
entertainment include:
- FreeLotto.com;
- Gamesville/Lycos;
- LuckySurf.com;
- Mplayer.com;
- Pogo.com;
- Sandbox.com;
- Station.Sony.com; and
- Zone.com.
Some of our competitors maintain game show style formats similar to those
offered by us. Sony Station, for example, currently has the exclusive right to
the online versions of the television game shows Jeopardy and Wheel of Fortune
and the board game Trivial Pursuit. Other competitors primarily offer "extreme"
games similar to many arcade and video games. We do not actively participate in
that segment of the market. Many competitors offer a wide variety of online
single-player games.
We also compete indirectly with many providers of content and services over
the Internet, including search engines and entertainment content sites. In
addition, we compete with traditional forms of media, like newspapers,
magazines, radio and television for advertisers and advertising revenue. If
advertisers perceive the Internet or our Web site to be a limited or an
ineffective advertising medium, they may be reluctant to devote a portion of
their advertising budget to our Web sites.
The online entertainment market does not have substantial barriers to
entry. Increased competition could result in:
- lower advertising rates;
- price reductions and lower profit margins;
- loss of visitors;
- reduced ad impressions; and
- loss of market share.
GOVERNMENT REGULATION AND LEGAL ENVIRONMENT
General. There are an increasing number of laws and regulations pertaining
to the Internet. In addition, a number of legislative and regulatory proposals
are under consideration by federal, state, local and foreign governments and
agencies. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, online content regulation, user privacy, taxation and quality of
products and services. Moreover, the applicability to the Internet of existing
laws governing issues such as intellectual property ownership and infringement,
copyright, trademark, trade secret, obscenity, libel, employment and personal
privacy is uncertain and developing. Any new legislation or regulation, or the
application or interpretation of existing laws, may decrease the growth in the
use of the Internet, which could in turn decrease the demand for our services,
increase our cost of doing business or otherwise have a material adverse effect
on our business, results of operations and financial condition.
Liability for Information Retrieved from Our Web sites and from the
Internet. Content may be accessed on any of our Web sites or on the Web sites
of our affiliates, and this content may be downloaded by users and subsequently
transmitted to others over the Internet. This could result in claims against us
based on a variety of theories, including defamation, obscenity, negligence,
copyright or trademark infringement or other theories based on the nature,
publication and distribution of this content. These types of claims have been
brought, sometimes successfully, against providers of Internet services in the
past. We could also be exposed to liability
82
92
with respect to third-party content that may be posted by users in chat rooms
offered on our Web sites. It is also possible that if any information provided
on our Web sites contains errors or false or misleading information, third
parties could make claims against us for losses incurred in reliance on such
information. Our sites contain numerous links to other Web sites. As a result,
we may be subject to claims alleging that, by directly or indirectly providing
links to other Web sites, we are liable for copyright or trademark infringement
or the wrongful actions of third parties through their respective Web sites.
The Communications Decency Act of 1996, or CDA, was enacted in the United
States to prohibit the transmission over the Internet of indecent, obscene or
offensive content. Although selected parts of the CDA have been deemed
unconstitutional, provisions protecting providers of Internet services from
claims related to third-party content remain effective. Under the CDA, a
provider of Internet services will generally not be treated as a publisher or
speaker of any information available on its service but provided by a
third-party content provider unless the provider of Internet services exerts
editorial control over the content or embraces the content as its own. Our
activities may not permit us, in every instance, to take advantage of this safe
harbor provision. Although we attempt to reduce our exposure to this potential
liability through, among other things, provisions in our affiliate agreements,
user policies and disclaimers, the enforceability and effectiveness of such
measures are uncertain.
Our general liability insurance may not cover all potential claims to which
we are exposed and may not be adequate to indemnify us for all liability that
may be imposed. Any imposition of liability that is not covered by insurance or
is in excess of insurance coverage could have a material adverse effect on our
business, results of operations and financial condition. Even to the extent that
these claims do not result in liability to Uproar, we could incur significant
costs in investigating and defending against these claims. Potential liability
for information disseminated through our Web sites could lead us to implement
measures to reduce its exposure to such liability, which may require the
expenditure of substantial resources and limit the attractiveness of our service
to users.
Online Content Regulations. Several United States federal and state
statutes prohibit the transmission of indecent, obscene or offensive content
over the Internet to particular groups of persons. The enforcement of these
statutes and initiatives, and any future enforcement activities, statutes and
initiatives, may result in limitations on the type of content and advertisements
available on our Web sites. Legislation regulating online content could dampen
the growth in use of the Internet generally and decrease the acceptance of the
Internet as an advertising and electronic commerce medium.
Legislation Prohibiting Online Gambling. Congress is currently considering
legislation that seeks to ban Internet gambling activities. One pending bill has
already been approved by the Senate and would prohibit a gambling-related
business from using the Internet to facilitate wagering. If enacted into law in
its current form, the bill would likely subject those who display advertising
for unlawful Internet gambling sites to criminal penalties. We do not engage in
gambling activities ourselves but we do accept advertising from online gambling
sites. For the year ended December 31, 1999, approximately 14.5% of our revenues
were derived from gambling sites. If these sites are outlawed or substantially
curtailed, our business could suffer. The pending legislation may impose
liability on United States companies that are deemed to assist in the operation
of offshore illegal gambling sites. If Congress ultimately passes this
legislation in a form that prohibits us from accepting advertising from gambling
sites, we would take all reasonable measures to comply with the legislation and
our advertising revenues would decline.
Regulation of Sponsors of Contests and Sweepstakes. Contests and games of
chance are subject to the gambling, lottery and disclosure laws of various
jurisdictions in which we offer our contests and games. Although we have been
advised by counsel that our contests and games are in compliance with the laws
of all jurisdictions in which we offer them, the laws or the way they are
interpreted and enforced may change from market to market. A game sponsor, for
example, cannot require the consumer to make a payment, buy its product or
provide a substantial benefit, collectively called "consideration," as a
condition of entering its game of chance, or in some instances, its contest of
skill. If consideration were interpreted differently in a particular
jurisdiction, we may find it necessary to eliminate, modify or cancel components
of our products that could result in additional development costs and/or the
possible loss of revenue.
83
93
PRIVACY CONCERNS
The United States Federal Trade Commission, or FTC, is considering adopting
regulations regarding the collection and use of personal identifying information
obtained from individuals when accessing Web sites, with particular emphasis on
access by minors. These regulations may include requirements that companies
establish procedures to, among other things:
- give adequate notice to consumers regarding information collection and
disclosure practices;
- provide consumers with the ability to have personal identifying
information deleted from a company's database;
- provide consumers with access to their personal information and with the
ability to rectify inaccurate information;
- clearly identify affiliations or a lack thereof with third parties that
may collect information or sponsor activities on a company's Web site;
and
- obtain express parental consent prior to collecting and using personal
identifying information obtained from children under 13 years of age.
These regulations may also include enforcement and redress provisions.
Moreover, our business model is in part based upon our ability to obtain
registration information about our users and to use this information for
targeted advertising. If new regulations are adopted that limit or eliminate our
ability to use this information, our business, results of operations and
financial condition could be materially adversely affected. Even in the absence
of these regulations, the FTC has begun investigations into the privacy
practices of companies that collect information on the Internet. The FTC's
regulatory and enforcement efforts alone may adversely affect the ability to
collect demographic and personal information from users, which similarly could
have an adverse effect on our ability to provide highly targeted opportunities
for advertisers.
It is also possible that "cookies," or information keyed to a specific
server, file pathway or directory location that is stored on a user's hard
drive, possibly without the user's knowledge, which are used to track
demographic information and to target advertising, may become subject to laws
limiting or prohibiting their use. A number of Internet commentators, advocates
and governmental bodies in the United States and other countries have urged the
passage of laws limiting or abolishing the use of cookies. Limitations on or
elimination of our use of cookies could limit the effectiveness of our targeting
of advertisements, which could have a material adverse effect on our business,
results of operations and financial condition.
The European Union, or EU, has adopted a directive that imposes
restrictions on the collection and use of personal data. Under the directive, EU
citizens are guaranteed rights to access their data, rights to know where the
data originated, rights to have inaccurate data rectified, rights to recourse in
the event of unlawful processing and rights to withhold permission to use their
data for direct marketing. The directive could, among other things, affect
companies that collect information over the Internet from individuals in EU
member countries, and may impose restrictions that are more stringent than
current Internet privacy standard in the United States. In particular, companies
with offices located in EU countries will not be allowed to send personal
information to countries that do not maintain adequate standards of privacy. The
directive does not, however, define what standards of privacy are adequate. As a
result, the directive may adversely affect our activities because we engage in
data collection from users in EU member countries.
Data Protection. Legislative proposals have been made by the United States
government that would afford broader protection to owners of databases of
information such as stock quotes and sports scores.
This protection already exists in the EU. If enacted, this legislation
could result in an increase in the price of services that provide data to Web
sites and could create potential liability for unauthorized use of this data.
Either of these possibilities could have a material adverse effect on our
business, results of operations and financial condition.
Internet Taxation. A number of legislative proposals have been made at the
United States federal, state and local level, and by certain European
governments, that would impose additional taxes on the sale of goods
84
94
and services over the Internet and certain states have taken measures to tax
Internet-related activities. Although the United States Congress recently placed
a three-year moratorium on state and local taxes on Internet access or on
discriminatory taxes on electronic commerce, existing state or local laws were
expressly excepted from this moratorium. Further, once this moratorium is
lifted, some type of federal and/or state taxes may be imposed upon Internet
commerce. This legislation, or other attempts at regulating commerce over the
Internet, may substantially impede the growth of commerce on the Internet and,
as a result, materially adversely affect our opportunity to derive financial
benefit from those activities.
Domain Names. Domain names are Internet "addresses." The current system
for registering, allocating and managing domain names has been the subject of
litigation, including trademark litigation, and of proposed regulatory reform.
We have registered several domain names. We may seek to register additional
domain names, although there is no assurance we will successfully obtain the
registrations and third parties may bring claims for infringement against us for
the use of any of our domain names or other trademarks. Our domain names may
lose their value, or we may not have to obtain entirely new domain names in
addition to or in lieu of its current domain names if reform efforts result in a
restructuring in the current system.
Jurisdictions. Due to the global nature of the Internet, it is possible
that, although our transmissions over the Internet originate primarily in the
United States and the United Kingdom, the governments of other states and
countries might attempt to regulate our transmissions or prosecute us for
violations of their laws. These laws may be modified, or new laws enacted, in
the future. Any of these developments could have a material adverse effect on
our business, results of operations and financial condition. In addition, as our
service is available over the Internet in multiple states and countries, these
jurisdictions may claim that we are required to qualify to do business as a
foreign corporation in each of these states or countries. We are qualified to do
business only in Delaware, New York, California, the United Kingdom and Hungary,
and our failure to qualify as a foreign corporation in a jurisdiction where we
are required to do so could subject us to taxes and penalties and could result
in our inability to enforce contracts in those jurisdictions. Any new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services could have a material adverse effect on our business, results of
operations and financial condition.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We do not currently maintain patents on our technology and others may be
able to develop similar technologies in the future. We regard our copyrights,
service marks, trademarks, trade secrets and other intellectual property as
critical to our success. We rely on trademark and copyright law, trade secret
protection and confidentiality and/or license agreements with our employees,
customers, partners and others to protect our intellectual property rights.
Despite our precautions, it may be possible for third parties to obtain and use
our intellectual property without authorization. Furthermore, the validity,
enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving.
We are pursuing the registration of our trademarks in the United States,
Germany, Italy, Norway, Sweden and the United Kingdom. We may not be able to
secure adequate protection for our trademarks in the United States and other
countries. To date, we do not believe that any oppositions have been filed.
We also currently hold trademark registrations in the United States, United
Kingdom, Germany, Sweden, Norway, Finland, Denmark and Iceland. Effective
trademark protection may not be available in all the countries in which we
conduct business. Policing unauthorized use of our marks is also difficult and
expensive. In addition, it is possible that our competitors will adopt product
or service names similar to ours, thereby impeding our ability to build brand
identity and possibly leading to customer confusion.
We currently license an advertising serving system from DoubleClick. This
system delivers and tracks advertising impressions and click-throughs in all of
our Web sites. If the DoubleClick system is no longer available or our license
is terminated, we would be likely to suffer a disruption in our business, which
could materially adversely affect our results of operations. In addition, a
replacement system could be costly to license and install.
85
95
Our inability to effectively protect our trademarks and service marks would
have a material adverse effect on our business, results of operations and
financial conditions. We also intend to continue to license technology from
third parties. The market in which we operate is continually and rapidly
evolving, and we may need to license additional technologies to remain
competitive. In addition, we may fail to successfully integrate any licensed
technology into our services. Our inability to obtain any of these licenses
could delay product and service development until alternative technologies can
be identified, licensed and integrated.
EMPLOYEES
As of July 31, 2000, we had 189 full-time employees, of whom 44 worked in
sales, 21 in marketing, 97 in production and technology; and 27 in finance and
administration. Of these employees, 137 are primarily resident in the United
States and 52 in Europe. As a result of our acquisition of ibetcha.com, we also
maintain a 41-member staff in Tel Aviv, Israel. From time to time, we employ
independent contractors to support our research and development, marketing,
sales and editorial departments. None of our personnel are represented under
collective bargaining agreements. We consider our relations with our employees
to be good.
FACILITIES
Our executive offices are located in approximately 37,500 square feet of
office space in New York, under leases that expire in August 2005 and May 2007.
We also lease approximately 8,900 square feet of office space in San Francisco
under a lease that expires in February 2005 and approximately 6,300 square feet
of office space in Budapest under a lease that expires in October 2001, unless
we choose to extend it to October 2003. In addition, we lease small sales
offices in London, Hamburg, Chicago and Los Angeles.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to our knowledge,
threatened against us.
86
96
UPROAR MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements which involve
risks and uncertainties. Uproar makes such forward-looking statements under the
provision of the "safe harbor" section of the private securities litigation
reform act of 1995. Any forward-looking statements should be considered in light
of the factors described in this joint proxy statement/prospectus. See "Risk
Factors." Actual results may vary materially from those projected, anticipated
or indicated in any forward-looking statements. In this management's discussion
and analysis of financial condition and results of operations, the words
"anticipates," "believes," "expects," "intends," "future," "could," and similar
words or expressions (as well as other words or expressions referencing future
events, conditions, or circumstances) identify forward-looking statements. The
following discussion and analysis should be read in conjunction with "Selected
Consolidated Financial Data of Uproar and iwin" and the consolidated historical
financial statements, and the related notes thereto, of Uproar presented in this
joint proxy statement/prospectus. See "Where You Can Find More Information."
OVERVIEW
We are a leading online entertainment destination. Through our network of
Web sites, we provide online game shows and interactive single- and multi-player
games that appeal to a broad audience. Our business was originally formed in
February 1995 as E-Pub Services Limited, a corporation organized under the laws
of Ireland. From February 1995 through July 1997, we focused on developing our
technology, raising capital and recruiting personnel and did not generate
significant revenues. In July 1997, we formed Uproar Ltd., a corporation
organized under the laws of Bermuda, which became the parent of E-Pub Services
Limited. In September 1997, we launched our Web sites uproar.com and
uproar.co.uk. Uproar Inc. was incorporated in Delaware on December 16, 1999. On
January 26, 2000, Uproar Ltd. re-domesticated from Bermuda to Delaware and was
merged with Uproar Inc. on January 27, 2000.
We have only a limited operating history for you to use as a basis for
evaluating our business. You must consider the risks and difficulties frequently
encountered by early stage companies like ours in new and rapidly evolving
markets, including the Internet advertising market.
We are subject to industry trends that affect Internet providers generally,
including seasonality and user inactivity. User traffic on Web sites has
typically declined during the summer and year-end vacation and holiday periods.
We believe that advertising sales in traditional media, such as television and
radio, generally are lower in the first and third quarters of each year.
We have incurred net losses and negative cash flows from operations since
our inception. At June 30, 2000, we had an accumulated deficit of $71.7 million.
These losses have been funded primarily through the issuance of shares of our
equity securities. On July 8, 1999, we raised approximately $30.3 million
through the issuance of 2,832,000 shares of our common stock which are presently
listed on EASDAQ. In January 1999, we raised an aggregate of approximately $9.6
million through two private issuances of 1,043,360 shares of our common stock.
On February 2, 2000, we raised approximately $25.0 million through the sale of
1,265,372 shares of our common stock to a strategic investor. On March 16, 2000,
the Securities and Exchange Commission declared effective our registration
statement on Form S-1. Pursuant to this registration statement, we completed a
public offering in the United States of 2,500,000 shares of common stock at an
offering price of $33.88 per share. Net proceeds from the offering totaled
approximately $77.1 million.
We intend to continue to invest heavily in marketing and brand development,
content enhancement and technology and infrastructure development. As a result,
we believe that we will continue to incur net losses and negative cash flows
from operations for the foreseeable future. Moreover, the rate at which these
losses will be incurred may increase from current levels.
ADVERTISING REVENUES
Since July 1997, substantially all of our revenues have been derived from
the sale of online advertising.
87
97
Our advertising revenues are predominantly derived from advertising
arrangements under which we receive revenues based on the number of times an
advertisement is displayed on our services, commonly referred to as cost per
thousand impressions, or CPMs.
We also derive revenues from:
- sponsorship arrangements under which advertisers sponsor a game show,
game or portion of one of our Web sites in exchange for which we receive
a fixed payment;
- strategic partner arrangements under which our strategic partners offer
co-branded versions of our games on their Web sites and display
advertising in connection with the use of the games, in return for which
we receive revenues from the related advertising; and
- advertising arrangements under which we receive revenues based on the
number of times users click on an advertisement displayed on our
services, commonly referred to as cost per click, or CPCs.
Our revenues from advertising are therefore affected by:
- the number of unique users visiting our Web sites during a given period;
- the amount of time that users actually spend on our Web sites, commonly
referred to as the "stickiness" of our sites;
- the number of advertisements delivered to a user while on our Web sites;
- our ability to target user audiences for our advertisers; and
- the success of our strategic partnerships.
We intermittently rotate advertisements on the pages of our Web sites where
our users tend to spend long amounts of time. As a result, we believe a more
accurate measurement of our potential to generate advertising revenue is the
number of unique users that visit our sites and the amount of time they spend on
our sites, rather than the number of registered users or page views.
We price our advertisements based on a variety of factors, including:
- whether payment is dependent upon guaranteed minimum impression or click
levels;
- whether the advertising is targeted to specific audiences; and
- the available inventory of impressions or clicks associated with a
specific game or game show that will display the specific advertisement.
Since we are able to vary the size of advertising banners we display on a
single page, we are able to charge more for "super-sized" banners than for more
traditional banners.
We recognize advertising revenues which are priced on a cost per thousand
impression, or CPM, basis as the advertisement is displayed, provided that no
significant obligations remain and collection of the resulting receivable is
probable. To the extent minimum guaranteed impression levels are not met, we
defer recognition of the corresponding revenues until guaranteed levels are
achieved. We recognize advertising revenues derived on a cost per click, or CPC,
basis as users click or otherwise respond to the advertisements. To the extent
minimum guaranteed click levels are not met, we defer recognition of the
corresponding revenues until guaranteed levels are achieved. In the case of
contracts requiring actual sales of advertised items, we may experience delays
in recognizing revenues pending receipt of data from that advertiser.
We recognize sponsorship advertising revenue ratably in the period in which
the sponsor's advertisement is displayed and costs associated with customizing
the advertisements received from sponsors are expensed as incurred. We recognize
revenues from our strategic partner arrangements ratably in the period in which
our games are displayed on a third party's Web site. In those situations where
we are responsible for selling the advertising, billing and collections, we
record the advertising revenues, and payments to our strategic partners are
recorded as cost of revenues. We are obligated to pay our strategic partners
their fee regardless of whether we ultimately collect the advertising revenue.
In those situations where our strategic partners are responsible
88
98
for selling the advertising, billing and collections, we recognize revenue only
to the extent of our share of net revenues.
If a payment is received prior to the time that we recognize revenue, we
record that payment as deferred revenues.
BARTER
We also engage in barter transactions in an effort to enhance our marketing
efforts and improve our reach to potential new users. Under these arrangements,
we deliver game content, including prizes, to a third party, or display on our
Web sites advertisements promoting the third party's goods and services in
exchange for its agreement to run advertisements promoting our Web sites.
Revenues and costs from barter arrangements are recorded at the estimated fair
value of the advertisements or services we provide, unless the fair value of the
goods or services we receive can be determined more objectively. We recognize
barter revenue at the time we deliver the third party's advertisement or product
to our users. We recognize barter costs when our advertisements are displayed by
the third-party to its users. Barter costs are recorded either as sales and
marketing expenses or as costs of revenue. The breakdown of costs is dependent
upon the nature of the goods or services received by the third party. Although
our revenues and related costs will be equal at the conclusion of the barter
transaction, the amounts may not be equal in any particular quarter. Barter
revenues were approximately 22.4% and 13.6% of revenues for the years ended
December 31, 1998 and 1999, respectively, and 7.6% of revenues for the six
months ended June 30, 2000.
ACQUISITION OF PRIZE POINT
In June 1999, we acquired Prize Point Entertainment Corporation for a total
of 2,444,320 shares of common stock and the assumption of 124,080 options
exercisable into an additional 124,080 shares of our common stock. The
acquisition was accounted for as a pooling-of-interests.
PEARSON AGREEMENT
In January 1999, we entered into an agreement with Pearson Television under
which Pearson acquired 2,000,000 shares of our common stock in exchange for
intangible assets, advertising services to be provided over a thirty-month
period commencing April 1, 1999, and cash of $124,599. We recorded the $16.7
million difference between the value of the shares issued and the fair value of
the advertising services and cash received as an intangible asset on our balance
sheet to be amortized over the 33-month life of the agreement. The $8.0 million
advertising contribution was recorded as a pre-paid advertising asset that is
being amortized over the period the ads are being shown, from April 1999 through
September 2001. In July 2000, we amended and restated our agreement with Pearson
that extends the term of the agreement through June 2005.
Under our agreement with Pearson, we have the obligation to pay Pearson a
royalty for the rights and license to use the licensed game show formats, equal
to a percentage of gross advertising and other revenue generated from the use of
the licensed games. Additional royalties are due to Pearson for a percentage of
net revenues generated by the licensed game shows, subject to minimum royalty
payments per broadcast year. The initial payment made in July 1999, which
relates to the broadcast year from September 1999 to September 2000, was
recorded as a prepayment and $150,000 was expensed in cost of revenues through
June 30, 2000. Under the amended and restated agreement with Pearson, our
guaranteed minimum royalty payments per broadcast year for the Internet games
range from $150,000 for specified games in the year ending June 30, 2001 to
$900,000 for specified games in the year ending June 30, 2005. In the event that
one or more of these games is not financially successful for us, we still are
obligated to make these minimum royalty payments to Pearson.
The intangible assets recorded as a result of the transaction with Pearson
represent the benefits of the association with Pearson during the length of the
agreement, or thirty-three months, resulting from the use of Pearson's
intellectual property and our association with them. The market value of the
common stock issuable to Pearson was determined based upon the share price
quoted on the Vienna Stock Exchange at the date the agreement was signed. The
intangible assets were valued as the difference between the value of the shares
89
99
issued and the fair value of the advertising services received. The fair value
of the advertising services received was based on rate card information provided
by Pearson and our estimate of the value of the advertising and promotional
services. During the year ended December 31, 1999, amortization of intangible
assets totaled $6.1 million and amortization of prepaid advertising services
amounting to $1.3 million was recorded as advertising expense.
CABLE & WIRELESS AGREEMENT
In December 1999, we entered into an agreement with Cable & Wireless, the
largest cable television franchise owner in the United Kingdom. The agreement
provides for Cable & Wireless to display up to 14 Uproar game shows on an
Interactive service offered via its digital cable television, which Cable
&Wireless launched in October 1999.
We pay Cable & Wireless a fee, for which Cable & Wireless guarantees
placement within the service, which is accounted for in cost of revenues. The
agreement provides that Cable and Wireless is entitled to additional fees equal
to a percentage of net advertising and sponsorship revenue generated through the
sale of advertising associated with our games placed in Cable & Wireless's
digital interactive service. Such amounts are accounted for in cost of revenues.
Sales, marketing and product and technology development costs are borne by us
and recognized in the period incurred.
TELEFONICA AGREEMENT
In September 1999, we entered into an agreement with TelefonicaInteractiva
de Contenidos, a Spanish corporation, to establish and develop our products and
the Uproar media property in the Spanish and Portuguese languages.
Revenues generated in connection with the Telefonica deal consist of fees
for exclusivity of distribution and for development and support obligations we
have assumed. Telefonica is also required to pay a royalty based on net
advertising and sponsorship revenue it generates through the sale of advertising
on Web sites, including our games, during the term of the agreement. Advertising
revenue will be recognized for this advertising and sponsorship revenue during
the period in which the advertising is delivered. Sales and marketing costs are
borne by Telefonica. Product and technology development costs associated with
the agreement are our responsibility and are recorded in the period the costs
are incurred.
STRATEGIC INVESTOR
On February 2, 2000, we completed the sale of 1,265,372 shares of our
common stock to Trans Cosmos USA, Inc. for approximately $25.0 million. We
intend to establish a joint venture with Trans Cosmos to produce a local
language version of Uproar properties in Japan. Under the proposed terms of the
agreement, we would contribute our intellectual property to the joint venture
along with $500,000 in cash, and Trans Cosmos would contribute $4.5 million in
cash. In addition, we would receive an annual license fee from the joint
venture.
INITIAL PUBLIC OFFERING
On March 16, 2000, the Securities and Exchange Commission declared
effective our registration statement on Form S-1. Pursuant to this registration
statement, we completed a public offering in the United States of 2,500,000
shares of common stock at an offering price of $33.88 per share. Net proceeds
from the offering totaled approximately $77.1 million.
IBETCHA.COM
In August 2000, we completed the purchase of TakeAim Holdings Ltd., the
parent company of ibetcha.com Inc. which operates ibetcha.com, a Web site that
offers users the opportunity to predict the outcome of real-world events for a
chance to win prizes. We issued approximately 1.33 million shares of our common
stock in the acquisition.
90
100
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
Revenues increased to $12.8 million for the six months ended June 30, 2000,
as compared with $2.5 million for the six months ended June 30, 1999. The
period-to-period growth in revenues of $10.3 million for the six months ended
June 30, 2000 resulted from:
- increasing the number of advertisers as well as the average commitment
per advertiser,
- increasing our Web site traffic,
- expanding our sales department, and
- increasing our branding and marketing efforts.
Advertising revenues for the six months ended June 30, 2000 were $12.2
million, which represented 95.5% of total revenues. Advertising revenues for the
six months ended June 30, 1999 were $2.5 million, which represented 98.5% of
total revenues. Since June 1999, we significantly increased our sales force,
relaunched our Web site, and ran a marketing campaign to promote brand
awareness. We anticipate the advertising revenues will continue to account for a
substantial share of our total revenues for the foreseeable future.
In the six months ended June 30, one advertiser, MyPoints, which accounted
for 21.0% of our revenues, accounted for more than 10% of our revenues.
COST OF REVENUES
Cost of revenues include:
- prizes;
- Internet connection costs;
- depreciation of equipment and software used to host our Web sites;
- royalties relating to our co-branded properties with our strategic
partners; and
- costs of goods sold in our affinity merchandising program.
Cost of revenues relating to our strategic partner arrangements are
recorded as an expense in the period in which the related revenues are recorded.
Minimum distribution payments, where applicable, are recorded ratably over the
period of the relevant agreement.
Cost of revenues were $4.3 million for the six months ended June 30, 2000
and $800,000 for the six months ended June 30, 1999. The increase in cost of
revenues was due primarily to:
- an increase in the prizes awarded due to the increase in users,
- an increase in internet costs to support the increase in web site
traffic,
- increase in royalties which are a function of revenue, and
- ad serving fees.
Gross margins were 66.6% for the six months ended June 30, 2000 and 66.2%
for the six months ended June 30, 1999. The increase in gross margin was
primarily due to a decrease in prizes and internet connection costs as a
percentage of revenue.
91
101
OPERATING EXPENSES
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of:
- advertising costs, including the costs of online and print
advertisements;
- salaries and commissions for sales and marketing personnel;
- public relations costs;
- referral fees in connection with acquisition of new users through our
affiliate program; and
- other marketing-related expenses.
Sales and marketing expenses were $18.1 million for the six months ended
June 30, 2000 as compared with sales and marketing expenses of $5.8 million for
the six months ended June 30, 1999. The period to period increases were
attributed to increases in advertising and public relations expense, salaries,
barter advertising, and depreciation.
Product and Technology Development Expenses. Product and technology
development expenses include:
- personnel costs for computer software and Web site programmers,
designers, editors and project managers;
- fees paid to writers and graphic artists; and
- the administrative costs relating to our product development facilities.
Product development expenses were $4.0 million for the six months ended
June 30, 2000, as compared with product and technology development expenses of
$1.5 million for the six months ended June 30, 1999. The period to period
increases were attributed to increases in salaries and consultants fees to reach
staffing levels to support our Web site and to enhance content and features.
Additionally, product development expenses increased as a result of added
features in connection with the launch of our site redesign in the U.K. in April
2000.
General and Administrative Expenses. General and administrative expenses
consist primarily of:
- salaries and benefits;
- fees for professional services;
- insurance and recruiting fees; and
- costs for general corporate functions, including finance, accounting and
facilities.
General and administrative expenses were $7.5 million for the six months
ended June 30, 2000, as compared with general and administrative expenses of
$3.6 million for the six months ended June 30, 1999. The period to period
increases were attributed to increases in recruitment fees and salaries and is
reflective of the highly competitive nature of hiring in the new media industry.
The increases were also due to increases in legal and professional fees, rental
costs, insurance costs, and costs related to our operation as a public company,
such as directors and officers' liability insurance and professional service
fees.
INTEREST INCOME
Interest income results from interest earned on our cash and investments
and amortization of debt discounts. Interest income was $2.1 million for the six
months ended June 30, 2000, as compared to $0.2 million for the six months ended
June 30, 1999. The increases resulted from investments made with the net
proceeds from our sale of common stock.
92
102
LITIGATION SETTLEMENT
In February 2000, we settled an action entitled "Burgos V. Ellwell
Associates, LLC and E-Pub Inc." in which we were a party defendant, relating to
an alleged personal injury, by a payment of $350,000.
YEAR ENDED DECEMBER 31, 1999 AND 1998
REVENUES
Revenues for the year ended December 31, 1999 increased to $10.4 million
from $1.6 million for the year ended December 31, 1998. The increase in revenues
was primarily due to our ability to generate significantly higher advertising
and sponsorship revenues, primarily as a result of:
- expanding our sales department;
- increasing the number of impressions available on our sites by adding
game shows;
- increasing our number of unique users, which has enabled us to deliver an
increased level of advertising impressions; and
- increasing our branding and marketing efforts.
During the year ended December 31, 1999, we derived revenues of
approximately $1.4 million or 13.6% of revenues, from barter transactions.
During the year ended December 31, 1998, we derived $365,000, or 22.4% of
revenues, from barter transactions.
In the year ended December 31, 1999, only one advertiser, MyPoints, which
accounted for 14.2% of our revenues, accounted for more than 10.0% of our
revenues.
COST OF REVENUES
Cost of revenues for the year ended December 31, 1999 increased to $2.5
million from $760,000 for the year ended December 31, 1998. The increase in cost
of revenues was primarily attributable to $846,000 related to expenses
associated with prizes, $824,000 related to Internet connection costs,
depreciation costs of equipment and software of $600,000 and $250,000 of
royalties. Our gross profit increased to $7.9 million for the year ended
December 31, 1999 from $873,000 for the year ended December 31, 1998.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses for the year ended
December 31, 1999 increased to $28.1 million from $3.8 million for the year
ended December 31, 1998. The increases in sales and marketing expenses were
primarily attributable to $23.4 million in advertising, public relations and
other promotional expenditures, and $3.5 million in salaries and commissions for
sales and marketing personnel. We believe that sales and marketing expenses will
continue to increase in absolute dollars for the foreseeable future as we:
- continue our branding strategy;
- continue to expand our direct sales force;
- hire additional marketing personnel; and
- increase expenditures for marketing and promotion.
Product and Technology Development. Product development expenses for the
year ended December 31, 1999 increased to $3.7 million from $850,000 for the
year ended December 31, 1998. The increase in product development expenses was
primarily attributable to increased staffing levels required to develop
proprietary software components used to create our service. We have, to date,
expensed all product development costs as incurred. We believe that increased
investments in new and enhanced features and technology are critical to
attaining our strategic objectives and remaining competitive. Accordingly, we
intend to continue recruiting and hiring experienced product development
personnel and to make additional investments in product development. We
anticipate that product expenditures will continue to increase in absolute
dollars in future periods.
93
103
General and Administrative. General and administration expenses for the
year ended December 31, 1999 increased to $8.9 million from $2.3 million for the
year ended December 31,1998. The increase was primarily attributable to $2.1
million in professional fees, $2.6 million in salaries and benefits associated
with hiring of additional personnel and $812,000 in travel-related costs.
YEAR ENDED DECEMBER 31, 1998 AND 1997
REVENUES
Revenues increased to $1.6 million for the year ended December 31, 1998
from $349,000 for the year ended December 31, 1997. The increase in revenues was
due primarily to our ability to generate higher advertising and sponsorship
revenues. In the year ended December 31, 1998, two of our customers, Yahoo! and
Microsoft, each accounted for greater than 10.0% of our revenues. Yahoo! and
Microsoft accounted for 20.7% and 11.8% of our revenues, respectively, for the
year ended December 31, 1998.
COST OF REVENUES
Cost of revenues increased to $760,000 for the year ended December 31,1998
from $217,000 for the year ended December 31, 1997. The increase in cost of
revenues was primarily attributable to $243,000 related to Internet connection
costs, and $225,000 associated with prizes and depreciation costs of equipment
and software of $127,000.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased to $3.8
million for the year ended December 31, 1998 from $1.1 million for the year
ended December 31, 1997. The increase in sales and marketing expenses were
primarily attributable to $1.6 million in advertising, public relations and
other promotional expenditures, $1.5 million in salaries for sales and marketing
personnel, and $365,000 in barter expenses.
Product Development. Product development expenses increased to $849,000
for the year ended December 31, 1998 from $773,000 for the year ended December
31, 1997. The increase in product development expenses was primarily
attributable to increased staffing levels.
General and Administrative. General and administrative expenses increased
to $2.3 million for the year ended December 31, 1998 from $2.1 million for the
year ended December 31, 1997. The increase in general and administrative
expenses was attributable to $710,000 in salaries and benefits associated with
hiring additional personnel, $560,000 in professional fees and $260,000 for
operating lease rental costs.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have primarily financed our operations through the sale of our
equity securities. As of June 30, 2000, we had approximately $9.3 million in
cash and cash equivalents and $85.4 million in short term investments, an
increase from $15.1 million in cash and cash equivalents and no short term
investments on December 31, 1999. Net cash used in operating activities was
$18.1 million and $9.2 million for the six months ended June 30, 2000 and 1999,
respectively. Net cash used in operating activities resulted primarily from our
net operating losses, partially offset by:
- depreciation and amortization; and
- increase in accounts payable and accrued expenses.
Net cash used in investing activities was $90.4 million and $1.1 million
for the six months ended June 30, 2000 and 1999, respectively, as we invested
the capital raised in our public offering and sale of common stock to Trans
Cosmos, as well as purchased equipment to enhance and develop our technical
infrastructure.
Net cash provided by financing activities was $102.9 million and $9.9
million for the six months ended June 30, 2000 and 1999, respectively. Net cash
provided by financing activities consisted primarily of proceeds from the sale
of shares of our common stock. On March 22, 2000, we raised approximately $77.1
million from
94
104
the public offering of 2,500,000 shares of our common stock, which are presently
listed on the Nasdaq National Market. On February 2, 2000, we raised
approximately $25.0 million from the sale of 1,265,372 shares of our common
stock to Trans Cosmos USA, Inc.
Our principal commitments consist of obligations under capital and
operating leases. In addition, we have committed to invest approximately
$500,000 in cash in our planned Japanese joint venture with Trans Cosmos. We
expect our capital expenditures will increase significantly in the future as we
make technological improvements to our system and technical infrastructure.
We have experienced a substantial increase in our capital expenditures and
operating lease arrangements since our inception consistent with the growth in
our operations and staffing. We anticipate that this will continue for the
foreseeable future. Additionally, we will continue to evaluate possible
investments in businesses, products and technologies, and plan to expand our
sales and marketing programs and conduct more aggressive brand promotions.
We believe our current cash, cash equivalents and investments will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for our existing business for the foreseeable future.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
We will adopt SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS 138, effective July 1, 2000, and are in
the process of determining the effect that SFAS No. 133 will have on our results
of operations and financial position. This statement is not required to be
applied retroactively to financial statements of prior periods.
FASB Interpretation No 44, "Accounting for Certain Transactions Involving
Stock Compensation" ("FIN No. 44"), provides guidance for applying APB Opinion
No. 25, "Accounting for Stock Issued to Employees. With certain exceptions, FIN
No. 44 applies prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards and changes in grantee status
on or after July 1, 2000. We do not believe that the implementation of FIN No.
44 will have a significant effect on our results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB No. 101"), which summarizes
certain of the SEC staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. We will be required
to adopt the accounting provisions of SAB No. 101, no later than the fourth
quarter of 2000. We do not believe that the implementation of SAB No. 101 will
have a significant effect on our results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency Rate Fluctuations. To date, our results of operations have not
been impacted materially by inflation in the U.S. or in the countries that
comprise Europe. Although most of our revenues are denominated in U.S. dollars,
a percentage of our revenues are denominated in foreign currencies. As a result,
our revenues may be impacted by fluctuations in these currencies and the value
of these currencies relative to the U.S. dollar. In addition, a portion of our
monetary assets and liabilities and our accounts payable and operating expenses
are denominated in foreign currencies. Therefore, we are exposed to foreign
currency exchange risks. However, revenues derived from foreign currencies
historically have not comprised a material portion of our revenues. As a result,
we have not tried to reduce our exposure to exchange rate fluctuations by using
hedging transactions. However, we may experience economic loss and a negative
impact on earnings and equity as a result of foreign currency exchange rate
fluctuations.
Market Risk. Our accounts receivable are subject, in the normal course of
business, to collection risks. We regularly assess these risks and have
established policies and business practices to protect against the adverse
effects of collection risks. As a result, we do not anticipate any material
losses in this area.
Interest Rate Risk. Our investments are classified as cash and cash
equivalents with original maturities of three months or less. Our short-term
investments are in bonds that have fixed interest rates at the time of purchase.
Therefore, changes in the market's interest rates do not significantly affect
the carrying value of our cash equivalents or short-term investments as recorded
by us.
95
105
DESCRIPTION OF IWIN
BUSINESS OF IWIN
iwin.com, Inc. is an online entertainment network focused on incubating
entertainment-themed and incentives marketing-oriented applications. We offer an
array of free classic interactive games, and are in the process of developing
additional free custom games. We currently generate revenue by selling targeted
advertising, sponsorships and partnerships.
To date, we have launched two leading sites -- iwin.com and
eXtremelotto.com. eXtremelotto.com has since been incorporated into iwin.com.
The iwin.com site offers a diverse selection of online games that allow visitors
to enter contests, win sweepstakes and accumulate reward currency, known as
"icoins", at no cost to the user. Users acquire icoins in three different ways:
- by playing any of the free games on the site,
- by performing a simple task or engaging certain advertisers on the site,
or
- by participating in our referral program.
Once acquired, these icoins can be used to purchase sweepstakes tickets for
a variety of prizes, including cash and sponsorship prizes. eXtremelotto offers
three free lotteries that award winners prizes, including the opportunity for a
$1,000,000, $10,000,000 and $20,000,000 jackpot.
We have recently soft-launched
- a new website, sendlaughter.com, and
- a free$tuff tab which allows online merchants to interact with users on
the iwin.com site.
Our strategy is to develop Web sites that will appeal to broad user
audiences from whom we can capture, collect, aggregate and categorize data. This
data can then be used to build demographic and pyschographic profiles for use in
generating highly-targeted leads for advertisers. We are developing a range of
capabilities and services that enable marketers to target the delivery of
advertisements to pre-qualified audiences. The market for these services
includes content publishers and merchants as well as agencies and brand
managers.
We also believe that we are uniquely positioned to capitalize on
incentivized email marketing. Incentivized email marketing allows content
providers to engage in an ongoing personalized dialogue with their customers
while offering them additional targeted information, services and products.
On August 23, 2000, we had over 65 employees, including a new 12-person
sales team in New York City. We maintain our headquarters at 10940 Wilshire
Boulevard in Los Angeles, California, where we lease two floors of office space.
We also lease a portion of a floor at 264 West 40th Street in New York City in
order to accommodate the new sales team.
96
106
IWIN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements which involve
risks and uncertainties. iwin makes such forward-looking statements under the
provision of the "safe harbor" section of the private securities litigation
reform act of 1995. Any forward-looking statements should be considered in light
of the factors described in this joint proxy statement/prospectus. See "Risk
Factors." Actual results may vary materially from those projected, anticipated
or indicated in any forward-looking statements. In this management's discussion
and analysis of financial condition and results of operations, the words
"anticipates," "believes," "expects," "intends," "future," "could," and similar
words or expressions (as well as other words or expressions referencing future
events, conditions, or circumstances) identify forward-looking statements. The
following discussion and analysis should be read in conjunction with "Selected
Consolidated Financial Data of Uproar and iwin" and the consolidated historical
financial statements, and the related notes thereto, of iwin presented in this
joint proxy statement/prospectus. See "Where You Can Find More Information."
OVERVIEW
iwin has experienced substantial losses since its inception in July 1999.
Its accumulated deficit as of June 30, 2000 was $19.2 million. iwin has spent
significant amounts to create, launch and enhance its Web sites, to promote
awareness of its Web sites and to develop its business. iwin expects to increase
its operating expenses as it continues to build brand awareness and
infrastructure to support the expansion of its business.
iwin has a very limited operating history to use in evaluating its
business. Accordingly, iwin has experienced many of the risks and uncertainties
frequently encountered by early stage companies in new and evolving markets,
including the Internet advertising market.
Although iwin has experienced revenue growth in recent periods, these
growth rates may not be sustainable or indicative of future growth. Even if iwin
does achieve profitability, it may not sustain profitability on a quarterly or
annual basis in the future. iwin believes quarter-to-quarter comparison should
not be relied on as an indication of its future performance.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Revenues. Since July 1999, substantially all of our revenues have been
derived from the sale of online advertising. Our advertising revenues are
predominantly derived from:
- advertising agreements under which we receive revenues based on the
number of times users click on an advertisement displayed on our
services, commonly referred to as cost per click, or CPCs; and
- advertising arrangements under which we receive revenues based on the
number of times an advertisement is displayed on our services, commonly
referred to as cost per thousand impressions, or CPMs.
We also derive revenues from:
- arrangements under which we receive revenues based on the number of users
which elect to register for an advertiser's product, service or
membership displayed on our services, commonly referred to as opt-ins;
- sponsorship arrangements under which advertisers sponsor a game, prize
category or portion of our Web site in exchange for which we receive a
fixed payment; and
- advertising arrangements under which we include an advertiser's promotion
in an electronic mail message distributed to our users, commonly referred
to as e-mail.
97
107
Our revenues from advertising are therefore affected by:
- the number of unique users visiting our Web sites during a given period;
- the amount of time that users actually spend on our Web sites, commonly
referred to as the "stickiness" of our site;
- the number of advertisements delivered to a user while on our Web sites;
- the number of e-mail messages distributed to our users; and
- our ability to target user audiences for our advertisers.
We price our advertisements based on a variety of factors, including:
- whether payment is dependent upon guaranteed minimum impressions or click
levels;
- whether the advertising is targeted to specific audiences;
- the quality, or historical effectiveness, of specific electronic message
and impression products; and
- the available inventory of impressions or clicks across our Web site
during a given period.
We recognize advertising revenues which are priced on a cost per click, or
CPC, basis as users click or otherwise respond to the advertisements, provided
that no significant obligations remain and collection of the resulting
receivable is probable. To the extent minimum guaranteed click levels are not
met, we defer recognition of the corresponding revenues until guaranteed levels
are achieved. We recognize advertising revenues which are priced on a cost per
thousand impression, or CPM, basis as the advertisement is displayed. To the
extent minimum guaranteed impression levels are not met, we defer recognition of
the corresponding revenues until guaranteed levels are achieved.
We recognize revenues derived from our user's registration for an
advertiser's product, service or membership as the registrations are transmitted
to the advertiser. We recognize sponsorship advertising revenues ratably in the
period in which the sponsor's advertisement is displayed, and costs associated
with customizing the advertisements received from the sponsor are expensed as
incurred. We recognize advertising revenues related to the distribution of
e-mail messages as the messages are delivered to our users. If a payment is
received prior to the time that we recognize revenue, we record that payment as
deferred revenues.
For the three months ended June 30, 2000, revenues increased to $6.2
million from $2.0 million for the three months ended March 31, 2000. The
increase in revenue is primarily attributable to an increase in iwin's
advertiser base and the amount spent per advertiser. As of June 30, 2000, iwin
had an advertiser base of over 200 advertisers compared to 85 advertisers as of
March 31, 2000. Also, the average spending per advertiser increased from $21,505
for the three months ended March 31, 2000 to $33,695 for the three months ended
June 30, 2000. In addition, iwin experienced an increase in advertising
inventory with the expansion of product offerings and increased traffic to its
Web sites, both of which contributed to an increase in revenue.
Cost of Revenues. Cost of revenues include:
- prizes;
- lottery award insurance;
- internet connection costs;
- advertisement campaign tracking and management costs; and
- depreciation of equipment and software related to site hosting and
maintenance.
98
108
Costs of revenues for the three months ended June 30, 2000 was $2.6 million
compared to $2.2 million for the three months ended March 31, 2000. The increase
is primarily due to the following:
- an increase in Web site insurance costs due to an increase in the number
of lottery entries from a daily average of 51,740 entries for the three
months ended March 31, 2000 to 216,269 entries for the three months ended
June 30, 2000;
- an increase in ad-serving costs resulting from increased traffic to
sites; and
- an increase in depreciation expense related to additional equipment and
software purchased to develop and host sites.
Sales and Marketing. Sales and marketing expenses include salaries, sales
commissions, employee benefits, travel and related expenses of its sales force,
advertising and promotional expenses, public relations, referral fees in
connection with acquisition of new users through the affiliate program,
marketing, and sales support functions. Marketing costs are expensed in the
period incurred. Sales and marketing expenses decreased to $6.1 million for the
three months ended June 30, 2000 compared to $6.3 million for the three months
ended March 31, 2000. This was primarily the result of a decrease in online
advertising and marketing.
Product and Technology Development. Product and technology development
costs include expenses incurred to develop, enhance, manage, monitor and operate
the Web sites. Development costs are expensed as incurred. Product and
technology development costs increased to $820,985 for the three months ended
June 30, 2000 from $753,173 for the three months ended March 31, 2000. This
increase was primarily due to the following:
- the expansion of product offerings;
- an increase in production and engineering personnel; and
- an increase in game development programming and development fees.
General and Administrative. General and administrative expenses include
salaries, employee benefits and expenses for executives, finance, legal, human
resources and administrative personnel. In addition, this category includes fees
for professional services, such as legal and accounting, and the costs related
to the leases for the iwin's occupational space for offices in Los Angeles and
New York. General and administrative expenses were $2.6 million for the three
months ended June 30, 2000 compared to $2.7 million for the three months ended
March 31, 2000.
Other Income (Expenses). Net interest income decreased to $211,295 for the
three months ended June 30, 2000 compared to $373,792 for the three months ended
March 31, 2000. This decrease was due to lower average cash balances. Loss from
disposal of property and equipment for the three months ended March 31, 2000 was
$63,755 associated with the abandonment of the tenant improvements in the Los
Angeles office space previously occupied. iwin did not incur a similar loss for
the three months ended June 30, 2000. Other income for the three months ended
June 30, 2000 was $28,077 compared to $13,527 for the three months ended March
31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, iwin has funded its operations primarily through net
cash proceeds from private placements of preferred and common stock totaling
$31.4 million through June 30, 2000. As of June 30, 2000, iwin had cash and cash
equivalents totaling $8.3 million.
Cash used for operating activities for the three months ended June 30, 2000
was $9.8 million, primarily due to the operating loss of $5.7 million and an
increase in accounts receivable balance of $3.3 million.
Cash provided by investing activities for the three months ended June 30,
2000 was net $1.8 million. Investing activities during this period included the
liquidation of $5.1 million in short-term investments and deposits and $3.3
million in capital expenditures related to the purchase of property and
equipment.
Cash provided by financing activities for the three months ended June 30,
2000 was $2.5 million. This resulted from the issuance of preferred stock for
net proceeds totaling $1.2 million, the net borrowings of $1.3 million on an
available equipment line of credit and several capital lease arrangements.
99
109
iwin's primary financial commitments consisted of $71,165 payable under the
equipment line of credit and $1.4 million in obligations under several capital
lease arrangements.
As of June 30, 2000, iwin had net operating loss carryforwards of
approximately $16.7 million, available to reduce future federal and state income
taxes payable to the extent permitted under the Internal Revenue Code, expiring
in varying amounts through 2020. The net operating loss carryforwards and
research tax credit carryforwards will be subject to the limitations provided in
IRC section 382.
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, iwin has placed a valuation
allowance against its otherwise recognizable deferred tax assets as of June 30,
2000.
The independent auditors' report for the financial statements of iwin as of
and for the period ended December 31, 1999 includes an explanatory paragraph
that indicates there are conditions that raise substantial doubt about iwin's
ability to continue as a going concern. Management believes that iwin has the
financial resources and ability to meet its business and financial obligations
in the normal course of business through December 31, 2000.
100
110
MANAGEMENT OF UPROAR
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth our directors, executive officers and other
key employees, their ages and the positions held by them:
NAME AGE POSITION
---- --- --------
Kenneth D. Cron.............. 44 Chairman of the Board of Directors and Chief Executive
Officer
Christopher R. Hassett....... 38 President, Chief Operating Officer and Director
Joel E. Wilhite.............. 30 Chief Financial Officer
Francis G. Blot.............. 38 Executive Vice President, Product Marketing
Timothy J. Ewing............. 34 Executive Vice President, Programming and Product
Development
Scott Kaufman(*) ............ 23 Executive Vice President, Product Development
Robert D. Marafioti.......... 53 Executive Vice President, General Counsel and Secretary
Michael K. Simon............. 35 Executive Vice President, President of International and
Director
Jeffrey L. Strief............ 44 Executive Vice President, Marketing and Sales
Thompson B. Barnhardt(**).... 37 Director
Thomas E. Dooley............. 43 Director
Esther Dyson................. 49 Director
James J. Geddes, Jr. ........ 50 Director
Catherine V. Mackay.......... 33 Director
Richard Janssen(***)......... 50 Director
Gary W. Loveman(***)......... 39 Director
Frederick Krueger(***)....... 40 Director
- ---------------
* Will become an officer of Uproar at closing of merger.
** Will resign from the Uproar board at closing of merger.
*** Will become a director of Uproar at closing of merger.
Kenneth D. Cron joined us as our Chief Executive Officer and as a director
in September 1999. In December 1999, Mr. Cron was appointed the Chairman of our
board of directors. From September 1978 to June 1999, Mr. Cron worked at CMP
Media where, as the President of Publishing, he had responsibility for the
company's United States businesses, including its print publications, trade show
conferences and online services. He was also a director of CMP Media. Mr. Cron
earned a B.A. from the University of Colorado.
Christopher R. Hassett joined us as our President, Chief Operating Officer,
and as a director in July 1999, subsequent to our acquisition of PrizePoint
Entertainment. Mr. Hassett was PrizePoint's co-founder and Chief Executive
Officer from March 1998 to June 1999. Prior to that, Mr. Hassett founded
Pointcast, serving as its Chairman and Chief Executive Officer from November
1992 to October 1997. Mr. Hassett earned a B.S. in electrical engineering from
the University of Lowell.
Joel E. Wilhite joined us as our Controller in April 1999 and served in
that capacity until May 2000, when he was appointed our Chief Financial Officer.
Prior to joining Uproar, Mr. Wilhite was an audit manager at KPMG Hungaria in
Budapest, Hungary, from August 1996 to March 1999 and worked for KPMG LLP in the
United States from July 1993 through July 1996. Mr. Wilhite received a B.S. in
Accounting from the University of South Carolina.
Francis G. Blot joined us as our Executive Vice President, Product
Marketing, in July 1999, subsequent to our acquisition of PrizePoint
Entertainment. Mr. Blot co-founded PrizePoint in March 1998 and served as its
Vice President of Marketing from March 1998 to June 1999. From June 1994 to
March 1998, Mr. Blot was Vice President of Business Development at Pointcast,
where he was responsible for, among other things, its
101
111
electronic commerce business. Prior to that, Mr. Blot worked in business and
product development positions for Prodigy for nearly seven years. Mr. Blot
earned a B.S. in electrical engineering from SUNY Utica.
Timothy J. Ewing joined us as our Managing Director in Budapest, Hungary in
1996. He served as our President of International from April 1999 to May 2000,
when he was appointed our Executive Vice President, Programming and Product
Development. Prior to joining Uproar, Mr. Ewing served as Manager of European
Business Development for Scala ECE from 1993 to 1996. Mr. Ewing earned an M.B.A.
in International Business from the University of Michigan and the Stockholm
School of Economics and a B.S.E. in Engineering from the University of Michigan.
Scott Kaufman will become Uproar's Executive Vice President, Product
Development, upon closing of the merger. Mr. Kaufman currently serves as Vice
President of Product Management for iwin, a position he has held since May 2000.
Mr. Kaufman joined iwin as Vice President of Business Development in September
1999. Prior to joining iwin, Mr. Kaufman was a financial analyst at Yucaipa
Companies, a private equity group, from January 1999 to September 1999. From
June 1998 to January 1999, Mr. Kaufman was a financial analyst at JP Morgan in
its private client group. Mr. Kaufman received a B.A. in economics from
Claremont McKenna College in June 1998.
Robert D. Marafioti joined us in October 1999 as Executive Vice President,
General Counsel and Secretary. From October 1988 through June 1999, he worked
for CMP Media, where he served as Executive Vice President, General Counsel and
Secretary. Mr. Marafioti earned a B.A. from Yale University and a J.D. from
Columbia School of Law.
Michael K. Simon is our founder. He was the Chairman of our board of
directors from July 1999 to December 1999 and served as our Chief Executive
Officer from February 1995 to September 1999. Mr. Simon served as our Chief
Financial Officer from November 1999 through May 2000, and as Executive Vice
President and as President of International since May 2000. Mr. Simon will step
down as an officer of Uproar on October 1, 2000, but he will remain a director.
Prior to founding Uproar, Mr. Simon was the Managing Director of Ablaksoft Kft.,
a Hungarian software company, from April 1993 to February 1995. He earned an
M.B.A. from Washington University in St. Louis and a B.S. in Electrical
Engineering from the University of Notre Dame.
Jeffrey L. Strief joined us as our Executive Vice President of Marketing
and Sales in October 1999. From May 1985 to June 1999, Mr. Strief worked for CMP
Media, where he served as Executive Vice President of the Business Technology
Group with responsibility for InformationWeek and other technology publications
and Internet services. Mr. Strief earned a B.A. in marketing from California
State University Fullerton.
Thompson B. Barnhardt joined our board of directors in February 1995. Since
November 1999, he has been President of BiznesPolska.pl, an Internet publishing
company. From June 1994 to October 1999, Mr. Barnhardt was President of New
World Publishing, Inc., a publisher of several English-language business
journals in Central Europe. Mr. Barnhardt earned an M.B.A. from the University
of Virginia Darden Graduate School of Business Administration and a B.A. in
economics from the University of Virginia.
Thomas E. Dooley joined our board of directors in March 2000. Mr. Dooley is
Co-Chairman and Chief Executive Officer of DND Capital Partners. From March 1980
through June 2000, Mr. Dooley held a variety of positions with Viacom Inc., most
recently as Deputy Chairman and Executive Vice President and a member of its
board of directors. During his 20-year tenure at Viacom, Mr. Dooley also served
as Executive Vice President, Finance, and Vice President -- Finance and
Treasurer, as well as President of Viacom's Interactive Television Division. He
also serves on the board of directors of the International Radio and Television
Society, St. Vincent's Services, the Friends Academy and La Branche & Company
Inc., and on the board of trustees of North Shore-Long Island Jewish Health
System. Mr. Dooley earned a B.S. from St. John's University and an M.B.A. from
the New York University Graduate School of Business.
Esther Dyson joined our board of directors in April 1997. Ms. Dyson has
been the Chairman of EDventure Holdings, publisher of the newsletter Release
1.0, since 1983. She is the author of Release 2.0, an acclaimed book about
cyberspace. Ms. Dyson is a director of six software companies: Aristotle
International, Graphisoft, Languageware.net, Scala Business Solutions, Talus
Solutions and Thinking Tools. She
102
112
is also a director of WPP Group, a communications company and MedicaLogic/
Medscape, a healthcare Web site, as well as Chairman of the Internet Corporation
for Assigned Names and Numbers. Ms. Dyson holds a B.A. from Harvard College.
James J. Geddes, Jr. joined our board of directors in February 2000. Mr.
Geddes is Senior Managing Director and a member of the board of directors of
Trans Cosmos USA, Inc., where he has worked in various capacities since August
1994. Mr. Geddes earned a B.S.E.E. from the University of Maryland.
Catherine V. Mackay joined our board of directors in September 1999. Ms.
Mackay is President of Pearson Television Enterprises, the division of Pearson
Television that operates all of its Internet, interactive television,
merchandising and music publishing activities. She has worked for Pearson
Television Enterprises since March 1995 in various capacities. Prior to joining
Pearson Television, Ms. Mackay worked for Cie Generale des Eaux, from January
1994 to August 1995, and for Lazard Freres & Co. from September 1988 to December
1991. Ms. Mackay earned an M.B.A. from INSEAD and a B.A. from Oxford University.
Richard Janssen will join our board of directors upon the closing of the
merger. Mr. Janssen has been President and Chief Operating Officer of
Homestore.com, a family of real estate web sites, since December 1996. From
August 1994 to December 1996, Mr. Janssen was President and Chief Executive
Officer of InfoTouch Corporation, which was merged with Homestore.com in
December 1996. Mr. Janssen earned a B.S. in math and computer science from UCLA.
Gary W. Loveman will join our board of directors upon the closing of the
merger. Mr. Loveman has been a director of Harrah's Entertainment, Inc. since
February 2000 and its Chief Operating Officer since May 1998. Mr. Loveman has
been a member of Harrah's three-executive Office of the President since May 1999
and was executive vice president of Harrah's from May 1998 to May 1999. Prior to
joining Harrah's Entertainment, Mr. Loveman was Associate Professor of Business
Administration, Harvard University Graduate School of Business Administration
from 1994 to 1998. He is also a director of National Airlines, Inc. and Zoho
Corporation. Mr. Loveman has a B.A. in economics from Wesleyan University and a
Ph.d. in economics from the Massachusetts Institute of Technology.
Frederick R. Krueger will become Vice-chairman of the Uproar board of
directors upon closing of the merger. Mr. Krueger currently serves as Chief
Executive Officer of iwin, which he founded in July 1999. Prior to founding
iwin, Mr. Krueger founded RandomNoise, the maker of the Java-based Internet
authoring tool Coda, in March 1996 and served as its Chief Executive Officer
until the company was sold in May 1998. From May 1992 to August 1995, Mr.
Krueger founded Fauve Software, which created the graphic design products
Matisse and xRes, and served as its Chief Executive Officer. Mr. Krueger earned
a B.A. in math from Cornell University and a Ph.d. in math from Stanford
University.
COMPOSITION OF THE BOARD OF DIRECTORS
Our board of directors currently consists of eight members, five of whom
are outside directors. Upon the closing of the merger, the board will be
increased to ten members, seven of whom will be outside directors. The directors
are elected by our stockholders at the annual meeting of stockholders. Each of
our directors holds office until the next annual meeting of stockholders and
until the director's successor is elected and qualified, or until the director's
earlier death, resignation or removal.
DIRECTOR COMPENSATION
In the past, we have compensated our directors with stock options from time
to time. As of July 31, 2000, our directors held options to purchase an
aggregate of 228,000 shares as compensation for services.
Under the automatic option grant program of our Stock Incentive Plan, each
individual who has served as a nonemployee board member for at least 6 months
and is to continue to serve as a nonemployee member of the board of directors is
granted an option each year to purchase 5,000 shares of our common stock at an
exercise price equal to the fair market value of such shares on the date of
grant. In addition, under the automatic option grant program of our Stock
Incentive Plan, each individual who first joins the board of directors as a
nonemployee member of the board is granted an option, as of the date of his or
her
103
113
commencement of service on the board, to purchase 30,000 shares of our common
stock at a price equal to the fair market value of such shares on the date of
grant. Each non-employee director who received a grant of 5,000 options or
30,000 options under the automatic option grant program in the first quarter of
2000 received a grant of the same number of options under the discretionary
option grant program in the third quarter of 2000. The exercise price of all
such options was equal to the fair market value of a share of Uproar common
stock on the date of grant. See "Securities Ownership of Certain Beneficial
Owners and Management of Uproar".
No executive officer of Uproar serves on the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of Uproar's board of directors or compensation committee.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
with respect to the annual and long-term compensation of Uproars' Chief
Executive Officer and each of Uproar's other highly compensated executive
officers, referred to as named executive officers, whose total compensation
exceeded $100,000 for the fiscal years ended December 31, 1998 and 1999.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ------------
OTHER SECURITIES
ANNUAL ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS
--------------------------- ---- -------- ------- ------------ ------------
Kenneth D. Cron(1).......................... 1998 $ -- $ -- $ -- --
Chairman and Chief Executive Officer 1999 -- -- -- 1,600,000
Christopher R. Hassett(2)................... 1998 -- -- -- --
President and Chief Operating Officer 1999 162,950 -- -- 686,978
Michael K. Simon(3)......................... 1998 122,495 -- -- 82,000
Executive Vice President, 1999 150,000 -- 2,950 100,000
President Of International
David A. Becker(4).......................... 1998 108,717 32,800 -- --
1999 150,000 35,820 -- --
- ---------------
(1) Kenneth D. Cron joined us as our Chief Executive Officer in September 1999
and became Chairman of our board of directors in December 1999. Mr. Cron is
not entitled to receive an annual salary or bonus from us.
(2) Christopher R. Hassett joined us as our Chief Operating Officer and as a
director in July 1999. He currently also serves as our President. Mr.
Hassett is not entitled to receive an annual salary or bonus from us.
(3) Mr. Simon served as our Chief Executive Officer until September 1999 and as
our Chairman until December 1999. Mr. Simon also served as our Chief
Financial Officer from November 1999 through May 2000. He is currently an
Executive Vice President and the President of International but will resign
as an officer of Uproar on October 1, 2000.
(4) Mr. Becker was our President and Chief Operating Officer until August 1999.
104
114
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to the
stock options granted during the fiscal year ended December 31, 1999 to each
named executive officer of Uproar listed in the Summary Compensation Table
above. Uproar did not grant any stock appreciation rights in 1999.
OPTION GRANTS IN LAST FISCAL YEAR
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE AT
NUMBER OF OPTIONS EXERCISE ASSUMED ANNUAL RATE OF
SECURITIES GRANTED TO PRICE IN STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES DOLLARS OPTION TERM(3)
OPTIONS IN PER EXPIRATION ------------------------------
NAME GRANTED FISCAL YEAR(1) SHARE(2) DATE 5% 10%
---- ---------- -------------- -------- ---------- ------------- --------------
Kenneth D. Cron.............. 1,600,000 30.0% $9.43 9/9/09 $9,483,731 $24,033,636
Christopher R. Hassett....... 686,987 12.9 9.43 9/9/09 4,071,947 10,319,112
Michael K. Simon............. 100,000 1.9 9.43 9/9/09 592,733 1,502,102
David A. Becker.............. -- -- -- -- -- --
- ---------------
(1) The percentage of total options granted to employees in the last fiscal year
is based on options to purchase an aggregate of 5.3 million shares of common
stock granted under our option plans in 1999.
(2) The exercise price equals the fair market value of the common stock as of
the grant date as determined by Uproar's board of directors.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant. It is calculated assuming that the fair market value
of common stock on the date of grant appreciates at the indicated annual
rate compounded annually for the entire term of the option and that the
option is exercised and sold on the last day of its term for the appreciated
stock price. These numbers are calculated based on the requirements of the
Securities and Exchange Commission and do not reflect our estimate of future
stock price growth.
AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth information with respect to the year-end
option values of options held by each named executive officer of Uproar listed
in the Summary Compensation Table above at December 31, 1999. None of these
officers exercised options during 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN THE MONEY OPTIONS
AT DECEMBER 31, 1999 AT DECEMBER 31, 1999 (1)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Kenneth D. Cron............................... 800,000 800,000 $10,352,800 $10,352,800
Christopher R. Hassett........................ 343,489 343,489 4,445,091 4,445,091
Michael K. Simon.............................. 109,759 72,241 1,490,802 1,456,090
David A. Becker............................... 400,000 -- 8,062,400 --
- ---------------
(1) Amounts calculated by subtracting the exercise price of the options from the
fair market value of the underlying common stock as quoted as the closing
price on EASDAQ of $22.366 per share on December 30, 1999 as converted into
United States dollars. Conversions into United States dollars are calculated
using the noon buying rate for cable transfers in foreign currencies as
certified by the Federal Reserve Bank of New York on the date the price was
quoted.
105
115
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
Uproar is currently party to an employment agreement with each of Messrs.
Cron, Hassett and Simon.
The agreements with each of Messrs. Cron and Hassett provides for
compensation solely in the form of options to acquire shares of Uproar's our
common stock.
Pursuant to the agreement with Mr. Cron, we granted him options to acquire
1,600,000 shares of our common stock, of which options to acquire 800,000 shares
have vested and are currently exercisable as of August 30, 2000, and options to
acquire the remaining 800,000 shares will have vested and become exercisable by
September 6, 2001. Pursuant to the agreement with Mr. Hassett, we granted him
options to acquire 686,978 shares of our common stock, of which options to
acquire 343,489 shares have vested and are currently exercisable as of August
30, 2000, and options to acquire the remaining 343,489 shares will have vested
and become exercisable by September 6, 2001. In the event of the termination of
employment of Mr. Cron or Mr. Hassett for any reason other than termination by
us for cause, or in the event of a change of control of Uproar, all stock
options that have not been exercised will immediately vest. Messrs. Cron and
Hassett are also entitled to participate in all health and other benefit plans
we provide to our executive employees. The employment of each of the executives
continues on an at-will basis. The employment agreement of each of the
executives prohibits him from competing with us for a period of one year from
the date of termination if we terminate his employment for cause or if he
resigns without good reason. We have agreed to indemnify each of the executives
for all liabilities relating to his status as an officer or director to the
extent permitted by the laws of the State of Delaware.
The agreement with Mr. Simon provides for compensation in the form of an
annual salary and bonus. In addition, beginning on March 31, 2000, at the end of
each calendar quarter during the term of the agreement, we are required to grant
Mr. Simon options to acquire 30,000 shares of our common stock, which will vest
and be exercisable upon termination of the agreement. Mr. Simon is also entitled
to participate in all health and other benefit plans provided by us to our
executive employees. An amendment to Mr. Simon's agreement provides that the
agreement and his employment under the agreement will terminate on September 30,
2000.
STOCK INCENTIVE PLAN
The Stock Incentive Plan is intended to serve as the successor equity
incentive program to our 1999 Share Option/Share Issuance Plan. The Stock
Incentive Plan became effective upon its adoption by the board of directors. We
anticipate that it will be ratified by the stockholders within a reasonable time
after board approval.
As of February 23, 2000, 6,750,000 shares of our common stock were
authorized for issuance under the Stock Incentive Plan. If the stockholders
approve the proposed amendment and restatement of the Stock Incentive Plan, an
additional 2,250,000 shares of our common stock will be authorized for issuance
under the Stock Incentive Plan, bringing the total number of shares authorized
for issuance under the Stock Incentive Plan to 9,000,000 shares. The Stock
Incentive Plan share reserve automatically increases on the first trading day of
each calendar year by a number of shares equal to one percent (1%) of the total
number of shares of common stock outstanding on the last trading day of the
immediately preceding calendar year, but no annual increase may exceed 400,000
shares. In no event may any one participant in the Stock Incentive Plan receive
option grants or direct stock issuances for more than 2,000,000 shares in the
aggregate per calendar year.
Outstanding options under the predecessor plan have been incorporated into
the Stock Incentive Plan and no further option grants will thereafter be made
under that predecessor plan. The incorporated options will continue to be
governed by their existing terms, unless our compensation committee extends one
or more features of the Stock Incentive Plan to those options. However, except
as otherwise noted below, the outstanding options under that predecessor plan
contain substantially the same terms and conditions summarized below for the
discretionary option grant program under the Stock Incentive Plan.
For a full description of the terms of the Stock Incentive Plan, see
"Proposal to Approve Amendment and Restatement of Uproar Inc. 2000 Stock
Incentive Plan" on page 61.
106
116
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS RELATING TO UPROAR
RELATED PARTY TRANSACTIONS
Sale of Common Stock
In February 2000, we sold 1,265,372 shares of common stock for
approximately $25.0 million to Trans Cosmos USA, Inc. As a result of this
transaction, Trans Cosmos now owns more than five percent (5%) of our stock. In
addition, we agreed to appoint a Trans Cosmos representative, Mr. Geddes, to our
board of directors.
Strategic Relationships and Acquisitions
In January 1999, we entered into a strategic relationship with Pearson
Television that provides us with rights to create and produce online
English-language versions of television game show formats owned by Pearson. In
connection with this arrangement, we issued 2,000,000 shares to Pearson. In
addition, we agreed to appoint a Pearson representative, Ms. Mackay, to our
board of directors. Ms. Mackay's term will expire at the annual stockholders'
meeting in 2001. In July 2000, we and Pearson amended and restated the agreement
underlying our strategic relationship.
Under the Pearson agreement, we pay Pearson a 50.0% royalty on all net
revenues we receive that are directly related to our online development and
implementation of the Pearson game shows. These net revenues exclude:
- a royalty of 15.0% of gross revenues, payable annually to Pearson;
- Web site maintenance costs of $120,000 a year;
- prize costs up to the greater of $10,000 per month for each game or 5% of
gross revenues;
- music and talent costs, including copyright, clearance and related
expenses for rights for use in the online game shows;
- direct marketing costs;
- costs of game show question research and development;
- costs of measuring online traffic and usage;
- registration and filing fees related to gaming; and
- sales commissions of 15.0%.
We paid Pearson a guaranteed minimum amount under the agreement of
$400,000.
In December 1998, pursuant to the agreement, Pearson purchased $100,000
worth of online promotion from us at a cost per thousand impressions of $20.00;
Pearson purchased an additional $100,000 worth of online promotion from us
during the first quarter of 1999, but at a discounted cost per thousand
impressions of $6.67.
The term of the agreement expires on June 30, 2005.
In June 1999, we acquired PrizePoint Entertainment Corporation, a provider
of online single-player games. The following table sets out the number of
PrizePoint shares that the following officers and directors of PrizePoint
purchased, the number of our shares into which they were converted and the
equivalent per share price:
NAME PRIZEPOINT SHARES UPROAR SHARES PRICE PER UPROAR SHARE
---- ----------------- ------------- ----------------------
Christopher R. Hassett................ 716,667 753,040 $0.30
Francis G. Blot....................... 218,500 229,560 $0.01
107
117
The Uproar shares listed for Mr. Hassett include 184,400 shares owned by
his spouse; the Uproar shares listed for Mr. Blot include 69,000 shares owned by
his spouse.
Under the merger agreement with PrizePoint, we issued approximately
2,440,000 shares of our common stock to PrizePoint stockholders, including Mr.
Hassett, our President and Chief Operating Officer, and his family members. In
addition, we appointed Mr. Hassett to our board of directors. Mr. Hassett's term
will expire at the annual stockholders' meeting in 2001.
Option Grants
The following directors and officers have been granted options to purchase
Uproar common stock:
1999 OPTION PURCHASE PRICE 2000 OPTION PURCHASE PRICE
NAME GRANTS PER SHARE GRANTS PER SHARE
---- ----------- -------------- ----------- --------------
Kenneth D. Cron...................... 1,600,000 $9.43 1,600,000 $5.13
Christopher R. Hassett............... 686,978 $9.43 200,000 $5.13
Michael K. Simon..................... 100,000 $9.43 30,000 $26.88
30,000 $7.44
Francis G. Blot...................... 223,360 $9.43
Timothy J. Ewing..................... 80,000 $9.43 170,000 $7.50
Robert D. Marafioti.................. 500,000 $10.82 300,000 $5.13
Jeffrey L. Strief.................... 700,000 $10.82 350,000 $5.13
Joel E. Wilhite...................... 12,000 $2.21 80,000 $7.31
8,554 $9.43
The options listed for Mr. Blot include 93,760 options granted to his
spouse.
In 1997, we created an option program under which employees and directors
were granted options to purchase in the aggregate up to 100,000 shares at an
exercise price of $2.21 per share. That price was above the fair market value of
the shares at the time this program was created. We granted the following
directors and executive officers options under this program:
NAME OPTIONS PURCHASE PRICE
---- ------- ---------------
Michael K. Simon............................................ 82,000 $2.21 per share
Thompson B. Barnhardt....................................... 32,000 $2.21 per share
Esther Dyson................................................ 32,000 $2.21 per share
In 1996, Michael Simon was granted an option to purchase 484,000 shares at
a price of $0.46 per share and an option to purchase 200,000 shares of our
common stock at $0.77 per share. The exercise price of these options was above
the fair market value of the shares at the time of grant and the expiration date
of the options was December 31, 1997. In December 1997, our board of directors
extended the expiration date of these options to June 30, 1998, and increased
the exercise price to $0.53 per share and $0.88 per share, respectively. In
1998, Mr. Simon exercised these options.
108
118
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF UPROAR
The following table sets forth certain information regarding the beneficial
ownership of Uproar's common stock as of August 23, 2000, for:
- each person who is known by Uproar to own beneficially more than five
percent (5%) of the outstanding shares of common stock;
- each director of Uproar;
- each executive officer of Uproar named in the Summary Compensation Table;
and
- all of the directors and executive officers of Uproar as a group.
Unless otherwise indicated, the address of each person listed on the table
is c/o Uproar Inc., 240 West 35th Street, New York, New York 10001.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to applicable community property laws, the persons named in the table have sole
voting power 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 person listed include
the number of shares of common stock underlying options held by such person that
are exercisable within 60 days of August 23, 2000, but excludes shares of common
stock underlying options held by any other person. Percentage of beneficial
ownership is based on 29,386,788 shares of Uproar common stock outstanding on
August 23, 2000 and the beneficial ownership of the individuals and entities
listed below on August 23, 2000.
SHARES OF UPROAR COMMON
STOCK BENEFICIALLY
OWNED AS OF
AUGUST 23, 2000
----------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
------------------------ ------------ -------
Kenneth D. Cron (1)......................................... 1,276,662 4.2%
Christopher R. Hassett (2).................................. 1,222,587 4.1
Michael K. Simon (3)........................................ 1,293,203 4.4
David A. Becker (4)......................................... 240,000 *
Thompson B. Barnhardt (5)................................... 28,500 *
Thomas E. Dooley............................................ -- --
Esther Dyson (6)............................................ 160,740 *
James J. Geddes, Jr. (7).................................... 1,742,142 5.9
Catherine V. Mackay (8)..................................... 2,002,500 6.8
Pearson Television, Inc. (9)................................ 2,000,000 6.8
Trans Cosmos USA, Inc. (10)................................. 1,742,142 5.9
All directors and executive officers as a group (14
persons).................................................. 9,176,245 28.2%
- ---------------
* Indicates less than one percent of the common stock.
(1) Includes 1,233,333 shares of common stock issuable pursuant to option(s)
exercisable within 60 days of August 23, 2000.
(2) Includes (a) 529,546 shares of common stock issuable pursuant to option(s)
exercisable within 60 days of August 23, 2000, and (b) 144,894 shares of
common stock owned by Mr. Hassett's spouse.
(3) Includes 219,083 shares of common stock issuable pursuant to option(s)
exercisable within 60 days of August 23, 2000.
(4) Includes 240,000 of common stock issuable pursuant to option(s) exercisable
within 60 days of August 23, 2000. Mr. Becker's address is 87 Remsen
Street, #3, Brooklyn, NY 11201.
109
119
(5) Includes 28,500 shares of common stock issuable pursuant to option(s)
exercisable within 60 days of August 23, 2000. Mr. Barnhardt's address is
c/o Ul. Walicow 11, Warsaw 00-865, Poland.
(6) Includes 34,500 shares of common stock issuable pursuant to option(s)
exercisable within 60 days of August 23, 2000. Ms. Dyson's address is 104
Fifth Avenue, 20th Floor, New York, NY 10011.
(7) All shares indicated as owned by Mr. Geddes are included because of Mr.
Geddes' affiliation with Trans Cosmos USA, Inc. Mr. Geddes disclaims
beneficial ownership of all shares owned by Trans Cosmos USA, Inc. Mr.
Geddes' address is c/o Trans Cosmos USA, Inc., 777 108th Avenue NE, Suite
2300, Bellevue, Washington 98004-5149.
(8) Includes 2,500 shares of common stock issuable pursuant to option(s)
exercisable within 60 days of August 23, 2000. 2,000,000 shares of common
stock indicated as owned by Ms. Mackay are included because of Ms. Mackay's
affiliation with Pearson Television, Inc. Ms. Mackay disclaims beneficial
ownership of such shares owned by Pearson Television, Inc. Ms. Mackay's
address is c/o Pearson Television, Inc., 1330 Avenue of the Americas, New
York, NY 10019.
(9) The address of Pearson Television, Inc. is 1330 Avenue of the Americas, New
York, NY 10019.
(10) The address of Trans Cosmos USA, Inc. is 777 108th Avenue NE, Suite 2300,
Bellevue, Washington 98004-5149.
110
120
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF IWIN
The following table sets forth the number and percentage of shares of iwin
common stock beneficially owned as of August 23, 2000 by:
- each person who is known by iwin to beneficially own more than five
percent (5%) of the outstanding shares of any class of iwin capital
stock;
- each director or nominee of iwin;
- the chief executive officer of iwin; and
- all iwin executive officers and directors as a group.
Except as noted below, the address of each person listed on the table is
c/o iwin.com, Inc., 10940 Wilshire Blvd., Los Angeles, CA 90024.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally 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. Share numbers and percentages in this
section assume that each outstanding share of iwin convertible preferred stock
has been converted into one share of iwin common stock, which will occur
concurrently with the closing of the merger. The number of shares of common
stock outstanding used in calculating the percentage for each listed person
includes the number of shares of common stock underlying options held by such
person that are exercisable within 60 days of August 23, 2000, but excludes the
number of shares of common stock underlying any other options held by such
person and any options held by any other person. Percentage of beneficial
ownership is based on an assumed 15,718,881 shares of common stock outstanding
as of August 23, 2000, and the beneficial ownership of the entities and
individuals listed below on August 23, 2000.
SHARES OF IWIN COMMON
STOCK BENEFICIALLY OWNED
AS OF AUGUST 23, 2000
-------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
------------------------ --------- -------
Frederick R. Krueger........................................ 4,828,660 30.7%
Rader Reinfrank Holdings No. 8(1)........................... 957,738 6.1%
Harrah's Operating Company, Inc.(2)......................... 836,120 5.3%
Kevin Wendle................................................ 698,814 4.4%
Richard Janssen............................................. 163,043 1.0%
Fred Nazem.................................................. 44,466 *
Gary Loveman(3)............................................. -- --
Scott Kaufman(4)............................................ 103,012 *
All directors and executive officers as a group (5
persons).................................................. 5,837,995 37.0%
- ---------------
* Indicates less than one percent (1%) of the common stock.
(1) The address of Rader Reinfrank Holdings No. 8 is 9465 Wilshire Boulevard,
Suite 950, Beverly Hills, California 90212.
(2) The address of Harrah's Operating Company, Inc. is 51 West Sahara Avenue,
Las Vegas, Nevada 89146.
(3) In addition to being an iwin nominee to the Uproar board of directors, Mr.
Loveman is the Chief Operating Officer and a director of Harrah's
Entertainment, Inc., the parent company of Harrah's Operating Company, Inc.
(4) Includes 38,783 shares of common stock issuable pursuant to option(s)
exercisable within 60 days of August 23, 2000. Does not include 104,417
shares of common stock issuable pursuant to option(s) exercisable
immediately upon the closing of the merger.
111
121
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
UPROAR FOLLOWING THE MERGER
The following table assumes the merger had been consummated on August 23,
2000, and sets forth certain information regarding the beneficial ownership of
Uproar's common stock after the merger for:
- each person who by Uproar believes will own beneficially more than five
percent (5%) of the outstanding shares of common stock;
- each director of Uproar after the merger;
- each executive officer of Uproar named in the Summary Compensation Table;
- all of the directors and executive officers of Uproar as a group after
the merger; and
- to the extent not included above, the beneficial owners and management of
iwin identified on page 111.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Except as indicated by footnote, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them. The number of shares of common stock outstanding
used in calculating the percentage for each listed person includes the shares of
common stock underlying options held by such person that are exercisable within
60 days of August 23, 2000, but excludes shares of common stock underlying
options held by any other person. Percentage of beneficial ownership is based on
29,386,788 shares of Uproar common stock outstanding as of August 23, 2000,
42,445,579 shares of common stock to be outstanding after the completion of the
merger and the beneficial ownership of the individuals and entities listed below
of Uproar common stock and iwin common stock on August 23, 2000. All share
numbers are indicated as Uproar common stock. iwin shares have been converted
for purposes of this table assuming a conversion ratio of 0.8308.
SHARES OF UPROAR COMMON
STOCK BENEFICIALLY
OWNED AFTER MERGER
--------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
------------------------ ---------- -------
Kenneth D. Cron............................................. 1,276,662 2.9%
Christopher R. Hassett...................................... 1,222,587 2.8
Michael K. Simon............................................ 1,293,203 3.0
David A. Becker............................................. 240,000 *
Thomas E. Dooley............................................ -- --
Esther Dyson................................................ 160,740 *
James J. Geddes, Jr......................................... 1,742,142 4.1
Catherine V. Mackay......................................... 2,002,500 4.7
Richard Janssen............................................. 135,456 *
Gary Loveman................................................ -- --
Frederick Krueger(1)........................................ 4,076,751 9.6
Pearson Television, Inc. ................................... 2,000,000 4.7
Trans Cosmos USA, Inc....................................... 1,742,142 4.1
Kevin Wendle................................................ 580,575 1.4
Fred Nazem.................................................. 36,942 *
Scott Kaufman............................................... 188,963 *
Rader Reinfrank Holdings No. 8.............................. 795,689 1.9
Harrah's Operating Company, Inc............................. 694,649 1.6
All former directors and executive officers of iwin as a
group (5 persons)......................................... 5,018,687 11.8%
All directors and executive officers of Uproar as a group
(17 persons).............................................. 13,548,915 29.6%
- ---------------
* Indicates less than one percent of the common stock.
For information on the vesting of options held by the above individuals and
entities and their addresses, please see pages 109 to 111.
(1) Frederick Krueger, iwin's chief executive officer, owned 65,100 shares of
Uproar common stock on September 18, 2000.
112
122
DESCRIPTION OF UPROAR CAPITAL STOCK
The following is a summary of certain matters with respect to the capital
stock of Uproar. Because it is only a summary, it does not contain all
information that may be important to you. Therefore, you should carefully read
the more detailed provisions of Uproar's amended and restated certificate of
incorporation and amended and restated bylaws attached as exhibits to our
filings with the Securities and Exchange Commission.
Our authorized capital stock currently consists of 112,000,000 shares of
common stock, par value $.01 per share, and 48,000,000 shares of preferred
stock, par value $.01 per share.
COMMON STOCK
As of August 23, 2000, there were 29,386,788 shares of common stock
outstanding held of record by 93 holders. After giving effect to the issuance of
the shares of common stock in the merger, there will be approximately 42,446,000
shares of common stock outstanding.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
those dividends, if any, as may be declared by the board of directors out of
legally available funds, subject to any preferential dividend rights of any
outstanding preferred stock. Upon our liquidation, dissolution or winding up,
the holders of common stock are entitled to receive ratably our net assets
available after the payment of all debts and other liabilities and subject to
the prior rights of any outstanding preferred stock. Holders of the common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are, and the shares offered by us in the
offering will be, when issued in consideration for payment, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of holders of
shares of any series of preferred stock which we may designate and issue in the
future.
PREFERRED STOCK
The board of directors is be authorized, without further stockholder
approval, to issue from time to time up to an aggregate of 48,000,000 shares of
preferred stock in one or more series and to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each series, including the dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. We have no present plans
to issue any shares of preferred stock.
GLOBAL INSTRUMENT CERTIFICATE UNITS
Some of our stockholders continue to hold interests in our shares in the
form of undivided interests, or GIC Units, in global instrument certificates, or
GICs, issued by Oesterreichische Kontrollbank Aktiengesellschaft, or OeKB, with
each GIC Unit representing one share. OeKB holds the shares and all rights
thereunder in trust for the GIC holders. OeKB, as legal owner of the shares,
votes at stockholder meetings only in accordance with the instructions of GIC
Unit holders, provided these have been received by OeKB in compliance with the
terms and conditions of the GIC arrangements.
GIC Units will be converted to the underlying shares on written application
by the GIC Unit holders to the OeKB. The OeKB charges a fee to the GIC Unit
holders for conversion according to the provisions applied by the OeKB from time
to time. The OeKB will not automatically convert the GICs in respect of shares
that it currently holds on behalf of GIC Unit holders to our shares of common
stock.
We withdrew from the trading facility for the GICs provided by the Vienna
Stock Exchange on November 30, 1999. As a result, the GIC Units are no longer
tradable on the Vienna Stock Exchange.
113
123
REGISTRATION RIGHTS
In our agreement with Pearson Television in January 1999, we granted
Pearson rights to register the shares of common stock that it acquired under
that agreement. Twice during the three-year period beginning in September 2000,
Pearson is entitled to require us to register all or any portion of its shares.
This type of registration right is known as a "demand" registration right. In
addition, during the five-year period commencing in January 2001, Pearson is
entitled to require us to register all or any portion of its shares when we
register shares of our common stock for our own account or for the account of
other stockholders. This type of registration right is known as a "piggyback"
registration right.
These registration rights are subject to certain conditions and
limitations, including:
- the right of the underwriters in any underwritten offering to limit the
number of shares of common stock held by Pearson to be included in any
demand or piggyback registration; and
- our right to refuse to effect a registration pursuant to Pearson's demand
registration rights during the twelve-month period following the
effective date of a registration statement in connection with which
Pearson exercised any piggyback registration rights, or at any time when
another registration statement of ours, other than a Form S-4 or S-8, is
reasonably foreseen by our board of directors to be filed within 30 days
of a registration demand, has been filed and not yet become effective, or
has been effective for less than six months prior to a registration
demand.
We are generally required to bear all of the expenses of registering
Pearson's shares of common stock, other than underwriting discounts and
commissions. Subject to the lock-up provisions contained in the Pearson
agreement, registration of any of the shares of common stock held by Pearson
would result in those shares becoming freely tradable without restriction under
the Securities Act of 1933, as amended, immediately after the effectiveness of
the registration We have agreed to indemnify Pearson in connection with the
registration of its shares of common stock under the terms of our agreement with
Pearson.
In connection with our sale of 1,265,372 shares of our common stock to a
strategic investor, Trans Cosmos USA, Inc., in February 2000, we granted that
strategic investor piggyback registration rights, subject to conditions and
limitations including the right of the underwriters in any written offering to
limit the number of shares of common stock held by Trans Cosmos to be included
in such piggyback registration. We also granted Trans Cosmos the right to
require us to file a registration statement on Form S-3 under the Securities Act
with respect to the shares of common stock it acquired from us. However, we are
not obligated to file this registration statement if:
- Form S-3 is not available;
- Trans Cosmos proposes to sell its common stock for an aggregate price of
less than $2.0 million;
- our Chief Executive Officer provides Trans Cosmos with a certificate
stating that, in the judgment of the Board of Directors, the registration
would be seriously detrimental to us and our stockholders, which would
allow us, once in any 12 month period, to defer the registration for up
to 90 days;
- the registration would require us to qualify to do business in any
particular jurisdiction or to provide a second consent of service of
process; or
- we have filed two effective Form S-3 registrations for the strategic
investor.
We are generally required to bear all of the expenses of registering Trans
Cosmos common stock, other than underwriting discounts and commissions and legal
fees of the strategic investor. Registration of any of the shares of common
stock held by Trans Cosmos would result in those shares becoming freely tradable
without restriction under the Securities Act immediately after effectiveness of
the registration. We have agreed to indemnify Trans Cosmos in connection with
the registration of its shares of common stock under the terms of the
registration rights agreement.
In connection with our acquisition of Take Aim Holdings Ltd., the parent
company of ibetcha.com Inc., which operates the Web site ibetcha.com, we entered
into a registration rights agreement with the Tulchinsky-
114
124
Stern Trust Company, as the representative of the shareholders who received
shares of Uproar common stock in the acquisition. Under the registration rights
agreement, we granted the Tulchinsky-Stern Trust Company and the other
shareholders the right to demand that we register the shares they acquired in
the acquisition on one occasion prior to December 31, 2002. In addition, prior
to December 31, 2002, Tulchinsky-Stern is entitled to require us to register all
or any portion of such shares when we register for sale to the public shares of
our common stock for our own account or for the account of other Uproar
stockholders.
These registration rights are subject to conditions and limitations,
including:
- the right of the underwriters in any underwritten offering to limit the
number of shares of common stock held by Tulchinsky-Stern and the other
shareholders to be included in any registration; and
- our right (once during any twelve-month period) to defer commencing a
registration filing for not more than 150 days in the event that our
board of directors determines in good faith that it would be detrimental
to us and our stockholders for the registration statement to be filed.
We are generally required to bear all expenses of registering the common
stock under this registration rights agreement. We have agreed to indemnify the
selling shareholders for damages in connection with the registration of their
shares.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND UPROAR'S
CERTIFICATE OF INCORPORATION AND BYLAWS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law (as amended from time to time, the "DGCL"). Subject to certain
exceptions, Section 203 prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the interested stockholder attained
such status with the approval of the board of directors or unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, fifteen percent (15%) or more of the corporation's
voting stock. This statute could prohibit or delay the accomplishment of mergers
or other takeover or change in control attempts with respect to Uproar and,
accordingly, may discourage attempts to acquire Uproar.
In addition, provisions of the certificate of incorporation and bylaws,
which provisions will be in effect upon the closing of the offering and are
summarized in the following paragraphs, may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the shares held by
stockholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation provides that, except to the extent
prohibited by the Delaware General Corporation Law, or DGCL, our directors shall
not be personally liable to Uproar or our stockholders for monetary damages for
any breach of fiduciary duty as directors of Uproar. Under the DGCL, the
directors have a fiduciary duty to Uproar which is not eliminated by this
provision of the certificate and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available. In addition, each director will continue to be subject to liability
under the DGCL for breach of the director's duty of loyalty to Uproar, for acts
or omissions which are found by a court of competent jurisdiction to be not in
good faith or which involves intentional misconduct, or knowing violations of
law, for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
prohibited by DGCL. This provision also does not affect the directors'
responsibilities under any other laws, such as the Federal securities laws or
state or Federal environmental laws.
115
125
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director:
(1) for any breach of the director's duty of loyalty to the corporation or
its stockholders;
(2) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(3) arising under Section 174 of the DGCL; or
(4) for any transaction from which the director derived an improper
personal benefit.
The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise. The Certificate eliminates the personal liability
of directors to the fullest extent permitted by Section 102(b)(7) of the DGCL
and provides that Uproar shall fully indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that such person is or was a director or
officer of Uproar, or is or was serving at the request of Uproar as a director
or officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding.
Our bylaws permit us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions, regardless of whether the DGCL would permit indemnification. We have
obtained liability insurance for our officers and directors.
At present, we are not the subject of any pending litigation or proceeding
involving any director, officer, employee or agent as to which indemnification
will be required or permitted under the certificate. We are not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Uproar's common stock is American
Stock Transfer & Trust Company, New York, New York.
116
126
COMPARISON OF STOCKHOLDER RIGHTS
GENERAL
Both Uproar and iwin are corporations organized under the laws of Delaware
and are therefore subject to the Delaware corporation statute. However, there
are differences between the certificates of incorporation and bylaws of Uproar
and iwin.
CAPITALIZATION
Uproar. Uproar is authorized to issue 112,000,000 shares of common stock
and 48,000,000 shares of preferred stock. As of August 23, 2000, 29,386,788
shares of Uproar common stock were issued and outstanding and no shares of
preferred stock were issued and outstanding. Uproar's board has the authority,
without stockholder approval, to issue shares of authorized preferred stock from
time to time in one or more series and to fix the rights and preferences,
including voting rights, of each series of preferred stock, which rights and
preferences may be superior to that of Uproar common stock on all matters voted
on by the Uproar stockholders.
iwin. iwin is authorized to issue 35,000,000 shares of common stock and
20,000,000 shares of preferred stock. As of August 23, 2000, 7,193,189 shares of
common stock were issued and outstanding, and 2,250,000, 5,177,865, and
1,097,827 shares of the Series A preferred stock, Series B preferred stock and
Series C preferred stock, respectively, were issued and outstanding.
VOTING RIGHTS
Uproar. Each holder of Uproar common stock is entitled to one vote for
each share and may not cumulate votes. Except as otherwise required by law, the
holders of Uproar common stock vote on all matters voted on by the Uproar
stockholders (with the exclusive right to vote in the election of directors and
for all other purposes) and the holders of Uproar preferred stock are not
entitled to vote at or receive notice of any meeting of stockholders.
iwin. Holders of iwin capital stock are entitled to one vote for each
share of capital stock held by them, subject to customary adjustments in the
event of subdivisions or combinations of common stock, stock dividends,
reorganizations, reclassifications, diluting issues or similar events. All
shares of common stock and all shares of preferred stock vote together as a
single class, except as otherwise required by law or provided in the certificate
of incorporation. So long as the voting power of the outstanding shares of
Series B preferred stock represents ten percent (10%) or more of the total
voting power of all outstanding shares, the holders of Series B preferred stock,
voting as a separate class, are entitled to elect one director. The remaining
directors are elected by the holders of the common stock, the Series A preferred
stock and the Series C preferred stock, voting as a single class. The Series B
preferred stock and Series C preferred stock each vote as a separate class with
respect to certain fundamental matters, including without limitation certain
mergers and consolidations (including the merger), liquidations or dissolutions,
repurchases and redemptions of equity securities, issuances of senior preferred
or common stock and certain reclassifications of capital stock.
NUMBER OF DIRECTORS
Uproar. Uproar's certificate of incorporation provides that the number of
directors shall be such number, not less than five or more than fifteen, as is
set forth in the bylaws, and may not be decreased or increased to less than five
or more than fifteen without the approval of at least a majority of the
outstanding shares of capital stock. Uproar's bylaws provide that the number of
directors shall be fixed by the board of directors or the stockholders at their
annual meeting. Uproar's bylaws further provide that the directors will be
elected at an annual meeting of stockholders and hold office until the next
annual meeting and until their successors are elected and qualified or until
their earlier death, resignation or removal.
117
127
iwin. iwin's certificate of incorporation provides for seven directors,
unless changed by an amendment to the bylaws or the certificate of
incorporation. iwin's bylaws further provide that the directors will hold office
until the expiration of the term for which elected and until a successor has
been elected and qualified.
REMOVAL OF DIRECTORS
Uproar. Uproar's bylaws provide that the stockholders may remove a
director with or without cause by the affirmative vote of the holders of a
majority of the shares entitled to vote at an election of directors, except as
otherwise provided by law.
iwin. iwin's bylaws provide that the stockholders may remove a director
with or without cause by the affirmative vote of the holders of a majority of
the shares of the capital stock of iwin then outstanding and entitled to vote.
However, if any class or series of stock is entitled to elect one or more
directors by the certificate of incorporation, only holders of the outstanding
shares of that class or series may remove such director without cause.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Uproar. Uproar's certificate of incorporation and bylaws provide that the
directors may fill a vacancy on the board, including a vacancy caused by an
increase in the number of directors, by a vote of a majority of the directors
then in office, though less than a quorum, or by a sole remaining director. A
director elected to fill a vacancy will be elected to hold office until the next
annual meeting of stockholders or until a successor is elected and qualified.
iwin. iwin's bylaws provide that the directors may fill a vacancy on the
board, including a vacancy caused by an enlargement of the board, by a vote of
the majority of the directors then in office, even if they constitute less than
a quorum, or by the sole remaining director. However, if any class or series of
stock is entitled to elect one or more directors by the certificate of
incorporation, only a majority of the directors elected by such class or series
then in office, or the sole remaining director so elected, may fill vacancies or
newly created directorships of such class or series. If, at the time of filling
any vacancy, the directors then in office constitute less than a majority of the
whole board, then stockholders holding at least ten percent of the total number
of shares at the time outstanding having the right to vote for such directors
may cause an election to be held to fill such vacancy. A director elected to
fill a vacancy following the resignation of an incumbent director will be
elected to hold office until the expiration of the term of office of the
director being replaced and until a successor has been elected and qualified.
AMENDMENTS TO CERTIFICATE OF INCORPORATION
Uproar. Uproar's certificate of incorporation provides that any amendment
of provisions of the certificate of incorporation relating to the board of
directors generally, treatment of compromises or arrangements between Uproar and
its creditors or stockholders, personal liability of directors, indemnification,
or amendment of the certificate of incorporation or bylaws requires the
affirmative vote of the holders of at least 66.67% of the shares of capital
stock of Uproar outstanding and entitled to vote generally in the election of
directors.
iwin. iwin's certificate of incorporation provides that iwin may not amend
its certificate of incorporation to materially and adversely affect the rights
of the holders of Series B preferred stock and Series C preferred stock without
first obtaining the approval of holders of not less than the majority of the
outstanding shares of the Series B preferred stock and Series C preferred stock,
each series voting as a separate class.
AMENDMENTS TO BYLAWS
Uproar. Uproar's bylaws and certificate of incorporation provide that the
directors may amend the bylaws by the affirmative vote of 66.67% of the members
of the Board of Directors. In addition, Uproar's bylaws provide that the
stockholders may amend the bylaws by the affirmative vote of a majority of the
shares
118
128
of Uproar capital stock outstanding and entitled to vote thereon at a meeting of
stockholders called for such purpose.
iwin. iwin's bylaws provide that the bylaws may be adopted, amended or
repealed by a majority of the shares held by the stockholders entitled to vote.
iwin's bylaws further provide that the corporation, in its certificate of
incorporation, may confer the power to adopt, amend or repeal the bylaws upon
the directors. iwin's certificate of incorporation confers this authority upon
the board of directors.
ACTION BY WRITTEN CONSENT
Uproar. Uproar's certificate of incorporation provides that the
stockholders may not take any action by written consent in lieu of a meeting.
iwin. iwin's bylaws provide that any action required to be taken by
stockholders may be taken by written consent, if the written consent is signed
by the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote were present and voted. Written notice of
stockholder action must be given to those stockholders who have not consented in
writing.
NOTICE OF STOCKHOLDER ACTIONS
Uproar. Uproar's bylaws provide that to nominate directors or bring
business before an annual meeting, stockholders must give written notice to the
Secretary of Uproar at least 90 days, but not more than 120 days, prior to the
first anniversary of the preceding year's annual meeting. However, in the event
that the date of the annual meeting is more than 30 days before or more than 70
days after such anniversary date, such notice by the stockholder to be timely
must be so delivered not earlier than 120 days prior to such annual meeting and
not later than the later of 90 days prior to such annual meeting or the tenth
day following the day on which public announcement of the date of such meeting
is first made by Uproar.
iwin. iwin's bylaws provide that to nominate directors for election to the
board of directors, a stockholder must provide written notice of such intent to
the secretary of the corporation. In order generally to bring business before an
annual stockholders meeting, a stockholder must give timely written notice to
the secretary of the corporation. To be considered timely, the notice must be
received by the corporation not less than 60 days prior to the meeting, or if
less than 70 days written notice of the date of the meeting is given to
stockholders, the notice by the stockholder must be received by the corporation
not less than 10 days following the date on which the initial notice of the
meeting was mailed or disclosed.
RIGHT TO CALL SPECIAL MEETING OF STOCKHOLDERS
Uproar. Uproar's bylaws provide that the chairman of the board, the chief
executive officer or, pursuant to a resolution adopted by the affirmative vote
of a majority of the whole board, the board of directors of Uproar may call a
special meeting of the stockholders at any time.
iwin. iwin's bylaws provide that the board of directors, the chairman of
the board, or the president may call a special meeting of the stockholders at
any time.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
The Delaware General Corporation Law, or the DGCL, provides that a
corporation's certificate of incorporation may include a provision limiting the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. However, no such
provision can eliminate or limit the liability of a director for:
- any breach of the director's duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
119
129
- willful or negligent violation of the laws governing the payment of
dividends or the purchase or redemption of stock; or
- any transaction from which the director devised an improper personal
benefit.
Uproar. The Uproar certificate of incorporation provides that no director
shall be personally liable to Uproar or its stockholders for monetary damages
for breach of fiduciary duty as director, except to the extent such exemption
from liability or limitation thereof is not permitted under the DGCL, as the
same may be amended and supplemented.
iwin. iwin's bylaws provide that iwin will indemnify its directors and
officers to the maximum extent permitted by the Delaware corporation statute
against expenses, judgments, fines and amounts paid in settlement incurred by
reason of such person's being a director or officer of the corporation.
DIVIDENDS
Uproar. Uproar's certificate of incorporation does not restrict the
ability of the board of directors to declare and pay dividends.
iwin. iwin's certificate of incorporation provides that the holders of
Series A preferred stock, Series B preferred stock and Series C preferred stock
are entitled to receive, on a pari passu basis, noncumulative dividends in an
amount equal to $0.088, $0.4048 and $0.4784 per share per year, respectively,
when declared by the board of directors. No dividend may be declared or paid on
common stock in any year, other than dividends payable solely in capital stock,
until all dividends for such year have been declared and paid on the preferred
stock, and no dividends on the common stock may be paid unless such dividend on
the common stock is also paid on the preferred stock.
CONVERSION AND REDEMPTION
Uproar. Holders of Uproar common stock have no right to convert their
shares into any other shares of capital stock of Uproar or any other securities.
Holders of Uproar common stock are not entitled to any redemption rights.
iwin. Holders of common stock have no right to convert their shares into
any other shares of capital stock of iwin or any other securities. Holders of
Series A preferred stock, Series B preferred stock, and Series C preferred stock
have the right to convert each share of preferred stock held by them into one
share of common stock, subject to customary adjustments and adjustments for
diluting issuances of capital stock, at any time. In addition, all outstanding
shares of Series A preferred stock, Series B preferred stock and Series C
preferred stock will be automatically converted into an equal number of shares
of common stock upon (1) a qualified public offering of iwin's common stock; (2)
the consent of holders of not less than the majority of the then outstanding
shares of Series A preferred stock, Series B preferred stock and Series C
preferred stock; or (3) immediately prior to any merger or consolidation of iwin
with or into any other corporation (including the merger), or a sale of all or
substantially all of the assets of iwin, in which the consideration received by
the stockholders meets certain requirements.
PREEMPTIVE RIGHTS
Uproar. Holders of Uproar common stock are not entitled to any preemptive
rights on issuances of securities by Uproar.
iwin. iwin's certificate of incorporation provides that holders of Series
B preferred stock and Series C preferred stock each have the right to purchase,
in the aggregate, up to ten percent of any new securities issued by iwin (twenty
percent in the aggregate for both series of preferred stock). These preemptive
rights do not apply to issuances of Series A preferred stock, Series B preferred
stock on Series C preferred stock (or the common stock into which such preferred
stock is convertible) or to issuances of securities in connection with qualified
public or other permitted offerings or fundamental transactions. These
preemptive rights are
120
130
allocated among the holders of Series B preferred stock and Series C preferred
stock in proportion to the number of shares of such preferred stock held by
them.
LIQUIDATION
Uproar. Subject to the settlement of claims upon the dissolution or
liquidation of Uproar, holders of Uproar common stock will be entitled to
receive all assets of Uproar available for distribution to Uproar's
stockholders.
iwin. iwin's certificate of incorporation provides that upon the
liquidation, dissolution, or winding up of iwin, prior and in preference to any
distribution of assets or funds to the holders of common stock, the holders of
Series A preferred stock, Series B preferred stock and Series C preferred stock
are entitled to receive, on a pari passu basis, for each such outstanding share
of preferred stock then held by them, an amount equal to $1.10, $5.06 or $5.98,
respectively, plus any declared but unpaid dividends on such share. Common
stockholders are entitled to receive all remaining assets and funds.
121
131
STOCK PERFORMANCE GRAPH
The following graph compares the percentage change in the cumulative total
stockholder return on Uproar's common stock during the period from Uproar's
initial public offering on March 17, 2000, through July 31, 2000, with the
cumulative total return of the Nasdaq Composite Index and a group of peer
issuers comprised of 4front Technologies Inc., Global Telesystems Group Inc. and
NTL Inc. These companies were chosen as Uproar's peer group because they are all
technology companies traded on Nasdaq and EASDAQ. The comparison assumes $100
was invested on March 17, 2000, at the $33.88 initial public offering price of
Uproar's common stock and in each of the foregoing indices and assumes
dividends, if any, were reinvested.
COMPARISON OF 4 MONTH CUMULATIVE TOTAL RETURN
AMONG UPROAR INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND A PEER GROUP(1)
[LINE GRAPH]
NASDAQ STOCK
UPROAR INC. MARKET (U.S) PEER GROUP
----------- ------------ ----------
3/17/00 100 100 100
7/31/00 22.9 78.68 38.79
(1) Prior to March 17, 2000, Uproar's common stock was not publicly traded on
the Nasdaq National Market. Comparative data is provided only for the period
since that date. The stock price information shown on the graph is not
necessarily indicative of future price performance. Information used on the
graph was obtained from Research Data Group, Inc., a source Uproar believes
to be reliable.
122
132
LEGAL MATTERS
The validity of the shares of Uproar common stock to be issued in
connection with the merger will be passed upon for Uproar by Gunderson Dettmer
Stough Villeneuve Franklin & Hachigian, LLP, New York, New York. Legal matters
pertaining to federal income tax consequences in connection with the merger will
be passed upon for iwin by O'Melveny & Myers LLP, Los Angeles, California and
for Uproar by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, New
York, New York.
EXPERTS
The consolidated financial statements of Uproar Inc. and subsidiaries as of
December 31, 1999 and for the year then ended have been included in this joint
proxy statement/prospectus in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of that firm as experts in accounting and auditing.
The consolidated financial statements of Uproar Inc. and subsidiaries as of
December 31, 1998 and for each of the years in the two-year period ended
December 31, 1998, have been included in this joint proxy statement/prospectus
in reliance upon the report, which contains a statement indicating that they did
not audit the financial statements of PrizePoint Entertainment Corporation, of
KPMG Hungaria Kft., independent certified public accountants, appearing
elsewhere herein, and upon the authority of that firm as experts in accounting
and auditing.
The financial statements of iwin.com, Inc. at December 31, 1999 and for the
period from July 8, 1999 (date of inception) through December 31, 1999, included
in this joint proxy statement/prospectus, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon (which contains
an explanatory paragraph describing conditions that raise substantial doubt
about iwin's ability to continue as a going concern as described in Note 1 to
the financial statements) appearing elsewhere herein, and are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing. Ernst & Young LLP was engaged to be iwin's principal
independent accountant on February 24, 2000.
The audited financial statements of PrizePoint Entertainment Corporation as
of December 31, 1998 and for the period from PrizePoint's inception, March 4,
1998, to December 31, 1998, included in this joint proxy statement/prospectus,
were audited by Arthur Andersen LLP, independent public accountants, and are
included herein in reliance upon the authority of that firm as experts in
accounting and auditing.
CHANGE IN UPROAR INDEPENDENT ACCOUNTANTS
On August 28, 1998, we changed our auditors to KPMG Hungaria Kft. from
Coopers & Lybrand in Dublin, Ireland. The decision to change independent
accountants from Coopers & Lybrand, Dublin, to KPMG Hungaria Kft., was
recommended by our audit committee and approved by our board of directors.
We believe, and have been advised by the successor to Coopers & Lybrand,
Dublin, PricewaterhouseCoopers LLP, Dublin, that it concurs in such belief that,
for the period from February 1995 (inception) through the date of the change in
accountants, Coopers & Lybrand, Dublin, did not have any disagreement with us on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of Coopers & Lybrand, Dublin, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report on our financial statements.
123
133
WHERE YOU CAN FIND MORE INFORMATION
Uproar files annual, quarterly and special reports and other information
with the Securities and Exchange Commission. You may read and copy any reports,
statements or other information filed by Uproar at the Securities and Exchange
Commission's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the public reference rooms. Uproar's
Securities and Exchange Commission filings are also available to the public from
commercial document retrieval services and at the web site maintained by the
Securities and Exchange Commission at "http://www.sec.gov."
Uproar filed with the Securities and Exchange Commission a registration
statement on Form S-4 under the Securities Act of 1933, as amended, to register
with the Securities and Exchange Commission the Uproar common stock issuable
pursuant to the agreement and plan of reorganization. This joint proxy
statement/ prospectus does not contain all the information you can find in the
registration statement or the exhibits and schedules to the registration
statement. For further information with respect to Uproar, iwin and the Uproar
common stock, please refer to the registration statement, including the exhibits
and schedules. You may inspect and copy the registration statement, including
the exhibits and schedules, as described above. Statements contained in this
joint proxy statement/prospectus about the contents of any contract or other
document are not necessarily complete, and we refer you, in each case, to the
copy of such contract or other document filed as an exhibit to the registration
statement.
Uproar has supplied all information contained in this joint proxy
statement/prospectus relating to Uproar, and iwin has supplied all information
contained in this joint proxy statement/prospectus relating to iwin.
UPROAR INC. IWIN.COM, INC.
ATTENTION: ROBERT D. MARAFIOTI, SECRETARY ATTENTION: DENNIS HOHN CHO, ASSISTANT SECRETARY
240 WEST 35TH STREET 10940 WILSHIRE BOULEVARD
NEW YORK, NEW YORK 10001 LOS ANGELES, CALIFORNIA 90024
TELEPHONE: (212) 714-9500 TELEPHONE: (310) 264-4300
If you would like to request documents from Uproar or iwin, please do so by
October 4, 2000 to receive them before the special meetings.
You should rely only on the information contained in this joint proxy
statement/prospectus to vote on the merger. We have not authorized anyone to
provide you with information that is different from that contained in this joint
proxy statement/prospectus. This joint proxy statement/prospectus is dated
September 18, 2000. You should not assume that the information contained in this
joint proxy statement/prospectus is accurate as of any date other than September
18, 2000, and neither the mailing of the joint proxy statement/prospectus to
stockholders nor the issuance of Uproar common stock in the merger shall create
any implication to the contrary.
124
134
INDEX TO FINANCIAL STATEMENTS
PAGE
----
UPROAR INC. AND SUBSIDIARIES
I. Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheet at June 30,
2000........................................................ F-2
Unaudited Condensed Consolidated Statements of Operations
for the six months ended June 30, 1999 and June 30, 2000.... F-3
Unaudited Condensed Consolidated Statement of Stockholders'
Equity and Comprehensive Loss for the six months ended June
30, 2000.................................................... F-4
Unaudited Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and June 30, 2000.... F-5
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. F-6
II. Consolidated Financial Statements
Independent Auditors' Reports............................... F-12
Consolidated Balance Sheets as of December 31, 1998 and
1999........................................................ F-14
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999............................ F-15
Consolidated Statements of Stockholders' Equity and
Comprehensive Loss for the years ended December 31, 1997,
1998 and 1999............................................... F-16
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999............................ F-17
Notes to Consolidated Financials Statements................. F-18
PRIZEPOINT ENTERTAINMENT CORPORATION
Report of Independent Public Accountants.................... F-33
Balance Sheets as of December 31, 1998 and March 31, 1999
(unaudited)................................................. F-34
Statements of Operations for the period from inception
(March 4, 1998) to December 31, 1998 and for the three
months ended March 31, 1999 (unaudited)..................... F-35
Statements of Stockholders' Equity for the period from
inception (March 4, 1998) to December 31, 1998 and for the
three months ended March 31, 1999 (unaudited)............... F-36
Statements of Cash Flows for the period from inception
(March 4, 1998) to December 31, 1998 and for the three
months ended March 31, 1999 (unaudited)..................... F-37
Notes to Financial Statements............................... F-38
IWIN.COM, INC.
I. Unaudited Condensed Financial Statements
Unaudited Condensed Balance Sheet at June 30, 2000.......... F-45
Unaudited Condensed Statement of Operations for the six
months ended June 30, 2000.................................. F-46
Unaudited Condensed Statement of Cash Flows for the six
months ended June 30, 2000.................................. F-47
Notes to Condensed Financial Statements (Unaudited)......... F-48
II. Financial Statements
Report of Independent Auditors.............................. F-49
Balance Sheet as of December 31, 1999....................... F-50
Statement of Operations for the period from July 8, 1999
(date of inception) through December 31, 1999............... F-51
Statement of Stockholders' Equity for the period from July
8, 1999 (date of inception) through December 31, 1999....... F-52
Statement of Cash Flows for the period from July 8, 1999
(date of inception) through December 31, 1999............... F-53
Notes to Financial Statements............................... F-54
F-1
135
UPROAR INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30,
2000
------------
(UNAUDITED)
Assets
Current assets:
Cash and cash equivalents................................. $ 9,253,122
Short term investments.................................... 85,376,894
Restricted cash........................................... 603,408
Accounts receivable -- net of allowance for doubtful
accounts of $396,000................................... 6,233,329
Prepaid advertising....................................... 3,796,004
Other current assets...................................... 1,273,902
------------
Total current assets................................... 106,536,659
------------
Property and equipment, net................................. 9,205,069
Intangible assets, net...................................... 7,625,666
Prepaid advertising, long term portion...................... 948,999
Other long term assets...................................... 412,025
------------
Total assets........................................... $124,728,418
============
Liabilities and stockholders' equity
Current liabilities:
Current portion of capital lease obligations.............. $ 194,745
Trade accounts payable.................................... 2,250,536
Accrued expenses and other current liabilities............ 4,574,382
------------
Total current liabilities.............................. 7,019,663
------------
Long term portion of capital lease obligation............... 183,753
Stockholders' equity:
Preferred stock, $.01 par value, 48,000,000 shares
authorized, none issued................................ --
Common stock, $.01 par value, 112,000,000 shares
authorized; 28,020,609 shares issued and outstanding... 280,206
Additional paid-in capital................................ 189,009,215
Accumulated deficit....................................... (71,705,969)
Accumulated other comprehensive (loss).................... (58,450)
------------
Total stockholders' equity............................. 117,525,002
------------
Total liabilities and stockholders' equity............. $124,728,418
============
See accompanying notes to unaudited condensed consolidated financial statements.
F-2
136
UPROAR INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 2000
------------ ------------
Revenues.................................................... $ 2,509,008 $ 12,768,854
Cost of revenues............................................ (848,302) (4,264,375)
------------ ------------
Gross profit................................................ 1,660,706 8,504,479
------------ ------------
Sales and marketing......................................... 5,813,158 18,130,410
Product and technology development.......................... 1,527,279 3,970,172
General and administrative.................................. 3,610,173 7,538,794
Amortization of intangible assets........................... 3,035,613 3,037,300
------------ ------------
Total operating expenses.................................... 13,986,223 32,676,676
------------ ------------
Loss from operations........................................ (12,325,517) (24,172,197)
Other income (expenses):
Litigation settlement..................................... -- (350,000)
Foreign exchange gain (loss).............................. (149,606) (77,965)
Interest income........................................... 194,307 2,091,477
Interest expense.......................................... (4,000) (29,906)
Other income (expense).................................... (47,000) 3,566
------------ ------------
Loss before income taxes.................................... (12,331,816) (22,535,025)
Provision for income taxes.................................. 45,004 21,605
------------ ------------
Net loss.................................................... $(12,376,820) $(22,556,630)
============ ============
Basic and diluted net loss per common share................. $ (0.61) $ (0.85)
Weighted average number of common shares outstanding........ 20,346,202 26,622,856
============ ============
The results for the six months ended June 30, 1999 have been restated to
reflect the acquisition of PrizePoint Entertainment Corporation which was
completed on June 7, 1999 and accounted for as a pooling of interests.
See accompanying notes to the unaudited condensed consolidated financial
statements.
F-3
137
UPROAR INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE
----------------------- PAID-IN ACCUMULATED INCOME
SHARES AMOUNT CAPITAL DEFICIT (LOSS) TOTAL
---------- ---------- ------------ ------------ ------------- ------------
Balance at December 31, 1999...... 23,971,948 $1,198,597 $ 85,193,156 $(49,149,339) $(38,108) $ 37,204,306
Comprehensive loss:
Net loss........................ -- -- -- (22,556,630) -- (22,556,630)
Change in fair value of
available for sale
investments................... -- -- -- -- 1,063 1,063
Foreign currency translation.... -- -- -- -- (21,405) (21,405)
Total comprehensive loss.......... -- -- -- -- -- (22,576,972)
Exercise of stock options......... 283,289 2,840 553,508 -- -- 556,348
Adjustment in par value per share
from $.05 to $.01............... -- (956,885) 958,885 -- -- --
Sale of common stock.............. 3,765,372 37,654 102,066,648 -- -- 102,106,302
Stock compensation expense........ -- -- 235,018 -- -- 235,018
---------- ---------- ------------ ------------ -------- ------------
Balance at June 30, 2000.......... 28,020,609 $ 280,206 $189,009,215 $(71,705,969) $(58,450) $117,525,002
========== ========== ============ ============ ======== ============
See accompanying notes to the unaudited condensed consolidated financial
statements.
F-4
138
UPROAR INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
----------------------------
1999 2000
------------ ------------
Cash flows from operating activities
Net loss.................................................... $(12,376,820) $(22,556,630)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 3,309,462 4,150,230
Unrealized loss on available for sale securities.......... -- 1,064
Provision for doubtful accounts........................... -- 235,000
Amortization of prepaid advertising services.............. -- 1,898,006
Stock compensation expense................................ 183,244 235,018
Changes in operating assets and liabilities:
Accounts receivable.................................... (823,305) (2,700,560)
Prepaid advertising and other current assets........... (487,290) (463,298)
Trade accounts payable................................. 493,883 859,628
Accrued expenses and other current liabilities......... 399,990 508,413
Other long term assets................................. 138,685 (238,599)
------------ ------------
Net cash used in operating activities..................... (9,162,151) (18,071,728)
Cash flows from investing activities
Purchase of short term investments........................ -- (85,376,894)
Purchase of property and equipment........................ (1,129,681) (5,024,185)
Decrease in restricted cash............................... -- 867
------------ ------------
Net cash used in investing activities..................... (1,129,681) (90,400,212)
Cash flows from financing activities
Proceeds from issuance of common stock.................... 9,969,253 102,106,301
Proceeds from exercise of stock options and warrants...... -- 556,349
Principal payments on capital lease obligations........... (35,172) (51,924)
------------ ------------
Net cash provided by financing activities................. 9,934,081 102,610,726
Effect of exchange rate on cash........................... (228,161) (21,406)
Net decrease in cash and cash equivalents................. (585,912) (5,882,620)
Cash and cash equivalents, beginning of period............ 7,035,645 15,135,742
------------ ------------
Cash and cash equivalents, end of period.................. $ 6,449,733 $ 9,253,122
============ ============
Supplemental disclosure of cash flow information
Interest paid............................................. $ 4,000 $ 29,906
Issuance of common stock for advertising services and
intangibles............................................ $ 24,655,875 $ --
Purchase of equipment under capital lease obligations..... $ -- $ 275,964
The results for the six months ended June 30, 1999 have been restated to
reflect the acquisition of PrizePoint Entertainment Corporation which was
completed on June 7, 1999 and accounted for as a pooling of interests.
See accompanying notes to unaudited condensed consolidated financial statements.
F-5
139
UPROAR INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Unaudited Interim Condensed Consolidated Financial Statements
The unaudited interim consolidated financial statements of the Company as
of June 30, 2000 and for the six months ended June 30, 1999 and 2000, included
herein have been prepared in accordance with the instructions for Form 10-Q
under the Securities Exchange Act of 1934, as amended, and Article 10 of
Regulation S-X under the Securities Act of 1933, as amended. Certain information
and note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations relating to interim consolidated
financial statements.
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company at June 30, 2000, and the results of their operations for the six
months ended June 30, 1999 and 2000 and their cash flows for the six months
ended June 30, 1999 and 2000.
The results of operations for such periods are not necessarily indicative
of results expected for the full year or for any future period. These financial
statements should be read in conjunction with the audited financial statements
as of December 31, 1998 and 1999, and for the three years ended December 31,
1999 and related notes included elsewhere in this joint proxy
statement/prospectus.
(b) Nature of business
The Company was originally formed in February 1995 as E-Pub Services
Limited, a corporation organized under the laws of Ireland. In July 1997, due to
tax matters related to the trading of common shares on the third tier of the
Vienna Stock Exchange, Uproar Ltd., a corporation organized under the laws of
Bermuda, was formed. All shareholders in E-Pub Services Limited became
shareholders in Uproar Ltd. by exchanging their shares in E-Pub Services Limited
for shares in Uproar Ltd. at a ratio of 1:1. The transaction was accounted for
as a transaction between companies under common control and therefore there was
no adjustment to the historical basis of the assets and liabilities of E-Pub
Services Limited.
On December 16, 1999, Uproar Inc. was incorporated in the state of
Delaware. On January 26, 2000, Uproar Ltd. domesticated from Bermuda to Delaware
and, on January 27, 2000, merged with Uproar Inc. Between the date of
incorporation and January 27, 2000, Uproar Inc. had no substantial operations.
The Company provides online game shows and interactive single- and
multi-player games that appeal to a broad audience. The Company seeks to attract
a large, quality audience by offering highly engaging and "sticky" products.
Players access the products free of charge, with the Company's revenue primarily
being generated through the sale of advertising. The Company operates in one
business segment.
(c) Principles of consolidation
The consolidated financial statements comprise the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(d) Short term investments
$65 million of the Company's short-term investments at June 30, 2000
consisted of commercial paper and mutual funds which are stated at amortized
cost and classified as held-to-maturity.
$20 million of the Company's short-term investments at June 30, 2000 are
classified as available-for-sale and are available to support current operations
or to take advantage of other investment opportunities. These
F-6
140
UPROAR INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
investments primarily consist of commercial paper which are stated at their
estimated fair value based upon publicly available market quotes. Unrealized
gains and losses are computed on the basis of specific identification and are
included in stockholders' equity. Realized gains, realized losses and decline in
value, judged to be other-than-temporary, are included in other income. There
were no gross realized gains or losses from sales of securities in the periods
presented. As of June 30, 2000, the Company had gross unrealized gains of $1,063
from its available-for-sale short-term investments.
(e) Stock split
On February 4, 2000, the Company's Board of Directors declared a
two-for-one stock split by way of a stock dividend. Stockholders of record on
February 18, 2000 received one additional share of Common Stock for every share
held on that date. All share numbers in the financial statements and notes
thereto for all periods presented have been adjusted to reflect the two-for-one
stock split.
(f) Major customers
For the six months ended June 30, 2000, there was one customer that
accounted for 21% of revenues generated by the Company. No other customer
accounted for greater than 10% of revenues.
(g) Revenue recognition
Advertising revenues are derived principally from short-term advertising
contracts in which the Company typically guarantees its advertising customers a
minimum number of impressions to be delivered to users of its Web sites or
clicks over a specified period of time for a fixed fee. Customers are invoiced
monthly in accordance with delivery of advertising services during the month.
Advertising revenues are recognized as the advertisement is displayed or as
users click or otherwise respond to advertisements, provided that no significant
Company obligations remain. To the extent that minimum guaranteed impressions
are not met, the Company defers recognition of the corresponding revenues until
the guaranteed impressions, or clicks, are achieved.
The Company commenced selling merchandise through its Web site in December
1999 and has recognized related revenues of approximately $15,000 and $34,000
for the year ended December 31, 1999 and the six months ended June 30, 2000,
respectively. In June 2000, the Company made a strategic decision to focus on
its core strength of online entertainment, and exit the e-commerce business. As
a direct result, the Uproar store was closed. The related inventory, amounting
to approximately $192,000 at June 30, 2000, will be used for game prizes.
The Company provides sponsorship advertising on game shows or on a portion
of its Web sites in consideration for a fixed fee. The Company incurs
insignificant costs to customize the advertisements received from the sponsors
which are expensed as incurred. Sponsorship agreements do not segregate the fees
for development of customized features and the displaying of sponsors
advertisements on the Web sites. Therefore, the entire fee is deferred and
recognized ratably in the period in which the sponsor's advertising is
displayed.
The Company enters into arrangements with third parties whereby the
Company's games are displayed on the third parties' Web sites. The revenues
generated from advertising in connection with the use of the Company's games are
recognized ratably in the period in which the advertising is displayed on the
third parties' Web sites. Generally the Company is responsible for selling the
advertising, billing, and collections and is obligated to pay the third party
their fees for displaying the games on their Web sites regardless of whether the
Company collects the advertising revenue. In these situations the Company
records the gross advertising revenues and the payments to the third parties are
recorded as cost of revenues. When the third party sells the
F-7
141
UPROAR INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
advertising and pays the Company a portion of the advertising revenues, the
Company only recognizes revenue for its portion of the gross revenues.
Revenues include barter revenues from the exchange by the Company of
services or advertising space on the Company's Web sites for reciprocal
advertising or promotional services including prizes. Revenues from these barter
transactions are recorded at the estimated fair value of the services or
advertisements delivered, unless the fair value of the goods or services
received is more objectively determinable, and are recognized when the
advertisements are run on the Company's Web sites or services are provided. The
related expense is recorded when it is incurred and classified as sales and
marketing expenses or cost of revenues in accordance with the terms of the
barter agreement. When the barter transaction involves advertising exchanged for
advertising, the Company recognizes barter advertising revenues only if the
bartered advertising is similar to previous advertising sold to third parties
for cash and is limited to the amount of available similar cash advertising
during the prior six-month periods.
(h) Business segment reporting
The Company has determined that it does not have any separately reportable
business segments. However, related disclosures about products and services and
geographic areas are included in note 4.
(i) Per share data
The Company computes per share data in accordance with SFAS No. 128,
"Earnings Per Share." Basic net income per share is computed by dividing the net
income available to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net income per
share is computed by dividing the net income for the period by the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares, comprised of incremental common shares
issuable upon the exercise of stock options and warrants, are included in the
calculation of net income per share to the extent such shares are dilutive.
Common stock equivalents were not included in the calculation of loss per share
for any periods presented since they were anitdilutive.
(j) Recent accounting pronouncements
The Company will adopt SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities", as amended by SFAS 138, effective July 1, 2000, and is
in the process of determining the effect that SFAS No. 133 will have on its
results of operations and financial position. This statement is not required to
be applied retroactively to financial statements of prior periods.
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation" ("FIN No. 44"), provides guidance for applying APB Opinion
No. 25. "Accounting for Stock Issued to Employees." With certain exceptions, FIN
No. 44 applies prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards and changes in grantee status
on or after July 1, 2000. The Company does not believe that the implementation
of FIN No. 44 will have a significant effect on its results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB No. 101"), which summarizes
certain of the SEC staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company will be
required to adopt the accounting provisions of SAB No. 101 no later than the
fourth quarter of 2000. The Company does not believe that the implementation of
SAB No. 101 will have a significant effect on its results of operations.
F-8
142
UPROAR INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) STOCKHOLDERS' EQUITY
(a) Par value
On December 16, 1999, Uproar Inc. was incorporated in the state of
Delaware. On January 26, 2000, Uproar Ltd. domesticated from Bermuda to Delaware
and, on January 27, 2000, merged with Uproar Inc. By reason of the merger, the
number of authorized shares of Common Stock increased to 112,000,000, with a par
value of $.01 per share.
(b) Sale of Common Stock to Trans Cosmos
On February 2, 2000, the Company sold 1,265,372 shares of Common Stock to a
strategic investor, Trans Cosmos USA, Inc., for approximately $25.0 million. The
Company intends to establish a joint venture with Trans Cosmos to produce a
local language version of the Company's flagship entertainment site, uproar.com,
in Japan. The joint venture would be owned equally. Uproar would contribute to
the joint venture certain intellectual property and $500,000 in cash and Trans
Cosmos would contribute $4,500,000. Trans Cosmos is a subsidiary of Trans
Cosmos, Inc., which is headquartered in Tokyo, Japan.
(c) Public offering
On March 16, 2000, the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form S-1. Pursuant to this
Registration Statement, the Company completed a public offering in the United
States of 2,500,000 shares of its Common Stock at an offering price of $33.88
per share ("the Offering"). Net proceeds to the Company from the Offering after
offering expenses totaled approximately $77.1 million.
(3) COMMITMENTS AND CONTINGENCIES
In connection with two office leases, the Company has letters of credit
outstanding for approximately $603,408. The cash balances supporting the letters
of credit are reported as restricted cash.
(4) SEGMENT REPORTING
In presenting segment information, the Company has applied the provisions
of SFAS No. 131. The Company has determined that it does not have any separately
reportable business segments.
The Company attributes revenues to different geographic areas on the basis
of the location of the customer. Revenues by geographic area are as follows:
REVENUES FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------------
1999 2000
----------- ------------
United States.............................................. $2,330,778 $12,441,089
England.................................................... 178,230 217,092
Other...................................................... -- 110,673
---------- -----------
Total............................................ $2,509,008 $12,768,854
========== ===========
F-9
143
UPROAR INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) SEGMENT REPORTING -- (CONTINUED)
Investments in long-lived assets by geographic area are as follows:
PROPERTY AND
EQUIPMENT
AND INTANGIBLE
ASSETS
--------------
JUNE 30,
2000
--------------
United States............................................... $16,523,358
England..................................................... 143,195
Hungary..................................................... 150,821
Germany..................................................... 13,361
-----------
Total............................................. $16,830,735
===========
(5) LITIGATION SETTLEMENT
In February 2000, the Company settled an action entitled "Burgos v. Ellwell
Associates, LLC and E-Pub Inc.", in which it was a party defendent, relating to
an alleged personal injury, by a payment of $350,000.
(6) SUBSEQUENT EVENTS
iwin.com, Inc.
On July 25, 2000, the Company entered into an agreement to acquire
iwin.com, Inc. Under the terms of the definitive agreement, Uproar will acquire
all outstanding shares of iwin in a stock-for-stock transaction in which iwin
stockholders will receive an aggregate of approximately 13.1 million shares of
Uproar common stock. In addition, Uproar will assume outstanding options and
warrants to purchase iwin common stock and it is estimated that they will be
converted into options to purchase approximately 1.8 million shares of Uproar
common stock. The merger will be accounted for as a purchase transaction.
Consummation of the merger is subject to, among other things, the absence of any
material adverse changes in the businesses, the receipt of any required
governmental approvals and approval of the transaction by the Company's and
iwin's stockholders. The transaction is anticipated to close in the fourth
quarter of 2000.
ibetcha.com, Inc.
In August 2000, the Company consummated the acquisition of Take Aim
Holdings Ltd., the parent company of ibetcha.com, Inc, which operates
ibetcha.com, a Web site that allows users to predict the outcome of real-world
events for a chance to win prizes. The Company issued approximately 1.33 million
shares of common stock in the acquisition, which will be accounted for as a
purchase.
Pearson agreement
In July 2000, the Company amended and restated its agreement with Pearson
Television to extend the term through June 2005. Under the terms of the amended
agreement, the Company has guaranteed minimum royalty payments per broadcast
year for each of the Pearson licensed games. Such payments range from $150,000
for certain games in the year ending June 30, 2001 to $900,000 for certain games
in the year ending June 30, 2005. The amended agreement also eliminated the
provision in the original agreement for contingent issuances of common stock to
Pearson.
F-10
144
UPROAR INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) SUBSEQUENT EVENTS -- (CONTINUED)
STOCK INCENTIVE PLAN
On June 30, 2000, the stockholders approved the Uproar Inc. 2000 Stock
Incentive Plan (Incentive Plan), which reserved 6,750,000 shares of common stock
for the grant of options or other awards. The Incentive Plan was the successor
to the Uproar Ltd. 1999 Share Option/Share Issuance Plan.
The Company's board of directors amended and restated the Incentive Plan on
July 25, 2000 to increase the shares reserved for issuance by 2,250,000 shares
to an aggregate of 9,000,000 shares. The number of shares of common stock
available for issuance under the Incentive Plan automatically increases on the
first trading day of each calendar year during the term of the Incentive Plan by
an amount equal to one percent of the shares of Uproar common stock outstanding
on December 31 of the immediately preceding calendar year, not to exceed 400,000
shares in any calendar year. For options that have been granted from the
increased share reserve that is subject to stockholder approval, compensation
expense will be recognized over the vesting period to the extent the fair value
of a share of the Company's common stock as quoted on the Nasdaq National Market
on the date of stockholder approval exceeds the exercise price for such options,
multiplied by the number of options granted.
F-11
145
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Uproar Inc.:
We have audited the accompanying consolidated balance sheet of Uproar Inc.
and subsidiaries (formerly Uproar Ltd.) as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Uproar Inc.
and subsidiaries, (formerly Uproar Ltd.) as of December 31, 1999, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles in the United States.
(Signed) KPMG LLP
New York, New York
February 4, 2000
F-12
146
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Uproar Inc.:
We have audited the accompanying consolidated balance sheet of Uproar Inc.
and subsidiaries (formerly Uproar Ltd.) as of December 31, 1998, and the
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for the years ended December 31, 1997 and 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of PrizePoint Entertainment Corporation, a Delaware corporation, a
company acquired during 1999 in a transaction accounted for as a pooling of
interests, as discussed in note 3. Such financial statements are included in the
financial statements of Uproar Inc. (formerly Uproar Ltd.) and subsidiaries as
of and for the year ended December 31, 1998 and reflect 23% and 0% of total
consolidated assets and revenues respectively. Those financial statements were
audited by other auditors whose unqualified report has been furnished to us and
our opinion, insofar as it relates to amounts included for PrizePoint
Entertainment Corporation, is based solely upon the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Uproar Inc. and subsidiaries,
(formerly Uproar Ltd.) as of December 31, 1998, and the results of their
operations and their cash flows for the years ended December 31, 1997 and 1998
in conformity with generally accepted accounting principles.
(Signed) KPMG Hungaria Kft.
August 4, 1999, except for paragraph 1 of note 19
which is as of December 16, 1999
F-13
147
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1999
DECEMBER 31,
----------------------------
1998 1999
------------ ------------
Assets
Current assets:
Cash and cash equivalents................................. $ 7,035,645 $ 15,135,742
Restricted cash........................................... -- 604,275
Accounts receivable -- net of allowance for doubtful
accounts of $0 and $271,000, respectively.............. 551,036 3,767,769
Prepaid advertising....................................... 201,327 3,861,996
Other current assets...................................... 24,689 744,612
------------ ------------
Total current assets................................... 7,812,697 24,114,394
------------ ------------
Property and equipment, net................................. 1,111,966 5,031,429
Intangible assets, net...................................... 47,357 10,649,387
Other long term assets...................................... 138,685 173,426
Prepaid advertising, long term portion...................... -- 2,847,005
------------ ------------
Total assets........................................... $ 9,110,705 $ 42,815,641
============ ============
Liabilities and stockholders' equity
Current liabilities:
Current portion of capital lease obligation............... $ 25,949 $ 102,777
Trade accounts payable.................................... 855,866 1,390,908
Accrued expenses.......................................... 471,906 3,921,570
Other current liabilities................................. 15,188 144,399
------------ ------------
Total current liabilities.............................. 1,368,909 5,559,654
------------ ------------
Long term portion of capital lease obligation............... 15,134 51,681
Stockholders' equity:
Preferred stock, $.01 par value, 48,000,000 shares
authorized, none issued................................ -- --
Common stock, $.05 par value, 112,000,000 shares
authorized; 17,746,280 and 23,971,948 shares issued and
outstanding at December 31, 1998 and 1999
respectively........................................... 643,860 1,198,597
Additional paid-in capital................................ 17,470,939 85,193,156
Accumulated deficit....................................... (10,424,698) (49,149,339)
Accumulated other comprehensive income (loss)............. 36,561 (38,108)
------------ ------------
Total stockholders' equity............................. 7,726,662 37,204,306
------------ ------------
Total liabilities and stockholders' equity............. $ 9,110,705 $ 42,815,641
============ ============
The balance sheet at December 31, 1998 has been restated to reflect the
acquisition of PrizePoint Entertainment Corporation, which was completed on June
7, 1999 and accounted for as a pooling of interests.
The accompanying notes are an integral part of these consolidated financial
statements
F-14
148
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999
----------- ----------- ------------
Revenues........................................... $ 348,709 $ 1,632,969 $ 10,391,527
Cost of revenues................................... (216,586) (760,376) (2,533,294)
----------- ----------- ------------
Gross profit....................................... 132,123 872,593 7,858,233
Sales and marketing................................ 1,087,058 3,770,866 28,065,956
Product and technology development................. 772,744 849,486 3,701,393
General and administrative......................... 2,092,394 2,327,720 8,919,011
Amortization of intangible assets.................. -- 9,303 6,086,198
----------- ----------- ------------
Total operating expenses........................... 3,952,196 6,957,375 46,772,558
----------- ----------- ------------
Loss from operations............................... (3,820,073) (6,084,782) (38,914,325)
Other income (expenses):
Foreign exchange gain (loss)..................... (85,439) 57,401 (119,996)
Interest income.................................. 97,717 205,751 535,166
Interest expense................................. (15,368) -- (7,050)
Other income (expense)........................... -- -- (190,436)
----------- ----------- ------------
Loss before income taxes......................... (3,823,163) (5,821,630) (38,696,641)
Provision for income taxes....................... 5,582 9,020 28,000
----------- ----------- ------------
Net loss......................................... $(3,828,745) $(5,830,650) $(38,724,641)
=========== =========== ============
Basic and diluted loss per share................. $ (0.42) $ (0.40) $ (1.77)
Weighted average number of common shares
outstanding................................... 9,034,928 14,697,112 21,909,456
=========== =========== ============
The results for all periods have been restated to reflect the acquisition
of PrizePoint Entertainment Corporation which was completed on June 7, 1999 and
accounted for as a pooling of interests.
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
149
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE
------------------------ PAID-IN ACCUMULATED INCOME
SHARES AMOUNT CAPITAL DEFICIT (LOSS) TOTAL
---------- ---------- ----------- ------------ ------------- -----------
Balance at December 31, 1996... 5,400,000 210,162 394,549 (765,303) (1,960) (162,552)
Comprehensive loss:
Net loss..................... -- -- -- (3,828,745) -- (3,828,745)
Foreign currency
translation................ -- -- -- -- 32,663 32,663
-----------
Total comprehensive loss....... -- -- -- -- -- (3,796,082)
Sale of common stock........... 4,000,000 157,526 4,558,161 -- -- 4,715,687
Stockholder receivable......... -- -- 195,318 -- -- 195,318
Conversion of loan notes....... 1,774,600 69,138 366,420 -- -- 435,558
Exercise of stock options...... 289,080 10,206 139,042 -- -- 149,248
Stock compensation expense..... -- -- 1,244,888 -- -- 1,244,888
---------- ---------- ----------- ------------ ------------ -----------
Balance at December 31, 1997... 11,463,680 447,032 6,898,378 (4,594,048) 30,703 2,782,065
Comprehensive loss:
Net loss..................... -- -- -- (5,830,650) -- (5,830,650)
Foreign currency
translation................ -- -- -- -- 5,858 5,858
-----------
Total comprehensive loss....... -- -- -- -- -- (5,824,792)
Sale of common stock........... 4,758,360 144,253 9,522,211 -- -- 9,666,464
Exercise of stock options...... 1,524,240 52,575 1,047,246 -- -- 1,099,821
Stock compensation expense..... -- -- 3,104 -- -- 3,104
---------- ---------- ----------- ------------ ------------ -----------
Balance at December 31, 1998... 17,746,280 643,860 17,470,939 (10,424,698) 36,561 7,726,662
Comprehensive loss:
Net loss..................... -- -- -- (38,724,641) -- (38,724,641)
Foreign currency
translation................ -- -- -- -- (74,669) (74,669)
-----------
Total comprehensive loss....... -- -- -- -- -- (38,799,310)
Re-denomination of currency of
common stock................. -- 288,858 (288,858) -- -- --
Acquisition and retirement of
shares....................... (760) (38) (19,342) -- -- (19,380)
Sale of common stock........... 3,875,360 179,064 39,887,305 -- -- 40,066,369
Issuance of common stock for
intangible assets and
advertising services from
Pearson Television Limited... 2,000,000 69,300 24,586,575 -- -- 24,655,875
Exercise of warrants........... 43,360 2,168 247,832 -- -- 250,000
Stock compensation expense..... -- -- 735,489 -- -- 735,489
Exercise of stock options...... 307,708 15,385 2,573,216 -- -- --
---------- ---------- ----------- ------------ ------------ -----------
Balance at December 31, 1999... 23,971,948 $1,198,597 85,193,156 $(49,149,339) $ (38,108) $37,204,306
========== ========== =========== ============ ============ ===========
The results for all periods have been restated to reflect the acquisition
of PrizePoint Entertainment Corporation which was completed on June 7, 1999 and
accounted for as a pooling of interests.
The accompanying notes are an integral part of these consolidated financial
statements
F-16
150
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1998 1999
----------- ------------ ------------
Cash flows from operating activities
Net loss......................................... $(3,828,745) $(5,830,650) $(38,724,641)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................... 56,556 183,181 6,954,230
Provision for doubtful accounts.................. -- -- 270,913
Amortization of prepaid advertising services..... -- -- 1,338,999
Stock compensation expense....................... 1,244,888 3,104 735,489
Loss on sale of property and equipment........... -- -- 189,683
Changes in operating assets and liabilities
Accounts receivable........................... (229,821) (302,366) (3,487,646)
Prepaid advertising and other current
assets...................................... (66,909) (121,858) (584,596)
Trade accounts payable........................ 115,204 711,060 667,411
Income tax payable............................ (2,936) -- --
Accrued expenses and other current
liabilities................................. 104,521 342,267 3,578,875
Other long term assets........................ (59,210) (79,475) (34,741)
----------- ----------- ------------
Net cash used in operating activities............ (2,666,452) (5,094,737) (29,096,024)
----------- ----------- ------------
Cash flows from investing activities
Purchase of intangibles.......................... (13,955) (42,706) --
Purchase of property and equipment............... (260,220) (930,470) (4,965,269)
Increase in restricted cash...................... -- -- (604,275)
Proceeds from sale of equipment.................. -- -- 27,154
----------- ----------- ------------
Net cash used in investing activities............ (274,175) (973,176) (5,542,390)
----------- ----------- ------------
Cash flows from financing activities
Proceeds from issuance of common stock........... 4,911,005 9,666,464 40,046,989
Proceeds from exercise of stock options and
warrants...................................... 149,248 1,099,821 2,838,601
Principal payments on capital leases............. -- (10,812) (72,410)
----------- ----------- ------------
Net cash provided by financing activities........ 5,060,253 10,755,473 42,813,180
----------- ----------- ------------
Effect of exchange rate on cash.................. (45,307) 5,858 (74,669)
----------- ----------- ------------
Net increase in cash and cash equivalents........ 2,074,319 4,693,418 8,100,097
Cash and cash equivalents, beginning of year..... 267,908 2,342,227 7,035,645
----------- ----------- ------------
Cash and cash equivalents, end of year........... $ 2,342,227 $ 7,035,645 $ 15,135,742
=========== =========== ============
Supplemental disclosure of cash flow information
Interest paid.................................... $ 41,441 $ -- $ 7,050
Income taxes paid................................ 8,518 10,625 15,842
Issuance of common stock for advertising services
and intangibles............................... -- -- 24,655,875
Purchase of equipment under capital lease
obligations................................... -- 41,083 185,785
Conversion of debt to common stock............... 435,558 -- --
The results for all periods have been restated to reflect the acquisition
of PrizePoint Entertainment Corporation which was completed on June 7, 1999 and
accounted for as a pooling of interests.
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
151
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS
The Company was originally formed in February 1995 as E-Pub Services
Limited, a corporation organized under the laws of Ireland. In July 1997, due to
tax matters related to the trading of common shares on the third tier of the
Vienna Stock Exchange, we formed Uproar Ltd., a corporation organized under the
laws of Bermuda. All shareholders in E-Pub Services Limited became shareholders
in Uproar Ltd. by exchanging their shares in E-Pub Services Limited for shares
in Uproar Ltd. at a ratio of 1:1. The transaction was accounted for as a
transaction between companies under common control and therefore there was no
adjustment to the historical basis of the assets and liabilities of E-Pub
Services Limited.
Uproar Inc. was incorporated in Delaware on December 16, 1999. Uproar Ltd.
subsequently domesticated from Bermuda to Delaware and, on January 27, 2000
merged with Uproar Inc. See note 19. Between the date of incorporation and
January 27, 2000, Uproar Inc. had no substantial operations.
The Company provides online game shows and interactive multi-player games
that appeal to a broad audience. The Company seeks to attract a large, quality
audience by offering highly engaging and "sticky" products. Players access the
products free of charge, the Company's revenue primarily being generated through
the sale of advertising. The Company operates in one business segment.
(2) SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
(a) Principles of consolidation
The consolidated financial statements comprise the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated upon consolidation.
(b) Cash equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the time of acquisition to be cash equivalents. Cash
equivalents at December 31, 1998 and December 31, 1999 consist primarily of
money market funds. Financial instruments that potentially subject the Company
to a concentration of credit risk consist of cash and cash equivalents and
accounts receivable. Cash and cash equivalents are deposited with high credit
quality financial institutions.
Restricted cash consists of cash on deposit supporting letters of credit in
favor of lessors for two office leases.
(c) Fair value of financial instruments
The Company's financial instruments, including cash and cash equivalents,
restricted cash, accounts receivable, accounts payable and accrued expenses are
carried at cost, which approximates their fair value because of the short-term
maturity of these instruments.
(d) Currency translation and transactions
The reporting currency for the Company is the United States Dollar (USD).
The functional currency for the Company's operations is generally the applicable
local currency. Accordingly, the assets and liabilities of the subsidiaries
whose functional currency is other than the USD are included in the consolidated
financial statements by translating the assets and liabilities into the
reporting currency at the exchange rates applicable at the end of the reporting
year. The statements of operations and cash flows of such non-USD functional
currency operations are translated at the average exchange rate for the
reporting year. Translation gains or losses are accumulated as a separate
component of stockholders' equity. Currency transaction gains or losses
F-18
152
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES -- (CONTINUED)
arising from transactions of the Company in currencies other than the functional
currency are included in operations for each reporting period.
(e) Property and equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated on the straight-line method over the estimated useful
lives of the assets as follows:
YEARS
-----
Furniture and fixtures...................................... 8
Computer equipment and software............................. 3
(f) Intangible assets
Intangible assets consist principally of intangible assets arising from the
agreement with Pearson Television (note 14(b)) which are being amortized on a
straight-line basis over the period of benefit, the thirty-three month life of
the agreement. Other intangible assets consist of costs incurred for trademarks
and license fees. These assets are amortized over five years, which is the
estimated period of benefit, on a straight-line basis.
(g) Impairment of long-lived assets and long-lived assets to be disposed of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(h) Stock based compensation
The Company accounts for stock based compensation under the intrinsic-value
based method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issues to Employees," and discloses the
effect of the difference in applying the fair value based method of accounting
on a pro-forma basis, as required by SFAS No. 123 "Accounting for Stock-Based
Compensation."
(i) Revenue recognition
Advertising revenues are derived principally from short-term advertising
contracts in which the Company typically guarantees its advertising customers a
minimum number of impressions to be delivered to users of its Web sites or
clicks, over a specified period of time for a fixed fee. Customers are invoiced
monthly in accordance with delivery of advertising services during the month.
Advertising revenues are recognized as the advertisement is displayed or as
users click or otherwise respond to advertisements, provided that no significant
Company obligations remain. To the extent that minimum guaranteed impressions or
click-throughs are not met, the Company defers recognition of the corresponding
revenues until the guaranteed impressions or clicks are achieved. Advertising
revenues were approximately 79%, 95% and 98% of total revenues for the years
ended December 31, 1997, 1998, and 1999, respectively.
The Company commenced selling merchandise through its Web site in December
1999 and has recognized related revenues of approximately $15,000 for the year
ended December 31, 1999. Such revenues
F-19
153
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES -- (CONTINUED)
include shipping and handling fees. Revenue is recognized at the time of
shipment from the warehouse or directly from the supplier. Customers have a
right to return product within 21 days after shipment. The Company provides an
allowance for actual sales returns in the 21 days subsequent to a period end.
Through January 28, 2000, the Company has not experienced any returns.
The Company provides sponsorship advertising on game shows or on a portion
of its Web sites in consideration for a fixed fee. The Company incurs
insignificant costs to customize the advertisements received from the sponsors
which are expensed as incurred. Sponsorship agreements do not segregate the fees
for development of customized features and displaying the sponsors
advertisements on the Web sites, therefore, the entire fee is deferred and
recognized ratably in the period in which the sponsor's advertising is
displayed.
The Company enters into arrangements with third parties whereby the
Company's games are displayed on the third parties' Web sites. The revenues
generated from advertising in connection with the use of the Company's games are
recognized ratably in the period in which the advertising is displayed on the
third party Web site. Generally, the Company is responsible for selling the
advertising, billing and collections and is obligated to pay the third parties
their fees for displaying the games on their Web sites regardless of whether the
Company collects the advertising revenue. In these situations the Company
records the advertising revenues and the payments to the third parties are
recorded as cost of revenues. When the third party sells the advertising and
pays the Company a portion of the advertising revenues, the Company only
recognizes revenue for its portion of gross revenues.
Revenues include barter revenues from the exchange by the Company of
services or advertising space on the Company's Web sites for reciprocal
advertising or promotional services including prizes. Revenues from these barter
transactions are recorded at the estimated fair value of the services or
advertisements delivered, unless the fair value of the goods or services
received is more objectively determinable, and are recognized when the
advertisements are run on the Company's Web sites or services are provided. The
related expense is recorded when it is incurred and classified as sales and
marketing expenses or cost of revenues in accordance with the terms of the
barter agreement.
Barter revenues represented 0%, 22% and 14% of total revenues for the years
ended December 31, 1997, 1998, and 1999, respectively.
In 1997, one advertising customer accounted for 14% of total revenues and
another accounted for 11%. In 1998, one advertising customer accounted for 21%
of total revenues while another customer accounted for 12%. In 1999, one
advertising customer accounted for 14% of total revenues.
(j) Cost of revenues
Cost of revenues is primarily comprised of prize expenses, Internet
connection charges, royalties, merchandise costs and a portion of computer
equipment and software depreciation.
(k) Product development and advertising
Product development costs and advertising costs are expensed as incurred.
Advertising costs, which are included in sales and marketing expenses, amounted
to $188,000, $1,847,000 and $22,739,000 in 1997, 1998, and 1999 respectively.
Prepaid Pearson advertising costs (notes 7 and 14(b)) are being amortized
commencing April 1, 1999 over the thirty-month contractual period the
advertising services are provided to the Company.
F-20
154
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES -- (CONTINUED)
(l) Merchandise Inventory
Inventories which are stated at the lower of cost or market, are comprised
of goods available for the online sale of merchandise through the Company's Web
site and are included in other current assets. See note 6.
(m) Business segment reporting
The Company has determined that it does not have any separately reportable
business segments. However related disclosures about products and services,
geographic areas and major customers are included in note 17.
(n) Income taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(o) Net loss per share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings Per Share". Basic net income per share is computed by dividing the net
income available to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net income per
share is computed by dividing the net income for the period by the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares, composed of incremental common shares issuable
upon the exercise of stock options and warrants, are included in net income per
share to the extent such shares are dilutive. Common stock equivalents were not
included in loss per share for any periods presented since they were
anitdilutive. Potentially dilutive common stock equivalents, consisting of stock
options, as of December 31, 1997, 1998 and 1999 amounted to 2,110,920, 897,200,
and 5,904,408 respectively.
(p) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Significant
estimates made by the Company include the useful lives and recoverability of
long-lived assets.
(q) Recent accounting pronouncements
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company adopted these statements effective July 1,
1998 and June 30, 1999, respectively. These statements modified or expanded the
Company's stockholders' equity and segment disclosures and had no impact on the
Company's results of operations, financial position or cash flows.
F-21
155
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES -- (CONTINUED)
In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement, which is effective for fiscal years beginning after June 15, 2000,
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through earnings. If the derivative is an effective hedge, changes in its fair
value will be offset against the change in the fair value of the hedged item in
either other comprehensive income or earnings. The ineffective portion of a
derivative classified as a hedge will be immediately recognized in earnings. The
Company is required to adopt the new statement effective July 1, 2000, and has
not yet determined the effect SFAS No. 133 will have on its results of
operations and financial position. This statement is not required to be applied
retroactively to financial statements of prior periods.
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement did not have any
effect on the Company's results of operations, financial position or cash flows.
In 1998, the Company adopted SFAS No. 128, "Earnings Per Share." The
Company has reported on the income statement basic and diluted loss per share
for all periods presented.
(3) PRIZEPOINT ACQUISITION
On June 7, 1999, the Company completed an acquisition of PrizePoint
Entertainment Corporation ("PrizePoint"), a provider of online single-player
games. Under the terms of the acquisition agreement the Company exchanged
approximately 2.44 million shares of its common stock in exchange for all of the
outstanding shares of common stock of PrizePoint. Fractional shares were
acquired for $19,380 and then retired. All outstanding PrizePoint preferred
shares were converted in accordance with their original terms into PrizePoint
common stock immediately prior to the acquisition. The acquisition has been
accounted for as a pooling of interests and, accordingly, the Company's
consolidated financial statements have been restated to include the accounts and
operations of PrizePoint for all periods prior to the merger.
Separate revenues and net loss amounts for the year ended December 31, 1998
and three months ended March 31, 1999 are summarized below:
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
Revenues
Uproar.................................................. $ 1,632,969 $ 963,418
PrizePoint.............................................. -- 47,750
----------- -----------
1,632,969 1,011,168
----------- -----------
Net loss
Uproar.................................................. (4,602,025) (4,399,357)
PrizePoint.............................................. (1,228,625) (818,575)
----------- -----------
$(5,830,650) $(5,217,932)
=========== ===========
PrizePoint was formed in March 1998 and recognized revenues beginning in
the first quarter of 1999. Adjustments to eliminate the sale of advertising
between Uproar Inc. and PrizePoint reduced combined net revenue by $12,000 for
the three months ended March 31, 1999.
F-22
156
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) PROPERTY AND EQUIPMENT
DECEMBER 31,
-------------------------
1998 1999
---------- -----------
Computer equipment......................................... $ 963,053 $ 4,680,785
Purchased software......................................... 162,768 667,335
Furniture and fixtures..................................... 247,184 568,493
Construction in progress................................... -- 162,461
---------- -----------
1,373,005 6,079,074
Less accumulated depreciation.............................. (261,039) (1,047,645)
---------- -----------
$1,111,966 $ 5,031,429
========== ===========
Depreciation expense for 1997, 1998, and 1999 was $56,556, $173,878 and
$882,385 respectively.
(5) INTANGIBLE ASSETS, NET
Intangible assets consist of the following:
DECEMBER 31,
----------------------
1998 1999
------- -----------
Intangible benefits of Pearson Agreement.................... $ -- $16,673,875
Patents..................................................... 3,510 3,510
Trademarks.................................................. 6,345 6,283
Licenses.................................................... 45,622 44,823
Other....................................................... 1,183 1,344
------- -----------
56,660 16,729,835
Less accumulated amortization............................... (9,303) (6,080,448)
------- -----------
$47,357 $10,649,387
======= ===========
The intangible benefits of the Pearson agreement include a license to
create and use the English language Internet versions of certain Pearson game
shows and benefits from association with Pearson and their brands during the
thirty-three month term of the agreement.
(6) OTHER CURRENT ASSETS
Other current assets consist of the following:
DECEMBER 31,
-------------------
1998 1999
------- --------
Prepaid insurance........................................... $19,864 $178,446
Prepaid license fees........................................ -- 150,000
Prepaid data warehouse services............................. -- 22,032
Prepaid rent................................................ -- 85,281
Merchandise inventory....................................... -- 172,508
Other....................................................... 4,825 136,345
------- --------
$24,689 $744,612
======= ========
F-23
157
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) PREPAID ADVERTISING
DECEMBER 31,
----------------------
1998 1999
-------- ----------
Prepaid advertising......................................... $201,327 $ 66,000
Prepaid Pearson advertising -- note 14(b)................... -- 3,795,996
-------- ----------
$201,327 $3,861,996
======== ==========
Long term portion of prepaid Pearson advertising -- note
14(b)..................................................... $ -- $2,847,005
======== ==========
(8) OTHER LONG TERM ASSETS
Other long term assets consist of the following:
DECEMBER 31,
--------------------
1998 1999
-------- --------
Security deposits........................................... $125,035 $168,657
Other....................................................... 13,650 4,769
-------- --------
$138,685 $173,426
======== ========
(9) ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
----------------------
1998 1999
-------- ----------
Advertising................................................. $ 33,825 $2,786,020
Severance................................................... -- 94,225
Prizes and awards........................................... 59,638 174,008
Commission and salaries..................................... 95,675 78,943
Deferred revenue............................................ 30,000 154,906
Bonus....................................................... 91,757 16,500
Legal and other fees........................................ 123,102 256,141
Other accruals.............................................. 37,909 360,828
-------- ----------
$471,906 $3,921,570
======== ==========
Accrued advertising consists of uninvoiced online banner advertising
purchased by and delivered to the Company.
(10) VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT PROVISIONS BALANCE AT
BEGINNING FOR RETURNS END OF
OF PERIOD AND DOUBTFUL ACCOUNTS WRITE-OFFS PERIOD
---------- --------------------- ---------- ----------
Year ended December 31, 1997.... -- -- -- --
Year ended December 31, 1998.... -- -- -- --
Year ended December 31, 1999.... -- 270,913 -- 270,913
F-24
158
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) STOCKHOLDERS' EQUITY
During 1997, 4,000,000 shares of common stock were sold in a private
placement. Net proceeds to the Company were $4,715,687.
In accordance with their original terms, during 1997 loan notes totaling
NLG 832,000 ($435,558) were converted to common stock at a rate of NLG 18.756
for every forty shares, which resulted in the issuance of 1,774,600 shares.
E-Pub Services Limited was the predecessor company to Uproar Limited.
During 1997, 11,174,600 common shares in E-Pub Services Limited, representing
100% of the equity ownership, were exchanged at the ratio of 1:1 for the common
shares in Uproar Limited, a company under common control, at that time a non-
operating shell company.
During 1998, 4,758,360 shares of common stock were sold in a private
placement. Net proceeds to the Company were $9,666,464.
In January 1999, 1,000,000 shares of common stock were sold in a private
placement. Net proceeds to the Company totaled $9,344,654.
In January 1999, 2,000,000 shares of common stock were issued to Pearson
Television Limited in exchange for intangible benefits, advertising services and
cash of $124,599. The fair value of the common stock issued was $24,780,474. See
Note 14(b).
In January 1999, 43,360 shares of common stock were sold in a private
placement for $250,000.
On April 1, 1999 the par value of the Company's common stock was changed
from 1 Irish Punt to $0.05. Subsequently the Company effected a 20 for 1 stock
split. The net effect of these transactions was a $288,858 transfer from
additional paid-in capital to common stock. All prior period stock transactions
have been restated to reflect the impact of the stock split.
In June 1999, 43,360 warrants, which had been issued by PrizePoint during
1998, were exercised at an aggregate exercise price of $250,000.
In July 1999 the Company completed the sale of 2,832,000 shares on the
EASDAQ stock exchange. Net proceeds to the Company totaled $30,347,116.
(12) STOCK COMPENSATION PLAN
As of December 31, 1998 the Company had one stock-based compensation plan.
The plan authorizes the granting of options to acquire the Company's common
stock to selected key employees, who also may be officers, and to non-employee
directors. Options granted prior to July 1, 1997 were granted with an exercise
price above the common stock's market value at the date of grant and became
fully exercisable on December 31, 1997. The original expiration date of these
options was also December 31, 1997. On December 31, 1997, the exercise price of
these options was increased by 15% and the expiration date was extended to June
30, 1998. Compensation expense for the excess of the market value over the
exercise price, aggregating $1,244,888 was recorded at that time. Generally 50%
of the options granted under this plan vest and become fully exercisable two
years from the date of grant and the remaining 50% vest and become fully
exercisable three years from the date of grant. During 1998 and 1999 the Company
granted options under this plan with exercise prices less than the fair value of
the common stock which resulted in stock compensation expense of $1,406,623.
This amount is recorded as compensation expense over the vesting periods, and
amounted to $3,104 and $735,489 for the years ended December 31, 1998 and 1999,
respectively.
F-25
159
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) STOCK COMPENSATION PLAN -- (CONTINUED)
During 1999, the Company established the Uproar Ltd. 1999 Share
Option/Share Issuance Plan (the "1999 Plan"). The 1999 Plan authorizes the
Company to grant options to its employees, non-employee directors and
consultants to purchase up to 5,400,000 shares of the Company's common stock, as
well as to issue shares directly to such persons without any intervening option
grants. The exercise period for options granted under the Plan can be no more
than ten years from the date of grant. The Company commenced granting options
under the 1999 Plan in September, 1999 and the exercise price of each such
option was the market value of a share of the Company's common stock on the date
of grant.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock compensation plans. The compensation cost charged
against income was $1,244,888, $3,104, and $735,489 for the years ended December
31, 1997, 1998 and 1999 respectively. Had compensation cost been determined in
accordance with the provisions of SFAS No. 123, the Company's net loss and net
loss per share would have been the pro forma amounts indicated below. The fair
values of the options for the pro-forma calculations are computed using the
Black-Scholes method.
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
----------- ----------- ------------
Net Loss
As reported.............................. $(3,828,745) $(5,830,650) $(38,724,641)
Proforma................................. (3,890,803) (6,678,354) (41,520,547)
Basic loss per share
As reported.............................. $ (0.42) (0.40) $ (1.77)
Proforma................................. (0.43) (0.45) (1.90)
Weighted average shares outstanding........ 9,034,928 14,697,112 21,909,456
Option pricing model assumptions:
Expected dividend yield.................. 0% 0% 0%
Average option life...................... 2.5 years 2 years 2.5 years
Volatility............................... 70% 70% 60%
Risk free interest rate.................. 3% 3% 5%
F-26
160
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) STOCK COMPENSATION PLAN -- (CONTINUED)
Stock option activity during the periods indicated is as follows:
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
---------- --------------
Outstanding, December 31, 1996............................. 1,800,000 $ .74
Granted.................................................. 600,000 2.43
Exercised................................................ (289,080) .64
---------- -----
Outstanding, December 31, 1997............................. 2,110,920 1.23
Granted.................................................. 329,200 2.32
Exercised................................................ (1,524,240) .77
Cancelled................................................ (18,680) 2.44
---------- -----
Outstanding, December 31, 1998............................. 897,200 2.39
Granted.................................................. 5,337,716 9.64
Options assumed in PrizePoint acquisition................ 124,080 .07
Exercised................................................ (307,708) 8.41
Cancelled................................................ (146,880) 4.76
---------- -----
Outstanding, December 31, 1999............................. 5,904,408 $8.52
========== =====
At December 31, 1999, the weighted-average exercise price and average
remaining contractual life of outstanding options was $8.52 and 9.55 years
remaining, respectively. 614,690 shares are available for grants under the 1999
Plan and 2,222,912 shares are exercisable at December 31, 1999.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------- ----------------------------
WEIGHTED-AVERAGE
-------------------------- WEIGHTED-
NUMBER EXERCISE REMAINING NUMBER AVERAGE
OUTSTANDING PRICES LIFE IN YEARS EXERCISABLE EXERCISE PRICE
- ----------- ---------- ------------- ----------- --------------
34,000 $ .01 7.52 14,228 $ .01
78,986 .10 9.27 35,326 .10
911,720 2.21 8.62 695,706 2.21
3,580,458 9.43 9.71 1,273,488 9.43
1,200,000 10.82 9.81 204,164 10.82
33,702 11.15 9.78 -- --
42,882 16.09 9.87 -- --
22,660 17.27 9.96 -- --
--------- ---------- --------- ------
5,904,408 $.01-17.27 9.55 2,222,912 $ 7.09
========= ========== ========= ======
F-27
161
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) INCOME TAXES
The Company's income tax expense is comprised of the following:
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------ ------ -------
Current tax expense
United States......................................... $ -- $ -- $ --
Foreign............................................... 5,582 9,020 28,000
------ ------ -------
Total income tax expense................................ $5,582 $9,020 $28,000
====== ====== =======
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
----------- ----------- ------------
Sources of loss before income tax
United States............................ $(1,060,562) $(4,455,439) $(22,848,393)
Foreign.................................. (2,762,601) (1,366,191) (15,848,248)
----------- ----------- ------------
Loss before income taxes................... $(3,823,163) $(5,821,630) $(38,696,641)
=========== =========== ============
The components of the net deferred tax asset as of December 31, 1998 and
1999 consist of the following:
DECEMBER 31,
---------------------------
1998 1999
----------- ------------
Deferred tax assets:
United States net operating loss carryforwards......... 2,146,000 10,864,000
Accounts receivable allowances......................... -- 108,000
Accrued liabilities.................................... 61,000 374,000
United Kingdom net operating loss carryforwards........ 137,000 323,000
----------- ------------
2,344,000 11,669,000
Less valuation allowance............................... (2,344,000) (11,669,000)
----------- ------------
Deferred tax assets, net................................. $ -- $ --
=========== ============
The net operating loss carryforwards are comprised of the losses incurred
in the UK and US subsidiaries. The Bermudan company enjoys tax-free status and
the only other subsidiary which is in Hungary, has been profitable.
Realization of deferred tax assets is dependent upon future earnings, if
any. The Company has recorded a full valuation allowance against its deferred
tax assets since management believes that it is not more likely than not that
these assets will be realized. No income tax benefit has been recorded for all
periods presented because of the valuation allowance.
At December 31, 1999, the US subsidiary has a federal net operating loss
carryforward for income tax purposes of approximately $27,160,000. There can be
no assurance that the Company will realize the benefit of the net operating loss
carryforwards. The federal net operating loss carryforwards are available to
offset future taxable income and expire in various amounts through 2019.
Due to the "change in ownership" provisions in Section 382 of the Internal
Revenue Code, the availability of the Company's US net operating loss
carryforwards will be subject to an annual limitation against taxable income in
future periods, which could substantially limit the eventual utilization of
these carryforwards.
F-28
162
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) SIGNIFICANT AGREEMENTS
(a) Cable and Wireless
On December 23, 1998, the Company entered into an agreement with Cable &
Wireless Communications ("CWC"), the largest cable television franchise owner in
the UK. The agreement provides for CWC to display up to 14 Uproar game shows on
an interactive service offered via its digital cable television which was
launched by CWC on October 15, 1999. The agreement provides for the Company to
have an anchor position within the games and entertainment channel on the CWC
service and to participate in promotional opportunities on the service. The
Company pays CWC an annual maintenance fee which is included in cost of revenues
for which CWC guarantees placement within the service. The amount paid through
December 31, 1999 was approximately $11,000. The agreement provides that CWC is
entitled to additional fees equal to a percentage of net advertising and
sponsorship revenue generated by the Company and arising directly from games
displayed upon the interactive service. The agreement is for an initial
three-year period from launch of the Uproar games on the CWC interactive
service, and then automatically continuing with a provision for a six-month
notice of cancellation. Two months of the annual fee has been paid and
recognized as an expense as of December 31, 1999.
(b) Pearson Television
On January 13, 1999, the Company entered into an agreement with Pearson
Television Limited ("Pearson"), whereby Pearson acquired 2,000,000 common shares
of the Company in exchange for intangible assets, advertising services to be
provided over a thirty-month period commencing April 1, 1999 and cash of
$124,599.
The market value of the common shares acquired by Pearson was $24,780,474
of which $24,655,875, net of the $124,599 cash payment was attributable to
intangible assets and prepaid advertising services. In accounting for the
transaction the Company capitalized intangible assets of $16,673,875 and prepaid
advertising services of $7,982,000, their estimated fair value. For the year
ended December 31, 1999, amortization of intangible assets was $6,063,227 and
amortization of prepaid advertising services amounting to $1,338,999 was
recorded as advertising expense.
Should Pearson meet certain television distribution targets for its game
shows in the United States, they will be granted 400,000 additional common
shares between September 1999 and August 2000 and a further 400,000 shares
between September 2000 and August 2001. See note 15.
Included in the intangible assets, Uproar acquired a license to create and
use the English language Internet versions of certain Pearson game shows during
the thirty-three month term of the agreement. The Company pays Pearson a royalty
for the rights and license to use the game show formats on its Web sites, equal
to a percentage of gross advertising and other revenue generated from the use of
the licensed Internet games. Additional royalties are due to Pearson for a
percentage of net advertising and other revenues generated by the licensed game
shows, as defined in the agreement, subject to a minimum guaranteed amount of
$400,000 for the term of the agreement. The minimum guaranteed amount of
$400,000 is due in two equal installments on July 15, 1999 and July 15, 2000 and
represents the minimum due for each of the two television broadcast years
measured from September 1999 to September 2001. The initial payment was recorded
as a prepayment with $50,000 expensed in the year ended December 31, 1999.
(c) Telefonica
On September 29, 1999, the Company entered an agreement with Telefonica
Interactiva De Contenidos ("Telefonica"), a Spanish corporation, to establish
and develop Uproar products and the Uproar media property in the Spanish and
Portuguese languages. The agreement requires Uproar to license distribution
F-29
163
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) SIGNIFICANT AGREEMENTS -- (CONTINUED)
rights to Telefonica, and provide services and support to Telefonica for the
operations of the Web sites in exchange for which Telefonica has agreed to pay
Uproar exclusivity fees. Such fees are recognized as revenue ratably over the
related contractual period. Telefonica will display the Uproar Web sites online
for the Spanish and Portuguese language markets from Telefonica's Terra.com Web
sites. Telefonica sells advertising displayed with Uproar games on their Web
sites and remits a percentage of the revenues to the Company, which is
recognized as revenue by the Company when the advertisements are displayed. The
agreement term is for an initial three-year period from the date of the
agreement, after which it can be extended for an additional twelve-month period.
(15) COMMITMENTS AND CONTINGENCIES
(a) Pearson Television
Under the terms of the Pearson agreement (see note 14(b)), should Pearson
meet certain television distribution targets for its game shows in the United
States, they will be granted 400,000 additional common shares between September
31, 1999 and August 2000 and a further 400,000 shares between September 2000 and
August 2001. Since, as of December 31, 1999 it is not considered probable that
the distribution target under the Pearson Television agreement will be met, no
accounting has been provided for this transaction in these consolidated
financial statements.
(b) Other commitment
In connection with two office leases the Company has letters of credit
outstanding for approximately $604,275. The cash balances supporting the letters
of credit are reported as restricted cash.
(16) LEASES
The Company has several non-cancelable operating leases, primarily for
office space. These leases generally contain renewal options for periods ranging
from three to five years and require the Company to pay all executory costs such
as maintenance and insurance. Rental expense for operating leases was $105,645,
$159,121, and $652,642 for the years ended December 31, 1997, 1998, and 1999
respectively. The interest rate on the capital leases was approximately 1%.
F-30
164
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) LEASES -- (CONTINUED)
Future minimum lease payments under non-cancelable leases (with initial or
remaining lease terms in excess of one year) as of December 31, 1999 are:
CAPITAL OPERATING
LEASES LEASES
-------- ----------
Year ended December 31,
2000...................................................... 107,989 822,222
2001...................................................... 54,228 800,439
2002...................................................... -- 618,021
2003...................................................... -- 612,301
2004...................................................... -- 548,541
Thereafter................................................ -- 90,289
-------- ----------
Total minimum lease payments................................ $162,212 $3,491,813
==========
Less amounts representing interest.......................... (7,754)
--------
Current portion of capital leases........................... 102,777
--------
Long term capital lease obligation.......................... $ 51,681
========
(17) SEGMENT REPORTING
In presenting segment information the Company has applied the provisions of
SFAS No. 131. The Company has determined that it does not have any separately
reportable business segments.
The Company attributes revenues to different geographic areas on the basis
of the location of the customer. Revenues by geographic area are as follows:
REVENUES
-------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
-------- ---------- -----------
United States.................................. $332,555 $1,545,663 $ 9,966,057
England........................................ 8,727 83,120 246,336
Hungary........................................ 6,612 -- --
Germany........................................ -- -- 54,134
Other.......................................... 815 4,186 125,000
-------- ---------- -----------
Total.......................................... $348,709 $1,632,969 $10,391,527
======== ========== ===========
Included in revenues in the United States for the year ended December 31,
1999 is $15,145 relating to the sale of merchandise through the Company Web
site. There were no such revenues in prior periods.
F-31
165
UPROAR INC. AND SUBSIDIARIES
(FORMERLY UPROAR LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) SEGMENT REPORTING -- (CONTINUED)
Investment in long-lived assets by geographic area are as follows:
PROPERTY AND EQUIPMENT AND
INTANGIBLE ASSETS
---------------------------
DECEMBER 31,
---------------------------
1998 1999
----------- ------------
United States.............................................. $ 962,880 $15,394,683
England.................................................... 35,399 89,496
Ireland.................................................... 20,532 --
Hungary.................................................... 108,040 184,618
Germany.................................................... -- 12,019
Bermuda.................................................... 32,472 --
---------- -----------
Total...................................................... $1,159,323 $15,680,816
========== ===========
(18) PENSION AND OTHER POST-RETIREMENT PLANS
Effective January 1, 1998, the Company established a 401(k) salary deferral
plan (the "401(k) Plan") on behalf of its U.S. employees. The 401(k) Plan is a
qualified defined contribution plan and allows employees to defer up to 15% of
their compensation, subject to certain limitations. Under the 401(k) Plan, the
Company has the discretion to match contributions made by the employee. The
Company made no matching contributions in 1998 or 1999.
(19) SUBSEQUENT EVENTS
On December 16, 1999, Uproar Inc., was incorporated in the state of
Delaware. On January 26, 2000 Uproar Ltd. was redomesticated from Bermuda to the
state of Delaware and became a Delaware corporation. On January 27, 2000, Uproar
Inc. was merged into Uproar Ltd. whereby each ordinary share of the Bermuda
Company became one share of common stock of the Delaware corporation, which was
accounted for as a transaction between companies under common control.
Simultaneous with the merger, Uproar Inc. increased its number of authorized
common stock to 112,000,000, with par value $.01 per share.
On February 2, 2000, the Company sold 1,265,372 shares of common stock for
net proceeds of approximately $25 million to Trans Cosmos USA, Inc. (TCUI).
Approximately $63,000 of the net proceeds will be allocated to common stock and
the remainder, or approximately $24,937,000, will be added to additional paid-in
capital. The Common Stock Purchase agreement provides that the Company and TCUI
intend to form a Japanese joint venture to produce a Japanese-localized version
of Uproar's Web site, uproar.com. The joint venture would be owned equally and
Uproar and TCUI will contribute to the joint venture $500,000 and $4,500,000,
respectively. Uproar would receive an annual royalty fee from the joint venture
for licensing its intellectual property.
On February 4, 2000 the Company declared a 2-for-1 common stock split for
shareholders of record on February 18, 2000, effected in the form of a stock
dividend. All prior period stock transactions and amounts have been restated to
reflect the impact of the stock split.
F-32
166
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PrizePoint Entertainment Corporation:
We have audited the accompanying balance sheet of PrizePoint Entertainment
Corporation (a Delaware corporation) as of December 31, 1998, and the related
statements of operations, stockholders' equity and cash flows for the period
from inception (March 4, 1998) to December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PrizePoint Entertainment
Corporation as of December 31, 1998, and the results of its operations and its
cash flows for the period from inception (March 4, 1998) to December 31, 1998,
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
New York, New York
April 29, 1999
F-33
167
PRIZEPOINT ENTERTAINMENT CORPORATION
BALANCE SHEETS
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 1,870,075 $ 1,244,072
Accounts receivable....................................... -- 21,250
Prepaid expenses and other current assets................. -- 40,054
----------- -----------
Total current assets................................... 1,870,075 1,305,376
Property and Equipment, net................................. 127,337 366,219
Deposits and Other Assets................................... 61,239 78,495
----------- -----------
Total assets........................................... $ 2,058,651 $ 1,750,090
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 63,457 $ 146,634
Accrued expenses.......................................... 25,867 33,497
Current portion of capital lease obligations.............. 25,949 102,777
----------- -----------
Total current liabilities.............................. 115,273 282,908
Capital Lease Obligations................................... 15,134 107,513
Commitments (Note 7)
Stockholders' Equity:
Preferred Stock, $.01 par value; 5,000,000 shares
authorized:
Series A Preferred Stock, 645,000 shares designated,
issued and outstanding as of December 31, 1998 and
March 31, 1999 (unaudited), respectively; liquidation
value of $645,000...................................... 6,450 6,450
Series B Preferred Stock, 495,049 shares designated;
412,541 and 453,795 shares issued and outstanding as of
December 31, 1998 and March 31, 1999 (unaudited),
respectively; liquidation value of $2,500,000 and
$2,750,000 (unaudited), respectively................... 4,125 4,538
Common stock, $.01 par value; 10,000,000 shares authorized
1,186,667 shares issued and outstanding as of December
31, 1998 and March 31, 1999 (unaudited),
respectively........................................... 11,867 11,867
Additional paid-in capital................................ 3,134,425 3,384,012
Accumulated deficit....................................... (1,228,623) (2,047,198)
----------- -----------
Total stockholders' equity............................. 1,928,244 1,359,669
----------- -----------
Total liabilities and stockholders' equity............. $ 2,058,651 $ 1,750,090
=========== ===========
The accompanying notes are an integral part of these balance sheets.
F-34
168
PRIZEPOINT ENTERTAINMENT CORPORATION
STATEMENTS OF OPERATIONS
FOR THE PERIOD
FROM INCEPTION FOR THE THREE
(MARCH 4, MONTHS
1998) TO ENDED
DECEMBER 31, MARCH 31
1998 1999
-------------- -------------
Revenues.................................................... $ -- $ 47,750
----------- ---------
Costs and Expenses:
Direct costs.............................................. 353,279 305,385
Selling and marketing expenses............................ 214,290 209,299
General and administrative expenses....................... 675,514 321,535
----------- ---------
Operating loss......................................... (1,243,083) (836,219)
Other Income (Expense):
Interest income, net...................................... 14,460 17,644
----------- ---------
Loss before income taxes............................... (1,228,623) (818,575)
Benefit for Income Taxes.................................. -- --
----------- ---------
Net loss............................................... $(1,228,623) $(818,575)
=========== =========
Per Share Information:
Net loss per share--
Basic and Diluted...................................... $ (1.04) $ (.68)
----------- ---------
Weighted average common shares outstanding--
Basic and Diluted...................................... 1,186,667 1,186,667
=========== =========
The accompanying notes are an integral part of these statements.
F-35
169
PRIZEPOINT ENTERTAINMENT CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------- ------------------- ---------------------- ADDITIONAL
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE PAID-IN CAPITAL
------- --------- ------- --------- ---------- --------- ---------------
Balance, March 4, 1998.............. -- $ -- -- $ -- -- $ -- $ --
Issuance of common stock.......... -- -- -- -- 1,186,667 11,867 --
Issuance of Series A Preferred
Stock.......................... 645,000 6,450 -- -- -- -- 638,550
Issuance of Series B Preferred
Stock.......................... -- -- 412,541 4,125 -- -- 2,495,875
Net loss.......................... -- -- -- -- -- -- --
------- ------ ------- ------ ---------- ------- ----------
Balance, December 31, 1998.......... 645,000 6,450 412,541 4,125 1,186,667 11,867 3,134,425
Issuance of Series B Preferred
Stock.......................... -- -- 41,254 413 -- -- 249,587
Net loss.......................... -- -- -- -- -- -- --
------- ------ ------- ------ ---------- ------- ----------
Balance, March 31, 1999
(unaudited)....................... 645,000 $6,450 453,795 $4,538 1,186,667 $11,867 $3,384,012
======= ====== ======= ====== ========== ======= ==========
ACCUMULATED
DEFICIT TOTAL
----------- -----------
Balance, March 4, 1998.............. $ -- $ --
Issuance of common stock.......... -- 11,867
Issuance of Series A Preferred
Stock.......................... -- 645,000
Issuance of Series B Preferred
Stock.......................... -- 2,500,000
Net loss.......................... (1,228,623) (1,228,623)
----------- -----------
Balance, December 31, 1998.......... (1,228,623) 1,928,244
Issuance of Series B Preferred
Stock.......................... -- 250,000
Net loss.......................... (818,575) (818,575)
----------- -----------
Balance, March 31, 1999
(unaudited)....................... $(2,047,198) $ 1,359,669
=========== ===========
The accompanying notes are an integral part of these statements.
F-36
170
PRIZEPOINT ENTERTAINMENT CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FOR THE THREE
FROM INCEPTION MONTHS
(MARCH 4, 1998) TO ENDED
DECEMBER 31, MARCH 31,
1998 1999
------------------ -------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(1,228,623) $ (818,575)
Adjustments to reconcile net loss to net cash used in
operating activities -- Depreciation and amortization..... 23,156 19,875
Changes in assets and liabilities --
Increase in accounts receivable........................ -- (21,250)
Increase in prepaid expenses and other current
assets............................................... -- (40,054)
Increase in deposits and other assets.................. (61,239) (17,256)
Increase in accounts payable........................... 63,457 83,177
Increase in accrued expenses........................... 25,867 7,630
----------- ----------
Net cash used in operating activities.................. (1,177,382) (786,453)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (98,598) (72,747)
----------- ----------
Net cash used in investing activities.................. (98,598) (72,747)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations...................... (10,812) (16,803)
Issuance of Series A Preferred Stock........................ 645,000 --
Issuance of Series B Preferred Stock........................ 2,500,000 250,000
Issuance of common stock.................................... 11,867 --
----------- ----------
Net cash provided by financing activities.............. 3,146,055 233,197
----------- ----------
Net increase (decrease) in cash and cash equivalents... 1,870,075 (626,003)
Cash and Cash Equivalents, beginning of period.............. -- 1,870,075
----------- ----------
Cash and Cash Equivalents, end of period.................... $ 1,870,075 $1,244,072
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................... $ -- $ --
Cash paid for income taxes.................................. -- --
Capital lease obligations................................... 56,608 186,010
The accompanying notes are an integral part of these statements.
F-37
171
PRIZEPOINT ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
PrizePoint Entertainment Corporation ("PrizePoint" or the "Company") was
formed as a Delaware corporation on March 4, 1998. The Company is engaged in the
marketing and promotion forum of games of chance and advertising via its
Internet web site. Individuals or "players" can log on to the Company's site and
earn points for participating in the various product and trivia promotions
offered in the Company's site. Individuals can redeem these points for various
awards. Sponsors provide some of the awards and gifts for the winning
participants in exchange for advertising services.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues are derived from the sale of advertising on the Company's web
site. Advertising revenues are recognized in the period the advertisement is
displayed provided that no significant Company obligations remain and collection
of the resulting receivable is probable. Company obligations typically include
guarantees of a minimum number of "impressions", or number of times that any
advertisement is viewed by users on the Company's web sites. To the extent
minimum guaranteed impressions are not met, the Company defers recognition of
the corresponding revenues until guaranteed impression levels are achieved.
Direct Costs
Direct costs consist primarily of cash prizes paid to participants, payroll
and related expenses for personnel, systems consultants and systems and
telecommunications infrastructures for web site development. To date, all direct
costs have been expensed as incurred.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Property and Equipment, net
Property and equipment are recorded at cost and depreciated on the
straight-line method over their estimated useful lives, ranging from three to
five years.
Costs of maintenance and repairs are charged to expense as incurred.
Accounting for Long-Lived Assets
The Company accounts for long-lived assets under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement establishes financial accounting and reporting standards for
the impairment of long-lived assets and for long-lived assets to be disposed of.
Management has performed a review of all long-lived assets and has determined
that no impairment of the respective carrying value has occurred as of December
31, 1998.
F-38
172
PRIZEPOINT ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Income Taxes
The Company accounts for its income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax
liabilities and assets for the estimated future tax effects of events that have
been recognized in the financial statements or income tax returns. Under this
method, deferred tax liabilities and assets are determined based on differences
between the financial accounting and income tax bases of assets and liabilities,
and the use of carryforwards, if any, using enacted tax rates in effect for the
years in which the differences and carryforwards are expected to reverse and be
utilized. Any deferred assets have been reserved for their full value until the
future realizability can be determined.
Stock-Based Compensation
The Company accounts for its employee stock option plans in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Compensation expense related to employee stock options is recorded only if, on
the date of grant, the fair value of the underlying stock exceeds the exercise
price. The Company adopted the disclosure-only requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," which allows entities to continue to
apply the provisions of APB Opinion No. 25 for transactions with employees and
to provide pro forma net income (loss) and pro forma earnings per share
disclosures (Note 8) for employee stock options as if the fair value based
method of accounting in SFAS No. 123 had been applied to these transactions.
The Company accounts for nonemployee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more readily determinable.
Basic and Diluted Net Loss Per Common Share
The Company accounts for net loss per common share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share." In accordance with SFAS No.
128, basic earnings per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding and diluted earnings per
share is computed by dividing net income (loss) by the weighted average number
of common shares and dilutive common equivalent shares outstanding during the
period. Common equivalent shares have been excluded from the calculation of
diluted earnings per share, as their effect is anti-dilutive.
Business and Credit Concentrations
Financial instruments, which subject the Company to concentrations of
credit risk, consist primarily of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses. The carrying amounts of these
instruments approximate fair value. The carrying amount of the Company's capital
leases approximate the fair value of these instruments based upon management's
best estimate of interest rates.
The Company maintains cash with a domestic financial institution. The
Company performs periodic evaluations of the relative credit standing of this
institution. From time to time, the Company's cash balances with this financial
institution may exceed Federal Deposit Insurance Corporation insurance limits.
Unaudited Interim Financial Statements
The unaudited consolidated financial information included herein for the
three months ended March 31, 1999, has been prepared in accordance with
generally accepted accounting principles for interim financial statements. In
the opinion of the Company, these unaudited financial statements, reflect all
adjustments necessary, consisting of normal recurring adjustments, for a fair
presentation of such data on a basis consistent
F-39
173
PRIZEPOINT ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
with that of the audited data presented herein. The results of operations for
interim periods are not necessarily indicative of the results expected for a
full year.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." This statement establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Company adopted this statement in 1998. The adoption of this
statement did not have an impact on the Company's financial condition or results
of operations. Accordingly, the Company's comprehensive net loss is equal to its
net loss for the period from inception (March 4, 1998) to December 31, 1998.
Additionally, in June 1997, the FASB issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information." This statement
establishes standards for the way the public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. The Company adopted this
statement in 1998. In the initial year of application, comparative information
for earlier years must be restated. Management has determined that it does not
have any separately reportable business segments.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. SOP 98-1 is effective for fiscal years
beginning after December 31, 1998. The Company has expensed all software
development costs and does not expect the adoption of SOP 98-1 to have a
material effect on its financial statements.
2. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following at December 31, 1998:
Computer equipment and software............................. $121,601
Furniture and fixtures.................................... 28,892
--------
150,493
Less -- Accumulated depreciation and amortization......... 23,156
--------
$127,337
========
3. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1998:
Accrued Vacation............................................ $15,835
Accrued Rent................................................ 10,032
-------
Total.................................................. $25,867
=======
F-40
174
PRIZEPOINT ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
No provision for U.S. federal or state income taxes has been recorded for
the period from inception (March 4, 1998) to December 31, 1998 as the Company
has incurred an operating loss.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets for federal and state income taxes at December
31, 1998 are as follows:
Deferred tax assets, net:
Net operating loss carryforwards.......................... $ 493,334
Other..................................................... 5,000
---------
498,334
Less -- Valuation allowance................................. (498,334)
---------
Deferred tax assets, net.................................. $ --
=========
Realization of deferred tax assets is dependent upon future earnings, if
any. The Company has recorded a full valuation allowance against its deferred
tax assets since management believes that it is not more likely than not that
these assets will be realized. No income tax benefit has been recorded for the
period from inception (March 4, 1998) to December 31, 1998 as a result of the
valuation allowance.
As of December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $1,229,000. There can be no
assurance that the Company will realize the benefit of the net operating loss
carryforwards. The federal net operating loss carryforwards are available to
offset future taxable income and expire in 2019 if not utilized.
5. CAPITAL LEASE OBLIGATIONS
At December 31, 1998 the Company was committed under a capital lease
agreement for office equipment. The asset and liability under the capital lease
is recorded at the lower of the present value of minimum lease payments or the
fair market value of the asset. The interest rate on the capital lease was
approximately 1% at December 31, 1998.
Future minimum payments under the capital lease agreements are as follows:
Year ending December 31:
1999...................................................... $28,308
2000...................................................... 16,513
-------
Total minimum lease payments................................ 44,821
Less--
Amounts representing interest............................... 3,738
-------
41,083
Current portion............................................. 25,949
-------
Long-term portion........................................... $15,134
=======
6. STOCKHOLDERS' EQUITY
Preferred Stock
The Company's stockholders authorized 5,000,000 shares of preferred stock.
The Company has designated 645,000 shares as Series A Preferred Stock and
495,049 shares as Series B Preferred Stock.
F-41
175
PRIZEPOINT ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
Series A Preferred
On April 1, 1998, the Company sold 645,000 shares of Series A Preferred
Stock for net proceeds of $645,000. The Series A Preferred Stock is convertible
into an equal number of common shares at the holder's option, subject to
adjustment for antidilution, and is automatically converted to common stock in
the event of a public offering of securities of the Company. The holders of
Series A Preferred Stock are entitled to receive dividends as and if declared by
the Board of Directors. In the event of liquidation or dissolution of the
Company, the holders of Series A Preferred Stock are entitled to receive all
accrued dividends, if applicable, plus a liquidation price per share of $1.00.
Subject to certain provision, registration rights, as defined in the
Certificate of Designation of Series A Convertible Preferred Stock agreement,
may be exercised after the earlier of (a) the date specified by a vote or
written consent or agreement of holders of at least two-thirds of the shares of
Series A Preferred Stock then outstanding, approving such conversion, or (b) the
effective date of the first registration statement for a public offering of
securities of the Company.
Series B Preferred Stock
On December 8, 1998, the Company sold 412,541 shares of Series B Preferred
Stock for net proceeds of $2,500,000. The Series B Preferred Stock is
convertible into an equal number of common shares at the holder's option,
subject to adjustment for antidilution, and is automatically converted to common
stock in the event of a public offering of securities of the Company. The
holders of Series B Preferred Stock are entitled to receive dividends as and if
declared by the Board of Directors. In the event of liquidation or dissolution
of the Company, the holders of Series B Preferred Stock are entitled to receive
all accrued dividends, if applicable, plus a liquidation price per share of
$6.06. Certain of the Series B Preferred Stock holders also received warrants to
receive 41,254 common shares into Series B Convertible Preferred Stock of the
Company at a purchase price equal to $6.06 per share. The warrants expire at the
earlier of (a) 18 months after the effective date of the registration statement
for an initial public offering by the Company and with a price per share of not
less than $6.06 and (b) 60 months after the first date set forth above.
Subject to certain provisions, registration rights, as defined in the
Certificate of Designation of Series B Convertible Preferred Stock agreement,
may be exercised after the earlier of (a) the date specified by vote or written
consent or agreement of holders of at least two-thirds of the shares of Series B
Preferred Stock then outstanding, approving such conversion, or (b) the
effective date of the first registration statement for a public offering of
securities of the Company.
Common Stock
The Company issued 1,186,667 common shares to its founders in April 1998
for total proceeds of $11,867.
F-42
176
PRIZEPOINT ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS
Operating Leases
The Company leases office space, equipment security and trash removal
services under operating leases expiring through February 29, 2004. At December
31, 1998, minimum lease commitments under noncancelable leases are as follows:
EQUIPMENT/
OFFICE SERVICES
---------- ----------
1999........................................................ $ 245,040 $2,225
2000........................................................ 293,005 1,781
2001........................................................ 299,480 1,194
2002........................................................ 305,469 684
2003........................................................ 320,818 342
Thereafter.................................................. 54,190 --
---------- ------
$1,518,002 $6,226
========== ======
Rent expense for the year ended December 31, 1998 was $97,545 for office
space.
Advertising and Sponsorship Contracts
The Company entered into several advertising and sponsorship agreements
with third parties, with terms ranging from one to six months whereby the
Company provides advertising in exchange for cash payments or goods. The goods
are used as awards for winning participants in the Company's online games and
sweepstakes. No revenue was earned on such contracts for the year ended December
31, 1998.
8. STOCK OPTIONS
On April 1, 1998, in order to promote the interests of the Company and
retain persons necessary for the success of the Company, the Company adopted its
1998 Stock Option Plan ("Option Plan") covering up to 150,000 shares, pursuant
to which employees (including officers), directors and independent contractors
of the Company and its present or future subsidiaries and affiliates are
eligible to receive incentive and/or nonstatutory stock options. The Option
Plan, which expires within ten years, will be administered by the Plan
Administrator. The selection of participants, allotment of units, determination
of price and other conditions relating to the purchase of options will be
determined by the Plan Administrator. Options granted under the Option Plan are
exercisable for a period of up to 10 years from the date of grant at an exercise
price, which may be less than, equal to or greater than the fair market value
per unit on the date of the grant. Incentive Options, however, may only be
granted to employees, the exercise price per share may not be less than 100% of
the fair market value per share of common stock on the option grant date, and
for a stockholder owning more than 10% of the outstanding common stock, its
exercise price may not be less than 110% of the fair market value of the common
stock on the date of the grant.
Pursuant to SFAS No. 123, the Company has elected to account for its Option
Plan under APB Opinion No. 25, under which no compensation expense is recognized
for unit option awards granted at or above fair market value. In 1998, the
Company granted 95,000 incentive stock options to various employees. The option
exercise price equals the stock's fair market value at the grant date, and the
options are exercisable over a four-year period, with 25% of options granted
becoming exercisable on the one-year anniversary of the grant date and the
remaining options becoming exercisable at the rate of 1/48 at the end of each
month thereafter. All options will terminate no later than 10 years from the
date of grant. Under SFAS No. 123, compensation cost is measured at the grant
date based on the fair value of the award and is recognized over the service (or
vesting) period. For the year ended December 31, 1998, the compensation cost for
this plan determined in
F-43
177
PRIZEPOINT ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTIONS -- (CONTINUED)
accordance with SFAS No. 123, net of compensation expense recognized under APB
No. 25, is an immaterial amount. As such the Company's pro-forma net loss has
not been presented.
The following table summarizes information about stock options outstanding
at December 31, 1998:
NUMBER
OUTSTANDING AT WEIGHTED WEIGHTED
DECEMBER 31, AVERAGE REMAINING AVERAGE
1998 CONTRACTUAL LIFE EXERCISE PRICE
-------------- ----------------- --------------
$.01.................................... 40,000 9.56 $.01
$.10.................................... 55,000 9.95 $.10
------
95,000
======
As of December 31, 1998, none of the outstanding options were exercisable.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 4.87 percent; expected dividend yield of
0 percent; expected life of 5 years; expected volatility of 100 percent.
The following table summarizes information about stock options outstanding
at December 31, 1998:
DECEMBER 31, 1998
--------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ ----------------
Outstanding at beginning of period.......................... -- $ --
Granted................................................... 95,000 .06
Cancelled................................................. -- --
Terminated................................................ -- --
Exercised................................................. -- --
Outstanding at end of period................................ 95,000 $.06
====== ====
Options exercisable at end of period --
------
Weighted average fair value of options granted.............. $ .05
======
9. SUBSEQUENT EVENTS
On January 7, 1999, the Company issued additional 41,254 shares of Series B
Preferred stock for $250,000 in proceeds.
On April 29, 1999 the Company entered into a merger agreement with Uproar
Ltd., a Bermuda corporation, which is a provider of online entertainment and
game shows. Under the provisions of the merger agreement, each share of common
and preferred stock of the Company will be converted into and exchanged for
common stock of Uproar Ltd. based upon a stated conversion rate.
F-44
178
IWIN.COM, INC.
UNAUDITED CONDENSED BALANCE SHEET
JUNE 30, 2000
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,283,611
Accounts receivable, net.................................. 4,532,139
Prepaid expenses and other current assets................. 1,684,173
------------
Total current assets........................................ 14,499,923
Property and equipment:
Computer and office equipment............................. 2,925,534
Leasehold improvements.................................... 1,608,520
Computer software and website development costs........... 402,954
Furniture and fixtures.................................... 543,246
------------
5,480,254
Accumulated depreciation.................................... (1,053,399)
------------
Net property and equipment.................................. 4,426,855
Deposits.................................................... 1,039,960
------------
Total assets................................................ $ 19,966,738
============
Liabilities and stockholders's equity
Current liabilities:
Accounts payable.......................................... $ 2,092,934
Accrued expenses.......................................... 2,677,707
Obligations under capital lease, current portion.......... 429,910
------------
Total current liabilities................................... 5,200,551
Obligations under capital leases, less current portion.... 930,516
Note Payable.............................................. 71,165
Stockholders' equity:
Preferred stock:
Series A Preferred Stock, $.001 par value, 2,275,000
shares authorized, 2,250,000 issued and outstanding... 2,250
Series B Preferred Stock, $.001 par value, 5,177,865
shares authorized, issued and outstanding............. 5,178
Common Stock, $.001 par value, 25,000,000 shares
authorized; 6,968,189 shares issued and outstanding.... 6,968
Additional paid-in capital................................ 37,754,395
Receivable from stockholders.............................. (482,238)
Deferred compensation..................................... (4,297,430)
Accumulated deficit....................................... (19,224,617)
------------
Total stockholders' equity.................................. 13,764,506
------------
Total liabilities and stockholders' equity.................. $ 19,966,738
============
F-45
179
IWIN.COM, INC.
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
Net revenues................................................ $ 8,180,826
Cost of revenues............................................ 4,763,887
------------
Gross profit................................................ 3,416,939
Operating expenses:
Sales and marketing....................................... 12,427,645
Product and Technology Development........................ 1,574,157
General and Administrative................................ 5,333,959
------------
Total operating expenses.......................... 19,335,761
------------
Operating loss.............................................. (15,918,822)
Other income (expense):
Interest income, net...................................... 585,087
Loss from disposal of property and equipment.............. (63,755)
Other income.............................................. 41,604
------------
Total other income.......................................... 562,936
------------
Loss before provision for income taxes...................... (15,355,886)
Provision for income taxes.................................. (9,523)
------------
Net loss.................................................... $(15,365,409)
============
Net loss per common share................................... $ (2.25)
Weighted average number of shares outstanding............... 6,826,734
F-46
180
IWIN.COM, INC.
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
OPERATING ACTIVITIES
Net loss.................................................... $(15,365,409)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 697,878
Stock issued for services................................. 287,375
Amortization of deferred compensation..................... 826,183
Loss on disposal of property and equipment................ 63,754
Interest income resulting from exercise of stock options
for notes receivable................................... (9,610)
Changes in operating assets and liabilities:
Accounts receivable....................................... (4,375,505)
Prepaid expenses and other current assets................. (1,638,907)
Accounts payable.......................................... 1,110,646
Accrued expenses.......................................... 2,386,463
Due to stockholder........................................ (50,000)
------------
Net cash used in operating activities..................... (16,067,132)
INVESTING ACTIVITIES
Capital expenditures for property and equipment............. (2,989,839)
Deposits.................................................... (1,016,535)
------------
Net cash used in investing activities....................... (4,006,374)
------------
FINANCING ACTIVITIES
Proceeds from issuance of Series B Preferred Stock, net..... 1,200,000
Proceeds from exercise of stock options..................... 205,156
Borrowings under equipment financing agreement.............. 71,165
Principal payments under capital lease obligations.......... (128,667)
------------
Net cash provided by financing activities................... 1,347,654
Net decrease in cash and cash equivalents................... (18,725,852)
Cash and cash equivalents at beginning of period............ 27,009,463
------------
Cash and cash equivalents at end of period.................. $ 8,283,611
============
SUPPLEMENTAL DISCLOSURES
Interest paid............................................... 26,409
Income taxes paid........................................... 9,523
Purchase of equipment under capital lease obligation........ 1,489,093
F-47
181
IWIN.COM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Unaudited Interim Condensed Financial Statements
The unaudited interim financial statements of the Company as of June 30,
2000 and for the six months ended June 30, 2000, included herein have been
prepared in accordance with Article 10 of Regulation S-X under the Securities
Act of 1933, as amended. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations relating to interim consolidated financial statements.
In the opinion of management, the accompanying unaudited interim condensed
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company at June 30, 2000, and the results of its operations for the six months
ended June 30, 2000 and its cash flows for the six months ended June 30, 2000.
The results of operations for such period is not necessarily indicative of
results expected for the full year or for any future period. These financial
statements should be read in conjunction with the audited financial statements
as of December 31, 1999, and for the period from July 8, 1999 (date of
inception) through December 31, 1999 and related notes included elsewhere in the
joint proxy statement/prospectus.
F-48
182
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
IWIN.COM, INC.
We have audited the accompanying balance sheet of iwin.com, Inc. (the
Company) as of December 31, 1999 and the related statements of operations,
stockholders' equity, and cash flows for the period from July 8, 1999 (date of
inception) through December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of iwin.com, Inc. as of
December 31, 1999 and the results of its operations and its cash flows for the
period from July 8, 1999 (date of inception) through December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1 to
the financial statements, the Company has incurred significant operating losses
since inception. In addition, successful completion of the Company's transition
to profitable operations may be dependent upon obtaining additional financing to
support the Company's operations. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
ERNST & YOUNG LLP
Los Angeles, California
April 7, 2000
F-49
183
IWIN.COM, INC.
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $27,009,463
Accounts receivable, net.................................... 156,634
Prepaid expenses and other current assets................... 65,770
-----------
Total current assets................................... 27,231,867
-----------
PROPERTY AND EQUIPMENT:
Computer equipment.......................................... 532,102
Leasehold improvements...................................... 274,798
Computer software and website development costs............. 144,363
Furniture and fixtures...................................... 50,059
-----------
1,001,322
Accumulated depreciation.................................... (291,767)
-----------
Net property and equipment.................................. 709,555
Deposits.................................................... 23,425
-----------
Total assets........................................... $27,964,847
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 982,288
Accrued prize expenses...................................... 223,212
Other accrued expenses...................................... 68,032
Due to stockholder.......................................... 50,000
-----------
Total current liabilities.............................. 1,323,532
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock:
Series A Convertible Preferred Stock, $0.001 par value,
2,275,000 shares authorized, 2,250,000 shares issued
and outstanding........................................ 2,250
Series B Convertible Preferred Stock, $0.001 par value,
4,940,711 shares authorized, issued and outstanding.... 4,941
Common Stock, $0.001 par value, 25,000,000 shares
authorized; 6,625,000 shares issued and outstanding....... 6,625
Additional paid-in capital.................................. 33,406,483
Deferred compensation....................................... (2,919,775)
Accumulated deficit......................................... (3,859,209)
-----------
Total stockholders' equity............................. 26,641,315
-----------
Total liabilities and stockholders' equity............. $27,964,847
===========
- ---------------
See accompanying notes.
F-50
184
IWIN.COM, INC.
STATEMENT OF OPERATIONS
Period from July 8, 1999 (date of inception) through December 31, 1999
Net revenues................................................ $ 176,325
Cost of revenues............................................ 536,182
-----------
Gross profit................................................ (359,857)
Operating expenses:
Marketing and sales....................................... 1,511,945
Product and technology development........................ 439,843
General and administrative................................ 1,421,929
-----------
Total operating expenses............................... 3,373,717
-----------
Operating loss.............................................. (3,733,574)
Other income (expense):
Interest income, net...................................... 102,742
Loss from disposal of property and equipment.............. (227,577)
-----------
Total other income (expense)........................... (124,835)
-----------
Loss before provision for income taxes...................... (3,858,409)
Provision for income taxes.................................. (800)
-----------
Net loss.................................................... $(3,859,209)
===========
Net loss per common share................................... $ (0.58)
===========
- ---------------
See accompanying notes.
F-51
185
IWIN.COM, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Period from July 8, 1999 (date of inception) through December 31, 1999
SERIES A SERIES B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
------------------ ------------------ ------------------ ADDITIONAL
COMMON STOCK PREFERRED STOCK PREFERRED STOCK PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
--------- ------ --------- ------ --------- ------ ----------- ------------ -----------
Balance at July 8, 1999
(date of inception)... -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
Issuance of Common
Stock, net of stock
issuance costs of
$16,452............. 6,500,000 6,500 -- -- -- -- 2,577,048 -- --
Issuance of Series A
Preferred Stock, net
of issuance costs of
$22,327............. -- -- 2,250,000 2,250 -- -- 2,450,423 -- --
Issuance of Series B
Preferred Stock, net
of issuance costs of
$17,038............. -- -- -- -- 4,940,711 4,941 24,978,019 -- --
Deferred compensation
related to grant of
stock options....... -- -- -- -- -- -- 3,055,996 (3,055,996) --
Amortization of
deferred
compensation........ -- -- -- -- -- -- -- 136,221 --
Stock issued for
services............ 125,000 125 344,997 -- --
Net loss.............. -- -- -- -- -- -- -- -- (3,859,209)
--------- ------ --------- ------ --------- ------ ----------- ----------- -----------
Balance at December 31,
1999.................. 6,625,000 $6,625 2,250,000 $2,250 4,940,711 $4,941 $33,406,483 $(2,919,775) $(3,859,209)
========= ====== ========= ====== ========= ====== =========== =========== ===========
TOTAL
-----------
Balance at July 8, 1999
(date of inception)... $ --
Issuance of Common
Stock, net of stock
issuance costs of
$16,452............. 2,583,548
Issuance of Series A
Preferred Stock, net
of issuance costs of
$22,327............. 2,452,673
Issuance of Series B
Preferred Stock, net
of issuance costs of
$17,038............. 24,982,960
Deferred compensation
related to grant of
stock options....... --
Amortization of
deferred
compensation........ 136,221
Stock issued for
services............ 345,122
Net loss.............. (3,859,209)
-----------
Balance at December 31,
1999.................. $26,641,315
===========
- ---------------
See accompanying notes.
F-52
186
IWIN.COM, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM JULY 8, 1999 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1999
OPERATING ACTIVITIES
Net loss.................................................... $(3,859,209)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 64,190
Stock issued for services................................. 345,122
Amortization of deferred compensation..................... 136,221
Loss on disposal of property and equipment................ 227,577
Changes in operating assets and liabilities:
Accounts receivable.................................... (156,634)
Prepaid expenses and other current assets.............. (65,770)
Accounts payable....................................... 982,288
Accrued expenses....................................... 291,244
Due to stockholder..................................... 50,000
-----------
Net cash used in operating activities....................... (1,984,971)
INVESTING ACTIVITIES
Capital expenditures for property and equipment............. (1,001,322)
Deposits.................................................... (23,425)
-----------
Net cash used in investing activities....................... (1,024,747)
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net................. 2,583,548
Proceeds from issuance of Series A Preferred Stock, net..... 2,452,673
Proceeds from issuance of Series B Preferred Stock, net..... 24,982,960
-----------
Net cash provided by financing activities................... 30,019,181
-----------
Net increase in cash and cash equivalents................... 27,009,463
Cash and cash equivalents at beginning of period............ --
-----------
Cash and cash equivalents at end of period.................. $27,009,463
===========
SUPPLEMENTAL DISCLOSURES
Interest paid............................................... $ --
Income taxes paid........................................... $ 800
- ---------------
See accompanying notes.
F-53
187
IWIN.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
General
iwin.com, Inc. (iwin or the Company) was incorporated in July 1999 in the
state of Delaware. The Company, which launched its website in October 1999, is
an online entertainment network focused on incubating entertainment-themed and
incentives marketing-oriented applications. iwin's strategy is to develop
Internet sites that appeal to broad audiences and provide rich demographic and
psychographic data for use in generating highly targeted leads for advertisers.
As the initial steps in implementing this strategy, iwin launched two
sites, iwin.com and eXtremelotto.com, which was later incorporated as a unique
tab on the iwin.com site. The iwin.com site offers a selection of online games
that allow visitors to enter contests, participate in raffles and accumulate
reward currency (called "icoins") at no cost to the user. Additionally, the site
offers an astrology section which allows users to read their daily horoscopes,
and a free shopping tab, which allows users to shop on-line for products and
services. Both of these sections offer icoins that allow users to enter raffles
for cash or prize drawings. The eXtremelotto.com site is a free lottery that
awards winners prizes, including the opportunity for a $1 million jackpot.
To further strengthen its strategy, the Company became a provider of
services for data based Internet marketing solutions. The Company offers a range
of capabilities and services that enable marketers to target the delivery of
advertisements to pre-qualified audiences. The Company offers a variety of
sponsored e-mails, ranging from confirming eXtremelotto picks to iwin
newsletters that describe Company prizes and promotions.
Basis of Presentation
The accompanying financial statements have been prepared on the basis that
the Company will continue as a going concern. The Company has incurred
significant operating losses since inception. Management has raised additional
proceeds through the sale of equity securities and believes such proceeds, along
with expense reductions and revenue growth, will be sufficient to support the
Company's operations in the foreseeable future. However, there can be no
assurance that available working capital will be sufficient to fund operations
until the Company reaches profitability. The accompanying financial statements
do not include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
Estimates and Assumptions
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, and the reported amounts of
revenues and expenses. Actual results could differ materially from those
estimates.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration
of credit risk consist primarily of temporary cash investments and accounts
receivable. The Company places its temporary cash investments with financial
institutions.
Most of the Company's accounts receivable are derived from Internet related
businesses located in the United States. For the period from July 8, 1999 (date
of inception) through December 31, 1999, two customers accounted for 63% and 14%
of revenues. The Company performs on going credit evaluations of its
F-54
188
IWIN.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
customers' financial condition and maintains allowances for potential credit
losses. The Company generally does not require collateral or other security from
its customers.
Cash Equivalents
The Company considers those investments that are highly liquid, readily
convertible to cash and which mature within three months from the original date
of purchase as cash equivalents.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities are carried at
cost, which approximates their fair value, due to the relatively short maturity
of these instruments.
Property and Equipment
Property and equipment is stated at cost. Depreciation of computer
equipment, computer software and website development costs is provided for by
the straight-line method over their estimated useful lives of two years.
Depreciation of furniture and fixtures is provided for by the straight-line
method over estimated useful lives of five years. Leasehold improvements are
amortized over the shorter of their useful lives or the lease term using the
straight-line method.
Maintenance and repair expenditures are charged to appropriate expense
accounts in the period incurred; replacements, renewals and betterments are
capitalized. Upon the sale or other disposition of property, the cost and
accumulated depreciation of such properties are eliminated from the accounts and
the gains or losses thereon are reflected in operations.
Income Taxes
Income taxes are accounted for using the liability method of accounting.
Deferred tax assets and liabilities are recognized based on differences between
financial reporting and tax bases of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Revenue Recognition
The Company barters portions of the unsold advertising impressions
generated by its websites for advertising and promotion in media properties
owned by third parties. The Company did not record the effects of such barter
transactions in its financial statements.
The Company generates its revenues from three primary sources: (i) the sale
of advertising on its websites; (ii) sponsorship of e-mails and e-mail
newsletters and (iii) sponsorships of games or prizes.
Advertising Revenue -- Advertising revenue represents advertisements on the
Company's website in the form of banners and buttons. Advertising revenue is
recognized ratably over the period the advertising is displayed, provided that
no significant obligations remain and collection of the resulting receivable is
probable.
Such obligations typically include guarantees of a minimum number of
advertising impressions, or the number of times that an advertisement is
"clicked-through" by users.
E-mail and E-mail Newsletter Sponsorship -- E-mail and e-mail newsletter
sponsorship revenue represents revenue earned by placing advertisement banners,
buttons or website links on e-mails that are sent to registered users. E-mail
and e-mail newsletter sponsorship revenue is recognized ratably over the period
during
F-55
189
IWIN.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
which the e-mails and e-mail newsletters are sent to registered users, provided
that no significant obligations remain and collection of the resulting
receivable is probable. Such obligations typically require a minimum number of
e-mails or e-mail newsletters to be delivered to registered users.
Game or Prize Sponsorship -- Game or prize sponsorship revenue represents
revenue earned through customer sponsorship advertising for a particular game or
prize. Game or prize sponsorship revenue is recognized ratably over the period
during which the sponsorship campaign is run, provided that no significant
obligations remain and collection of the resulting receivable is probable. Such
obligations typically include placing the advertiser's logo on a game, attaching
the advertiser's name to a given prize, guaranteeing a minimum number of
advertising impressions, or the minimum number of times that an advertisement is
"clicked-through" by users.
Cost of Revenues
Included in cost of revenues is prize costs, Internet connection costs,
website insurance and depreciation of computer equipment and software used to
service the website. Additionally, cost of revenues includes costs associated
with placing advertisements on the Web site (in the form of banners, buttons or
sponsorships) and for sending e-mails to registered users.
Advertising Costs
The Company expenses advertising costs as incurred. The Company incurred
advertising costs of $1,250,104 for the period from July 8, 1999 (date of
inception) through December 31, 1999.
Prize Costs
The Company's gaming currency, called "icoins", can be used by registered
users to purchase tickets in a variety of raffles for cash and prizes. The costs
of cash and prizes are expensed as winners are selected. The Company incurred
prize costs of $296,792 for the period from July 8, 1999 (date of inception)
through December 31, 1999.
Website Development Costs
The Company capitalizes certain costs related to the development of its
websites as incurred, and expenses costs to manage, monitor and operate the
sites.
Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements in
accordance with the provisions of SFAS No. 123 "Accounting for Stock Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of the grant. SFAS
No. 123 allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income (loss) and pro forma earnings (loss) per
share disclosures for employee stock option grants made in 1995 and future years
as if the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
Net Loss Per Common Share
Net loss per common share for the period from July 8, 1999 (date of
inception) through December 31, 1999 has been determined on the basis of
6,604,119 weighted average shares outstanding. Common shares
F-56
190
IWIN.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
issuable pursuant to the Company's convertible preferred stock and stock options
were not included in the computation of net loss per common share because their
effect would be anti-dilutive.
Recently Issued Accounting Pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because the
Company does not currently hold any derivative instruments and does not engage
in hedging activities, the impact of the adoption of SFAS No. 133 is not
expected to have a material impact on the Company's financial position, results
of operations or cash flows. In July 1999, SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133" was issued. The Company will be required to adopt
SFAS No. 133 in 2000.
Long-Lived Assets
The Company reviews for impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The recoverability test is performed at the lowest level at
which undiscounted net cash flows can be attributable to long-lived assets.
2. INCOME TAXES
As a result of the net operating losses, the provision for income taxes
consists solely of minimum state taxes.
The difference between income taxes computed at the U.S. federal statutory
income tax rate and the income tax provision for the period from July 8, 1999
(date of inception) through December 31, 1999 resulted primarily from net
operating loss carryovers for which no financial statement benefit was recorded.
The components of the deferred tax assets and related valuation allowance
at December 31, 1999 are as follows:
Net operating loss carryforwards............................ $ 1,493,000
Fixed assets and other...................................... 104,000
-----------
Deferred tax assets......................................... 1,597,000
Valuation allowance......................................... (1,597,000)
-----------
$ --
===========
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax assets.
At December 31, 1999, the Company had net operating losses for both federal
and state income tax purposes of approximately $3,500,000 expiring beginning in
the year 2018 for federal income tax purposes and 2006 for state income tax
purposes. Utilization of the above carryforwards may be subject to utilization
limitations resulting from changes in the Company's ownership, which may inhibit
the Company's ability to use carryforwards in the future.
F-57
191
IWIN.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. CAPITAL STRUCTURE
Common and Preferred Stock
On July 18, 1999, the Company's Board of Directors authorized 25,000,000
shares of common stock at a par value of $.001 per share in conjunction with the
formation of the Company. On September 17, 1999 the Company issued 6,500,000
shares of common stock at $0.40 per share, resulting in net proceeds of
$2,583,548.
In 1999, the Company issued 125,000 shares of common stock to nonemployees
for services rendered through December 31, 1999. The Company recorded
compensation expense of $345,122. The expense represented the fair market value
of the common stock at December 31, 1999, or when the services were essentially
completed. The Company will be required to record additional changes over the
period the services are performed based upon the fair market value of the common
stock during the service period.
The following table summarizes common stock issued or reserved as of
December 31, 1999:
DESCRIPTION OF INSTRUMENT
- -------------------------
Common Stock outstanding.................................... 6,625,000
Series A Preferred Stock.................................... 2,250,000
Series B Preferred Stock.................................... 4,940,711
1999 Stock Plan............................................. 673,243
1999 Secondary Stock Plan................................... 1,556,500
----------
Common stock issued or reserved............................. 16,045,454
==========
The Company authorized Series A and Series B Preferred Stock on July 30,
1999 and December 15, 1999, respectively. For the Series A Preferred Stock, the
Company authorized 2,275,000 shares and sold 2,250,000 shares at $1.10 per share
for net proceeds of $2,452,673. For the Series B Preferred Stock, the Company
authorized 4,940,711 shares at $5.06 per share and sold 4,940,711 shares
resulting in net proceeds of $24,982,960.
The Series A and Series B Preferred Stock (collectively the Preferred
Stock) is convertible, at the option of the holder, at a ratio of 1:1. Such
ratio is subject to proportionate adjustment for stock splits, stock dividends,
and stock combinations. The Preferred Stock is automatically convertible into
Common Stock upon the earlier of (i) the closing of a firm commitment
underwritten public offering with an aggregate price to the public of at least
$20 million and a price per share of not less than $15.60 per share (or as
otherwise approved by the Board of Directors), (ii) the consent of the holders
of not less than a majority of the then outstanding shares of Preferred Stock,
determined on an as-converted to Common Stock basis, or (iii) immediately prior
to any merger or consolidation of the Company with or into another corporation.
Upon liquidation or winding up of the Company, the holders of the Preferred
Stock are entitled to the return of an amount equal to the original purchase
prices per share of the applicable series of Preferred Stock. If the assets of
the Company legally available for distribution are insufficient to satisfy such
liquidation preferences of the Preferred Stock in full, then the holders of
Preferred Stock will share in the assets legally available for distribution in
proportion to the full preferential amounts otherwise payable to them. Following
the satisfaction in full of the liquidation preferences of the Preferred Stock,
any assets remaining available for distribution to stockholders will be
distributed to the holders of Common Stock pro rata in accordance with the
number of shares owned by such holder.
For purposes of the liquidation preference, a merger or consolidation of
the Company, or a sale of all or substantially all of the assets of the Company,
will be treated as a liquidation or winding up of the Company unless (i) the
stockholders of the Company immediately prior to such event hold more than 50%
of the outstanding voting securities of the surviving entity or (ii) the
consideration received by the stockholders of
F-58
192
IWIN.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. CAPITAL STRUCTURE -- (CONTINUED)
the Company in connection with the transaction consists entirely of securities
of the surviving corporation or its parent which are of a class that is listed
on a national securities exchange of the NASDAQ National Market (collectively,
and subject to such conditions, the Surviving Corporation).
Except as otherwise required by law, the Preferred Stock will vote on an
as-converted basis with the Common Stock as a single class.
The holders of the Preferred Stock are entitled to receive noncumulative
dividends in an amount equal to 8% of their original purchase price per share,
per annum, payable when, as and if declared by the Board of Directors. Such
dividends, or any portion thereof, will be paid to the holders of the Preferred
Stock on a pari-passu basis. No dividend or distribution is paid on the Common
Stock until the above dividends on the Preferred Stock have been declared and
paid in full. Thereafter, no dividend or distribution may be paid on the Common
Stock unless the Preferred Stock participates in such dividend or distribution
on an as-converted to Common Stock basis.
Due to Stockholder
The Company's Series B Preferred Stock offering was oversubscribed
resulting in $50,000 cash received in excess of the amount authorized. In lieu
of issuing additional shares, the Company's Chief Executive Officer and major
stockholder transferred 9,881 shares, or $50,000, of his recently purchased
Series B Preferred Stock holdings to the oversubscribed party. At December 31,
1999, the Company owed the officer $50,000 for the stock transfer. In February
2000, the Company reimbursed the Chief Executive Officer the $50,000.
Deferred Compensation
The Company recorded deferred compensation of $3,055,996 for the period
from July 8, 1999 (date of inception) through December 31, 1999. The amount
recorded represents the difference between the grant price and the deemed fair
value of the Company's Common Stock for shares subject to options granted. The
amortization of deferred compensation is charged to operations over the vesting
period of the options, which is typically four years. Total amortization expense
recognized was $136,221 for the period from July 8, 1999 (date of inception)
through December 31, 1999.
4. STOCK OPTION PLANS
In August 1999, the Board of Directors adopted and approved the 1999 Stock
Plan, which provided for the grant of up to 2,000,000 shares of Common Stock.
Under the terms of the 1999 Stock Plan, options may be granted to employees,
nonemployees, directors or consultants at prices not less than the fair value at
the date of grant. The exercise price for incentive stock options granted under
the 1999 Stock Plan may not be less than 100% of the fair market value of the
common stock on the option grant date. In the case of nonstatutory stock
options, the minimum exercise price is 85% of the fair market value of Common
Stock on the option grant date. In both cases, if an option holder owns more
than 10% of the voting power of all classes of stock, the exercise price shall
be no less than 100% of the fair market value of the option oat the grant date.
Options granted to nonemployees are valued at the fair value of Common Stock at
the date of measurement and expensed during the period in which services are
rendered. Options granted to employees generally vest over four years, 25% for
the first year and ratably over the remaining three years and generally expire
ten years from the date of grant.
In December 1999, the Board of Directors adopted and approved the 1999
Secondary Stock Plan, which provided for the grant of up to 2,000,000 shares of
Common Stock under terms similar to those of the 1999 Stock Plan.
F-59
193
IWIN.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. STOCK OPTION PLANS -- (CONTINUED)
All options are designated as either Incentive Stock Options (ISOs) or
Nonstatutory Stock Options (NSOs). Both ISOs and NSOs are granted to employees
and NSOs are granted to non-employees. Additionally, to the extent an option
holder exercises an ISO with a fair market value in excess of $100,000, the
excess portion qualifies as an NSO. Change in control provisions, which
accelerate the vesting of options immediately prior to a merger or acquisition
of the Company by another corporation, exist for key employees.
The following table summarizes the Company's stock option activity for the
period from July 8, 1999 (date of inception) through December 31, 1999:
EXERCISE WEIGHTED
NUMBER OF PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------- --------- --------------
Outstanding at July 8, 1999 (date of
inception)................................. -- $ -- $ --
Granted.................................... 2,229,743 0.75 0.75
Exercised.................................. -- -- --
Canceled................................... -- -- --
--------- ----- -----
Outstanding at December 31, 1999............. 2,229,743 $0.75 $0.75
========= ===== =====
The Company had 1,770,257 options available for future grant at December
31, 1999.
During the period from July 8, 1999 (date of inception) through December
31, 1999, options for 20,753 shares were issued to nonemployees. Options granted
to non-employees are valued at the fair value of Common Stock at the date of
measurement and expensed during the period services are rendered. The Company
recorded compensation expense of $38,674 for services rendered during the period
from July 8, 1999 (date of inception) through December 31, 1999.
The weighted average remaining contractual life of the outstanding options
was 9.92 as of December 31, 1999. The number of options that were exercisable as
of December 31, 1999 was 120,753.
The weighted average exercise prices and fair market value of stock options
granted for the period from July 8, 1999 (date of inception) through December
31, 1999 using the minimum value option valuation model were $.75 and $1.51,
respectively.
The Company calculated the fair value of each option grant on the date of
the grant using the minimum value option pricing model using the following
assumptions:
Risk-free interest rates.................................... 6.1%
Expected lives (in years)................................... 4.0
Had compensation cost been recognized based on the fair value at the date
of grant for options awarded under the 1999 Stock Plan and the 1999 Secondary
Stock Plan, the pro forma amount of the Company's net loss and net loss per
common share for the period from July 8, 1999 (date of inception) through
December 31, 1999 would have been $(3,828,493) and $(0.58), respectively.
5. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its office under a long-term noncancelable operating
lease. Total rent expense for its office for the period from July 8, 1999 (date
of inception) through December 31, 1999 totaled $112,660. In February 2000, the
Company moved its Santa Monica, California based headquarters to Westwood,
California
F-60
194
IWIN.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
and entered into two new leases for office space. The first lease began in
February 2000 and terminates in May 2000. The second lease begins in June 2000
and terminates in June 2005.
Additionally, the Company leases server equipment and housing facilities at
an off-site location over a twelve month period.
At December 31, 1999, future lease commitments under the above mentioned
agreements were as follows:
OPERATING
LEASES
----------
2000........................................................ $1,784,268
2001........................................................ 994,002
2002........................................................ 1,026,642
2003........................................................ 1,018,032
2004........................................................ 1,036,422
Thereafter.................................................. 482,333
----------
Total future minimum lease payments.................... $6,341,699
==========
Advertising Commitments
During the period from July 8, 1999 (date of inception) through December
31, 1999, the Company entered into a number of commitments for online
advertising. The Company makes commitments less than 30 days in advance of
airing the advertisement.
Litigation
From time to time, the Company may be involved in litigation relating to
claims arising out of the ordinary course of business. The Company believes that
there are no claims or actions ending or threatened, the ultimate disposition of
which would have a material adverse effect on the Company.
6. SUBSEQUENT EVENTS (UNAUDITED)
Series C Preferred Stock
In July 2000, the Company issued 1,097,827 shares of Series C Preferred
Stock at $5.98 per share. The provisions of the Series C Preferred Stock are
similar to the Series A and Series B Preferred Stock provisions. The Company
received net proceeds of approximately $5,948,000 from this issuance.
Equipment Financing Agreement
In March 2000, the Company entered into a line of credit arrangement with a
financial institution that provides for sale and leaseback transactions of
capital equipment up to a maximum of $1,500,000. Under this agreement, the full
amount was available for future financing transactions at March 31, 2000.
In May 2000, the Company's $1,500,000 equipment financing agreement was
utilized in the amount of $66,623 to purchase server equipment from a third
party vendor. Under the terms of the agreement, the Company received the
equipment in exchange for a note payable for the value of the equipment. The
note payable requires monthly payments of $2,130 and matures on May 30, 2003.
F-61
195
IWIN.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. SUBSEQUENT EVENTS (UNAUDITED) -- (CONTINUED)
Capital Leases
During the period from January 2000 through May 2000, the Company entered
into several capital lease arrangements for an aggregate of approximately $1.5
million in office equipment, computer equipment, servers and networking
equipment. The leases, which expire at varying dates between 2002 and 2004,
require monthly payments aggregating approximately $50,000. The leases generally
provide the Company with the option to purchase the equipment at the end of the
lease at the equipment's fair market value.
Proposed Sale of the Company
On July 14, 2000, the Company entered into a Letter of Intent with Uproar,
Inc. (Uproar) whereby Uproar will purchase all of the outstanding stock of the
Company in exchange for common stock of Uproar. Consummation of the transaction
is subject to the completion of a definitive document, the negotiation of
employment contracts with selected iwin management, the absence of any material
adverse changes in the business, the receipt of any requisite governmental
approvals, and the receipt of approval by Uproar's shareholders, among other
conditions. The Board of Directors of the Company has approved the transaction.
F-62
196
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
A-1
197
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
UPROAR INC.,
IWIN.COM ACQUISITION CORPORATION,
IWIN.COM, INC.,
FREDERICK KRUEGER (AS STOCKHOLDERS' AGENT), AND
THE UNDERSIGNED STOCKHOLDERS OF IWIN.COM, INC.
JULY 25, 2000
A-2
198
TABLE OF CONTENTS
PAGE
----
ARTICLE I THE MERGER................................................ A-6
1.1 The Merger.................................................. A-6
1.2 Closing; Effective Time..................................... A-6
1.3 Effect of the Merger........................................ A-7
1.4 Certificate of Incorporation; Bylaws........................ A-7
1.5 Directors and Officers...................................... A-7
1.6 Effect on Capital Stock..................................... A-7
1.7 Surrender of Certificates................................... A-8
1.8 No Further Ownership Rights in Target Common Stock.......... A-10
1.9 Lost, Stolen or Destroyed Certificates...................... A-10
1.10 Tax Consequences............................................ A-10
1.11 Taking of Necessary Action; Further Action.................. A-10
ARTICLE II REPRESENTATIONS AND WARRANTIES OF TARGET AND PRINCIPAL
STOCKHOLDERS............................................. A-10
2.1 Organization, Standing and Power............................ A-10
2.2 Capital Structure........................................... A-11
2.3 Authority................................................... A-12
2.4 Financial Statements........................................ A-12
2.5 Absence of Certain Changes.................................. A-12
2.6 Absence of Undisclosed Liabilities.......................... A-13
2.7 Accounts Receivable......................................... A-13
2.8 Litigation.................................................. A-13
2.9 Restrictions on Business Activities......................... A-13
2.10 Governmental Authorization.................................. A-13
2.11 Title to Property........................................... A-14
2.12 Intellectual Property....................................... A-14
2.13 Environmental Matters....................................... A-14
2.14 Taxes....................................................... A-15
2.15 Employee Benefit Plans...................................... A-16
2.16 Employees and Consultants................................... A-18
2.17 Related-Party Transactions.................................. A-18
2.18 Insurance................................................... A-19
2.19 Compliance with Laws........................................ A-19
2.20 Brokers' and Finders' Fees.................................. A-19
2.21 Intentionally Omitted....................................... A-19
2.22 Vote Required............................................... A-19
2.23 Intentionally Omitted....................................... A-19
2.24 Intentionally Omitted....................................... A-19
2.25 Customers and Suppliers..................................... A-19
2.26 Material Contracts.......................................... A-19
2.27 No Breach of Material Contracts............................. A-20
2.28 Third-Party Consents........................................ A-20
2.29 Registration Statement; Proxy Statement/Prospectus.......... A-21
2.30 Minute Books................................................ A-21
2.31 Complete Copies of Materials................................ A-21
2.32 Representations Complete.................................... A-21
A-3
199
PAGE
----
ARTICLE II-A REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL
STOCKHOLDERS........................................................ A-21
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND
MERGER SUB.......................................... A-22
3.1 Organization, Standing and Power............................ A-22
3.2 Capital Structure........................................... A-22
3.3 Authority................................................... A-23
3.4 SEC Documents; Financial Statements......................... A-23
3.5 Absence of Certain Changes.................................. A-24
3.6 Litigation.................................................. A-24
3.7 Registration Statement...................................... A-25
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME...................... A-25
4.1 Conduct of Business of Target and Acquiror.................. A-25
4.2 Conduct of Business of Target............................... A-26
4.3 Notices..................................................... A-27
ARTICLE V ADDITIONAL AGREEMENTS..................................... A-27
5.1 No Solicitation............................................. A-27
5.2 Proxy Statement/Prospectus; Registration Statement.......... A-28
5.3 Stockholder Meetings or Consent Solicitations............... A-28
5.4 Access to Information....................................... A-28
5.5 Confidentiality............................................. A-28
5.6 Public Disclosure........................................... A-28
5.7 Consents; Cooperation....................................... A-29
5.8 Update Disclosure; Breaches................................. A-29
5.9 Stockholder Agreements...................................... A-30
5.10 Indemnification............................................. A-30
5.11 Voting Agreements........................................... A-30
5.12 Legal Requirements.......................................... A-30
5.13 Tax-Free Reorganization..................................... A-30
5.14 Blue Sky Laws............................................... A-30
5.15 Stock Options............................................... A-31
5.16 Escrow Agreement............................................ A-31
5.17 Listing of Additional Shares................................ A-31
5.18 Additional Agreements; Reasonable Best Efforts.............. A-31
5.19 Employee Benefits........................................... A-31
5.20 Lock-Up Agreements.......................................... A-32
5.21 Board Composition........................................... A-32
5.22 Registration Rights......................................... A-32
ARTICLE VI CONDITIONS TO THE MERGER................................. A-32
6.1 Conditions to Obligations of Each Party to Effect the
Merger...................................................... A-32
6.2 Additional Conditions to Obligations of Target.............. A-33
6.3 Additional Conditions to the Obligations of Acquiror and
Merger Sub.................................................. A-34
A-4
200
PAGE
----
ARTICLE VII TERMINATION, EXPENSES, AMENDMENT AND WAIVER............. A-35
7.1 Termination................................................. A-35
7.2 Effect of Termination....................................... A-36
7.3 Expenses and Termination Fees............................... A-36
7.4 Amendment................................................... A-37
7.5 Extension; Waiver........................................... A-37
ARTICLE VIII ESCROW AND INDEMNIFICATION............................. A-37
8.1 Survival of Representations, Warranties and Covenants....... A-37
8.2 Indemnity................................................... A-37
8.3 Escrow Fund................................................. A-38
8.4 Damage Threshold............................................ A-38
8.5 Escrow Period............................................... A-38
8.6 Claims upon Escrow Fund..................................... A-38
8.7 Objections to Claims........................................ A-39
8.8 Resolution of Conflicts; Arbitration........................ A-39
8.9 Stockholders' Agent......................................... A-40
8.10 Distribution Upon Termination of Escrow Period.............. A-40
8.11 Actions of the Stockholders' Agent.......................... A-40
8.12 Third-Party Claims.......................................... A-40
8.13 Maximum Liability and Remedies.............................. A-41
8.14 Indemnification by Acquiror................................. A-41
ARTICLE IX GENERAL PROVISIONS....................................... A-42
9.1 Notices..................................................... A-42
9.2 Interpretation.............................................. A-43
9.3 Counterparts................................................ A-43
9.4 Entire Agreement; No Third Party Beneficiaries.............. A-43
9.5 Severability................................................ A-43
9.6 Remedies Cumulative......................................... A-44
9.7 Governing Law............................................... A-44
9.8 Assignment.................................................. A-44
9.9 Rules of Construction....................................... A-44
SCHEDULES
Target Disclosure Letter
Acquiror Disclosure Letter
Option Schedule
EXHIBITS
Exhibit A -- Certificate of Merger
Exhibit B -- Voting Agreements
Exhibit C -- Escrow Agreement
Exhibit D -- Target Affiliate Agreement
Exhibit E -- Acquiror's Legal opinion
Exhibit F -- Employment and Noncompetition Agreement
Exhibit G -- Target's Legal opinion
Exhibit H -- Lock-Up Agreement
A-5
201
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of July 25, 2000, by and among Uproar Inc., a Delaware
corporation ("Acquiror"), iwin.com Acquisition Corporation, a Delaware
corporation and a wholly-owned subsidiary of Acquiror ("Merger Sub"), iwin.com,
Inc., a Delaware corporation ("Target"), Frederick Krueger ("Stockholders'
Agent") and each of the undersigned stockholders of Target (each a "Principal
Stockholder" and, collectively, the "Principal Stockholders"). Certain other
capitalized terms used in this Agreement are as defined herein.
RECITALS
A. The Boards of Directors of Target, Acquiror and Merger Sub believe it is
in the best interests of their respective companies and the stockholders of
their respective companies that Target and Merger Sub combine into a single
company through the statutory merger of Merger Sub with and into Target (the
"Merger") and, in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, each outstanding share of
common stock of Target, $0.001 par value ("Target Common Stock"), shall be
converted into shares of common stock of Acquiror, $0.01 par value ("Acquiror
Common Stock"), at the rate set forth herein.
C. Target, Acquiror, Merger Sub and the Principal Stockholders desire to
make certain representations and warranties and other agreements in connection
with the Merger.
D. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"), and to cause the Merger to qualify as a
reorganization under the provisions of Sections 368(a)(1)(A) and 368(a)(2)(E) of
the Code.
E. Concurrent with the execution of this Agreement and as an inducement to
Acquiror and Target to enter into this Agreement, the Principal Stockholders,
certain other stockholders and the officers and directors of Target, and certain
stockholders of Acquiror and the officers and directors of Acquiror are each
entering into an agreement to vote the shares of Target's and Acquiror's Common
Stock respectively owned by such person to approve the Merger and against any
competing proposals, substantially in the form attached hereto as Exhibit B
(collectively, the "Voting Agreements").
NOW, THEREFORE, in consideration of the covenants and representations set
forth herein, and for other good and valuable consideration, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement, the Certificate
of Merger attached hereto as Exhibit A (the "Certificate of Merger") and the
applicable provisions of the Delaware General Corporation Law ("DGCL"), Merger
Sub shall be merged with and into Target, the separate corporate existence of
Merger Sub shall cease and Target shall continue as the surviving corporation.
Target as the surviving corporation after the Merger is hereinafter sometimes
referred to as the "Surviving Corporation."
1.2 Closing; Effective Time. The closing of the transactions contemplated
hereby (the "Closing") shall take place as soon as practicable after the
satisfaction or waiver of each of the conditions set forth in Article VI hereof
or at such other time as the parties hereto agree (the date on which the Closing
shall occur, the "Closing Date"). The Closing shall take place at the offices of
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, 733 Third Avenue, New
York, New York, 10017, or at such other location as the parties hereto agree. On
the Closing Date, the parties hereto shall cause the Merger to be consummated by
filing the Certificate of Merger with the Secretary of State of the State of
Delaware, in accordance with the relevant provisions of the DGCL (the time and
date of such filing being the "Effective Time" and the "Effective Date,"
respectively).
A-6
202
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement, the Certificate of Merger and the
applicable provisions of DGCL. Without limiting the generality of the foregoing,
and subject thereto, at the Effective Time, all the property, rights,
privileges, powers and franchises of Target shall vest in the Surviving
Corporation, and all debts, liabilities and duties of Target shall become the
debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of Merger Sub,
as in effect immediately prior to the Effective Time, shall be the Certificate
of Incorporation of the Surviving Corporation until thereafter amended as
provided by the DGCL and such Certificate of Incorporation; provided, however,
that Article I of the Certificate of Incorporation shall be amended to read as
follows: "The name of the corporation is iwin.com, Inc."
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 Directors and Officers. Subject to Section 5.21, at the Effective
Time, the directors of Merger Sub immediately prior to the Effective Time shall
be the directors of the Surviving Corporation, to hold office until such time as
such directors resign, are removed or their respective successors are duly
elected or appointed and qualified. The officers of Merger Sub immediately prior
to the Effective Time shall be the officers of the Surviving Corporation, to
hold office until such time as such officers resign, are removed or their
respective successors are duly elected or appointed and qualified.
1.6 Effect on Capital Stock. By virtue of the Merger and without any
action on the part of Acquiror, Merger Sub, Target or the holders of any of
Target's securities:
(a) Conversion of Target Common Stock. At the Effective Time, each
share of Target Common Stock (including each share of Target Common Stock
into which shares of Target Preferred Stock ("Target Preferred Stock"),
$0.001 par value, are converted prior to the Effective Time) issued and
outstanding immediately prior to the Effective Time (other than shares of
Target Common Stock to be cancelled pursuant to Section 1.6(b) and
Dissenting Shares, as defined in Section 1.6(h)) will be canceled and
extinguished and be converted automatically into the right to receive a
fraction of a share of Acquiror Common Stock (the "Exchange Ratio"), the
numerator of which is equal to fourteen million eight thousand three
hundred three (14,008,303) (the "Total Acquiror Shares"), and the
denominator of which is equal to the sum of (X) the aggregate number of
shares of Target Common Stock outstanding as of the Effective Time
(including each share of Target Common Stock into which shares of Target
Preferred Stock are converted prior to the Effective Time), (Y) the
aggregate number of shares of Target Common Stock issuable upon exercise of
all options of Target ("Target Options") outstanding and vested as of the
Effective Time and assumed by Acquiror pursuant to Section 5.15 hereof,
including Target Options the vesting of which will accelerate as a result
of the consummation of the Merger, and (Z) the aggregate number of shares
of Target Common Stock issuable upon exercise of all outstanding warrants
of Target ("Target Warrants") outstanding as of the Effective Time and
assumed by Acquiror in accordance with Section 1.6(d) hereof. No adjustment
shall be made in the number of shares of Acquiror Common Stock issued in
the Merger as a result of (1) any increase or decrease in the market price
of Acquiror Common Stock prior to the Effective Time or (2) any cash
proceeds received by Target from the date hereof to the Closing Date
pursuant to the exercise of currently outstanding Target Options.
(b) Cancellation of Target Capital Stock Owned by Acquiror or
Target. Immediately prior to the Effective Time, all shares of capital
stock of Target ("Target Capital Stock") that are owned by Target as
treasury stock, and each share of Target Capital Stock owned by Acquiror or
any direct or indirect wholly owned subsidiary of Acquiror or of Target
immediately prior to the Effective Time shall be canceled and extinguished
without any conversion thereof.
(c) Target Stock Option Plans. At the Effective Time, the Target 1999
Stock Plan and the 1999 Secondary Stock Plan (collectively, the "Target
Stock Option Plan") and all options to purchase Target
A-7
203
Common Stock then outstanding under the Target Stock Option Plan shall be
assumed by Acquiror in accordance with Section 5.15.
(d) Target Warrants. At the Effective Time, all outstanding Target
Warrants which do not terminate by their terms shall be converted into
warrants to acquire Acquiror Common Stock in accordance with their terms.
(e) Capital Stock of Merger Sub. At the Effective Time, each share of
Common Stock, $0.001 par value, of Merger Sub ("Merger Sub Common Stock"),
issued and outstanding immediately prior to the Effective Time, shall be
converted into and exchanged for one validly issued, fully paid and
nonassessable share of Common Stock, $0.001 par value, of the Surviving
Corporation. Each stock certificate of Merger Sub evidencing ownership of
any such shares shall thereupon evidence ownership of such shares of
capital stock of the Surviving Corporation.
(f) Adjustments to Exchange Ratio. The Exchange Ratio shall be
adjusted to reflect fully the effect of any stock split, reverse split,
stock dividend (including any dividend or distribution of securities
convertible into Acquiror Common Stock or Target Common Stock),
reorganization, recapitalization or other like change with respect to
Acquiror Common Stock or Target Common Stock occurring after the date
hereof and prior to the Effective Time.
(g) Fractional Shares. No fraction of a share of Acquiror Common
Stock will be issued, but in lieu thereof each holder of shares of Target
Common Stock who would otherwise be entitled to a fraction of a share of
Acquiror Common Stock (after aggregating all fractional shares of Acquiror
Common Stock to be received by such holder) shall receive from Acquiror an
amount of cash (rounded to the nearest whole cent) equal to the product of
(i) such fraction, multiplied by (ii) the closing market price of the
Acquiror Common Stock on the Effective Date.
(h) Dissenters' Rights. Shares of Target Common Stock held by persons
who have not voted such shares for approval of the Merger and with respect
to which such persons shall be entitled to exercise dissenters' rights in
accordance with Section 262 of the DGCL ("Dissenting Shares") shall not be
converted into Acquiror Common Stock but shall instead be converted into
the right to receive such consideration as may be determined to be due with
respect to such Dissenting Shares pursuant to the DGCL. Target agrees that,
except with the prior written consent of Acquiror, or as required under the
DGCL, it will not voluntarily make any payment with respect to, or settle
or offer to settle, any such purchase demand. Each holder of Dissenting
Shares ("Dissenting Stockholder") who, pursuant to the provisions of the
DGCL, becomes entitled to payment of the fair value for shares of Target
Common Stock shall receive payment therefor (but only after the value
therefor shall have been agreed upon or finally determined pursuant to such
provisions). If, after the Effective Time, any Dissenting Shares shall lose
their status as Dissenting Shares, Acquiror shall issue and deliver, upon
surrender by such stockholder of certificate or certificates representing
shares of Target Common Stock, the number of shares of Acquiror Common
Stock to which such stockholder would otherwise be entitled under this
Section 1.6 and the Certificate of Merger, less the number of shares
allocable to such stockholder that have been or will be deposited in the
Escrow Fund (as defined below) in respect of such shares of Acquiror Common
Stock pursuant to Section 1.7(c) and Article VIII hereof.
1.7 Surrender of Certificates.
(a) Exchange Agent. American Stock Transfer & Trust Company shall act as
exchange agent (the "Exchange Agent") in the Merger.
(b) Acquiror to Provide Common Stock and Cash. Promptly after the
Effective Time, Acquiror shall make available to the Exchange Agent for exchange
in accordance with this Article I, through such reasonable procedures as
Acquiror may adopt, the shares of Acquiror Common Stock issuable pursuant to
Section 1.6(a) in exchange for shares of Target Common Stock outstanding
immediately prior to the Effective Time less (i) the number of shares of
Acquiror Common Stock to be deposited into an escrow fund (the "Escrow Fund")
pursuant to the requirements of Article VIII hereof and (ii) cash in an amount
sufficient to permit payment of cash in lieu of fractional shares pursuant to
Section 1.6(g).
A-8
204
(c) Exchange Procedures. Promptly after the Effective Time, the Surviving
Corporation shall cause to be mailed to each holder of record of a certificate
or certificates (the "Certificates") which immediately prior to the Effective
Time represented outstanding shares of Target Common Stock, whose shares were
converted into the right to receive shares of Acquiror Common Stock (and cash in
lieu of fractional shares) pursuant to Section 1.6, (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon receipt of the Certificates by the
Exchange Agent, and shall be in such form and have such other provisions as
Acquiror may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of Acquiror Common Stock (and cash in lieu of fractional shares). Upon surrender
of a Certificate for cancellation to the Exchange Agent or to such other agent
or agents as may be appointed by Acquiror, together with such letter of
transmittal, duly completed and validly executed in accordance with the
instructions thereto, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing the number of whole
shares of Acquiror Common Stock (less the number of shares of Acquiror Common
Stock to be deposited in the Escrow Fund on such holder's behalf pursuant to
Article VIII hereof) and payment in lieu of fractional shares which such holder
has the right to receive pursuant to Section 1.6, and the Certificate so
surrendered shall forthwith be canceled. Until so surrendered, each outstanding
Certificate that, prior to the Effective Time, represented shares of Target
Common Stock will be deemed from and after the Effective Time, for all corporate
purposes, other than the payment of dividends, to evidence the ownership of the
number of full shares of Acquiror Common Stock into which such shares of Target
Common Stock shall have been so converted and the right to receive an amount in
cash in lieu of the issuance of any fractional shares in accordance with Section
1.6. As soon as practicable after the Effective Time, and subject to and in
accordance with the provisions of Section 8.3 hereof, Acquiror shall cause to be
delivered to the Escrow Agent (as defined in Section 8.3 hereof) a certificate
or certificates representing ten percent (10%) of the Total Acquiror Shares
otherwise deliverable to the stockholders of Target pursuant to Section 1.6(a)
which shall be registered in the name of the Escrow Agent as nominee for such
stockholders of Target. Such shares shall be beneficially owned by such
stockholders of Target and shall be held in escrow and shall be available to
compensate Acquiror for certain damages as provided in Article VIII. To the
extent not used for such purposes, such shares shall be released, all as
provided in Article VIII hereof.
(d) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to Acquiror Common Stock with a record date
after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of Acquiror Common Stock represented
thereby until the holder of record of such Certificate surrenders such
Certificate. Subject to applicable law, following surrender of any such
Certificate, there shall be paid to the record holder of the certificates
representing whole shares of Acquiror Common Stock issued in exchange therefor,
without interest, at the time of such surrender, the amount of any such
dividends or other distributions with a record date after the Effective Time
which would have been previously payable (but for the provisions of this Section
1.7(d)) with respect to such shares of Acquiror Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Acquiror
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it shall be a condition of the
issuance thereof that such issuance be in accordance with applicable law and
that the Certificate so surrendered is properly endorsed and otherwise in proper
form for transfer and that the person requesting such exchange will have paid to
Acquiror or any agent designated by it any transfer or other taxes required by
reason of the issuance of a certificate for shares of Acquiror Common Stock in
any name other than that of the registered holder of the Certificate
surrendered, or established to the satisfaction of Acquiror or any agent
designated by it that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this Section
1.7, none of the Exchange Agent, the Surviving Corporation or any party hereto
shall be liable to any person for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(g) Dissenting Shares. The provisions of this Section 1.7 shall also apply
to Dissenting Shares that lose their status as such, except that the obligations
of Acquiror under this Section 1.7 shall commence on the date
A-9
205
of loss of such status and the holder of such shares shall be entitled to
receive in exchange for such shares the number of shares of Acquiror Common
Stock to which such holder is entitled pursuant to Section 1.6 hereof.
1.8 No Further Ownership Rights in Target Common Stock. All shares of
Acquiror Common Stock issued upon the surrender for exchange of shares of Target
Common Stock in accordance with the terms hereof (including any cash paid in
lieu of fractional shares) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Target Common Stock, and
there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Target Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of Acquiror Common
Stock (and cash in lieu of fractional shares) as may be required pursuant to
Section 1.6; provided, however, that Acquiror may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
Acquiror, the Surviving Corporation or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
1.10 Tax Consequences. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368 of
the Code. No party shall take any action which would, to such party's knowledge,
cause the Merger to fail to qualify as a reorganization within the meaning of
Section 368 of the Code.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Target, the officers and directors of Target and Merger Sub
are fully authorized in the name of their respective corporations or otherwise
to take, and shall take, all such lawful and necessary action, so long as such
action is not inconsistent with this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF TARGET AND PRINCIPAL STOCKHOLDERS
Target and the Principal Stockholders, jointly and severally, represent and
warrant to Acquiror and Merger Sub that the statements contained in this Article
II are true and correct, except as set forth in the disclosure letter delivered
by Target to Acquiror prior to the execution and delivery of this Agreement (the
"Target Disclosure Letter"). The Target Disclosure Letter shall be arranged in
paragraphs corresponding to the numbered and lettered paragraphs contained in
this Article II, and the disclosure in any paragraph shall qualify only the
corresponding paragraph in this Article II. Any reference in this Article II to
an agreement being "enforceable" shall be deemed to be qualified to the extent
such enforceability is subject to (i) laws of general application relating to
bankruptcy, insolvency, moratorium and the relief of debtors, and (ii) the
availability of specific performance, injunctive relief and other equitable
remedies. In the remainder of this Article II, "Target" will be deemed to
include (and each representation and warranty will apply separately and
collectively to) Target and each of Target's subsidiaries, unless the context
otherwise provides.
2.1 Organization, Standing and Power. Target is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization. Target has the corporate power to own its
properties and to carry on its business as now being conducted and as proposed
to be conducted and is duly qualified to do business and is in good standing in
each jurisdiction in which the failure to be so qualified and in good standing
would have a Material Adverse Effect (as defined herein) on Target. Target has
delivered to Acquiror a true and correct copy of the Certificate of
Incorporation and Bylaws or other charter documents, as applicable, of Target,
each as amended to date. Target is not in violation of any of the provisions of
its Articles
A-10
206
of Incorporation or Bylaws or equivalent organizational documents. Target does
not own any subsidiaries and does not directly or indirectly own any equity or
similar interest in, or any interest convertible or exchangeable or exercisable
for, any equity or similar interest in, any corporation, partnership, joint
venture or other business association or entity.
2.2 Capital Structure. The authorized capital stock of Target consists of
35,000,000 shares of Target Common Stock and 20,000,000 shares of Target
Preferred Stock, of which there were issued and outstanding as of the date of
this Agreement, 7,068,189 shares of Target Common Stock, 2,250,000 shares of
Series A Preferred Stock (the "Series A Preferred"), 5,177,865 shares of Series
B Preferred Stock (the "Series B Preferred") and 1,097,827 shares of Series C
Preferred Stock (the "Series C Preferred"). The Target Preferred Stock will
convert into an aggregate of 8,525,692 shares of Target Common Stock prior to
the Effective Time, and no shares of Target Preferred Stock shall be outstanding
at the Effective Time. There are no other outstanding shares of capital stock or
voting securities and no outstanding commitments to issue any shares of capital
stock or voting securities after the date of this Agreement other than pursuant
to the exercise of (i) outstanding Target Warrants and (ii) options outstanding
as of the date of this Agreement under the Target Stock Option Plan. All
outstanding shares of Target Capital Stock are duly authorized, validly issued,
fully paid and non-assessable and are free of any liens or encumbrances other
than any liens or encumbrances created by or imposed upon the holders thereof,
and are not subject to preemptive rights, rights of first refusal, rights of
first offer or similar rights created by statute, the Certificate of
Incorporation or Bylaws of Target or any agreement to which Target is a party or
by which it is bound. As of the date of this Agreement, Target has reserved (i)
14,159,740 shares of Target Common Stock for issuance upon conversion of the
Target Preferred Stock, and (ii) 2,756,162 shares of Target Common Stock for
issuance to employees, directors and consultants pursuant to the Target Stock
Option Plan, of which 363,189 shares have been issued pursuant to option
exercises or direct stock purchases, 2,392,973 shares are subject to
outstanding, unexercised options, and (iii) 60,000 shares subject to outstanding
Target Warrants. Except for (i) the rights created pursuant to this Agreement,
(ii) rights created pursuant to the Target Stock Option Plan, and (iii) the
Target Warrants, there are no other options, warrants, calls, rights,
commitments or agreements of any character to which Target is a party or by
which it is bound obligating Target to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of Target Capital Stock or obligating Target to grant, extend, accelerate
the vesting of, change the price of, or otherwise amend or enter into any such
option, warrant, call, right, commitment or agreement. The Target Disclosure
Letter also sets forth a true, correct and complete list of all outstanding
Target Options (which, for each outstanding option, sets forth the name of the
holder of such option, the number of shares subject to such options, the amount
of such options that are vested and the vesting schedule for any unvested
options, the type of stock subject to such option, the exercise price of such
option, the repricing of any such option and, if the exercisability of such
option will be or is required to be accelerated in any way by the transactions
contemplated by this Agreement or for any other reason, an indication of the
extent of such acceleration and the reason therefor) (the "Option Schedule").
There are no contracts, commitments or agreements relating to the voting,
purchase or sale of Target Capital Stock (i) between or among Target and any of
its stockholders and (ii) to the best of Target's knowledge, among any of
Target's stockholders or between any of Target's stockholders and any third
party, except for the stockholders delivering Voting Agreements. The terms of
the Target Stock Option Plan permit the assumption of such Target Stock Option
Plan by Acquiror or the substitution of options to purchase Acquiror Common
Stock as provided in this Agreement, without the consent or approval of the
holders of the outstanding options, the Target stockholders, or otherwise and
without any acceleration of the exercise schedule or vesting provisions in
effect for such options. True and complete copies of all agreements and
instruments relating to or issued under the Target Stock Option Plan have been
made available to Acquiror, and such agreements and instruments have not been
amended, modified or supplemented, and there are no agreements to amend, modify
or supplement such agreements or instruments from the form made available to
Acquiror. All outstanding Target Capital Stock, Target Options, Target Warrants
and other Target securities, if any, were issued in compliance with all
applicable federal and state securities laws.
A-11
207
2.3 Authority.
(a) Target has all requisite power, corporate or otherwise, and authority
to enter into this Agreement and the Escrow Agreement, in substantially the form
as Exhibit C hereto, to be entered into among Acquiror, Target, the
Stockholders' Agent and The Chase Manhattan Bank, as Escrow Agent (the "Escrow
Agreement", and with this Agreement and the Voting Agreements, collectively, the
"Transaction Documents") and to consummate the transactions contemplated hereby
and thereby. The execution and delivery of this Agreement and the other
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of Target, subject only to the approval of the Merger by Target's
stockholders as contemplated by Section 6.1(a). This Agreement and other
Transaction Documents have been duly executed and delivered by Target and
constitute the valid and binding obligations of Target enforceable against
Target in accordance with their terms.
(b) The execution and delivery of this Agreement and the other Transaction
Documents by Target do not, and the consummation of the transactions
contemplated hereby and thereby will not, conflict with, or result in any
violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of any benefit under (i) any provision of the Certificate
of Incorporation or Bylaws of Target, as amended, or (ii) any Material Contract
(as defined in Section 2.26) or any material permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Target or any of its properties or assets.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality ("Governmental Entity") is
required by or with respect to Target in connection with the execution and
delivery of this Agreement and the other Transaction Documents or the
consummation of the transactions contemplated hereby or thereby, except for (i)
the filing of the Certificate of Merger, together with the required officers'
certificates, as provided in Section 1.2; (ii) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
applicable state securities laws and the securities laws of any foreign country;
(iii) such filings as may be required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended ("HSR"); and (iv) such other consents,
authorizations, filings, approvals and registrations which have been made or, if
not obtained or made, would not have a Material Adverse Effect on Target and
would not prevent, or materially alter or delay any of the transactions
contemplated by this Agreement.
2.4 Financial Statements. Target has delivered to Acquiror its audited
financial statements (balance sheet, statement of operations, statement of
stockholders' equity and statement of cash flows) for the fiscal year ended
December 31, 1999 and its unaudited financial statements (balance sheet,
statement of operations, statement of stockholders' equity and statement of cash
flows) on a consolidated basis as at, and for the six-month period ended June
30, 2000 (collectively, the "Financial Statements"). The Financial Statements
have been prepared in accordance with generally accepted accounting principles
("GAAP") (except that the unaudited financial statements do not have notes
thereto) applied on a consistent basis throughout the periods indicated and with
each other. The Financial Statements fairly present the financial condition and
operating results of Target as of the dates, and for the periods, indicated
therein, subject; in the case of the unaudited financial statements, to normal
year-end audit adjustments which are not material in the aggregate. Target
maintains a standard system of accounting established and administered in
accordance with GAAP.
2.5 Absence of Certain Changes. Since December 31, 1999, (the "Target
Balance Sheet Date"), Target has conducted its business in the ordinary course
consistent with past practice and there has not occurred: (i) any change, event
or condition (whether or not covered by insurance) that has resulted in, or
might reasonably be expected to result in, a Material Adverse Effect (as defined
in Section 9.2) on Target; (ii) any acquisition, sale or transfer of any
material asset of Target; (iii) any change in accounting methods or practices
(including any change in depreciation or amortization policies or rates) by
Target or any revaluation by Target of any of its assets; (iv) any declaration,
setting aside, or payment of a dividend or other distribution with respect to
the shares of Target, or any direct or indirect redemption, purchase or other
acquisition by Target of any of its shares of capital stock; (v) any Material
Contract entered into by Target, other than as
A-12
208
provided to Acquiror, or any material amendment or termination of, or default
under, any Material Contract to which Target is a party or by which it is bound;
(vi) any amendment or change to the Certificate of Incorporation or Bylaws of
Target; (vii) any increase in or modification of the compensation or benefits
payable or to become payable by Target to any of its directors, employees or
consultants; (viii) capital expenditures or capital commitments by Target
exceeding $50,000 individually or $300,000 in the aggregate (other than computer
equipment); (ix) destruction of, damage to or loss of any material assets or
business of Target; and (x) any agreement by Target to do any of the things
described in the preceding clauses (i) through (ix). In addition, there are no
capital commitments for computer equipment by Target in excess of $50,000
individually or $300,000 in the aggregate and Target has not incurred capital
expenditures for computer equipment since June 30, 2000 in excess of $50,000
individually or $300,000 in the aggregate.
2.6 Absence of Undisclosed Liabilities. Target has no material obligations
or liabilities of any nature (matured or unmatured, fixed or contingent) other
than (i) those set forth or adequately provided for in the Balance Sheet for the
period ended June 30, 2000 (the "Target Balance Sheet"), (ii) those incurred in
the ordinary course of business prior to the Target Balance Sheet Date and not
required to be set forth in the Target Balance Sheet under GAAP and (iii) those
incurred in connection with the execution of this Agreement.
2.7 Accounts Receivable. The accounts receivable shown on Schedule 2.7
arose in the ordinary course of business and have been collected or are
collectible in the book amounts thereof, less the allowance for doubtful
accounts and returns provided for in such balance sheet. Allowances for doubtful
accounts and returns are adequate and have been prepared in accordance with GAAP
and the past practices of Target. The accounts receivable of Target arising
after the date indicated on Schedule 2.7 and prior to the date hereof arose in
the ordinary course of business and have been collected or are collectible in
the book amounts thereof, less allowances for doubtful accounts and returns
determined in accordance with GAAP and the past practices of Target. None of the
accounts receivable are subject to any material claim of offset or recoupment,
or counterclaim and Target has no knowledge of any specific facts that would be
reasonably likely to give rise to any such claim. No material amount of accounts
receivable are contingent upon the performance by Target of any obligation. No
agreement for deduction or discount has been made with respect to any accounts
receivable.
2.8 Litigation. There is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the knowledge of Target, threatened
(including allegations that could form the basis for future action) against
Target or any of its properties or officers or directors (in their capacities as
such) that, individually or in the aggregate, could reasonably be expected to
have a Material Adverse Effect on Target, nor does Target have any reason to
expect that any such activity, threat or allegation will be forthcoming. There
is no judgment, decree or order against Target, or, to the knowledge of Target,
any of its directors or officers (in their capacities as such), that could
prevent, enjoin, or materially alter or delay any of the transactions
contemplated by this Agreement, or that could reasonably be expected to have a
Material Adverse Effect on Target. All litigation to which Target is a party
(or, to the knowledge of Target, threatened to become a party) is disclosed in
the Target Disclosure Letter. Target does not have any plans to initiate any
litigation, arbitration or other proceeding against any third party, other than
for the routine collection of bills.
2.9 Restrictions on Business Activities. There is no agreement, judgment,
injunction, order or decree binding upon Target that has or could reasonably be
expected to have the effect of prohibiting or impairing any current business
practice of Target, any acquisition of property by Target or the conduct of
business by Target as currently conducted.
2.10 Governmental Authorization. Target has obtained each federal, state,
county, local or foreign governmental consent, license, permit, grant, or other
authorization of a Governmental Entity (i) pursuant to which Target currently
operates or holds any interest in any of its properties or (ii) that is required
for the operation of Target's business as currently conducted or the holding of
any such interest ((i) and (ii) herein collectively called "Target
Authorizations"), and all of such Target Authorizations are in full force and
effect,
A-13
209
except where the failure to obtain or have any such Target Authorizations could
not reasonably be expected to have a Material Adverse Effect on Target.
2.11 Title to Property. Target has good and valid title to all of its
properties, interests in properties and assets, real and personal, used for the
conduct of its business as presently conducted or which are reflected in the
Target Balance Sheet or acquired after the Target Balance Sheet Date (except
properties, interests in properties and assets sold or otherwise disposed of in
the ordinary course of business since the Target Balance Sheet Date), or with
respect to leased properties and assets, valid leasehold interests therein, in
each case free and clear of all mortgages, liens, pledges, charges or
encumbrances of any kind or character, except (i) the lien of current taxes not
yet due and payable, (ii) such imperfections of title, liens and easements as do
not and will not materially detract from or interfere with the use of the
properties subject thereto or affected thereby, or otherwise materially impair
business operations involving such properties and (iii) liens securing debt that
are reflected on the Target Balance Sheet. All properties used in the operations
of Target are reflected in the Target Balance Sheet to the extent GAAP require
the same to be reflected. Schedule 2.11 identifies each parcel of real property
owned or leased by Target.
2.12 Intellectual Property.
(a) Target is the sole and exclusive owner of all Target Intellectual
Property (defined below) free of all contingent and noncontingent liens,
restrictions, interests, rights of reversion or termination, and all other
encumbrances of any nature that could reasonably be expected to have a Material
Adverse Effect. The conduct of Target's business as currently conducted by
Target or as currently proposed to be conducted will not infringe,
misappropriate or violate any Intellectual Property (defined below) of others.
(b) All Target Intellectual Property that is the subject of any
application, registration or issuance with or from any governmental entity is
identified on Schedule 2.12; all such registered or issued Target Intellectual
Property is valid and subsisting and is free from any challenge, and Target is
not aware of any basis therefor. All such applications, registrations and
issuances have been properly maintained. Target has endeavored to adequately
protect all other Target Intellectual Property through the use of
confidentiality agreements and otherwise and Target is not aware of any use,
exercise or exploitation of any Target Intellectual Property, except as
authorized by Target.
(c) Each current and former employee and contractor of Target has executed
and delivered (and to Target's knowledge, is in compliance with) an agreement in
substantially the form of Target's standard Proprietary Information and
Inventions Agreement (in the case of an employee) or Target's standard
Consulting Agreement (in the case of a contractor), which agreement provides
written assignments of all title and rights to any Target Intellectual Property
conceived or developed thereunder or otherwise in connection with his or her
consulting or employment.
(d) "Intellectual Property" means patent rights; trade name, trademark,
service mark and similar rights ("Mark" rights); copyrights; mask work rights;
sui generis database rights; trade secret rights; moral rights; and all other
intellectual and industrial property rights of any sort, and all applications,
registrations, issuances and the like with respect thereto. "Target Intellectual
Property" means all Intellectual Property that is owned by Target, or used,
exercised, or exploited, or otherwise necessary for, Target's business as
currently conducted.
2.13 Environmental Matters. Target is and has at all times operated its
business in material compliance with all Environmental Laws, and to the best of
Target's knowledge, no material expenditures are or will be required in order to
comply with such Environmental Laws. "Environmental Laws" means all applicable
statutes, rules, regulations, ordinances, orders, decrees, judgments, permits,
licenses, consents, approvals, authorizations, and governmental requirements or
directives or other obligations lawfully imposed by governmental authority under
federal, state or local law pertaining to the protection of the environment,
protection of public health, protection of worker health and safety, the
treatment, emission and/or discharge of gaseous, particulate and/or effluent
pollutants, and/or the handling of hazardous materials, including without
limitation, the Clean Air Act, 42 U.S.C. sec. 7401, et seq., the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), 42
U.S.C. sec. 9601, et seq., the Federal Water
A-14
210
Pollution Control Act, 33 U.S.C. sec. 1321, et seq., the Hazardous Materials
Transportation Act, 49 U.S.C. sec. 1801, et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. sec. 6901, et seq. ("RCRA"), and the Toxic Substances
Control Act, 15 U.S.C. sec. 2601, et seq.
2.14 Taxes.
(a) All Tax returns, statements, reports, declarations and other forms and
documents (including without limitation estimated Tax returns and reports and
material information returns and reports) required to be filed with any Tax
authority with respect to any Taxable period ending on or before the Closing, by
or on behalf of Target (collectively, "Tax Returns" and individually a "Tax
Return"), have been or will be completed and filed when due (including any
extensions of such due date) and all amounts shown due on such Tax Returns on or
before the Effective Time have been or will be paid on or before such date. The
Target Financial Statements (i) fully accrue all actual and contingent
liabilities for Taxes with respect to all periods through the Target Balance
Sheet Date and Target has not and will not incur any Tax liability in excess of
the amount reflected on the Target Balance Sheet included in the Target
Financial Statements with respect to such periods, other than Taxes incurred in
the ordinary course of its business following the Target Balance Sheet, and (ii)
properly accrue in accordance with GAAP all material liabilities for Taxes
payable after the Target Balance Sheet Date with respect to all transactions and
events occurring on or prior to such date. No material Tax liability since the
Target Balance Sheet has been incurred by Target other than in the ordinary
course of business, and adequate provision has been made by Target for all Taxes
since that date in accordance with GAAP on at least a quarterly basis.
(b) Target has previously provided or made available to Acquiror copies of
all income, franchise, and sales Tax Returns as filed with the appropriate Tax
authority, and, as reasonably requested by Acquiror, prior to or following the
date hereof, presently existing information statements and reports. Target has
withheld and paid to the applicable financial institution or Tax authority all
amounts required to be withheld. To the best knowledge of Target, no Tax Returns
filed with respect to Taxable years of Target through the Taxable year ended
December 31, 1999 in the case of the United States, have been examined and
closed. Target (or any member of any affiliated or combined group of which
Target has been a member) has not granted any extension or waiver of the
limitation period applicable to any Tax Returns that is still in effect. There
is no material claim, audit, action, suit, proceeding, or (to the knowledge of
Target) investigation now pending or (to the knowledge of Target) threatened
against or with respect to Target in respect of any Tax or assessment. No notice
of deficiency or similar document of any Tax authority has been received by
Target, and there are no liabilities for Taxes (including liabilities for
interest, additions to Tax and penalties thereon and related expenses) with
respect to the issues that have been raised (and are currently pending) by any
Tax authority that could, if determined adversely to Target, materially and
adversely affect the liability of Target for Taxes. There are no liens for Taxes
(other than for current Taxes not yet due and payable) upon the assets of
Target. Target has never been a member of an affiliated group of corporations,
within the meaning of Section 1504 of the Code. Target is in full compliance
with all the terms and conditions of any Tax exemptions or other Tax-sharing
agreement or order of a foreign government and the consummation of the Merger
will not have any adverse effect on the continued validity and effectiveness of
any such Tax exemption or other Tax-sharing agreement or order. Neither Target
nor any person on behalf of Target has entered into or will enter into any
agreement or consent pursuant to the collapsible corporation provisions of
Section 341(f) of the Code (or any corresponding provision of state, local or
foreign income tax law) or agreed to have Section 341(f)(2) of the Code (or any
corresponding provision of state, local or foreign income tax law) apply to any
disposition of any asset owned by Target. None of the assets of Target is
property that Target is required to treat as being owned by any other person
pursuant to the so-called "safe harbor lease" provisions of former Section
168(f)(8) of the Code. None of the assets of Target directly or indirectly
secures any debt the interest on which is tax-exempt under Section 103(a) of the
Code. None of the assets of Target is "tax-exempt use property" within the
meaning of Section 168(h) of the Code. Target has not made and will not make a
consent dividend election under Section 565 of the Code. Target has never been a
party to any transaction intended to qualify under Section 355 of the Internal
Revenue Code or any corresponding provision of state law. Target has not
participated in (and will not participate in) an international boycott within
the meaning of Section 999 of the Code. No Target stockholder is other than a
United States person within the meaning of the Code. Target
A-15
211
does not have and has not had a permanent establishment in any foreign country,
as defined in any applicable tax treaty or convention between the United States
of America and such foreign country and Target has not engaged in a trade or
business within any foreign country. Target has never elected to be treated as
an S-corporation under the Code or any corresponding provision of federal or
state law. All material elections with respect to Target's Taxes made during the
fiscal year ending December 31, 1999 are reflected on the Target Tax Returns for
such period, copies of which have been provided or made available to Acquiror.
After the date of this Agreement and prior to the Effective Time, no material
election with respect to Taxes will be made without the prior written consent of
Acquiror, which consent not to be unreasonably withheld. Target is not party to
any joint venture, partnership, or other arrangement or contract which could be
treated as a partnership for federal income tax purposes. Target is not
currently and never has been subject to the reporting requirements of Section
6038A of the Code. There is no agreement, contract or arrangement to which
Target is a party that could, individually or collectively, result in the
payment of any amount that would not be deductible by reason of Sections 280G
(as determined without regard to Section 280G(b)(4), 162 (other than 162(a)) or
404 of the Code. Target is not a party to or bound by any Tax indemnity, Tax
sharing or Tax allocation agreement (whether written or unwritten or arising
under operation of federal law as a result of being a member of a group filing
consolidated Tax returns, under operation of certain state laws as a result of
being a member of a unitary group, or under comparable laws of other states or
foreign jurisdictions) which includes a party other than Target nor does Target
owe any amount under any such Agreement. Target has previously provided or made
available to Acquiror copies of all income, franchise, and sales Tax Returns as
filed with the appropriate Tax authority, and, as reasonably requested by
Acquiror, prior to or following the date hereof, presently existing information
statements and reports. Target is not, and has not been, a United States real
property holding corporation (as defined in Section 897(c)(2) of the Code)
during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
Other than by reason of the Merger, Target has not been and will not be required
to include any material adjustment in Taxable income for any Tax period (or
portion thereof) pursuant to Section 481 of the Code or any comparable provision
under state or foreign Tax laws as a result of transactions, events or
accounting methods employed prior to the Merger.
(c) For purposes of this Agreement, the following terms have the following
meanings: "Tax" (and, with correlative meaning, "Taxes" and "Taxable") means any
and all taxes including, without limitation, (i) any net income, alternative or
add-on minimum tax, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, value added, net worth, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax governmental fee
or other like assessment or charge of any kind whatsoever, together with any
interest or any penalty, addition to tax or additional amount imposed by any
Governmental Entity (a "Tax authority") responsible for the imposition of any
such tax (domestic or foreign), (ii) any liability for the payment of any
amounts of the type described in (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any Taxable period or as
the result of being a transferee or successor thereof and (iii) any liability
for the payment of any amounts of the type described in (i) or (ii) as a result
of any express or implied obligation to indemnify any other person. As used in
this Section 2.14, the term "Target" means Target and any entity included in, or
required under GAAP to be included in, any of the Target Financial Statements.
2.15 Employee Benefit Plans.
(a) For all purposes under this Section 2.15 "ERISA Affiliate" shall mean
each person (as defined in Section 3(9) of ERISA) that, together with Target, is
treated as a single employer under Section 4001(b) of ERISA or Section 414 of
the Code. Except for the plans and agreements listed in Schedule 2.15
(collectively, the "Plans"), Target and its ERISA Affiliates do not maintain,
are not a party to, do not contribute to and are not obligated to contribute to,
and the employees or former employees of Target and its ERISA Affiliates and
their dependents or survivors do not receive benefits under, any of the
following (whether or not set forth in a written document):
(i) Any employee benefit plan, as defined in section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA");
A-16
212
(ii) Any bonus, deferred compensation, incentive, restricted stock,
stock purchase, stock option, stock appreciation right, phantom stock,
supplemental pension, executive compensation, cafeteria benefit, dependent
care, director or employee loan, fringe benefit, sabbatical, severance,
termination pay or similar plan, program, policy, agreement or arrangement;
or
(iii) Any plan, program, agreement, policy, commitment or other
arrangement relating to the provision of any benefit described in section
3(1) of ERISA to former employees or directors or to their survivors, other
than procedures intended to comply with the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA").
(b) Neither Target nor any ERISA Affiliate has, since January 1, 1994,
terminated, suspended, discontinued contributions to or withdrawn from any
employee pension benefit plan, as defined in section 3(2) of ERISA, including
(without limitation) any multiemployer plan, as defined in section 3(37) of
ERISA.
(c) Target has provided to Acquiror complete, accurate and current copies
of each of the following:
(i) The text (including amendments) of each of the Plans, to the
extent reduced to writing;
(ii) A summary of each of the Plans, to the extent not previously
reduced to writing;
(iii) With respect to each Plan that is an employee benefit plan (as
defined in section 3(3) of ERISA), the following:
(1) The most recent summary plan description, as described in
section 102 of ERISA;
(2) Any summary of material modifications that has been distributed
to participants but has not been incorporated in an updated summary plan
description furnished under Subparagraph (1) above; and
(3) The annual report, as described in section 103 of ERISA, and
(where applicable) actuarial reports, for the three most recent plan
years for which an annual report or actuarial report has been prepared;
and
(iv) With respect to each Plan that is intended to qualify under
section 401(a) of the Code the most recent determination letter concerning
the plan's qualification under section 401(a) of the Code, as issued by the
Internal Revenue Service, and any subsequent determination letter
application.
(d) With respect to each Plan that is an employee benefit plan (as defined
in section 3(3) of ERISA), the requirements of ERISA applicable to such Plan
have been satisfied in all material respects.
(e) With respect to each Plan that is subject to COBRA, the requirements of
COBRA applicable to such Plan have been satisfied in all material respects.
(f) With respect to each Plan that is subject to the Family Medical Leave
Act of 1993, as amended, the requirements of such Act applicable to such Plan
have been satisfied in all material respects.
(g) Each Plan that is intended to qualify under section 401(a) of the Code
meets the requirements for qualification under section 401(a) of the Code and
the regulations thereunder, except to the extent that such requirements may be
satisfied by adopting retroactive amendments under section 401(b) of the Code
and the regulations thereunder or may be otherwise corrected without material
cost to Target. Each such Plan has been administered in all material respects in
accordance with its terms (or, if applicable, such terms as will be adopted
pursuant to a retroactive amendment under section 401(b) of the Code) and the
applicable provisions of ERISA and the Code and the regulations thereunder.
(h) Neither Target nor any ERISA Affiliate has any accumulated funding
deficiency under section 412 of the Code or any termination or withdrawal
liability under Title IV of ERISA.
(i) All contributions, premiums or other payments due from the Target to
(or under) any Plan have been fully paid or adequately provided for on the books
and financial statements of Target. All accruals (including, where appropriate,
proportional accruals for partial periods) have been made in accordance with
prior practices.
A-17
213
2.16 Employees and Consultants.
(a) Target has provided Acquiror with a true and complete list of all
individuals employed by Target as of the date hereof and the position and base
compensation payable to each such individual. Other than offer letters, each of
which relate to employments-at-will and a form of which has been provided to
Acquiror, there are no written or oral employment agreements, consulting
agreements or termination or severance agreements to which Target is a party.
(b) Target is not a party to or subject to a labor union or a collective
bargaining agreement or arrangement, is not a party to any labor or employment
proceeding and to the knowledge of Target is not involved in any labor or
employment dispute.
(c) The consummation of the transactions contemplated herein will not
result in (i) any amount becoming payable to any employee, director or
independent contractor of Target, (ii) the acceleration of payment or vesting of
any benefit, option or right to which any employee, director or independent
contractor of Target may be entitled, (iii) the forgiveness of any indebtedness
of any employee, director or independent contractor of Target or (iv) any cost
becoming due or accruing to Target or the Acquiror with respect to any employee,
director or independent contractor of Target.
(d) Target is not obligated and upon consummation of the Merger will not be
obligated to make any payment or transfer any property that would be considered
a "parachute payment" under section 280G(b)(2) of the Code.
(e) To the knowledge of Target, no employee of Target has been materially
injured in the work place or in the course of his or her employment except for
injuries which are covered by insurance or for which a claim has been made under
workers' compensation or similar laws.
(f) Target has complied in all material respects with the verification
requirements and the record-keeping requirements of the Immigration Reform and
Control Act of 1986 ("IRCA"); to the best knowledge of Target, the information
and documents on which Target relied to comply with IRCA are true and correct;
and there have not been any discrimination complaints filed against Target
pursuant to IRCA, and to the knowledge of Target, there is no basis for the
filing of such a complaint.
(g) Target has not received or been notified of any complaint by any
employee, applicant, union or other party of any discrimination or other conduct
forbidden by law or contract, nor to the knowledge of Target, is there a basis
for any complaint.
(h) Target's action in complying with the terms of this Agreement will not
violate any agreements with any of Target's employees.
(i) Target has filed all reports and information required to be filed under
applicable law with respect to its employees that are due prior to the date
hereof and otherwise has complied in all material respects in its hiring,
employment, promotion, termination and other labor practices with all applicable
federal and state law and regulations, including without limitation those within
the jurisdiction of the United States Equal Employment Opportunity Commission,
United States Department of Labor and state and local human rights or civil
rights agencies. Target has filed and shall file any such reports and
information that are required to be filed under applicable law prior to the
Closing Date.
(j) Target is not aware that any of its employees or contractors is
obligated under any agreement, commitments, judgment, decree, order or otherwise
(an "Employee Obligation") that could reasonably be expected to interfere with
the use of his or her best efforts to promote the interests of Target or that
could reasonably be expected to conflict with any of Target's business as
conducted or proposed to be conducted. Neither the execution nor delivery of
this Agreement nor the conduct of Target's business as conducted or proposed to
be conducted, will, to Target's knowledge, conflict with or result in a breach
of the terms, conditions or provisions of, or constitute a default under, any
Employee Obligation.
2.17 Related-Party Transactions. No Target stockholder or employee,
officer or director of Target or member of his or her immediate family is
indebted to Target, nor is Target indebted (or committed to make
A-18
214
loans or extend or guarantee credit) to any of them. To Target's knowledge, no
Target stockholder owning over 2% of the outstanding Target Capital Stock (on a
fully-diluted basis) or employee, officer or director of Target or member of his
or her immediate family has any direct or indirect controlling interest in any
firm or corporation with which Target is affiliated or with which Target has a
business relationship, or any firm or corporation that competes with Target,
except to the extent that such employees, officers or directors or stockholders
and members of their immediate families own stock in publicly traded companies
that may compete with the Company. To Target's knowledge, no member of the
immediate family of any officer or director of Target is directly or indirectly
interested in any material contract with Target.
2.18 Insurance. Target has policies of insurance and bonds of the type and
in amounts customarily carried by persons conducting businesses or owning assets
similar to those of Target. There is no material claim pending under any of such
policies or bonds as to which coverage has been questioned, denied or disputed
by the underwriters of such policies or bonds. All premiums due and payable
under all such policies and bonds have been paid and Target is otherwise in
material compliance with the terms of such policies and bonds. Target has no
knowledge of any threatened termination of, or material premium increase with
respect to, any of such policies.
2.19 Compliance with Laws. Target has complied with, is not in violation
of, and has not received any notices of violation with respect to, any federal,
state, local or foreign statute, law or regulation with respect to the conduct
of its business, or the ownership or operation of its business, except for such
violations or failures to comply as could not be reasonably expected to have a
Material Adverse Effect on Target.
2.20 Brokers' and Finders' Fees. Target has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or investment bankers' fees or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
2.21 [Intentionally Omitted]
2.22 Vote Required. The affirmative vote of the holders of a majority of
each voting class of Target Capital Stock outstanding on the record date set for
the Target Stockholders Meeting (as defined herein) is the only vote of the
holders of any of Target's Capital Stock necessary to approve this Agreement and
the transactions contemplated hereby.
2.23 [Intentionally Omitted]
2.24 [Intentionally Omitted]
2.25 Customers and Suppliers. As of the date hereof, no customer which
individually accounted for more than 1% of Target's gross revenues during the 12
month period preceding the date hereof, and no supplier of Target, has canceled
or otherwise terminated, or made any written threat to Target to cancel or
otherwise terminate its relationship with Target for any reason including,
without limitation the consummation of the transactions contemplated hereby, or,
in the three-month period ended June 30, 2000 compared to the three-month period
ended March 31, 2000, decreased by over 10% its services or supplies to Target
in the case of any such supplier, or its usage of the services or products of
Target in the case of such customer, and to Target's knowledge, no such supplier
or customer intends to cancel or otherwise terminate its relationship with
Target. Target has not knowingly breached, so as to provide a benefit to Target
that was not intended by the parties, any agreement with, or engaged in any
fraudulent conduct with respect to, any customer or supplier of Target.
2.26 Material Contracts. Except for the material contracts described in
Schedule 2.26 (collectively, the "Material Contracts") Target is not a party to
or bound by any material contract, including without limitation:
(a) any distributor, sales, advertising, agency or manufacturer's
representative contract involving more than $75,000 over the life of the
contract;
(b) any continuing contract for the purchase of materials, supplies,
equipment or services involving in the case of any such contact more than
$75,000 over the life of the contract;
A-19
215
(c) any contract that expires or may be renewed at the option of any
person other than the Target so as to expire more than one year after the
date of this Agreement;
(d) any trust indenture, mortgage, promissory note, loan agreement or
other contract for the borrowing of money, any currency exchange,
commodities or other hedging arrangement or any leasing transaction of the
type required to be capitalized in accordance with GAAP;
(e) any contract for capital expenditures in excess of $75,000 in the
aggregate;
(f) any contract limiting the freedom of the Target to engage in any
line of business or to compete with any other Person as that term is
defined in the Exchange Act (as defined herein) or any confidentiality,
secrecy or non-disclosure contract;
(g) any contract pursuant to which Target leases any real property;
(h) any contract pursuant to which the Target is a lessor of any
machinery, equipment, motor vehicles, office furniture, fixtures or other
personal property;
(i) any contract with any affiliate;
(j) any agreement of guarantee, support, indemnification, assumption
or endorsement of, or any similar commitment with respect to, the
obligations, liabilities (whether accrued, absolute, contingent or
otherwise) or indebtedness of any other Person;
(k) any license, sublicense or other agreement to which Target is a
party (or by which it or any Target Intellectual Property is bound or
subject) and pursuant to which any person has been or may be assigned,
authorized to use, or given access to any Target Intellectual Property;
(l) any license, sublicense or other agreement pursuant to which
Target has been or may be assigned or authorized to use (A) any third party
Intellectual Property or (B) any Target Intellectual Property (in both
cases, other than off the shelf software products used in its business
under various "shrink wrap" licenses);
(m) any agreement pursuant to which Target has deposited or is
required to deposit with an escrow holder or any other person or entity,
all or part of the source code (or any algorithm or documentation contained
in or relating to any source code) of any Target Intellectual Property
("Source Materials"); and
(n) any agreement to indemnify, hold harmless or defend any other
person with respect to any assertion of personal injury, damage to property
or Intellectual Property infringement, misappropriation or violation or
warranting the lack thereof, other than indemnification provisions
contained in customary purchase orders/purchase agreements/product licenses
arising in the ordinary course of business.
2.27 No Breach of Material Contracts. The Target has materially performed
all of the obligations required to be performed by it and is entitled to all
benefits under, and is not alleged to be in default in respect of any Material
Contract. Each of the Material Contracts is in full force and effect, unamended,
and there exists no default or event of default or event, occurrence, condition
or act, with respect to Target or to Target's knowledge with respect to the
other contracting party, or otherwise that, with or without the giving of
notice, the lapse of the time or the happening of any other event or conditions,
could reasonably be expected to (A) become a default or event of default under
any Material Contract, which default or event of default could reasonably be
expected to have a Material Adverse Effect on Target or (B) result in the loss
or expiration of any material right or option by Target (or the gain thereof by
any third party) under any Material Contract or (C) result in the release,
disclosure or delivery to any third party of any part of the Source Materials
(as defined in Section 2.26(m)). True, correct and complete copies of all
Material Contracts have been delivered to the Acquiror.
2.28 Third-Party Consents. Schedule 2.28 lists all contracts that require
a novation or consent to assignment, as the case may be, prior to the Effective
Time so that Acquiror shall be made a party in place of
A-20
216
Target or as assignee (the "Contracts Requiring Novation or Consent to
Assignment"). Such list is complete and accurate.
2.29 Registration Statement; Proxy Statement/Prospectus. The written
information supplied by Target expressly for the purpose of inclusion in the
registration statement (the "Registration Statement") on Form S-4 (or such other
or successor form as shall be appropriate) pursuant to which the issuance of the
shares of Acquiror Common Stock to be issued in the Merger will be registered
with the Securities and Exchange Commission (the "SEC") shall not at the time
the Registration Statement (including any amendments or supplements thereto) is
declared effective by the SEC contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein not misleading. The written information supplied by Target expressly for
the purpose of inclusion in the proxy statement/prospectus to be sent to the
stockholders of Target in connection with the meetings of Target's stockholders
(the "Target Stockholders Meeting") and Acquiror's stockholders (the "Acquiror
Stockholders Meeting") to be held in connection with the Merger (such proxy
statement/prospectus as amended or supplemented is referred to herein as the
"Proxy Statement") shall not, on the date the Proxy Statement is first mailed to
Target's stockholders and Acquiror stockholders, at the time of the Target
Stockholders Meeting and Acquiror Stockholder Meeting and at the Effective Time,
contain any untrue statement of a material fact, or omit to state any material
fact necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. If at any time prior
to the Effective Time any event or information should be discovered by Target
which should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, Target shall promptly inform Acquiror.
Notwithstanding the foregoing, Target makes no representation, warranty or
covenant with respect to any information supplied by Acquiror that is contained
in any of the foregoing documents.
2.30 Minute Books. The minute books of Target made available to Acquiror
contain a complete and accurate summary of all meetings of directors and
stockholders or actions by written consent since the time of incorporation of
Target through the date of this Agreement, and reflect all transactions referred
to in such minutes accurately in all material respects.
2.31 Complete Copies of Materials. Target has delivered or made available
true and complete copies of each document which has been requested by Acquiror
or its counsel in connection with their legal and accounting review of Target.
2.32 Representations Complete. None of the representations or warranties
made by Target herein or in any Schedule hereto, including the Target Disclosure
Schedule, or certificate furnished by Target pursuant to this Agreement, when
all such documents are read together in their entirety, contains or will contain
at the Effective Time any untrue statement of a material fact, or omits or will
omit at the Effective Time to state any material fact necessary in order to make
the statements contained herein or therein, in the light of the circumstances
under which made, not misleading.
ARTICLE II-A
REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL STOCKHOLDERS
In addition to the joint and several representations made in Article II
hereof, each of the Principal Stockholders hereby represents and warrants,
severally and not jointly, that such Principal Stockholder has all requisite
power and authority to enter into each Transaction Document to which it is a
party and to consummate the transactions contemplated hereby and thereby, and
each of the Transaction Documents constitutes the valid and legally binding
obligation of such Principal Stockholder, enforceable in accordance with its
terms.
A-21
217
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB
Acquiror and Merger Sub, jointly and severally, represent and warrant to
Target that the statements contained in this Article III are true and correct,
except as set forth in the disclosure schedule delivered by Acquiror to Target
prior to the execution and delivery of this Agreement (the "Acquiror Disclosure
Schedule"). The Acquiror Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
III, and the disclosure in any paragraph shall qualify only the corresponding
paragraph in this Article III. Any reference in this Article III to an agreement
being "enforceable" shall be deemed to be qualified to the extent such
enforceability is subject to (i) laws of general application relating to
bankruptcy, insolvency, moratorium and the relief of debtors, and (ii) the
availability of specific performance, injunctive relief and other equitable
remedies.
3.1 Organization, Standing and Power. Each of Acquiror and its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization. Each of Acquiror
and its subsidiaries has the corporate power to own its properties and to carry
on its business as now being conducted and as proposed to be conducted and is
duly qualified to do business and is in good standing in each jurisdiction in
which the failure to be so qualified and in good standing would have a Material
Adverse Effect on Acquiror. Acquiror has delivered a true and correct copy of
the Certificate of Incorporation and Bylaws or other charter documents, as
applicable, of Acquiror and its subsidiaries, each as amended to date, to
Target. Neither Acquiror nor Merger Sub (or any other subsidiary) is in
violation of any of the provisions of its Certificate of Incorporation or Bylaws
or equivalent organizational documents. Acquiror is the owner of all outstanding
shares of capital stock of each of its subsidiaries and all such shares are duly
authorized, validly issued, fully paid and nonassessable. All of the outstanding
shares of capital stock of each such subsidiary are owned by Acquiror free and
clear of all liens, charges, claims or encumbrances or rights of others. There
are no outstanding subscriptions, options, warrants, puts, calls, rights,
exchangeable or convertible securities or other commitments or agreements of any
character relating to the issued or unissued capital stock or other securities
of any such subsidiary, or otherwise obligating Acquiror or any such subsidiary
to issue, transfer, sell, purchase, redeem or otherwise acquire any such
securities. Except as disclosed in the Acquiror SEC Documents (as defined in
Section 3.4), Acquiror does not directly or indirectly own any equity or similar
interest in, or any interest convertible or exchangeable or exercisable for, any
equity or similar interest in, any corporation, partnership, joint venture or
other business association or entity.
3.2 Capital Structure. The authorized capital stock of Acquiror consists
of 112,000,000 shares of Common Stock, $0.01 par value, and 48,000,000 shares of
Preferred Stock, $0.01 par value, of which there were issued and outstanding as
of the close of business on the date hereof, 28,043,394 shares of Common Stock
and no shares of Preferred Stock. There are no other outstanding shares of
capital stock or voting securities of Acquiror and no outstanding commitments to
issue any shares of capital stock or voting securities after the date of this
Agreement other than pursuant to the exercise of options issued under the 2000
Stock Incentive Plan (the "Acquiror Stock Option Plan") and as set forth below
in this Section 3.2. The authorized capital stock of Merger Sub consists of
1,000 shares of Common Stock, $0.001 par value, all of which are issued and
outstanding and are held by Acquiror. All outstanding shares of Acquiror and
Merger Sub have been duly authorized, validly issued, fully paid and are
nonassessable and free of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders thereof and are not subject
to preemptive rights, rights of first refusal or other similar rights created by
statute, the Certificate of Incorporation or Bylaws of Acquiror or Merger Sub or
any agreement to which Acquiror or Merger Sub is a party or by which it is
bound. As of the date hereof, Acquiror has reserved (i) 6,750,000 shares of
Common Stock for issuance to employees, directors and independent contractors
pursuant to the Acquiror Stock Option Plan, of which approximately 128,900
shares have been issued pursuant to option exercises, and approximately
6,621,100 shares are subject to outstanding, unexercised options, (ii) 688,772
shares of Common Stock pursuant to options granted outside the Acquiror Stock
Option Plan, and (iii) 807,797 shares of Common Stock for issuance to employees,
directors and independent consultants pending approval of an increase in the
shares available under the Acquiror Stock Option Plan. Other than as set forth
above and the commitment to issue shares of Common Stock pursuant to this
Agreement, there are no other options, warrants, calls, rights,
A-22
218
commitments or agreements of any character to which Acquiror or Merger Sub is a
party or by which either of them is bound obligating Acquiror or Merger Sub to
issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered,
sold, repurchased or redeemed, any shares of the capital stock of Acquiror or
Merger Sub or obligating Acquiror or Merger Sub to grant, extend or enter into
any such option, warrant, call, right, commitment or agreement. The shares of
Acquiror Common Stock to be issued pursuant to the Merger will be duly
authorized, validly issued, fully paid, and non-assessable, will not be subject
to any preemptive or other statutory right of stockholders, will be issued in
compliance with applicable U.S. Federal and state securities laws and will be
free of any liens or encumbrances other than any liens or encumbrances created
by or imposed upon the holders thereof. There are no contracts, commitments or
agreements relating to voting, registration, purchase or sale of Acquiror's
capital stock (i) between or among Acquiror and any of its stockholders or (ii)
to the best of Acquiror's knowledge, between or among any of Acquiror's
stockholders or between any of Acquiror's stockholders and any third party,
except for the stockholders delivering the Voting Agreements.
3.3 Authority.
(a) Each of Acquiror and Merger Sub has all requisite corporate power and
authority to enter into this Agreement and the other Transaction Documents and
to consummate the transactions contemplated hereby and thereby. The execution
and delivery of this Agreement and the other Transaction Documents and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action on the part of each of Acquiror and
Merger Sub, subject only to the approval of the Merger by Acquiror's
stockholders as contemplated by Section 6.1(a). This Agreement and the other
Transaction Documents have been duly executed and delivered by each of Acquiror
and Merger Sub and constitute the valid and binding obligations of each of
Acquiror and Merger Sub enforceable against Acquiror and Merger Sub in
accordance with their terms.
(b) The execution and delivery of this Agreement and the other Transaction
Documents do not, and the consummation of the transactions contemplated hereby
and thereby will not, conflict with, or result in any violation of, or default
under (with or without notice or lapse of time, or both), or give rise to a
right of termination, cancellation or acceleration of any obligation or loss of
a benefit under (i) any provision of the Certificate of Incorporation or Bylaws
of Acquiror or any of its subsidiaries, as amended, or (ii) any material
agreement contained as an exhibit to any Acquiror SEC Documents (as defined) or
any instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Acquiror or any of its
subsidiaries or their properties or assets.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity, is required by or with
respect to Acquiror or any of its subsidiaries in connection with the execution
and delivery of this Agreement or the other Transaction Documents by Acquiror or
the consummation by Acquiror of the transactions contemplated hereby or thereby,
except for (i) the filing of the Agreement of Merger, together with the required
officers' certificates, as provided in Section 1.2, (ii) the filing of a
registration statement on Form S-4 or other applicable form, (iii) the filing of
a Form 8-K with the SEC and National Association of Securities Dealers ("NASD")
within 15 days after the Closing Date, (iv) any filings as may be required under
applicable state securities laws and the securities laws of any foreign country,
(v) such filings as may be required under HSR, (vi) the filing with the Nasdaq
National Market of a Notification Form for Listing of Additional Shares, and the
filing with the European Association of Securities Dealers Automated Quotation
("EASDAQ") of a Notification Form for Request for Admission to Trading on EASDAQ
of Additional Financial Instruments, with respect to the shares of Acquiror
Common Stock issuable upon conversion of the Target Capital Stock in the Merger
and upon exercise of the options under the Target Stock Option Plan assumed by
Acquiror, and (vii) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not have a Material Adverse
Effect on Acquiror and would not prevent, materially alter or delay any of the
transactions contemplated by this Agreement.
3.4 SEC Documents; Financial Statements. Acquiror has furnished to Target
a true and complete copy of each statement, report, registration statement (with
the prospectus in the form filed pursuant to Rule 424(b) of the Securities Act
of 1933, as amended (the "Securities Act")), definitive proxy statement,
A-23
219
and other filing filed with the SEC by Acquiror since its inception, and, prior
to the Effective Time, Acquiror will have furnished Target with true and
complete copies of any additional documents filed with the SEC by Acquiror prior
to the Effective Time (collectively, the "Acquiror SEC Documents"). In addition,
Acquiror has made available to Target all exhibits to the Acquiror SEC Documents
filed prior to the date hereof, and will promptly make available to Target all
exhibits to any additional Acquiror SEC Documents filed prior to the Effective
Time. All documents required to be filed as exhibits to the Target SEC Documents
have been so filed, and all material contracts so filed as exhibits are in full
force and effect, except those which have expired in accordance with their
terms, and neither Acquiror nor any of its subsidiaries is in default
thereunder. As of their respective filing dates, the Acquiror SEC Documents
complied in all material respects with the requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and the Securities Act,
and none of the Acquiror SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
in which they were made, not misleading, except to the extent corrected by a
subsequently filed Acquiror SEC Document. The financial statements of Acquiror,
including the notes thereto, included in the Acquiror SEC Documents (the
"Acquiror Financial Statements") were complete and correct in all material
respects as of their respective dates, complied as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto as of their respective dates,
and have been prepared in accordance with GAAP applied on a basis consistent
throughout the periods indicated and consistent with each other (except as may
be indicated in the notes thereto or, in the case of unaudited statements
included in Quarterly Reports on Form 10-Qs, as permitted by Form 10-Q). The
Acquiror Financial Statements fairly present the consolidated financial
condition and operating results of Acquiror and its subsidiaries at the dates
and during the periods indicated therein (subject, in the case of unaudited
statements, to normal, recurring year-end adjustments).
3.5 Absence of Certain Changes. Since June 30, 2000 (the "Acquiror Balance
Sheet Date"), Acquiror has conducted its business in the ordinary course
consistent with past practice and there has not occurred: (i) any change, event
or condition (whether or not covered by insurance) that has resulted in, or
might reasonably be expected to result in, a Material Adverse Effect on
Acquiror; (ii) any acquisition, sale or transfer of any material asset of
Acquiror; (iii) any change in accounting methods or practices (including any
change in depreciation or amortization policies or rates) by Acquiror or any
revaluation by Acquiror of any of its assets; (iv) any declaration, setting
aside, or payment of a dividend or other distribution with respect to the shares
of Acquiror, or any direct or indirect redemption, purchase or other acquisition
by Acquiror of any of such shares of capital stock; (v) any material contract
entered into by Acquiror, other than in the ordinary course of business and as
provided to Target, or any material amendment or termination of, or default
under, any material contract to which Acquiror is a party or by which it is
bound except in the ordinary course of business; (vi) any amendment or change to
the Certificate of Incorporation or Bylaws of Acquiror; (vii) any increase or
modification of the compensation or benefits payable or to become payable by
Acquiror to any of its directors, employees or consultants; (viii) capital
expenditures or capital commitments by Acquiror exceeding $25,000 individually
or $200,000 in the aggregate; (ix) destruction of, damage to or loss of any
material assets, business or customer of Acquiror; or (x) any agreement by
Acquiror to do any of the things described in the preceding clauses (i) through
(ix).
3.6 Litigation. There is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the knowledge of Acquiror or any of its
subsidiaries, threatened (including allegations that could form the basis for
such future actions) against Acquiror or any of its subsidiaries or any of their
respective properties or any of their respective officers or directors (in their
capacities as such) that, individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect on Acquiror. There is no judgment,
decree or order against Acquiror or any of its subsidiaries or, to the knowledge
of Acquiror or any of its subsidiaries, any of their respective directors or
officers (in their capacities as such) that could prevent, enjoin, or materially
alter or delay any of the transactions contemplated by this Agreement, or that
could reasonably be expected to have a Material Adverse Effect on Acquiror.
Acquiror does not have any plans to initiate any litigation, arbitration or
other proceeding against any third party, other than for routine collection on
bills.
A-24
220
3.7 Registration Statement. The written information supplied by Acquiror
and Merger Sub expressly for the purpose of inclusion in the Registration
Statement shall not, at the time the Registration Statement (including any
amendments or supplements thereto) is declared effective by the SEC, contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading. The written information supplied by
Acquiror expressly for the purpose of inclusion in the Proxy Statement shall
not, on the date the Proxy Statement is first mailed to Target's stockholders
and Acquiror stockholders, at the time of the Target Stockholders Meeting and
Acquiror Stockholder Meeting and at the Effective Time, contain any untrue
statement of a material fact, or omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading. If at any time prior to the Effective Time
any event or information should be discovered by Acquiror which should be set
forth in an amendment to the Registration Statement or a supplement to the Proxy
Statement, Acquiror shall promptly inform Target. Notwithstanding the foregoing,
neither Acquiror nor Merger Sub make any representation, warranty or covenant
with respect to any information supplied by Target that is contained in any of
the foregoing documents.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of Target and Acquiror. During the period from the
date of this Agreement and continuing until the earlier of the termination of
this Agreement or the Effective Time, Target and Acquiror each agree (except to
the extent expressly contemplated by this Agreement or as consented to in
writing by the other), to carry on its and its subsidiaries' business in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted. Each of Target and Acquiror further agrees to (i) pay and
to cause its subsidiaries to pay debts and Taxes when due subject to good faith
disputes over such debts or Taxes, (ii) subject to the other's consent to the
filing of material Tax Returns if applicable, to pay or perform other
obligations when due, and (iii) to use all reasonable efforts consistent with
past practice and policies to preserve intact its and its subsidiaries' present
business organizations, keep available the services of its and its subsidiaries'
present officers and key employees and preserve its and its subsidiaries'
relationships with customers, suppliers, distributors, licensors, licensees, and
others having business dealings with it or its subsidiaries, to the end that its
and its subsidiaries' goodwill and ongoing businesses shall be unimpaired at the
Effective Time. Target and Acquiror agree to promptly notify the other of any
event or occurrence not in the ordinary course of its or its subsidiaries'
business, and of any event which could have a Material Adverse Effect on it.
Without limiting the foregoing, except as expressly contemplated by this
Agreement, neither Target nor Acquiror shall do, cause or permit any of the
following, or allow, cause or permit any of its subsidiaries to do, cause or
permit any of the following, without the prior written consent of the other:
(a) Charter Documents. Cause or permit any amendments to its
Certificate or Articles of Incorporation or Bylaws;
(b) Dividends; Changes in Capital Stock. Declare or pay any dividends
on or make any other distributions (whether in cash, stock or property) in
respect of any of its capital stock, or split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, or repurchase or otherwise acquire, directly or indirectly,
any shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of
shares in connection with any termination of service to it or its
subsidiaries;
(c) Other. Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) and (b) above, or any action which
would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not
to perform its covenants hereunder.
A-25
221
4.2 Conduct of Business of Target. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, except as expressly contemplated by this Agreement,
Target shall not do, cause or permit any of the following, or allow, cause or
permit any of its subsidiaries to do, cause or permit any of the following,
without the prior written consent of Acquiror:
(a) Material Contracts. Enter into any material contract, agreement,
license or commitment, or violate, amend or otherwise modify or waive any
of the terms of any of its material contracts, agreements or licenses other
than in the ordinary course of business consistent with past practice;
(b) Stock Option Plans, etc. Accelerate, amend or change the period
of exercisability or vesting of options or other rights granted under its
stock plans or authorize cash payments in exchange for any options or other
rights granted under any of such plans;
(c) Issuance of Securities. Issue, deliver or sell or authorize or
propose the issuance, delivery or sale of, or purchase or propose the
purchase of, any shares of its capital stock or securities convertible
into, or subscriptions, rights, warrants or options to acquire, or other
agreements or commitments of any character obligating it to issue any such
shares or other convertible securities, other than the issuance of shares
of Target Common Stock pursuant to the exercise of stock options, warrants
or other rights therefor outstanding as of the date of this Agreement;
(d) Intellectual Property. Transfer to or license any person or
entity or otherwise extend, amend or modify any rights to its Intellectual
Property other than the grant of non-exclusive licenses in the ordinary
course of business consistent with past practice;
(e) Exclusive Rights. Enter into or amend any agreements pursuant to
which any other party is granted exclusive marketing, manufacturing or
other exclusive rights of any type or scope with respect to any of its
products or technology;
(f) Dispositions. Sell, lease, license or otherwise dispose of or
encumber any of its properties or assets which are material, individually
or in the aggregate, to its and its subsidiaries' business, taken as a
whole;
(g) Indebtedness. Incur or commit to incur any indebtedness for
borrowed money or guarantee any such indebtedness or issue or sell any debt
securities or guarantee any debt securities of others;
(h) Leases. Enter into any operating lease requiring payments in
excess of $50,000;
(i) Payment of Obligations. Pay, discharge or satisfy in an amount in
excess of $50,000 in any one case or $150,000 in the aggregate, any claim,
liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) arising other than in the ordinary course of
business, other than the payment, discharge or satisfaction of liabilities
reflected or reserved against in the applicable Financial Statements;
provided however that in the event that any claims, liabilities or
obligations arising from the matters set forth on Schedule 2.8 are settled
after the date hereof in consideration for a payment in cash or the
issuance of securities by Target in accordance with the provisions of this
Section 4.2, then such payments or issuances shall be deemed Damages (as
defined in Section 8.2) for purposes of Article VIII hereof. For purposes
of any such determination, the value of any securities issued shall be the
fair market value of such securities on the Closing Date;
(j) Capital Expenditures. Incur or commit to incur any capital
expenditures in excess of $50,000 in the aggregate;
(k) Insurance. Materially reduce the amount of any insurance coverage
provided by existing insurance policies;
(l) Termination or Waiver. Terminate or waive any right of
substantial value, other than in the ordinary course of business;
(m) Employee Benefits; Severance. Take any of the following actions:
(i) increase or agree to increase the compensation payable or to become
payable to its officers or employees, except for increases
A-26
222
in salary or wages of non-officer employees in the ordinary course of
business and in accordance with past practices, (ii) grant any additional
severance or termination pay to, or enter into any employment or severance
agreements with, any officer or employee, (iii) enter into any collective
bargaining agreement, or (iv) establish, adopt, enter into or amend in any
material respect any bonus, profit sharing, thrift, compensation, stock
option, restricted stock, pension, retirement, deferred compensation,
employment, termination, severance or other plan, trust, fund, policy or
arrangement for the benefit of any directors, officers or employees;
(n) Lawsuits. Commence a lawsuit or arbitration proceeding other than
(i) for the routine collection of bills, or (ii) for a breach of this
Agreement;
(o) Acquisitions. Acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to its and its subsidiaries' business,
taken as a whole;
(p) Taxes. Make any material Tax election other than in the ordinary
course of business and consistent with past practice, change any material
Tax election, adopt any Tax accounting method other than in the ordinary
course of business and consistent with past practice, change any Tax
accounting method, file any Tax return (other than any estimated tax
returns, immaterial information returns, payroll tax returns or sales tax
returns) or any amendment to a Tax return, enter into any closing
agreement, settle any Tax claim or assessment or consent to any Tax claim
or assessment provided that Acquiror shall not unreasonably withhold or
delay approval of any of the foregoing actions;
(q) Revaluation. Revalue any of its assets, including without
limitation writing down the value of inventory or writing off notes or
accounts receivable other than in the ordinary course of business; or
(r) Other. Take or agree in writing or otherwise to take, any of the
actions described in Sections 4.2(a) through (q) above, or any action which
would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not
to perform its covenants hereunder.
4.3 Notices. Each of Acquiror and Target shall give all notices and other
information required to be given to its employees, any collective bargaining
unit representing any group of its employees, and any applicable government
authority under the National Labor Relations Act, the Internal Revenue Code, the
Consolidated Omnibus Budget Reconciliation Act, and other applicable law in
connection with the transactions provided for in this Agreement.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 No Solicitation.
(a) From and after the date of this Agreement until the earlier of the
Effective Time or the termination of this Agreement, Target shall not, directly
or indirectly, through any officer, director, employee, stockholder,
representative or agent, (i) solicit, initiate, or encourage any inquiries or
proposals that constitute, or could reasonably be expected to lead to, a
proposal or offer for a merger, consolidation, business combination, sale of all
or substantially all of the assets, sale of shares of capital stock (including
without limitation by way of a tender offer) or similar transactions involving
Target, other than the transactions contemplated by this Agreement (any of the
foregoing inquiries or proposals being referred to in this Agreement as a
"Takeover Proposal"), (ii) engage in negotiations or discussions concerning, or
provide any non-public information to any person or entity relating to, any
Takeover Proposal, or (iii) agree to, approve or recommend any Takeover
Proposal.
A-27
223
(b) Target shall notify Acquiror immediately (and no later than 24 hours)
after receipt by Target (or its advisors or agents) of any Takeover Proposal or
any request for information in connection with a Takeover Proposal or for access
to the properties, books or records of Target by any person or entity that
informs Target that it is considering making, or has made, a Takeover Proposal
prior to the earlier of the Effective Time or the termination of this Agreement.
Such notice shall be made orally and in writing and shall indicate in reasonable
detail the identity of the offeror and the terms and conditions of such
proposal, inquiry or contact.
(c) Acquiror shall notify Target no later than two (2) days prior to the
consummation of any acquisition of a third party involving consideration in
excess of $5,000,000. Such notice shall be made orally and in writing and shall
indicate in reasonable detail the identity of the target and the terms and
conditions of such acquisition.
5.2 Proxy Statement/Prospectus; Registration Statement. As promptly as
practicable after the execution of this Agreement, Target and Acquiror shall
prepare proxy materials relating to the approval of the Merger and the
transactions contemplated hereby by the stockholders of Target and Acquiror and,
as promptly as practicable, Acquiror shall file with the SEC a Registration
Statement on Form S-4 (or such other or successor form as shall be appropriate),
which complies in form with applicable SEC requirements and shall use reasonable
best efforts to cause the Registration Statement to become and remain effective
as soon thereafter as practicable. The Proxy Statement shall include the
recommendation of the Board of Directors of Acquiror and Target in favor of the
Merger.
5.3 Stockholder Meetings or Consent Solicitations. Target and Acquiror
shall promptly after the date hereof take all actions necessary to either (i)
call a meeting of their respective stockholders to be held for the purpose of
voting upon this Agreement and the Merger or (ii) commence a consent
solicitation to obtain such approvals on or prior to November 30, 2000 or as
soon thereafter as is practicable and in any event within 10 days of the date on
which the Registration Statement is declared effective. Target and Acquiror
will, through their respective Boards of Directors, recommend to their
stockholders approval of such matters as soon as practicable after the date
hereof. Target and Acquiror shall use all reasonable efforts to solicit from
their stockholders proxies or consents in favor of such matters.
5.4 Access to Information.
(a) Each of Acquiror and Target shall afford the other party and its
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (i) all of its
and its subsidiaries' properties, books, contracts, commitments and records, and
(ii) all other information concerning its business, properties and personnel as
the other may reasonably request. Each of Acquiror and Target agrees to provide
to the other party and its accountants, counsel and other representatives copies
of internal financial statements promptly upon request.
(b) Subject to compliance with applicable law, from the date hereof until
the Effective Time, each of Acquiror and Target shall confer on a regular and
frequent basis with one or more representatives of the other party to report
operational matters of materiality and the general status of ongoing operations.
(c) No information or knowledge obtained in any investigation pursuant to
this Section 5.4 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger.
5.5 Confidentiality. The parties acknowledge that Acquiror and Target have
previously executed a non-disclosure agreement dated July 14, 2000 (the
"Confidentiality Agreement"), which Confidentiality Agreement shall continue in
full force and effect in accordance with its terms.
5.6 Public Disclosure. Unless otherwise permitted by this Agreement,
Acquiror and Target shall consult with each other before issuing any press
release or otherwise making any public statement or making any other public (or
non-confidential) disclosure (whether or not in response to an inquiry)
regarding the terms of this Agreement and the transactions contemplated hereby,
and neither shall issue any such press release or make any such statement or
disclosure without the prior approval of the other (which approval shall not be
unreasonably withheld), except as may be required by Acquiror to comply with the
rules and
A-28
224
regulations of the SEC or the Belgium Banking and Finance Commission or any
obligations pursuant to any listing agreement with any national securities
exchange, with the NASD or with EASDAQ.
5.7 Consents; Cooperation.
(a) Each of Acquiror and Target shall promptly apply for or otherwise seek,
and use its reasonable best efforts to obtain, all consents and approvals
required to be obtained by it for the consummation of the Merger, including
those required under HSR, and shall use its reasonable best efforts to obtain
all necessary consents, waivers and approvals under any of its material
contracts in connection with the Merger for the assignment thereof or otherwise.
The parties hereto will consult and cooperate with one another, and consider in
good faith the views of one another, in connection with any analyses,
appearances, presentations, memoranda, briefs, arguments, opinions and proposals
made or submitted by or on behalf of any party hereto in connection with
proceedings under or relating to HSR or any other federal or state antitrust or
fair trade law.
(b) Each of Acquiror and Target shall use all commercially reasonable
efforts to resolve such objections, if any, as may be asserted by any
Governmental Entity with respect to the transactions contemplated by this
Agreement under the HSR, the Sherman Act, as amended, the Clayton Act, as
amended, the Federal Trade Commission Act, as amended, and any other Federal,
state or foreign statutes, rules, regulations, orders or decrees that are
designed to prohibit, restrict or regulate actions having the purpose or effect
of monopolization or restraint of trade (collectively, "Antitrust Laws"). In
connection therewith, if any administrative or judicial action or proceeding is
instituted (or threatened to be instituted) challenging any transaction
contemplated by this Agreement as violative of any Antitrust Law, each of
Acquiror and Target shall cooperate and use all commercially reasonable efforts
vigorously to contest and resist any such action or proceeding and to have
vacated, lifted, reversed, or overturned any decree, judgment, injunction or
other order, whether temporary, preliminary or permanent (each an "Order"), that
is in effect and that prohibits, prevents, or restricts consummation of the
Merger or any such other transactions, unless by mutual agreement Acquiror and
Target decide that litigation is not in their respective best interests.
Notwithstanding the provisions of the immediately preceding sentence, it is
expressly understood and agreed that neither Target nor Acquiror shall have any
obligation to litigate or contest any administrative or judicial action or
proceeding or any Order beyond the earlier of (i) November 30, 2000 or (ii) the
date of a ruling preliminarily enjoining the Merger issued by a court of
competent jurisdiction. Each of Acquiror and Target shall use all commercially
reasonable efforts to take such action as may be required to cause the
expiration of the notice periods under the HSR or other Antitrust Laws with
respect to such transactions as promptly as possible after the execution of this
Agreement.
(c) Notwithstanding the foregoing, neither Acquiror nor Target shall be
required to agree, as a condition to any approval, to divest itself of or hold
separate any subsidiary, division or business unit which is material to the
business of such party and its subsidiaries, taken as a whole, or the
divestiture or holding separate of which would be reasonably likely to have a
Material Adverse Effect on (A) the business, properties, assets, liabilities,
financial condition or results of operations of such party and its subsidiaries,
taken as a whole or (B) the benefits intended to be derived as a result of the
Merger.
5.8 Update Disclosure; Breaches. From and after the date of this Agreement
until the Effective Time, each party hereto shall promptly notify the other
party, by written update to its Disclosure Schedule, of (i) the occurrence or
non-occurrence of any event which would be likely to cause any condition to the
obligations of any party to effect the Merger and the other transactions
contemplated by this Agreement not to be satisfied, or (ii) the failure of
Target or Acquiror, as the case may be, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it pursuant to this
Agreement which would be likely to result in any condition to the obligations of
any party to effect the Merger and the other transactions contemplated by this
Agreement not to be satisfied. The delivery of any notice pursuant to this
Section 5.8 shall not cure any breach of any representation or warranty
requiring disclosure of such matter prior to the date of this Agreement or
otherwise limit or affect the remedies available hereunder to the party
receiving such notice, provided that such party, within ten days after receipt
of such notice, advises the other party of its objection to the matter disclosed
in such notice and the nature of such objection.
A-29
225
5.9 Stockholder Agreements. Upon the execution of this Agreement, Target
will provide Acquiror with a list of those persons who are, in Target's
reasonable judgment, "affiliates" of Target, within the meaning of Rule 145
under the Securities Act ("Rule 145"). Each such person who is an "affiliate" of
Target within the meaning of Rule 145 is referred to herein as an "Affiliate."
Target shall provide Acquiror such information and documents as Acquiror shall
reasonably request for purposes of reviewing such list and shall notify Acquiror
in writing regarding any change in the identity of its Affiliates prior to the
Closing Date. Target shall use its best efforts to deliver or cause to be
delivered to Acquiror as soon as practicable after the date hereof from each of
the Affiliates of Target, an executed agreement, in the form attached hereto as
Exhibit D ("Target Affiliate Agreement"). Acquiror shall be entitled to place
appropriate legends on the certificates evidencing any Acquiror Common Stock to
be received by Affiliates of Target pursuant to the terms of this Agreement, and
to issue appropriate stop transfer instructions to the transfer agent for the
Acquiror Common Stock, consistent with the terms of the Target Affiliate
Agreement.
5.10 Indemnification.
(a) From and after the Effective Time, Acquiror and the Surviving
Corporation jointly and severally shall indemnify, defend and hold harmless each
person who is now, or has been at any time prior to the date of this Agreement
or who becomes prior to the Effective Time, an officer, director or employee of
Target or any of its subsidiaries (the "Indemnified Parties") in respect of acts
or omissions occurring on or prior to the Effective Time to the extent permitted
under applicable law and as provided under Target's Certificate of
Incorporation, Bylaws and indemnification agreements in effect on the date
hereof.
(b) If Acquiror or the Surviving Corporation or any of their respective
successors or assigns (i) consolidates with or merges into any other person or
entity and shall not be the continuing or surviving person of such consolidation
or merger or (ii) transfers all or substantially all of its properties and
assets to any person or entity, then and in each such case, proper provision
shall be made so that such successors or assigns of Acquiror or the Surviving
Corporation, as the case may be, shall assume the obligations set forth in this
Section 5.10.
5.11 Voting Agreements. Target shall use its best efforts to cause the
Principal Stockholders, its directors and officers and the other stockholders
listed on Schedule 5.11.1 to, and Acquiror shall use its best efforts to cause
its officers and directors and stockholders listed on Schedule 5.11.2 hereto to,
execute and deliver to Acquiror and Target a Voting Agreement substantially in
the form of Exhibit B attached hereto concurrently with the execution of this
Agreement.
5.12 Legal Requirements. Each of Acquiror and Target will, and will cause
their respective subsidiaries to, take all reasonable actions necessary to
comply promptly with all legal requirements which may be imposed on them with
respect to the consummation of the transactions contemplated by this Agreement
and will promptly cooperate with and furnish information to any party hereto
necessary in connection with any such requirements imposed upon such other party
in connection with the consummation of the transactions contemplated by this
Agreement and will take all reasonable actions necessary to obtain (and will
cooperate with the other parties hereto in obtaining) any consent, approval,
order or authorization of, or any registration, declaration or filing with, any
Governmental Entity or other person, required to be obtained or made in
connection with the taking of any action contemplated by this Agreement.
5.13 Tax-Free Reorganization. Neither Target, Acquiror nor Merger Sub
will, either before or after consummation of the Merger, take any action which,
to the knowledge of such party, would cause the Merger to fail to constitute a
"reorganization" within the meaning of Code Section 368.
5.14 Blue Sky Laws. Acquiror shall take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the Acquiror Common Stock in connection with the
Merger. Target shall use its reasonable best efforts to assist Acquiror as may
be necessary to comply with the securities and blue sky laws of all
jurisdictions which are applicable in connection with the issuance of Acquiror
Common Stock in connection with the Merger.
A-30
226
5.15 Stock Options.
(a) At the Effective Time, the Target Stock Option Plan and each Target
Option, whether vested or unvested, shall be assumed by Acquiror, and Target's
repurchase right with respect to any unvested option shares granted under the
Target Stock Option Plan shall be assigned to Acquiror. On the Closing Date,
Target shall deliver to Acquiror an updated Option Schedule current as of such
date. Each Target Option so assumed by Acquiror under this Agreement shall
continue to have, and be subject to, the same terms and conditions set forth in
the Target Stock Option Plan immediately prior to the Effective Time, except
that (i) such Target Option shall be exercisable for that number of whole shares
of Acquiror Common Stock equal to the product of the number of shares of Target
Common Stock that were issuable upon exercise of such Target Option immediately
prior to the Effective Time multiplied by the Exchange Ratio and rounded down to
the nearest whole number of shares of Acquiror Common Stock, (ii) the per share
exercise price for the shares of Acquiror Common Stock issuable upon exercise of
such Target Option shall be equal to the quotient determined by dividing the
exercise price per share of Target Common Stock at which such option was
exercisable immediately prior to the Effective Time by the Exchange Ratio,
rounded down to the nearest whole cent, and (iii) immediately prior to the
Effective Time, an aggregate of 1,277,114 unvested Target Options subject to
certain trigger letters will vest automatically in accordance with such trigger
letters. It is the intention of the parties that the Target Options so assumed
by Acquiror qualify following the Effective Time as incentive stock options as
defined in Section 422 of the Code to the extent such options qualified as
incentive stock options prior to the Effective Time. Within 45 business days
after the Effective Time, Acquiror will issue to each person who, immediately
prior to the Effective Time was a holder of a Target Option a document
evidencing the foregoing assumption of such Target Option by Acquiror.
(b) Acquiror shall comply with the terms of the Target Stock Option Plan
and ensure, to the extent required by, and subject to the provisions of, such
Target Stock Option Plan, that Target Options which qualified as incentive stock
options prior the Effective Time continue to quality as incentive stock options
after the Effective Time.
(c) Acquiror shall take all corporate action necessary to reserve and make
available for issuance a sufficient number of shares of Acquiror Common Stock
for delivery under Target Options assumed in accordance with this Section 5.15.
Promptly after the Effective Time, Acquiror shall file a registration statement
on Form S-8 (or any successor or other appropriate forms) with respect to the
shares of Acquiror Common Stock subject to such Target Options and shall use its
best efforts to maintain the effectiveness of such registration statement or
registration statements (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as such Target Options remain
outstanding.
5.16 Escrow Agreement. On or before the Effective Time, Acquiror, Target,
the Escrow Agent and the Stockholders' Agent (as defined in Article VIII hereto)
will execute the Escrow Agreement contemplated by Article VIII in the form
attached hereto as Exhibit C.
5.17 Listing of Additional Shares. Prior to the Effective Time, Acquiror
shall file with Nasdaq a Notification Form for Listing of Additional Shares with
respect to the Total Acquiror Shares and any additional shares of Acquiror
Common Stock required to be reserved for issuance upon exercise of Target
Options assumed by Acquiror and shall use reasonable best efforts to get such
shares accepted for quotation.
5.18 Additional Agreements; Reasonable Best Efforts. Each of the parties
agrees to use their reasonable best efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper or advisable
under applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including cooperating fully with
the other party, including by provision of information. In case at any time
after the Effective Time any further action is necessary or desirable to carry
out the purposes of this Agreement or to vest the Surviving Corporation with
full title to all properties, assets, rights, approvals, immunities and
franchises of either of Target or Acquiror, the proper officers and directors of
each party to this Agreement shall take all such necessary action.
5.19 Employee Benefits. Acquiror shall make offers of employment to those
employees of Target as of the Closing Date it shall so determine in its
discretion after consultation with Target. Acquiror shall take such
A-31
227
reasonable actions, to the extent permitted by Acquiror's benefits program, as
are necessary to allow eligible employees of Target to participate in the
benefit programs of Acquiror, or alternative benefits programs in the aggregate
substantially comparable to those applicable to employees of Acquiror on similar
terms, as soon as practicable after the Effective Time of the Merger. For
purposes of satisfying the terms and conditions of such programs, to the extent
permitted by Acquiror's benefit programs, Acquiror shall give full credit for
eligibility, or vesting for each participant's period of service with Target.
Notwithstanding the foregoing, Acquiror's undertakings described in this Section
5.19 are subject to the terms and conditions of any applicable insurance
policies and requirements of relevant insurers. Target shall, immediately prior
to and contingent upon the Closing Date, have terminated Target's 401(k) Plan
(the "401(k) Plan") and no further contributions shall be made to the 401(k)
Plan. Target shall provide to Acquiror (i) resolutions by the Target Board
authorizing the termination and (ii) an executed amendment to the 401(k) Plan,
which in Acquiror's reasonable judgment is sufficient to assure compliance with
all applicable requirements of the Code and regulations thereunder.
5.20 Lock-Up Agreements. Prior to the Effective Time, each Target
stockholder, Target optionholder that has been granted 10,000 or more Target
Options, holder of other Target securities convertible into Target Capital Stock
and each officer and director of Target shall execute and deliver a lock-up
agreement to Acquiror in the form attached hereto as Exhibit H. In addition,
Target shall use its reasonable best efforts to obtain prior to the Effective
Time executed lock-up agreements from all optionholders that have been granted
less than 10,000 Target Options.
5.21 Board Composition. Acquiror shall, in connection with the obtaining
of the requisite stockholder vote or consent to approve the Merger, take all
reasonable actions necessary to increase the size of its Board of Directors to
ten (10) members and remove one of the existing independent directors from the
Board. Target will have the right to nominate three (3) members of the Board at
the time of such increase, at least one of which shall be independent, as
defined by the rules and regulations of Nasdaq.
5.22 Registration Rights. In the event that at any time after the
Effective Time any affiliate of Acquiror shall be granted the right to require
the Acquiror to register shares of such affiliate's Acquiror Common Stock,
Acquiror shall grant similar registration rights to any affiliate of Target that
after the Effective Time shall be an affiliate of Acquiror or be subject to Rule
145 of the Securities Act. For purposes herein, "affiliate" shall be defined in
accordance with the Securities Act and the rules and regulations thereunder.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to consummate and effect
this Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by agreement of all the
parties hereto:
(a) Stockholder Approval. This Agreement and the Merger shall have
been approved and adopted by the requisite vote of Target Capital Stock and
Acquiror Common Stock as of the record date set for the Target Stockholders
Meeting and Acquiror Stockholders Meeting, as applicable, or solicitation
of stockholder consents, and any agreements or arrangements that may result
in the payment of any amount that would not be deductible by reason of
Section 280G of the Code shall have been approved by such number of
stockholders of Target as is required by the terms of Section
280G(b)(5)(B).
(b) No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint or prohibition preventing the consummation of the Merger shall be
in effect, nor shall any proceeding brought by an administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign, seeking any of the foregoing be pending; nor shall there be any
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Merger, which makes the consummation
of the Merger illegal. In the event an injunction or other
A-32
228
order shall have been issued, each party agrees to use its reasonable
diligent efforts to have such injunction or other order lifted.
(c) Governmental Approval. Acquiror and Target and their respective
subsidiaries shall have timely obtained from each Governmental Entity all
approvals, waivers and consents, if any, necessary for consummation of or
in connection with the Merger and the several transactions contemplated
hereby, including such approvals, waivers and consents as may be required
under the Securities Act, under state Blue Sky laws, and under HSR.
(d) Tax Opinion. Each of Target and Acquiror shall have received a
written opinion from their respective counsel to the effect that the Merger
will constitute a reorganization within the meaning of Section 368 of the
Code, which opinions shall be substantially identical in substance;
provided, however, that if counsel to either Target or Acquiror does not
render such opinion, this condition shall nonetheless be satisfied with
respect to such party if counsel to the other party renders such opinion to
such party. In preparing the Target and the Acquiror tax opinions, counsel
may rely on reasonable assumptions and may also rely on (and to the extent
reasonably required, the parties and Target's stockholders shall make)
reasonable representations related thereto.
(e) Listing of Additional Shares. The filing with the Nasdaq National
Market of a Notification Form for Listing of Additional Shares, and the
filing with EASDAQ of a Notification Form for Request for Admission to
Trading on EASDAQ of Additional Financial Instruments, with respect to the
shares of Acquiror Common Stock issuable upon conversion of the Target
Common Stock in the Merger and upon exercise of the options under the
Target Stock Option Plan assumed by Acquiror shall have been made and
accepted.
(f) Escrow Agreement. Acquiror, Target, Escrow Agent and the
Stockholder's Agent (as defined in Article VIII hereto) shall have entered
into an Escrow Agreement substantially in the form attached hereto as
Exhibit C.
(g) Registration Statement Effective. The SEC shall have declared the
Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose shall have been initiated or
threatened in writing by the SEC.
6.2 Additional Conditions to Obligations of Target. The obligations of
Target to consummate and effect this Agreement and the transactions contemplated
hereby shall be subject to the satisfaction at or prior to the Effective Time of
each of the following conditions, any of which may be waived, in writing, by
Target:
(a) Representations, Warranties and Covenants. Except as disclosed in
the Acquiror Disclosure Schedule, (i) the representations and warranties of
Acquiror and Merger Sub in this Agreement shall be true and correct in all
material respects (except for such representations and warranties that are
qualified by their terms by a reference to materiality which
representations and warranties as so qualified shall be true in all
respects) on and as of the Effective Time as though such representations
and warranties were made on and as of such time and (ii) Acquiror and
Merger Sub shall have performed and complied in all material respects with
all covenants, obligations and conditions of this Agreement required to be
performed and complied with by them as of the Effective Time.
(b) Certificate of Acquiror. Target shall have been provided with a
certificate executed on behalf of Acquiror by its chief executive officer
and chief financial officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by Acquiror and Merger
Sub under this Agreement are true and complete in all material respects
(except for such representations and warranties that are qualified by
their terms by a reference to materiality which representations and
warranties as so qualified shall be true in all respects) on and as of
the Effective Time as though such representations and warranties were
made on and as of such time; and
A-33
229
(ii) all covenants, obligations and conditions of this Agreement to
be performed by Acquiror and Merger Sub on or before such date have been
so performed in all material respects.
(c) Legal Opinion. Target and the Former Target Stockholders (as
defined in Article VIII) shall have received a legal opinion from
Acquiror's legal counsel substantially in the form attached as Exhibit E
hereto.
(d) No Material Adverse Changes. There shall not have occurred any
material adverse change in the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
operations, results of operations or prospects (a "Material Adverse
Change") of Acquiror and its subsidiaries, taken as a whole, except for
such as are directly or indirectly attributable to or arise out of general
market or industry conditions; provided, that, a decline in the market
price of the Acquiror Common Stock shall not be deemed a Material Adverse
Change absent any other occurrence or event that itself would be deemed a
Material Adverse Change.
(e) Employment and Non-Competition Agreements. Acquiror shall have
entered into Employment and Non-Competition Agreements with the employees
of Target set forth on Schedule 6.2(e) in the form attached hereto as
Exhibit F, and the Compensation Committee of Acquiror shall have approved
the options granted under such agreements.
(f) Third Party Consents. Target shall have been furnished with
evidence satisfactory to it of the consent or approval of those persons
whose consent or approval shall be required in connection with the Merger
under the material contracts of Acquiror filed as exhibits to the Acquiror
SEC Documents, if failure to obtain such consents or approvals would or
would reasonably be expected to have a Material Adverse Effect on Acquiror.
(g) Injunctions or Restraints on Merger and Conduct of Business. No
proceeding brought by any administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking to
prevent the consummation of the Merger shall be pending. In addition, no
temporary restraining order, preliminary or permanent injunction or other
order issued by any court of competent jurisdiction or other legal or
regulatory restraint provision limiting or restricting Acquiror's conduct
or operation of the business of Acquiror and its subsidiaries, following
the Merger shall be in effect, nor shall any proceeding brought by an
administrative agency or commission or other Governmental Entity, domestic
or foreign, seeking the foregoing be pending.
6.3 Additional Conditions to the Obligations of Acquiror and Merger
Sub. The obligations of Acquiror and Merger Sub to consummate and effect this
Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by Acquiror:
(a) Representations, Warranties and Covenants. Except as disclosed in
the Target Disclosure Schedule (i) the representations and warranties of
Target in this Agreement shall be true and correct in all material respects
(except for such representations and warranties that are qualified by their
terms by a reference to materiality which representations and warranties as
so qualified shall be true in all respects) on and as of the Effective Time
as though such representations and warranties were made on and as of such
time and (ii) Target shall have performed and complied in all material
respects with all covenants, obligations and conditions of this Agreement
required to be performed and complied with by it as of the Effective Time.
(b) Certificate of Target. Acquiror shall have been provided with a
certificate executed on behalf of Target by its chief executive officer and
chief financial officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by Target under this
Agreement are true and complete in all material respects (except for
such representations and warranties that are qualified by their terms by
a reference to materiality which representations and warranties as so
qualified shall
A-34
230
be true in all respects) on and as of the Effective Time as though such
representations and warranties were made on and as of such time; and
(ii) all covenants, obligations and conditions of this Agreement to
be performed by Target on or before such date have been so performed in
all material respects.
(c) Third Party Consents. Acquiror shall have been furnished with
evidence satisfactory to it of the consent or approval of those persons
whose consent or approval shall be required in connection with the Merger
under the contracts of Target set forth on Schedule 2.26 hereto, if failure
to obtain such consents or approvals would or would reasonably be expected
to have a Material Adverse Effect on Target.
(d) Injunctions or Restraints on Merger and Conduct of Business. No
proceeding brought by any administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking to
prevent the consummation of the Merger shall be pending. In addition, no
temporary restraining order, preliminary or permanent injunction or other
order issued by any court of competent jurisdiction or other legal or
regulatory restraint provision limiting or restricting Acquiror's conduct
or operation of the business of Target and its subsidiaries, following the
Merger shall be in effect, nor shall any proceeding brought by an
administrative agency or commission or other Governmental Entity, domestic
or foreign, seeking the foregoing be pending.
(e) Legal Opinion. Acquiror shall have received a legal opinion from
Target's legal counsel, in substantially the form attached hereto as
Exhibit G.
(f) No Material Adverse Changes. There shall not have occurred any
material adverse change in the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
operations, results of operations or prospects of Target and its
subsidiaries, taken as a whole, except for such as are directly or
indirectly attributable to or arise out of general market or industry
conditions.
(g) Affiliate Agreements. Acquiror shall have received from the
Affiliates of Target an executed Affiliate Agreement in substantially the
form attached hereto as Exhibit D.
(h) Conversion of Preferred Stock. All of Target's outstanding
Preferred Stock shall have been converted into Target Common Stock in
accordance with the Certificate of Incorporation of Target.
(i) Employment and Non-Competition Agreements. The employees of
Target set forth on Schedule 6.2(e) shall have entered into an Employment
and Non-Competition Agreement in the form attached hereto as Exhibit F.
(j) Lock-Up Agreements. The persons identified in the first sentence
of Section 5.20 shall have executed and delivered Lock-Up Agreements to
Acquiror as provided therein.
ARTICLE VII
TERMINATION, EXPENSES, AMENDMENT AND WAIVER
7.1 Termination. At any time prior to the Effective Time, whether before
or after approval of the matters presented in connection with the Merger by the
stockholders of Target or Acquiror, this Agreement may be terminated:
(a) by mutual consent duly authorized by the Boards of Directors of
Acquiror and Target;
(b) by either Acquiror or Target, if, without fault of the terminating
party, the Closing shall not have occurred on or before November 30, 2000
(provided, a later date may be agreed upon in writing by the parties
hereto, and provided further that the right to terminate this Agreement
under this Section 7.1(b) shall not be available to any party whose action
or failure to act has been the cause or resulted in the failure of the
Merger to occur on or before such date and such action or failure to act
constitutes a breach of this Agreement);
A-35
231
(c) by Acquiror, if (i) Target shall breach any representation,
warranty, obligation or agreement hereunder and such breach shall not have
been cured within ten (10) business days of receipt by Target of written
notice of such breach, provided that the right to terminate this Agreement
by Acquiror under this Section 7.1(c)(i) shall not be available to Acquiror
where Acquiror is at that time in willful breach of this Agreement, (ii)
the Board of Directors of Target shall have withdrawn or modified its
recommendation of this Agreement or the Merger in a manner adverse to
Acquiror or shall have resolved to do any of the foregoing, provided that
the right to terminate this Agreement by Acquiror under this Section
7.1(c)(ii) shall not be available to Acquiror where Acquiror is at that
time in willful breach of this Agreement, or (iii) for any reason Target
fails to call and hold the Target Stockholders Meeting or commence
solicitation of stockholder consents by November 15, 2000, provided that
the right to terminate this Agreement by Acquiror under this Section
7.1(c)(iii) shall not be available to Acquiror where Acquiror is at that
time in material breach of this Agreement;
(d) by Target, if (i) Acquiror shall breach any representation,
warranty, obligation or agreement hereunder and such breach shall not have
been cured within ten (10) days following receipt by Acquiror of written
notice of such breach, provided that the right to terminate this Agreement
by Target under this Section 7.1(d)(i) shall not be available to Target
where Target is at that time in material breach of this Agreement, (ii) the
Board of Directors of Acquiror shall have withdrawn or modified its
recommendation of this Agreement or the Merger in a manner adverse to
Target or shall have resolved to do any of the foregoing, provided that the
right to terminate this Agreement by Target under this Section 7.1(d)(ii)
shall not be available to Target where Target is at that time in willful
breach of this Agreement, or (iii) for any reason Acquiror fails to call
and hold the Acquiror Stockholders Meeting or commence solicitation of
stockholder consents by November 15, 2000, provided that the right to
terminate this Agreement by Target under this Section 7.1(d)(iii) shall not
be available to Target where Target is at that time in material breach of
this Agreement;
(e) by Acquiror if (i) any permanent injunction or other order of a
court or other competent authority preventing the consummation of the
Merger shall have become final and nonappealable or (ii) if any required
approval of the stockholders of Target shall not have been obtained by
reason of the failure to obtain the required vote upon a vote held at a
duly held meeting of stockholders and any adjournment thereof; or
(f) by Target if (i) any permanent injunction or other order of a
court or other competent authority preventing the consummation of the
Merger shall have become final and nonappealable or (ii) if any required
approval of the stockholders of Acquiror shall not have been obtained by
reason of the failure to obtain the required vote upon a vote held at a
duly held meeting of stockholders and any adjournment thereof.
7.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 7.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Acquiror or Target or their
respective officers, directors, stockholders or affiliates, except to the extent
that such termination results from the breach by a party hereto of any of its
representations, warranties or covenants set forth in this Agreement; provided
that, the provisions of Section 5.5 (Confidentiality), Section 7.3 (Expenses and
Termination Fees) and this Section 7.2 shall remain in full force and effect and
survive any termination of this Agreement.
7.3 Expenses and Termination Fees.
(a) Subject to Sections 7.3(b), whether or not the Merger is consummated,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby (including, without limitation, the fees and
expenses of its advisers, accountants and legal counsel) shall be paid by the
party incurring such expense; provided, however, that one-half ( 1/2) of any
out-of-pocket expenses incurred by Target in excess of $500,000 for fees and
expenses of legal counsel plus any other expenses, including, without limitation
fees and expenses of financial advisors and accountants but excluding costs
associated with SEC filing fees of the Registration Statement and printing and
mailing the Prospectus/Proxy Statements (which shall be the obligation of
Acquiror), shall remain an obligation of Target's stockholders. If Acquiror or
Target
A-36
232
receives invoices for amounts in excess of said amounts (in the aggregate), it
may, with Acquiror's written approval, pay such fees; provided that such payment
shall constitute "Damages" recoverable under Article VIII hereof and the Escrow
Agreement and such Damages shall not be subject to any minimum threshold
contained therein.
(b) In the event that Target shall terminate this Agreement pursuant to
Section 7.1(f)(ii) following a failure of the stockholders of Acquiror to
approve this Agreement, then Acquiror shall reimburse Target for all of the
out-of-pocket costs and expenses incurred by Target in connection with this
Agreement and the transactions contemplated hereby (including, without
limitation, the fees and expenses of its advisors, accountants and legal
counsel) up to an aggregate of $500,000.
7.4 Amendment. The Boards of Directors of the parties hereto may cause
this Agreement to be amended at any time by execution of an instrument in
writing signed on behalf of each of the parties hereto and in accordance with
applicable law.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed and in its sole and absolute
discretion, (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE VIII
ESCROW AND INDEMNIFICATION
8.1 Survival of Representations, Warranties and Covenants. Notwithstanding
any investigation conducted before or after the Closing Date, and
notwithstanding any actual or implied knowledge or notice of any facts or
circumstances which Acquiror or Target may have as a result of such
investigation or otherwise, Acquiror and Target will be entitled to rely upon
the other party's representations, warranties and covenants set forth in this
Agreement. The obligations of the parties with respect to their representations,
warranties, agreements and covenants will survive the Closing and continue in
full force and effect until the date 12 months following the Effective Time (the
"Termination Date"), at which time, subject to Section 8.5, the representations,
warranties and covenants of the parties set forth in this Agreement and any
liability of the parties with respect to those representations, warranties and
covenants will terminate. If a claim is made by either party prior to the
expiration of any representations, warranties, agreements or covenants, such
claim shall survive until such claim is finally resolved.
8.2 Indemnity. From and after the Effective Time of the Merger, and
subject to the provisions of Sections 8.1 and 4.2(i), Acquiror and the Surviving
Corporation (on or after the Closing Date) shall be indemnified and held
harmless by the former stockholders of Target (the "Former Target
Stockholders"), jointly and severally, against, and reimbursed for, any
liability, damage, loss, obligation, demand, judgment, fine, penalty, cost or
expense, including reasonable attorneys' fees and expenses, and the costs of
investigation incurred in defending against or settling such liability, damage,
loss, cost or expense or claim therefor and any amounts paid in settlement
thereof, imposed on or reasonably incurred by Acquiror or the Surviving
Corporation (net of any insurance proceeds received by the Acquiror or the
Surviving Corporation) as a result of (i) any breach of any representation,
warranty, agreement or covenant on the part of Target or the Principal
Stockholders under this Agreement or (ii) any of the matters listed on Schedule
2.8 (collectively the "Damages"); provided that each Principal Stockholder shall
severally, and not jointly, indemnify and hold harmless Acquiror and the
Surviving Corporation (on or after the Closing Date) against Damages resulting
from a breach by such Principal Stockholder of any representation and warranty
made by such Principal Stockholder in Article II-A. "Damages" as used herein is
not limited to matters asserted by third parties, but includes Damages incurred
or sustained by Acquiror in the absence of claims by a third party.
A-37
233
8.3 Escrow Fund. As security for the indemnity provided for in Section 8.2
hereof, ten percent 10% of the Acquiror Common Stock issuable pursuant to
Section 1.6(a) (the "Escrow Shares") to the Former Target Stockholders shall be
deposited by Acquiror in an escrow account with The Chase Manhattan Bank (or
other mutually acceptable institution) as Escrow Agent (the "Escrow Agent"), as
of the Effective Time, such deposit to constitute an escrow fund (the "Escrow
Fund") to be governed by the terms set forth in this Agreement and the
provisions of an Escrow Agreement to be executed and delivered pursuant to
Section 5.16. The Escrow Fund shall be allocated among the Former Target
Stockholders on a pro-rata basis in accordance with the number of shares of
Target Common Stock held by the Former Target Stockholders at the Effective Time
(excluding for purposes of this calculation any Dissenting Shares). Upon
compliance with the terms hereof and subject to the provisions of this Article
VIII, Acquiror and the Surviving Corporation shall be entitled to obtain
indemnity from the Escrow Fund for Damages covered by the indemnity provided for
in Section 8.2 of this Agreement. Any and all distributions of stock or any
securities of Acquiror Common Stock issued in respect thereof (including,
without limitation, any shares issued pursuant to any stock dividend, stock
split, reverse stock split, combination or reclassification thereof) shall be
the property of the Former Target Stockholders, shall be deposited with the
Escrow Agent and shall be treated as Escrow Shares pursuant to the terms of this
Agreement. Cash dividends or other property distributed in respect of Acquiror
Common Stock shall be delivered to the Former Target Stockholders on a pro-rata
basis in accordance with the number of shares of Target Common Stock held by the
Former Target Stockholders at the Effective Time and shall not be deposited with
or retained by the Escrow Agent. The Former Target Stockholders shall be
entitled to exercise any and all voting and other consensual rights pertaining
to the Escrow Shares or any part thereof for any purpose not inconsistent with
the terms of this Agreement.
8.4 Damage Threshold. Notwithstanding the foregoing, Acquiror may not
receive any shares from the Escrow Fund unless and until an Officer's
Certificate (as defined in Section 8.6 below) identifying Damages the aggregate
amount of which exceeds $500,000 has been delivered to the Escrow Agent as
provided in Section 8.5 below and such amount is determined pursuant to this
Article VIII to be payable, in which case Acquiror shall receive shares equal in
value to the full amount of Damages. In determining the amount of any Damage
attributable to a breach, any materiality standard contained in a
representation, warranty or covenant of Acquiror shall be disregarded.
8.5 Escrow Period. The Escrow Period shall terminate at the expiration of
twelve (12) months after the Effective Time; provided, however, that a portion
of the Escrow Shares, which are necessary to satisfy any unsatisfied claims
specified in any Officer's Certificate theretofore delivered to the Escrow Agent
prior to termination of the Escrow Period with respect to facts and
circumstances existing prior to expiration of the Escrow Period, shall remain in
the Escrow Fund until such claims have been finally resolved, including without
limitation any claims relating to items set forth on Schedule 2.8 hereto.
8.6 Claims upon Escrow Fund.
(a) Upon receipt by the Escrow Agent on or before the Termination Date of a
certificate signed by the chief financial or chief executive officer of Acquiror
(an "Officer's Certificate"):
(i) stating that Acquiror or the Surviving Corporation has incurred,
paid or properly accrued (in accordance with GAAP) or knows of facts giving
rise to a reasonable probability that it will have to incur, pay or accrue
(in accordance with GAAP) Damages in an aggregate stated amount with
respect to which Acquiror or the Surviving Corporation is entitled to
payment from the Escrow Fund pursuant to this Agreement; and
(ii) specifying in reasonable detail the individual items of Damages
included in the amount so stated, the date each such item was incurred,
paid or properly accrued (in accordance with GAAP), or the basis for such
anticipated liability and the specific nature of the breach to which such
item is related,
the Escrow Agent shall, subject to the provisions of Section 8.7 of this
Agreement, deliver to Acquiror shares of Acquiror Common Stock in an amount
necessary to indemnify Acquiror for the Damages claimed; provided, however, that
no shares of Acquiror Common Stock shall be delivered to Acquiror, as a result
of a claim based upon an accrual of, or upon a reasonable probability of having
to incur, pay or accrue Damages
A-38
234
until such time as the Acquiror has actually incurred or paid Damages. All
shares of Acquiror Common Stock subject to such claims shall remain in the
Escrow Fund until Damages are actually incurred or paid or the Acquiror
determines in its reasonably good faith judgment that no Damages will be
required to be incurred or paid (in which event such shares shall be distributed
to the Former Target Stockholders in accordance with Section 8.10 below).
(b) For the purpose of compensating Acquiror for its Damages pursuant to
this Agreement, the Acquiror Common Stock in the Escrow Fund shall be valued at
the closing market price of the Acquiror Common Stock on the Closing Date.
8.7 Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such Officer's Certificate
shall be delivered to the Stockholders' Agent (defined in Section 8.9 below) and
for a period of forty-five (45) days after such delivery to the Escrow Agent,
the Escrow Agent shall make no delivery of Acquiror Common Stock or other
property pursuant to Section 8.6 hereof unless the Escrow Agent shall have
received written authorization from the Stockholders' Agent to make such
delivery. After the expiration of such forty-five (45) day period, the Escrow
Agent shall make delivery of the Acquiror Common Stock or other property in the
Escrow Fund in accordance with Section 8.6 hereof, provided that no such payment
or delivery may be made if the Stockholders' Agent shall object in a written
statement to the claim made in the Officer's Certificate, and such statement
shall have been delivered to the Escrow Agent and to Acquiror prior to the
expiration of such forty-five (45) day period.
8.8 Resolution of Conflicts; Arbitration.
(a) In case the Stockholders' Agent shall object in writing to any claim or
claims by Acquiror made in any Officer's Certificate, the Stockholders' Agent
and Acquiror shall attempt in good faith to agree upon the rights of the
respective parties with respect to each of such claims. If the Stockholders'
Agent and Acquiror should so agree, a memorandum setting forth such agreement
shall be prepared and signed by both parties and shall be furnished to the
Escrow Agent. The Escrow Agent shall be entitled to rely on any such memorandum
and shall distribute the Acquiror Common Stock or other property from the Escrow
Fund in accordance with the terms thereof.
(b) If no such agreement can be reached after good faith negotiation for
sixty (60) days, either Acquiror or the Stockholders' Agent may, by written
notice to the other, demand arbitration of the matter unless the amount of the
Damage is at issue in pending litigation with a third party, in which event
arbitration shall not be commenced until such amount is ascertained or both
parties agree to arbitration; and in either such event the matter shall be
settled by arbitration conducted by three arbitrators. Within fifteen (15) days
after such written notice is given, Acquiror and the Stockholders' Agent shall
each select one arbitrator, and the two arbitrators so selected shall select a
third arbitrator. The decision of the arbitrators as to the validity and amount
of any claim in such Officer's Certificate shall be binding and conclusive upon
the parties to this Agreement, and notwithstanding anything in Section 8.6
hereof, the Escrow Agent shall be entitled to act in accordance with such
decision and make or withhold payments out of the Escrow Fund in accordance
therewith.
(c) Judgment upon any award rendered by the arbitrators may be entered in
any court having jurisdiction. Any such arbitration shall be held in New York,
New York under the commercial rules then in effect of the American Arbitration
Association. For purposes of this Section 8.8, in any arbitration hereunder in
which any claim or the amount thereof stated in the Officer's Certificate is at
issue, Acquiror shall be deemed to be the Non-Prevailing Party unless the
arbitrators award Acquiror more than one-half ( 1/2) of the amount in dispute,
plus any amounts not in dispute; otherwise, the Former Target Stockholders shall
be deemed to be the Non-Prevailing Party. The Non-Prevailing Party to an
arbitration shall pay its own expenses, the fees of each arbitrator, the
administrative fee of the American Arbitration Association, and the expenses,
including without limitation, attorneys' fees and costs, reasonably incurred by
the other party to the arbitration.
A-39
235
8.9 Stockholders' Agent.
(a) Frederick Krueger shall be constituted and appointed as agent
("Stockholders' Agent") for and on behalf of the Former Target Stockholders to
give and receive notices and communications, to authorize delivery to Acquiror
of the Acquiror Common Stock or other property from the Escrow Fund in
satisfaction of claims by Acquiror, to deliver to the Former Target Stockholders
cash received from the Acquiror in satisfaction of claims by the Former Target
Stockholders, to object to such deliveries, to agree to, negotiate, enter into
settlements and compromises of, and demand arbitration and comply with orders of
courts and awards of arbitrators with respect to such claims, and to take all
actions necessary or appropriate in the judgment of the Stockholders' Agent for
the accomplishment of the foregoing. Such agency may be changed by the holders
of a majority in interest of the Escrow Fund from time to time upon not less
than 10 days' prior written notice to Acquiror. The Stockholder's Agent may
resign upon thirty (30) days notice to the parties to this Agreement and the
Former Target Stockholders. No bond shall be required of the Stockholders'
Agent, and the Stockholders' Agent shall receive no compensation for his
services. Notices or communications to or from the Stockholders' Agent shall
constitute notice to or from each of the Former Target Stockholders.
(b) The Stockholders' Agent shall not be liable for any act done or omitted
hereunder as Stockholders' Agent while acting in good faith and in the exercise
of reasonable judgment, and any act done or omitted pursuant to the advice of
counsel shall be conclusive evidence of such good faith. The Former Target
Stockholders shall severally indemnify the Stockholders' Agent and hold him
harmless against any loss, liability or expense incurred without gross
negligence or bad faith on the part of the Stockholders' Agent and arising out
of or in connection with the acceptance or administration of his duties
hereunder.
(c) The Stockholders' Agent shall have reasonable access to information
about Target and the reasonable assistance of Target's officers and employees
for purposes of performing his duties and exercising his rights hereunder,
provided that the Stockholders' Agent shall treat confidentially and not
disclose any nonpublic information from or about Target to anyone (except on a
need to know basis to individuals who agree to treat such information
confidentially).
(d) The Stockholders' Agent shall be entitled to a distribution from the
Escrow Fund equal to any such indemnity claim which has not been satisfied;
provided, however, that no such distribution shall be made until all claims of
Acquiror set forth in any Officer's Certificate delivered to the Escrow Agent on
or prior to the Termination Date have been resolved.
8.10 Distribution Upon Termination of Escrow Period. Within five (5)
business days following the Termination Date, the Escrow Agent shall deliver to
the Former Target Stockholders all of the shares in the Escrow Fund in excess of
any amount of such shares reasonably necessary to satisfy any unsatisfied or
disputed claims for Damages specified in any Officer's Certificate delivered to
the Escrow Agent on or before the Termination Date and any unsatisfied or
disputed claims by the Stockholder's Agent under Section 8.9. As soon as all
such claims have been resolved, the Escrow Agent shall deliver to the Former
Target Stockholders all shares remaining in the Escrow Fund and not required to
satisfy such claims. Deliveries of shares to the Former Target Stockholders
pursuant to this section shall be made in proportion to the allocation set forth
in Section 8.3.
8.11 Actions of the Stockholders' Agent. A decision, act, consent or
instruction of the Stockholders' Agent shall constitute a decision of all Former
Target Stockholders for whom shares of Acquiror Common Stock otherwise issuable
to them are deposited in the Escrow Fund and shall be final, binding and
conclusive upon each such Former Target Stockholder, and the Escrow Agent and
Acquiror may rely upon any decision, act, consent or instruction of the
Stockholders' Agent as being the decision, act, consent or instruction of each
and every such Former Target Stockholder. The Escrow Agent and Acquiror are
hereby relieved from any liability to any person for any acts done by them in
accordance with such decision, act, consent or instruction of the Stockholders'
Agent.
8.12 Third-Party Claims. In the event Acquiror becomes aware of a
third-party claim which Acquiror believes may result in a demand against the
Escrow Fund, Acquiror shall notify the Stockholders' Agent of such claim, and
the Stockholders' Agent shall be entitled, at his expense, to participate in any
defense of such
A-40
236
claim. Acquiror shall have the right in its sole discretion to settle any such
claim; provided, however, that Acquiror may not effect the settlement of any
such claim without the consent of the Stockholders' Agent, which consent shall
not be unreasonably withheld or delayed. In the event that the Stockholders'
Agent has consented to any such settlement, the Stockholders' Agent shall have
no power or authority to object under Section 8.6 or any other provision of this
Article VIII to the amount of any claim by Acquiror against the Escrow Fund for
indemnity with respect to such settlement.
8.13 Maximum Liability and Remedies. The rights of the Acquiror to make
claims upon the Escrow Fund in accordance with this Article VIII shall be the
sole and exclusive remedy of Acquiror and its affiliates, successors and assigns
after the Closing with respect to any representation, warranty, covenant or
agreement made by Target or the Former Target Stockholders under this Agreement
and no former stockholder, optionholder, warrantholder, director, officer,
employee or agent of Target shall have any personal liability to Acquiror or the
Surviving Corporation after the Closing in connection with the Merger except
with respect to the shares held in the Escrow Fund; provided, however, that
nothing herein limits any potential remedies and liabilities of Acquiror or the
Surviving Corporation, arising under applicable state and federal laws with
respect to any fraudulent breaches of the representations or warranties of
Target, or intentional breaches of the covenants of Target, made in or pursuant
to this Agreement. Notwithstanding the foregoing, if Acquiror or its affiliates,
successors or permitted assigns successfully asserts a claim arising from a
breach by a Principal Stockholder of its representations and warranties
contained in Article II-A, recovery for Damages attributable to such claim shall
by limited to the greater of (a) Escrow Shares beneficially owned by the
breaching Principal Stockholder, valued as of the closing market price on the
Closing Date, and (b) $200,000.
8.14 Indemnification by Acquiror.
(a) From and after the Effective Time of the Merger, and subject to the
provisions of Section 8.1, the Former Target Stockholders shall be indemnified
and held harmless by Acquiror and the Surviving Corporation, jointly and
severally, against, and reimbursed for, any liability, damage, loss, obligation,
demand, judgment, fine, penalty, cost or expense, including reasonable
attorneys' fees and expenses, and the costs of investigation incurred in
defending against or settling such liability, damage, loss, cost or expense or
claim therefor and any amounts paid in settlement thereof, imposed on or
reasonably incurred by the Former Target Stockholders (net of any insurance
proceeds received by the Former Target Stockholders) as a result of any breach
of any representation, warranty, agreement or covenant on the part of Acquiror
or Merger Sub under this Agreement ("Target Damages").
(b) Notwithstanding the foregoing, the Former Target Stockholders may not
receive any indemnification unless and until a certificate signed by the
Stockholders' Agent identifying Target Damages, the aggregate amount of which
exceeds $500,000 has been delivered to Acquiror as provided below and such
amount is determined pursuant to this Section 8.14 to be payable, in which case
the Former Target Stockholders shall receive in the aggregate cash equal in
value to the full amount of Target Damages as provided herein. In determining
the amount of any Target Damage attributable to a breach, any materiality
standard contained in a representation, warranty or covenant of Acquiror or
Merger Sub shall be disregarded.
(c) The period in which the Former Target Stockholders shall be entitled to
indemnification shall terminate at the expiration of twelve (12) months after
the Effective Time; provided, however, that any claims made prior to the
expiration of such period shall survive until such claims have been finally
resolved.
(d) Upon receipt by Acquiror on or before the Termination Date of a
certificate signed by the Stockholders' Agent:
(i) stating that the Former Target Stockholders have incurred or paid
or knows of facts giving rise to a reasonable probability that it will have
to incur Target Damages in an aggregate stated amount with respect to which
the Former Target Stockholders are entitled to indemnification pursuant to
this Section 8.14; and
(ii) specifying in reasonable detail the individual items of Target
Damages included in the amount so stated, the date each such item was
incurred or paid, or the basis for such anticipated liability and the
specific nature of the breach to which such item is related,
A-41
237
Acquiror shall, subject to the provisions of subparagraph (e), deliver to the
Former Target Stockholders cash in an amount necessary to indemnify the Former
Target Stockholders for the Target Damages claimed. Such cash shall be
distributed to the Former Target Stockholders pro rata in proportion to the
allocation set forth in Section 8.3.
(e) For a period of forty-five (45) days after delivery of the certificate
by the Stockholders' Agent to Acquiror, Acquiror shall have the right to object
in a written statement to the claim made in the certificate delivered by the
Stockholders' Agent. If no objection is made, Acquiror shall issue cash to the
Former Target Stockholders as provided in subparagraph (d) above. If Acquiror
does so object, the Stockholders' Agent and Acquiror shall attempt in good faith
to agree upon the rights of the respective parties. If no such agreement can be
reached in sixty (60) days, the conflict shall be resolved in accordance with
Sections 8.8(b) and (c).
(f) The maximum aggregate cash to which the Former Target Stockholders
shall be entitled hereunder regarding their right to indemnification shall be
nine percent (9%), multiplied by the Total Acquiror Shares, multiplied by the
closing market price of the Acquiror Common Stock on the Closing Date. The right
to this cash in accordance with this Section 8.14 shall be the sole and
exclusive remedy of the Former Target Stockholders after the Closing with
respect to any breach of any representation, warranty, covenant or agreement
made by Acquiror or Merger Sub under this Agreement and no former stockholder,
optionholder, warrantholder, director, officer, employee or agent of Acquiror
shall have any personal liability to any Former Target Stockholder after the
Closing in connection with the Merger; provided, however, that nothing herein
limits any potential remedies and liabilities of the Former Target Stockholders
arising under applicable state and federal laws with respect to any fraudulent
breaches of the representations or warranties of Acquiror or Merger Sub, or
intentional breaches of the covenants of Acquiror or Merger Sub, made in or
pursuant to this Agreement.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given when delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with confirmation of receipt) to the parties
at the following address (or at such other address for a party as shall be
specified by like notice):
(a) if to Acquiror or Merger Sub, to:
Uproar Inc.
240 West 35th Street
New York, NY 10001
Attention: General Counsel
Facsimile No.: (917) 351-2896
telephone No.: (212) 714-9500
with a copy to:
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
733 Third Avenue, Suite 220
New York, NY 10017
Attention: Babak Yaghmaie
Facsimile No.: (212) 687-6665
Telephone No.: (212) 687-5222
A-42
238
(b) if to Target, to:
iwin.com, Inc.
10940 Wilshire Boulevard
Los Angeles, CA 90024
Attention: General Counsel
Facsimile No.: (310) 264-4399
Telephone No.: (310) 264-4300
with a copy to:
O'Melveny & Myers LLP
400 South Hope Street
Los Angeles, CA 90071
Attn: David J. Johnson, Jr., Esq.
Facsimile No.: (213) 430-6407
Telephone No.: (213) 430-6000
9.2 Interpretation. When a reference is made in this Agreement to
Exhibits, such reference shall be to an Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." In this Agreement, any reference to any event, change, condition or
effect being "material" with respect to any entity or group of entities means
any material event, change, condition or effect related to the condition
(financial or otherwise), properties, assets (including intangible assets),
liabilities, business, operations or results of operations of such entity or
group of entities. In this Agreement, any reference to a "Material Adverse
Effect" with respect to any entity or group of entities means any event, change
or effect that is materially adverse to the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
prospects, operations or results of operations of such entity and its
subsidiaries, taken as a whole, but shall exclude events, changes or effects
directly or indirectly arising out of or attributable to general market or
industry conditions. In this Agreement, any reference to a party's "knowledge"
means such party's actual knowledge after due and diligent inquiry of officers,
directors and other employees of such party and its subsidiaries reasonably
believed to have substantive knowledge of such matters. The phrase "made
available" in this Agreement shall mean that the information referred to has
been made available if requested by the party to whom such information is to be
made available. The phrases "the date of this Agreement", "the date hereof", and
terms of similar import, unless the context otherwise requires, shall be deemed
to refer to July 25, 2000. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
9.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
9.4 Entire Agreement; No Third Party Beneficiaries. This Agreement, the
other Transaction Documents and the documents and instruments and other
agreements specifically referred to herein or delivered pursuant hereto,
including the Exhibits, the Schedules, including the Target Disclosure Schedule
and the Acquiror Disclosure Schedule (a) constitute the entire agreement among
the parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof, except for the Confidentiality Agreement,
which shall continue in full force and effect, and shall survive any termination
of this Agreement or the Closing, in accordance with its terms; and (b) are not
intended to confer upon any other person any rights or remedies hereunder.
9.5 Severability. In the event that any provision of this Agreement, or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or
A-43
239
circumstances will be interpreted so as reasonably to effect the intent of the
parties hereto. The parties further agree to replace such void or unenforceable
provision of this Agreement with a valid and enforceable provision that will
achieve, to the extent possible, the economic, business and other purposes of
such void or unenforceable provision.
9.6 Remedies Cumulative. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to applicable
principles of conflicts of law. Each of the parties hereto irrevocably consents
to the exclusive jurisdiction of any court located within the State of Delaware,
in connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, agrees that process may be served upon them in any
manner authorized by the laws of the State of Delaware for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction and such process.
9.8 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and permitted assigns.
9.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
A-44
240
IN WITNESS WHEREOF, Target, Acquiror, Merger Sub, the Principal
Stockholders and the Stockholders' Agent have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized,
all as of the date first written above.
IWIN.COM, INC.
By:
--------------------------------------
Name:
Title:
UPROAR INC.
By:
--------------------------------------
Name:
Title:
IWIN.COM ACQUISITION CORPORATION
By:
--------------------------------------
Name:
Title:
STOCKHOLDERS' AGENT:
--------------------------------------
Name: Frederick Krueger
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION]
A-45
241
PRINCIPAL STOCKHOLDERS
--------------------------------------
Name: Frederick Krueger
--------------------------------------
Name: Kevin Wendle
RADER REINFRANK HOLDINGS NO. 8
By:
--------------------------------------
Name:
Title:
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION]
A-46
242
EXHIBIT A
CERTIFICATE OF MERGER
A-47
243
CERTIFICATE OF MERGER
MERGING
IWIN.COM ACQUISITION CORP.
WITH AND INTO
IWIN.COM, INC.
The constituent entities participating in the merger described herein,
iwin.com Acquisition Corp., a Delaware corporation ("Merger Sub") and wholly
owned subsidiary of Uproar Inc., a Delaware corporation ("Parent"), and
iwin.com, Inc., a Delaware corporation ("iwin"), DO HEREBY CERTIFY AS FOLLOWS:
FIRST: That Merger Sub was originally incorporated on July 24, 2000,
pursuant to the General Corporation Law of the State of Delaware (the "General
Corporation Law"), and that iwin was originally incorporated on July 8, 1999,
pursuant to the General Corporation Law.
SECOND: That an Agreement and Plan of Reorganization dated as of July 24,
2000 (the "Merger Agreement"), by and among Parent, Merger Sub, iwin, Frederick
Krueger as stockholders' agent, The Chase Manhattan Bank as the escrow agent,
and certain stockholders of iwin has been approved, adopted, certified, executed
and acknowledged by each of the constituent entities in accordance with Section
251 of the General Corporation Law.
THIRD: That the Merger shall become effective (the "Effective Time") at the
time of the filing of this Certificate of Merger with the Secretary of State of
the State of Delaware.
FOURTH: At the Effective Time, Merger Sub shall be merged with and into
iwin and iwin shall be the surviving corporation (the "Surviving Corporation")
and shall continue its corporate existence under the laws of the State of
Delaware. At the Effective Time, the separate corporate existence of Merger Sub
shall cease.
FIFTH: That the Certificate of Incorporation of iwin shall be as set forth
in Annex A hereto.
SIXTH: That an executed copy of the Merger Agreement is on file at the
principal place of business of the Surviving Corporation at the following
address:
240 West 35th Street
New York, NY 10001
Attention: General Counsel
SEVENTH: That a copy of the Merger Agreement will be furnished by the
Surviving Corporation, on request, and without cost, to any stockholder of
Merger Sub or iwin.
A-48
244
IN WITNESS WHEREOF, Merger Sub has caused this Certificate of Merger to be
signed by , its President, and attested by , its
, and iwin has caused this Certificate of Merger to be signed by
, its President, and attested by , its
, each as of this day of , 2000.
IWIN ACQUISITION CORP.
By:
--------------------------------------
Title: President
ATTEST:
- -----------------------------
IWIN.COM, INC.
By:
--------------------------------------
Title: President
ATTEST:
- -----------------------------
A-49
245
EXHIBIT B
VOTING AGREEMENT
A-50
246
VOTING AGREEMENT
THIS VOTING AGREEMENT (this "AGREEMENT") is entered into as of the day of
July, 2000, between Uproar Inc., a Delaware corporation (the "ACQUIROR"), and
, a stockholder (the "TARGET STOCKHOLDER") of iwin.com, Inc., a
Delaware corporation (the "TARGET").
RECITALS
A. Acquiror, Target and certain other parties have entered into an
Agreement and Plan of Reorganization, dated as of July , 2000 (the "MERGER
AGREEMENT"), pursuant to which iwin.com Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Acquiror, will be merged with and
into Target (the "MERGER").
B. Upon the consummation of the Merger and in connection therewith, the
Target Stockholder will become the owner of shares of Common Stock of Acquiror,
par value $0.01 per share (the "ACQUIROR COMMON STOCK"), to be issued pursuant
to a registration under the Securities Act of 1933, as amended (the "ACT").
C. Pursuant to the Merger Agreement, the Target Stockholder has agreed to
enter into this Agreement prior to the execution of the Merger Agreement and as
an inducement to the Acquiror to enter into the Merger Agreement.
D. Capitalized terms used and not defined herein have the respective
meanings ascribed to them in the Merger Agreement.
E. Pursuant to the Merger Agreement, an Escrow Agreement attached thereto
as Exhibit C (the "ESCROW AGREEMENT") shall be entered into among the Acquiror,
Target, a representative ("STOCKHOLDERS' REPRESENTATIVE") of the former
stockholders of Target and the Escrow Agent.
F. The Target Stockholder understands and acknowledges that Acquiror is
entitled to rely on (i) the truth and accuracy of such Target Stockholder's
representations contained herein and (ii) such Target Stockholder's performance
of the obligations set forth herein.
NOW, THEREFORE, in consideration of the promises and the mutual agreements,
provisions and covenants set forth in the Merger Agreement and in this
Agreement, it is hereby agreed as follows:
1. Share Ownership and Agreement to Retain Shares.
1.1 Transfer and Encumbrance.
(a) Target Stockholder is the beneficial owner of that number and
class of shares of the capital stock of Target set forth on the
signature page hereto (the "SHARES"). These Shares constitute the Target
Stockholder's entire interest in the outstanding capital stock of
Target. No other person or entity not a signatory to this Agreement has
a beneficial interest in or a right to acquire such Shares or any
portion of such Shares (except, in the event Target Stockholder is a
partnership, partners, retired partners or former partners of Target
Stockholder). The Shares are and will be at all times up until the
Expiration Date (as defined below) free and clear of any liens, claims,
options, charges or other encumbrances other than those existing under
the Act. The Target Stockholder's principal residence or place of
business is set forth on the signature page hereto.
(b) Prior to the Expiration Date, Target Stockholder agrees not to:
(i) transfer (except to partners, retired partners or former partners of
Target Stockholder or as may be specifically required by court order or
by operation of law), sell, exchange, pledge or otherwise dispose of or
encumber the Shares or any New Shares (as defined below), or to make any
offer or agreement relating to the transfer, sale, exchange, pledge,
disposal or encumbrance thereof; (ii) grant any proxy or power of
attorney, deposit any of the Shares into a voting trust or enter into a
voting agreement or arrangement with respect to the Shares except as
provided in or contemplated by this Agreement; or (iii) take any other
action that would make any representation or warranty of Target
Stockholder contained herein untrue or incorrect or have the effect of
preventing or disabling Target Stockholder
A-51
247
from performing its obligations under this Agreement. As used herein,
the term "EXPIRATION DATE" shall mean the earlier to occur of (i) the
Effective Time of the Merger, and (ii) termination of the Merger
Agreement pursuant to its terms.
1.2 New Shares. Target Stockholder agrees that any shares of capital
stock of Target that Target Stockholder purchases or with respect to which
Target Stockholder otherwise acquires beneficial ownership after the date
of this Agreement and prior to the Expiration Date ("NEW SHARES") shall be
subject to the terms and conditions of this Agreement to the same extent as
if they constituted Shares.
2. Agreement to Vote Shares. Prior to the Expiration Date, at every
meeting of the stockholders of Target called with respect to any of the
following, and at every adjournment thereof, and on every action or approval by
written consent of the stockholders of Target with respect to any of the
following, Target Stockholder shall vote the Shares and any New Shares (i) in
favor of approval of the Merger and any matter that could reasonably be expected
to facilitate the Merger; (ii) against any matter that could reasonably be
expected to adversely affect, prevent, delay or impede the Merger; and (iii)
against any action or agreement that would result in a breach in any respect of
any covenant, representation or warranty or any other obligation or agreement of
the Target under the Merger Agreement or this Agreement.
3. Irrevocable Proxy. Target Stockholder hereby agrees to timely deliver
to Acquiror a duly executed proxy in the form attached hereto as Exhibit A (the
"PROXY") with respect to each and every meeting of stockholders of Target or
action or approval by written consent of stockholders of Target, such Proxy to
cover the total number of Shares and New Shares in respect of which Target
Stockholder is entitled to vote at any such meeting or such written consent. In
the event that Target Stockholder is unable to provide any such Proxy in a
timely manner, Target Stockholder hereby grants Acquiror a power of attorney to
execute and deliver such Proxy for and on behalf of Target Stockholder, such
power of attorney, which being coupled with an interest, shall survive any
death, disability, bankruptcy, or any other such impediment. Effective
immediately upon the execution of this Agreement by the Target Stockholder, the
Target Stockholder hereby revokes any and all prior proxies given by the Target
Stockholder with respect to the matters contemplated hereby and agrees not to
grant any subsequent proxies with respect to such matters until after the
Expiration Date.
4. Representations, Warranties and Covenants of Target Stockholder. Target
Stockholder hereby represents, warrants and covenants to Acquiror as follows:
(a) Power; Binding Agreement. Target Stockholder has the legal
capacity, power and authority to enter into and perform all of Target
Stockholder's obligations under this Agreement. This Agreement has been
duly and validly executed and delivered by Target Stockholder and
constitutes a valid and binding agreement of Target Stockholder,
enforceable against Target Stockholder in accordance with its terms except
that (i) such enforcement may be subject to applicable bankruptcy,
insolvency or other similar laws, now or hereafter in effect, affecting
creditors' rights generally, and (ii) the remedy of specific performance
and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(b) No Conflicts. None of the execution and delivery of this
Agreement by Target Stockholder, the consummation by Target Stockholder of
the transactions contemplated hereby or compliance by Target Stockholder
with any of the provisions hereof shall (i) conflict with or result in any
breach of any organizational documents applicable to Target Stockholder, if
any, (ii) result in a violation or breach of, or constitute (with or
without notice or lapse of time or both) a default (or give rise to any
third party right of termination, cancellation, material modification or
acceleration) under any of the terms, conditions or provisions of any note,
loan agreement, bond, mortgage, indenture, license, contract, commitment,
arrangement, understanding, agreement or other instrument or obligation of
any kind to which Target Stockholder is a party or by which Target
Stockholder or any of its properties or assets may be bound, or (iii)
violate any order, writ, injunction, decree, judgment, order, statute, rule
or regulation applicable to Target Stockholder or any of Target
Stockholder's properties or assets.
A-52
248
(c) Compliance with Securities Laws. Target Stockholder will observe
and comply with the Act and the General Rules and Regulations thereunder,
as now in effect and as from time to time amended and including those
hereafter enacted or promulgated, in connection with any offer, sale,
exchange, transfer, pledge or other disposition of the Acquiror Common
Stock or any part thereof.
(d) Until the Expiration Date, Target Stockholder will not (and will
use Target Stockholder's best efforts to cause Target, its affiliates,
officers, directors and employees and any investment banker, attorney,
accountant or other agent retained by Target Stockholder or such other
parties, not to): (i) initiate or solicit, directly or indirectly, any
proposal, plan or offer to acquire all or any substantial part of the
business or properties or capital stock of Target, whether by merger,
purchase of assets, tender offer or otherwise, or to liquidate Target or
otherwise distribute to the stockholders of Target all or any substantial
part of the business, properties or capital stock of Target (each, an
"ACQUISITION PROPOSAL"); (ii) initiate, directly or indirectly, any contact
with any person in an effort to solicit, or with a view towards soliciting,
any Acquisition Proposal; (iii) furnish information concerning Target's
business, properties or assets to any corporation, partnership, person or
other entity or group (other than Acquiror, or any associate, agent or
representative of Acquiror) under any circumstances that could reasonably
be expected to relate to an actual or potential Acquisition Proposal; or
(iv) negotiate or enter into discussions or an agreement, directly or
indirectly, with any entity or group with respect of any potential
Acquisition Proposal.
(e) Target Stockholder understands that pursuant to the Merger
Agreement, Acquiror, Target and Stockholders' Representative shall enter
into the Escrow Agreement and that Target Stockholder shall be bound by the
provisions of the Escrow Agreement in the form attached as an exhibit to
the Merger Agreement and Article VIII of the Merger Agreement ("ARTICLE
VIII"); and as such, Target Stockholder agrees to the appointment of
Stockholders' Representative as the representative of the Target
Stockholder in connection with the Escrow Agreement as provided therein and
further agrees to be bound by the terms of the Escrow Agreement and Article
VIII.
5. Conversion of Preferred Stock. To the extent that the Shares are
Preferred Stock, $0.001 par value (the "Preferred Stock"), of the Target, the
Target Stockholder hereby consents to the automatic conversion of all such
shares of Preferred Stock owned by the Target Stockholder into Common Stock, par
value $0.001 per share, of Target, pursuant to Article IV, Section 3(b) of the
Second Amended and Restated Certificate of Incorporation of Target. The
conversion provided for herein shall be effective immediately prior to the
Effective Time and shall not require any further action on the part of the
Target Stockholder.
6. Additional Documents. Target Stockholder hereby covenants and agrees to
execute and deliver any additional documents necessary or desirable, in the
reasonable opinion of Acquiror, to carry out the purpose and intent of this
Agreement.
7. Consent and Waiver. Target Stockholder hereby gives any consents or
waivers that are reasonably required for the consummation of the Merger under
the terms of any agreement to which Target Stockholder is a party or pursuant to
any rights Target Stockholder may have.
8. Confidentiality. Target Stockholder agrees (i) to hold any information
regarding this Agreement and the Merger in strict confidence, and (ii) not to
divulge any such information to any third person, until such time as the Merger
has been publicly disclosed by Acquiror or as required by applicable laws, rules
or regulations.
9. Miscellaneous.
9.1 Survival; Termination. All representations, warranties and
covenants contained in Sections 4, 5, 7, 8 and 9 of this Agreement shall
survive the Closing.
9.2 Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, then the remainder of the terms, provisions,
A-53
249
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
9.3 Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, representatives, successors and
permitted assigns, but, except as otherwise specifically provided herein,
neither this Agreement nor any of the rights, interests or obligations of
the parties hereto may be assigned by either of the parties without the
prior written consent of the other. This Agreement is intended to bind
Target Stockholder as a stockholder of Target only with respect to the
specific matters set forth herein.
9.4 Amendment and Modification. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of a
written agreement executed by the parties hereto.
9.5 Specific Performance; Injunctive Relief. The parties hereto
acknowledge that Acquiror will be irreparably harmed and that there will be
no adequate remedy at law for a violation of any of the covenants or
agreements of Target Stockholder set forth herein. Therefore, it is agreed
that, in addition to any other remedies that may be available to Acquiror
upon any such violation, Acquiror shall have the right to enforce such
covenants and agreements by specific performance, injunctive relief or by
any other means available to Acquiror at law or in equity and the Target
Stockholder hereby agrees that it will not oppose the granting of such
relief on the basis that Acquiror has not been irreparably harmed or has an
adequate remedy at law and waives any requirement for the security or
posting of any bond in connection with such enforcement.
9.6 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given (i) when delivered personally or by
commercial delivery service, or (ii) five business days after the date
mailed by registered or certified mail (return receipt requested) or (iii)
one business day after dispatch via facsimile (with confirmation of
receipt) to the parties at the following address (or at such other address
for a party as shall be specified by like notice):
(a) If to the Target Stockholder, at the address set forth below
the Target Stockholder's signature at the end hereof.
(b) If to Acquiror:
Uproar Inc.
240 West 35th Street
New York, NY 10001
Attention: General Counsel
Telephone No.: (212) 714-9500
Facsimile No.: (917) 351-2896
with a copy to:
Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP
733 3rd Avenue
New York, NY 10017
Attention: Babak Yaghmaie
Telephone No.: (212) 687-5222
Facsimile No.: (212) 687-6665
or to such other address as any party hereto may designate for itself by notice
given as herein provided.
9.7 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Delaware.
A-54
250
9.8 Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties
with respect to such subject matter.
9.9 Counterpart. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
9.10 Effect of Headings. The section headings herein are for
convenience only and shall not affect the construction or interpretation of
this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
A-55
251
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
UPROAR INC. --------------------------------------------------
By: --------------------------------------------------
------------------------------------------------- (Signature)
Name: --------------------------------------------------
---------------------------------------------- (Print Name)
Title: --------------------------------------------------
----------------------------------------------- (Print Address)
--------------------------------------------------
(Print Address)
--------------------------------------------------
(Print Telephone Number)
--------------------------------------------------
(Social Security or Tax I.D. Number)
Total Number of Shares owned on the date hereof:
Common Stock: ----------
Series A Preferred Stock: ----------
Series B Preferred Stock: ----------
Series C Preferred Stock: ----------
State of Residence: ----------
A-56
252
EXHIBIT A
IRREVOCABLE PROXY
TO VOTE STOCK OF COMPANY
The undersigned stockholder of iwin.com, Inc., a Delaware corporation
("Company"), hereby irrevocably (to the fullest extent permitted by the Delaware
General Corporation Law) appoints the members of the Board of Directors of
Uproar Inc., a Delaware corporation ("Uproar"), and each of them, or any other
designee of Uproar, as the sole and exclusive attorneys and proxies of the
undersigned, with full power of substitution and resubstitution, to vote and
exercise all voting and related rights (to the fullest extent that the
undersigned is entitled to do so) with respect to all of the shares of capital
stock of Company that now are or hereafter may be beneficially owned by the
undersigned, and any and all other shares or securities of Company issued or
issuable in respect thereof on or after the date hereof (collectively, the
"Shares") in accordance with the terms of this Irrevocable Proxy. The Shares
beneficially owned by the undersigned stockholder of Company as of the date of
this Irrevocable Proxy are listed on the final page of this Irrevocable Proxy.
Upon the undersigned's execution of this Irrevocable Proxy, any and all prior
proxies given by the undersigned with respect to any Shares are hereby revoked
and the undersigned agrees not to grant any subsequent proxies with respect to
the Shares until after the Expiration Date (as defined below).
This Irrevocable Proxy is irrevocable (to the fullest extent provided in
the Delaware General Corporation Law), is coupled with an interest, including,
but not limited to, that certain Voting Agreement dated as of even date herewith
by and between Uproar and the undersigned, and is granted in consideration of
Uproar entering into that certain Agreement and Plan of Merger and
Reorganization between Company and Uproar (the "Merger Agreement"), which
agreement provides for the merger of iwin Acquisition Corp., a wholly-owned
subsidiary of Uproar, with and into the Company (the "Merger"). As used herein,
the term "Expiration Date" shall mean the earlier to occur of (i) such date and
time as the Merger shall become effective in accordance with the terms and
provisions of the Merger Agreement, and (ii) the date of termination of the
Merger Agreement pursuant to its terms.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date, to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting and other rights of the undersigned with respect to the
Shares (including, without limitation, the power to execute and deliver written
consents pursuant to the Delaware General Corporation Law), at every annual,
special or adjourned meeting of the stockholders of the Company and in every
written consent in lieu of such meeting as follows: (a) in favor of approval of
the Merger and any matter that could be reasonably expected to facilitate the
Merger; (b) against any matter that could reasonably be expected to adversely
affect, prevent, delay or impede the Merger; and (c) against any action or
agreement that would result in a breach in any respect of any covenant,
representation or warranty or any other obligation or agreement of the Target
under the Merger Agreement or the Voting Agreement between Uproar and the
undersigned, dated as of July , 2000.
The attorneys and proxies named above may not exercise this Irrevocable
Proxy on any other matter except as provided above. The undersigned stockholder
may vote the Shares on all other matters.
All authority herein conferred shall survive the death or incapacity of the
undersigned and any obligation of the undersigned hereunder shall be binding
upon the heirs, personal representatives, successors and assigns of the
undersigned.
A-57
253
This Irrevocable Proxy is coupled with an interest as aforesaid and is
irrevocable.
Dated: July , 2000
-----------------------------------
(Signature of Company Stockholder)
-----------------------------------
(Print Name of Company Stockholder)
Shares beneficially owned:
_______ shares of Company Common
Stock
_______ shares of Company Series A
Preferred Stock
_______ shares of Company Series B
Preferred Stock
_______ shares of Company Series C
Preferred Stock
A-58
254
VOTING AGREEMENT
THIS VOTING AGREEMENT (this "AGREEMENT") is entered into as of the day
of July, 2000, between iwin.com, Inc., a Delaware corporation (the "TARGET"),
and , a stockholder (the "ACQUIROR STOCKHOLDER"), of Uproar,
Inc., a Delaware corporation (the "ACQUIROR").
RECITALS
A. Acquiror, Target and certain other parties have entered into an
Agreement and Plan of Reorganization, dated as of July , 2000 (the "Merger
Agreement"), pursuant to which Iwin.com Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Acquiror, will be merged with and
into Target (the "Merger").
B. Pursuant to the Merger Agreement, the Acquiror Stockholder has agreed to
enter into this Agreement prior to the execution of the Merger Agreement and as
an inducement to the Target to enter into the Merger Agreement.
C. Capitalized terms used and not defined herein have the respective
meanings ascribed to them in the Merger Agreement.
D. The Acquiror Stockholder understands and acknowledges that Target is
entitled to rely on (i) the truth and accuracy of such Acquiror Stockholder's
representations contained herein and (ii) such Acquiror Stockholder's
performance of the obligations set forth herein.
NOW, THEREFORE, in consideration of the promises and the mutual agreements,
provisions and covenants set forth in the Merger Agreement and in this
Agreement, it is hereby agreed as follows:
1. Share Ownership and Agreement to Retain Shares.
1.1 Transfer and Encumbrance.
(a) Acquiror Stockholder is the beneficial owner of that number and
class of shares of the capital stock of Acquiror set forth on the
signature page hereto (the "SHARES"). These Shares constitute the
Acquiror Stockholder's entire interest in the outstanding capital stock
of Acquiror. No other person or entity not a signatory to this Agreement
has a beneficial interest in or a right to acquire such Shares or any
portion of such Shares (except, in the event Acquiror Stockholder is a
partnership, partners, retired partners or former partners of Acquiror
Stockholder). The Shares are and will be at all times up until the
Expiration Date (as defined below) free and clear of any liens, claims,
options, charges or other encumbrances other than those existing under
the Act. The Acquiror Stockholder's principal residence or place of
business is set forth on the signature page hereto.
(b) Prior to the Expiration Date, Acquiror Stockholder agrees not
to: (i) transfer (except to partners, retired partners or former
partners of Acquiror Stockholder or as may be specifically required by
court order or by operation of law), sell, exchange, pledge or otherwise
dispose of or encumber the Shares or any New Shares (as defined below),
or to make any offer or agreement relating to the transfer, sale,
exchange, pledge, disposal or encumbrance thereof; (ii) grant any proxy
or power of attorney, deposit any of the Shares into a voting trust or
enter into a voting agreement or arrangement with respect to the Shares
except as provided in or contemplated by this Agreement; or (iii) take
any other action that would make any representation or warranty of
Acquiror Stockholder contained herein untrue or incorrect or have the
effect of preventing or disabling Acquiror Stockholder from performing
its obligations under this Agreement. As used herein, the term
"EXPIRATION DATE" shall mean the earlier to occur of (i) the Effective
Time of the Merger, and (ii) termination of the Merger Agreement
pursuant to its terms.
1.2 New Shares. Acquiror Stockholder agrees that any shares of
capital stock of Acquiror that Acquiror Stockholder purchases or with
respect to which Acquiror Stockholder otherwise acquires beneficial
ownership after the date of this Agreement and prior to the Expiration Date
("NEW SHARES")
A-59
255
shall be subject to the terms and conditions of this Agreement to the same
extent as if they constituted Shares.
2. Agreement to Vote Shares. Prior to the Expiration Date, at every
meeting of the stockholders of Acquiror called with respect to any of the
following, and at every adjournment thereof, and on every action or approval by
written consent of the stockholders of Acquiror with respect to any of the
following, Acquiror Stockholder shall vote the Shares and any New Shares (i) in
favor of approval of the Merger and any matter that could reasonably be expected
to facilitate the Merger; (ii) against any matter that could reasonably be
expected to adversely affect, prevent, delay or impede the Merger; (iii) against
any action or agreement that would result in a breach in any respect of any
covenant, representation or warranty or any other obligation or agreement of the
Acquiror under the Merger Agreement or this Agreement; and (iv) in favor of all
nominees to the Acquiror's Board of Directors designated by Target pursuant to
Section 5.21 of the Merger Agreement.
3. Irrevocable Proxy. Acquiror Stockholder hereby agrees to timely deliver
to Target a duly executed proxy in the form attached hereto as Exhibit A (the
"PROXY") with respect to each and every meeting of stockholders of Acquiror or
action or approval by written consent of stockholders of Acquiror, such Proxy to
cover the total number of Shares and New Shares in respect of which Acquiror
Stockholder is entitled to vote at any such meeting or such written consent. In
the event that Acquiror Stockholder is unable to provide any such Proxy in a
timely manner, Acquiror Stockholder hereby grants Target a power of attorney to
execute and deliver such Proxy for and on behalf of Acquiror Stockholder, such
power of attorney, which being coupled with an interest, shall survive any
death, disability, bankruptcy, or any other such impediment. Effective
immediately upon the execution of this Agreement by the Acquiror Stockholder,
the Acquiror Stockholder hereby revokes any and all prior proxies given by the
Acquiror Stockholder with respect to the matters contemplated hereby and agrees
not to grant any subsequent proxies with respect to such matters until after the
Expiration Date.
4. Representations, Warranties and Covenants of Acquiror
Stockholder. Acquiror Stockholder hereby represents, warrants and covenants to
Target as follows:
(a) Power; Binding Agreement. Acquiror Stockholder has the legal
capacity, power and authority to enter into and perform all of Acquiror
Stockholder's obligations under this Agreement. This Agreement has been
duly and validly executed and delivered by Acquiror Stockholder and
constitutes a valid and binding agreement of Acquiror Stockholder,
enforceable against Acquiror Stockholder in accordance with its terms
except that (i) such enforcement may be subject to applicable bankruptcy,
insolvency or other similar laws, now or hereafter in effect, affecting
creditors' rights generally, and (ii) the remedy of specific performance
and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(b) No Conflicts. None of the execution and delivery of this
Agreement by Acquiror Stockholder, the consummation by Acquiror Stockholder
of the transactions contemplated hereby or compliance by Acquiror
Stockholder with any of the provisions hereof shall (i) conflict with or
result in any breach of any organizational documents applicable to Acquiror
Stockholder, if any, (ii) result in a violation or breach of, or constitute
(with or without notice or lapse of time or both) a default (or give rise
to any third party right of termination, cancellation, material
modification or acceleration) under any of the terms, conditions or
provisions of any note, loan agreement, bond, mortgage, indenture, license,
contract, commitment, arrangement, understanding, agreement or other
instrument or obligation of any kind to which Acquiror Stockholder is a
party or by which Acquiror Stockholder or any of its properties or assets
may be bound, or (iii) violate any order, writ, injunction, decree,
judgment, order, statute, rule or regulation applicable to Acquiror
Stockholder or any of Acquiror Stockholder's properties or assets.
(c) Until the Expiration Date, Acquiror Stockholder will not (and will
use Acquiror Stockholder's best efforts to cause Acquiror, its affiliates,
officers, directors and employees and any investment banker, attorney,
accountant or other agent retained by Acquiror Stockholder or such other
parties, not to): (i) initiate or solicit, directly or indirectly, any
proposal, plan or offer to acquire all or any substantial part of the
business or properties or capital stock of Acquiror, whether by merger,
purchase of assets, tender
A-60
256
offer or otherwise, or to liquidate Acquiror or otherwise distribute to the
stockholders of Acquiror all or any substantial part of the business,
properties or capital stock of Acquiror (each, an "ACQUISITION PROPOSAL");
(ii) initiate, directly or indirectly, any contact with any person in an
effort to solicit, or with a view towards soliciting, any Acquisition
Proposal; (iii) furnish information concerning Acquiror's business,
properties or assets to any corporation, partnership, person or other
entity or group (other than Target, or any associate, agent or
representative of Target) under any circumstances that could reasonably be
expected to relate to an actual or potential Acquisition Proposal; or (iv)
negotiate or enter into discussions or an agreement, directly or
indirectly, with any entity or group with respect of any potential
Acquisition Proposal.
5. Additional Documents. Acquiror Stockholder hereby covenants and agrees
to execute and deliver any additional documents necessary or desirable, in the
reasonable opinion of Target, to carry out the purpose and intent of this
Agreement.
6. Consent and Waiver. Acquiror Stockholder hereby gives any consents or
waivers that are reasonably required for the consummation of the Merger under
the terms of any agreement to which Acquiror Stockholder is a party or pursuant
to any rights Acquiror Stockholder may have.
7. Confidentiality. Acquiror Stockholder agrees (i) to hold any
information regarding this Agreement and the Merger in strict confidence, and
(ii) not to divulge any such information to any third person, until such time as
the Merger has been publicly disclosed by Target or as required by applicable
laws, rules or regulations.
8. Miscellaneous.
8.1 Survival; Termination. All representations, warranties and
covenants contained in Sections 4, 6, 7, and 8 of this Agreement shall
survive the Closing.
8.2 Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
8.3 Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, representatives, successors and
permitted assigns, but, except as otherwise specifically provided herein,
neither this Agreement nor any of the rights, interests or obligations of
the parties hereto may be assigned by either of the parties without the
prior written consent of the other. This Agreement is intended to bind
Acquiror Stockholder as a stockholder of Acquiror only with respect to the
specific matters set forth herein.
8.4 Amendment and Modification. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of a
written agreement executed by the parties hereto.
8.5 Specific Performance; Injunctive Relief. The parties hereto
acknowledge that Target will be irreparably harmed and that there will be
no adequate remedy at law for a violation of any of the covenants or
agreements of Acquiror Stockholder set forth herein. Therefore, it is
agreed that, in addition to any other remedies that may be available to
Target upon any such violation, Target shall have the right to enforce such
covenants and agreements by specific performance, injunctive relief or by
any other means available to Target at law or in equity and the Acquiror
Stockholder hereby agrees that it will not oppose the granting of such
relief on the basis that Target has not been irreparably harmed or has an
adequate remedy at law and waives any requirement for the security or
posting of any bond in connection with such enforcement.
8.6 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given (i) when delivered personally or by
commercial delivery service, or (ii) five business days after the date
mailed by registered or certified mail (return receipt requested) or (iii)
one business day
A-61
257
after dispatch via facsimile (with confirmation of receipt) to the parties
at the following address (or at such other address for a party as shall be
specified by like notice):
(a) If to the Acquiror Stockholder, at the address set forth below
the Acquiror Stockholder's signature at the end hereof.
(b) if to Target, to:
iwin.com, Inc.
10940 Wilshire Blvd.
Los Angeles, CA 90024
Attention: General Counsel
Telephone No.: (310) 264-4300
Facsimile No.: (310) 264-4399
with a copy to:
O'Melveny & Myers LLP
1999 Avenue of the Stars
7th Floor
Los Angeles, CA 90067-6035
Telephone No.: (310) 553-6700
Facsimile No.: (310) 246-6779
or to such other address as any party hereto may designate for itself by
notice given as herein provided.
8.7 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Delaware.
8.8 Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties
with respect to such subject matter.
8.9 Counterpart. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
8.10 Effect of Headings. The section headings herein are for
convenience only and shall not affect the construction or interpretation of
this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
A-62
258
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
IWIN.COM, INC. STOCKHOLDER
By: --------------------------------------------------
------------------------------------------------- (Signature)
Name: --------------------------------------------------
---------------------------------------------- (Print Name)
Title: --------------------------------------------------
----------------------------------------------- (Print Address)
--------------------------------------------------
(Print Address)
--------------------------------------------------
(Print Telephone Number)
--------------------------------------------------
(Social Security or Tax I.D. Number)
Total Number of Shares owned on the date hereof:
Common Stock: ------------------
Others: ------------------
------------------
------------------
State of Residence: ------------------
A-63
259
EXHIBIT A
IRREVOCABLE PROXY
TO VOTE STOCK OF COMPANY
The undersigned stockholder of Uproar, Inc., a Delaware corporation
("Company"), hereby irrevocably (to the fullest extent permitted by the Delaware
General Corporation Law) appoints the members of the Board of Directors of
iwin.com, Inc., a Delaware corporation ("iwin.com"), and each of them, or any
other designee of iwin.com, as the sole and exclusive attorneys and proxies of
the undersigned, with full power of substitution and resubstitution, to vote and
exercise all voting and related rights (to the fullest extent that the
undersigned is entitled to do so) with respect to all of the shares of capital
stock of Company that now are or hereafter may be beneficially owned by the
undersigned, and any and all other shares or securities of Company issued or
issuable in respect thereof on or after the date hereof (collectively, the
"Shares") in accordance with the terms of this Irrevocable Proxy. The Shares
beneficially owned by the undersigned stockholder of Company as of the date of
this Irrevocable Proxy are listed on the final page of this Irrevocable Proxy.
Upon the undersigned's execution of this Irrevocable Proxy, any and all prior
proxies given by the undersigned with respect to any Shares are hereby revoked
and the undersigned agrees not to grant any subsequent proxies with respect to
the Shares until after the Expiration Date (as defined below).
This Irrevocable Proxy is irrevocable (to the fullest extent provided in
the Delaware General Corporation Law), is coupled with an interest, including,
but not limited to, that certain Voting Agreement dated as of even date herewith
by and between iwin.com and the undersigned, and is granted in consideration of
iwin.com entering into that certain Agreement and Plan of Merger and
Reorganization between Company and iwin.com (the "Merger Agreement"), which
agreement provides for the merger of iwin.com Acquisition Corporation, a
wholly-owned subsidiary of Uproar, with and into iwin.com (the "Merger"). As
used herein, the term "Expiration Date" shall mean the earlier to occur of (i)
such date and time as the Merger shall become effective in accordance with the
terms and provisions of the Merger Agreement, and (ii) the date of termination
of the Merger Agreement pursuant to its terms.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date, to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting and other rights of the undersigned with respect to the
Shares (including, without limitation, the power to execute and deliver written
consents pursuant to the Delaware General Corporation Law), at every annual,
special or adjourned meeting of the stockholders of the Company and in every
written consent in lieu of such meeting as follows: (a) in favor of approval of
the Merger and any matter that could be reasonably expected to facilitate the
Merger; (b) against any matter that could reasonably be expected to adversely
affect, prevent, delay or impede the Merger; (c) against any action or agreement
that would result in a breach in any respect of any covenant, representation or
warranty or any other obligation or agreement of the Company or the Voting
Agreement dated as of even date herewith by and between iwin.com and the
undersigned; and (iv) in favor of all nominees to the Acquiror's Board of
Directors designated by Target pursuant to Section 5.21 of the Merger Agreement.
The attorneys and proxies named above may not exercise this Irrevocable
Proxy on any other matter except as provided above. The undersigned stockholder
may vote the Shares on all other matters.
All authority herein conferred shall survive the death or incapacity of the
undersigned and any obligation of the undersigned hereunder shall be binding
upon the heirs, personal representatives, successors and assigns of the
undersigned.
A-64
260
This Irrevocable Proxy is coupled with an interest as aforesaid and is
irrevocable.
Dated: July , 2000
______________________________________
(Signature of Company Stockholder)
______________________________________
(Print Name of Company Stockholder)
Shares beneficially owned:
_______ shares of Company Common Stock
_______ shares of Company _______ Stock
_______ shares of Company _______ Stock
_______ shares of Company _______ Stock
_______ shares of Company _______ Stock
A-65
261
EXHIBIT C
ESCROW AGREEMENT
A-66
262
ESCROW AGREEMENT
This Agreement is made and entered into on this day of , 2000,
by and among (i) Uproar Inc., a Delaware corporation ("Acquiror"), (ii)
iwin.com, Inc. ("Target"), (iii) Frederick Krueger as the representative (the
"Target Stockholders' Agent") of the stockholders of Target (the "Target
Stockholders"), and (iv) The Chase Manhattan Bank, as escrow agent ("Escrow
Agent").
WITNESSETH:
WHEREAS, Acquiror, Merger Sub, Target, the Target Stockholders' Agent and
the Target Stockholders are parties to that certain Agreement and Plan of
Reorganization dated as of July , 2000 (collectively, with all schedules,
letters, exhibits and certificates referred to therein, the "Merger Agreement")
and attached hereto as Exhibit A, which provides for the merger of Merger Sub
with and into Target, with Target surviving as a wholly-owned subsidiary of
Acquiror (the "Merger"); and
WHEREAS, the Merger Agreement provides that at the Effective Time, certain
shares of Acquiror Common Stock to be issued in the Merger and otherwise
distributable to the Former Target Stockholders pursuant thereto will be
deposited in escrow pursuant to this Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in the Merger Agreement and herein, the parties agree as follows:
ARTICLE I
ESCROW
1.1 Defined Terms. Capitalized terms not defined herein shall have the
meaning assigned to such terms in the Merger Agreement. All provisions of the
Merger Agreement shall be incorporated herein by reference as if set forth in
their entirety herein. If any term of this Agreement is inconsistent with the
terms of the Merger Agreement, then the terms of the Merger Agreement shall
control.
1.2 Escrow Agreement. Acquiror and Target hereby appoint the Escrow Agent
as the escrow agent for the purposes set forth in Article VIII of the Merger
Agreement. At the Effective Time, the Target Stockholders' Agent, on behalf of
the Target Stockholders, shall deposit, or cause to be deposited, into an escrow
account with the Escrow Agent one or more certificates in the name of "Chase
Manhattan Bank, as Escrow Agent" representing ten percent (10%) of the amount of
Acquiror Common Stock otherwise deliverable to such Target Stockholder pursuant
to Section 1.6 of the Merger Agreement (collectively, the "Escrow Shares") which
shares, together with distributions thereof pursuant to Section 1.5, shall
constitute the Escrow Fund. The Escrow Agent will acknowledge receipt of the
Escrow Shares into the Escrow Fund to the Target Stockholders' Agent and the
Acquiror and will hold such shares in accordance with the terms and conditions
hereof and of Article VIII of the Merger Agreement. The "Termination Date" shall
be the date that is twelve (12) calendar months from the Closing Date.
1.3 Escrow Fees. Acquiror agrees to (i) pay Escrow Agent upon execution of
this Escrow Agreement and annually thereafter reasonable compensation for the
services to be rendered hereunder, which unless otherwise agreed in writing,
shall be as described in Schedule A attached hereto, and (ii) pay or reimburse
Escrow Agent upon request for all expenses, disbursements and advances,
including reasonable attorney's fees and expenses, incurred or made by it in
connection with the preparation, execution, performance, delivery, modification
and termination of this Agreement.
1.4 Ownership and Vote of Shares. The Escrow Agent shall, subject to the
provisions of this Agreement and the Merger Agreement, hold the Escrow Shares
and any distributions in respect thereof as agent for the respective Target
Stockholders. All Escrow Shares in the Escrow Fund shall be available for
distribution by the Escrow Agent, subject to the provisions of this Agreement
and the Merger Agreement, to reimburse Acquiror in respect of any Damages which
are indemnifiable pursuant to the Merger Agreement. The Target Stockholders
shall be entitled to exercise any and all voting and other consensual rights
pertaining to the
A-67
263
Escrow Shares or any part thereof for any purpose not inconsistent with the
terms of this Agreement or the Merger Agreement. The Escrow Agent shall from
time to time deliver to the Target Stockholders' Agent, who shall deliver to the
Target Stockholders, such proxies, consents or other documents as may be
necessary to enable the Target Stockholders to exercise such rights. In the
absence of exercise of such voting rights, the Escrow Agent shall not vote any
of the Escrow Shares.
1.5 Distribution of Securities. Any and all distributions of stock or any
securities of Acquiror Common Stock issued in connection with the Escrow Shares
(including, without limitation, any shares issued pursuant to any stock
dividend, stock split, reverse stock split, combination or reclassification
thereof) shall be the property of the Target Stockholders, shall be deposited
with the Escrow Agent and shall be treated as Escrow Shares pursuant to the
terms of this Agreement.
1.6 Dividends. Subject to Section 1.5, cash dividends or other property
distributed in respect of Acquiror Common Stock shall be delivered to the Target
Stockholders on a pro-rata basis in accordance with the number of shares of
Target Common Stock held by the Target Stockholders at the Effective Time and
shall not be deposited with or retained by the Escrow Agent.
ARTICLE II
RELEASE FROM ESCROW
2.1 Claims upon Escrow Fund. Upon receipt by the Escrow Agent (on or
before the Termination Date) of an Officer's Certificate from Acquiror stating
that (i) Acquiror has incurred Damages in an aggregate stated amount and (ii) is
entitled to payment from the Escrow Fund in a specified number of shares, the
Escrow Agent shall, subject to the provisions of Section 2.2 of this Agreement,
deliver to Acquiror the specified number of shares of Acquiror Common Stock to
indemnify Acquiror for the Damages claimed. In the event that the number of
shares of Acquiror Common Stock in the Escrow Fund is less than the number
required to pay the Damages claimed by the Acquiror in any Officer's
Certificate, Escrow Agent shall, subject to the provisions of this Agreement,
distribute to the Acquiror the remaining Acquiror Common Stock held in the
Escrow Fund.
2.2 Objections to Claims. For a period of forty-five (45) days after
delivery to the Escrow Agent of an Officer's Certificate, the Escrow Agent shall
make no delivery of Acquiror Common Stock or other property pursuant to Section
2.1 hereof unless the Escrow Agent shall have received written authorization
from the Target Stockholders' Agent to make such delivery. After the expiration
of such forty-five (45) day period, the Escrow Agent shall make delivery of the
Acquiror Common Stock or other property in the Escrow Fund in accordance with
Section 2.1 hereof, provided that no such payment or delivery may be made if the
Target Stockholders' Agent shall object in a written statement to any claim made
in the Officer's Certificate, and such statement shall have been delivered to
the Escrow Agent prior to the expiration of such forty-five (45) day period.
2.3 Contested Claims. In case the Target Stockholders' Agent shall object
in writing to any claim or claims by Acquiror made in any Officer's Certificate
as provided in Section 2.2, the Target Stockholders' Agent and Acquiror shall
attempt in good faith for sixty (60) days to agree upon the rights of the
respective parties with respect to each of such claims. If the Target
Stockholders' Agent and Acquiror should so agree, a memorandum setting forth
such agreement shall be prepared and signed by both parties and shall be
furnished to the Escrow A gent. The Escrow Agent shall be entitled to rely on
any such memorandum and shall distribute the Acquiror Common Stock or other
property from the Escrow Fund in accordance with the terms thereof. If the
parties have not resolved the dispute during such sixty (60) day period as
evidenced by an executed memorandum then the parties will resolve the dispute by
final, binding award (the "Award") of an arbitrator as provided in Section 8.8
of the Merger Agreement. The Award shall be provided to the Escrow Agent and the
Escrow Agent shall be entitled to rely on any such Award and shall distribute
the Acquiror Common Stock or other property from the Escrow Fund in accordance
with the terms thereof.
2.4 No Fractional Shares. No fractional shares shall be delivered to
satisfy any Damages claims. Instead, in the event that the Escrow Shares to be
so delivered from the Escrow Fund would include a
A-68
264
fractional share, the parties hereto agree that the Target Stockholders' Agent
and the Acquiror may round such fraction to a whole share in such manner as they
may agree in their sole and absolute discretion.
2.5 Distribution Upon Termination of Escrow Period. Within five (5)
business days following the Termination Date, the Escrow Agent shall deliver to
the Former Target Stockholders all of the Acquiror Common Stock in the Escrow
Fund in excess of any amount of such Acquiror Common Stock reasonably necessary
to satisfy any unsatisfied or disputed claims for Damages specified in any
Officer's Certificate delivered to the Escrow Agent on or before the Termination
Date and any unsatisfied or disputed claims by the Target Stockholders' Agent
under Section 8.9(d) of the Merger Agreement. As soon as the Escrow Agent has
received a memorandum of the parties stating that all such claims have been
resolved or an Award has been entered with regard to all disputed claims, the
Escrow Agent shall promptly deliver to the Former Target Stockholders all
Acquiror Common Stock remaining in the Escrow Fund and not required to satisfy
such claims. All distributions from the Escrow Fund to the Former Target
Stockholders shall be made on a pro-rata basis in accordance with the number of
shares of Target Common Stock held by the Target Stockholders at the Effective
Time.
2.6 Actions of the Target Stockholders' Agent. A decision, act, consent or
instruction of the Target Stockholders' Agent shall constitute a decision of all
Target Stockholders for whom shares of Acquiror Common Stock otherwise issuable
to them are deposited in the Escrow Fund and shall be final, binding and
conclusive upon each such Target Stockholder, and the Escrow Agent and Acquiror
may rely upon any decision, act, consent or instruction of the Target
Stockholders' Agent as being the decision, act, consent or instruction of each
and every such Target Stockholder. The Escrow Agent is hereby relieved from any
liability to any person for any acts done by it in accordance with such
decision, act, consent or instruction of the Target Stockholders' Agent.
ARTICLE III
AUTHORITY AND INDEMNIFICATION
3.1 Authority. Upon consummation of the Merger and in consideration of the
mutual promises and covenants set forth in the Merger Agreement, the Target
Stockholders and Acquiror shall be deemed to have irrevocably appointed the
Escrow Agent to hold all of the Escrow Fund for the account of the Target
Stockholders as provided in Section 8.3 of the Merger Agreement subject to this
Agreement until their release in accordance with this Agreement.
3.2 Responsibilities of Escrow Agent.
(a) With respect to this Agreement, the parties acknowledge and agree that
Escrow Agent is acting solely as an independent Escrow Agent pursuant to this
Agreement. The Escrow Agent undertakes to perform only such duties as are
expressly set forth herein and no other or further duties or responsibilities
shall be implied.
(b) Escrow Agent shall not be required to institute or defend any action
involving any matters referred to herein or which affected it or its duties or
liabilities hereunder unless or required to do so by any party to this Agreement
and then only upon receiving indemnity in accordance with Section 3.3 hereto,
against any and all claims, liabilities and expenses in relation thereto. Except
as otherwise contemplated by Section 3.2(c) hereof, Escrow Agent shall not be
required to defend any legal proceedings which may be instituted against Escrow
Agent in respect to the subject matter hereof. Except as otherwise contemplated
by Section 3.2(c) hereof, in the event any action is instituted against Escrow
Agent, Escrow Agent may interplead the parties hereto and may deposit the
subject matter of this escrow into court and in such event Escrow Agent shall be
relieved and/or discharged from any and all obligations and liabilities under
and pursuant hereto subject to any required permission of the court in which
such interpleader is filed.
(c) Escrow Agent may rely upon and shall not be liable for acting or
refraining from acting upon any written notice, instruction or request furnished
to it hereunder and believed by it to be genuine and to have been signed or
presented by the proper party or parties so long as Escrow Agent complies with
the terms of
A-69
265
this Agreement. Escrow Agent shall be under no duty to inquire into or
investigate the validity, accuracy or content of any such document. Escrow Agent
shall have no duty to solicit any payments which may be due it hereunder. Escrow
Agent shall not be liable for any action taken or omitted by it in good faith
except to the extent that a court of competent jurisdiction determines that the
Escrow Agent's gross negligence or willful misconduct was the primary cause of
any loss to the Acquiror or Target. Escrow Agent may execute any of its powers
and perform any of its duties hereunder directly or through agents or attorneys
(and shall be liable only for the careful selection of any such agent or
attorney) and may consult with counsel, accountants and other skilled persons to
be selected and retained by it. Escrow Agent shall not be liable for anything
done, suffered or omitted in good faith by it in accordance with the advice or
opinion of any such counsel, accountants or other skilled persons. In the event
that Escrow Agent shall be uncertain as to its duties or rights hereunder or
shall receive instructions, claims or demands from any party hereto which, in
its opinion, conflict with any of the provisions of this Agreement, it shall be
entitled to refrain from taking any action and its sole obligation shall be to
keep safely all property held in escrow until it shall be directed otherwise in
writing by all of the other parties hereto or by a final order or judgment of a
court of competent jurisdiction. Anything in this Escrow Agreement to the
contrary notwithstanding, in no event shall the Escrow Agent be liable for
special, indirect or consequential loss or damage of any kind whatsoever
(including but not limited to lost profits), even if the Escrow Agent has been
advised of the likelihood of such loss or damage and regardless of the form of
action.
3.3 Indemnity. Acquiror and the Target Stockholders shall jointly and
severally indemnify, defend and save harmless Escrow Agent and its directors,
officers, agents and employees (the "Indemnitees") from all loss, liability or
expense (including the fees and expenses of in house or outside counsel) arising
out of or in connection with (i) Escrow Agent's execution and performance of
this Agreement, except in the case of any Indemnitee to the extent that such
loss, liability or expense is due to the gross negligence or willful misconduct
of such Indemnitee, or (ii) its following any instructions or other directions
from Acquiror or the Target Stockholders' Agent, except to the extent that its
following any such instruction or direction is expressly forbidden by the terms
of this Agreement. The parties hereto acknowledge that the foregoing indemnities
shall survive the resignation or removal of Escrow Agent or the termination of
this Agreement. The parties hereby grant Escrow Agent a lien on, right of
set-off against and security interest in the Escrow Fund for the payment of any
claim for indemnification, compensation, expenses and amounts due hereunder,
provided however, that the Target Stockholders' liability to Escrow Agent
hereunder shall be limited to the Escrow Shares on deposit in the Escrow Fund at
the time of contribution.
3.4 In no case shall Acquiror or the Target Stockholders be liable under
this Agreement with respect to any lawsuit filed against Escrow Agent unless
Acquiror or the Target Stockholders, as the case may be, are notified by Escrow
Agent, by letter or by telegram or telex confirmed by letter, of the
commencement of any such action within a reasonable time after such person shall
have been served with a summons or other first legal process giving information
as to the nature and basis of the lawsuit, but failure to so notify Acquiror and
the Target Stockholders shall not relieve them from any liability they may have
otherwise than on account of this Agreement. Acquiror and the Target
Stockholders shall each be entitled to participate at their own expense in the
defense of any such lawsuit, and if one of the parties so elects within a
reasonable time after receipt of such notice, upon receiving consent from the
other party, such party shall assume the defense of any lawsuit. In the event
that a party assumes the defense of any lawsuit, such defense shall be conducted
by counsel chosen by such party and satisfactory to Escrow Agent. If counsel is
so retained, the defendant or defendants in the lawsuit shall bear the fees and
expenses of any additional counsel thereafter retained by it or them.
3.5 Reliance. Escrow Agent shall not be responsible for the genuineness of
any certificate or signature, and may rely conclusively upon and shall be
protected when acting upon any notice, affidavit, request, consent, instruction
or other instrument believed by it in good faith to be genuine or to be signed
or presented by the proper person, or duly authorized, or properly made. Escrow
Agent shall have no responsibility except for the performance of its express
duties hereunder and no additional duties shall be inferred or implied by this
Agreement.
A-70
266
ARTICLE IV
MISCELLANEOUS
4.1 Notices. Any notice or other communication required or permitted to be
given to the parties hereto shall be deemed to have been given if personally
delivered (including personal delivery by facsimile), or four days after mailing
by certified or registered mail, return receipt requested, first class postage
prepaid, addressed as follows (or at such other address as the addressed party
may have substituted by notice pursuant to this Section 4.1):
(a) If to Acquiror.
Uproar, Inc.
240 West 35th Street
New York, NY 10001
Attention: General Counsel
Facsimile No.: (917) 351-2896
Telephone No.: (212) 714-9500
(b) If to the Target Stockholders' Agent:
Frederick Krueger
c/o iwin.com, Inc.
10940 Wilshire Boulevard
Los Angeles, CA 90024
Fax No.: (310) 264-4399
(c) With copies to counsel as set forth in the Merger Agreement.
If to the Escrow Agent:
The Chase Manhattan Bank
Capital Markets Fiduciary Services
450 West 33rd Street
New York, NY 10001-2697
Attention: Escrow Administration, 10th Floor
Fax No.: (212) 946-8156
(d) If to Target Stockholders at the addresses set forth on Schedule B
hereto.
4.2 Amendment. The provisions of this Agreement may be waived, altered,
amended or supplemented, in whole or in part, only by a writing signed by all of
the parties hereto.
4.3 Successor to Escrow Agent. Escrow Agent may resign and be discharged
from its duties or obligations hereunder by giving 10 days advance notice in
writing of such resignation to the other parties hereto specifying a date when
such resignation shall take effect. The Escrow Agent shall have the right to
withhold upon its resignation or discharge an amount equal to any amount due and
owing to the Escrow Agent, plus any costs and expenses the Escrow Agent shall
reasonably believe may be incurred by the Escrow Agent in connection with the
termination of the Escrow Agreement; provided that any amounts withheld that are
not so incurred shall be returned to the new escrow agent and the Escrow Fund to
be governed in accordance with this Agreement. Any corporation or association
into which the Escrow Agent may be merged or converted or with which it may be
consolidated, or any corporation or association to which all or substantially
all the escrow business of the Escrow Agent's corporate trust line of business
may be transferred, shall be the Escrow Agent under this Escrow Agreement
without further act.
4.4 Termination. This Agreement shall terminate upon the earlier of (a)
the mutual written express agreement of the parties hereto and (b) when all of
the Escrow Shares have been released from escrow according to the terms hereof.
In a mutual written express agreement of Acquiror and the Target Stockholders'
Agent terminating this Agreement, the parties may instruct the Escrow Agent to
distribute the
A-71
267
balance of the Escrow Shares according to instructions contained in such
agreement and the Escrow Agent shall so distribute the balance of the Escrow
Shares in accordance with such instructions.
4.5 Interpretation. The validity, construction, interpretation and
enforcement of this Agreement shall be determined and governed by the laws of
the State of Delaware. The invalidity or unenforceability of any provision of
this Agreement or the invalidity or unenforceability of any provision as applied
to a particular occurrence or circumstance shall not affect the validity or
enforceability of any of the other provisions of this Agreement or the
applicability of such provision, as the case may be.
4.6 Attorneys' Fees: Remedies. If any arbitration is filed or instituted
or any action at law or in equity in necessary to enforce or interpret the terms
of this Agreement or to protect the rights obtained hereunder, the prevailing
party shall be entitled to its reasonable attorneys' fees, costs, and
disbursements in addition to any other relief to which it may be entitled. The
rights and remedies of the parties under this Agreement and the Merger Agreement
and the other agreements related thereto, and all other letters, certificates or
documents executed in connection herewith and therewith are cumulative and not
exclusive of any rights, remedies, powers and privilege that may otherwise be
available to the parties hereto.
4.7 Counterparts and Facsimile. This Agreement may be signed in one or
more counterparts, each of which shall be deemed an original and all of which
shall constitute one agreement. All signatures of the parties to this Agreement
may be transmitted by facsimile, and such facsimile will, for all purposes, be
deemed to be the original signature of such party whose signature it reproduces,
and will be binding upon such party.
4.8 Transfer of Interests. No Target Stockholder shall sell, transfer,
pledge, hypothecate or otherwise dispose of any Escrow Shares, or any interest
therein, prior to the distribution of such Escrow Shares except in accordance
with this Agreement.
4.9 Miscellaneous. Without the prior written consent of the other parties,
neither this Agreement nor any right or interest hereunder may be assigned in
whole or in part by any party, except by Acquiror to one or more entities
controlled by Acquiror (with Acquiror remaining responsible for its obligations
hereunder). Notwithstanding the foregoing, none of the rights or duties of any
of the parties under this Agreement shall be affected by a merger or
consolidation of the Escrow Agent with any other entity. Nothing expressed or
implied in this Agreement is intended, nor shall it be construed to confer (x)
any rights, remedies, obligations or liabilities, legal or equitable, other than
as provided by this Agreement, or (y) otherwise constitute any person (other
than the Target Stockholder's Agent) a third party beneficiary under or by
reason of this Agreement (it being acknowledged that the Target Stockholders'
Agent is a third party beneficiary of this Agreement and is entitled to enforce
relevant provisions of this Agreement).
4.10 Governing Law, etc. This Escrow Agreement shall be governed by and
construed under the laws of the State of Delaware. Each party hereto irrevocably
waives any objection on the grounds of venue, forum non-conveniens or any
similar grounds and irrevocably consents to service of process by mail or in any
other manner permitted by applicable law and consents to the jurisdiction of the
courts located in the State of New York. The parties further hereby waive any
right to a trial by jury with respect to any lawsuit or judicial proceeding
arising or relating to this Escrow Agreement. No party to this Agreement is
liable to any other party for losses due to, or if it is unable to perform its
obligations under the terms of this Agreement because of, acts of God, fire,
floods, strikes, equipment or transmission failure, or other causes reasonably
beyond its control.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
A-72
268
IN WITNESS WHEREOF, the parties have signed this Agreement on the day and
year first above written.
UPROAR INC.,
a Delaware corporation
By:
Name:
Title:
IWIN.COM, INC.,
a Delaware corporation
By:
Name:
Title:
FREDERICK KRUEGER,
As Target Stockholders' Agent
By:
Name:
Title:
CHASE MANHATTAN BANK,
As Escrow Agent
By:
Name:
Title:
A-73
269
SCHEDULE A
ESCROW FEES
ESCROW AGENT'S COMPENSATION:
15 basis points of the highest value of collateral held on deposit per
annum or any part thereof without proration for partial years, subject
to a minimum of $7,500 per annum or any part thereof without proration
for partial years, (includes investment in a Chase Manhattan Bank Money
Market Account, Chase Manhattan Bank Trust Account or The Chase
Manhattan Bank Mutual Fund known as the Vista Fund).
$75 per investment (excludes Money Market, Trust Account or Vista Fund
Investments).
A-74
270
SCHEDULE B
ADDRESSES OF TARGET STOCKHOLDERS
A-75
271
EXHIBIT D
TARGET AFFILIATE AGREEMENT
A-76
272
TARGET AFFILIATE AGREEMENT
THIS TARGET AFFILIATE AGREEMENT (the "Affiliate Agreement") is entered into
as of , 2000 between UPROAR, INC., a Delaware corporation
("Acquiror"), and the undersigned stockholder ("Stockholder") of IWIN.COM, INC.,
a Delaware corporation (the "Target").
RECITALS
A. Acquiror, Target and certain other parties have entered into an
Agreement and Plan of Reorganization, dated as of July , 2000 (the "Merger
Agreement"), pursuant to which iwin.com Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Acquiror, will be merged with and
into Target (the "Merger").
B. Upon the consummation of the Merger and in connection therewith, the
Stockholder will become the owner of Common Stock of Acquiror, par value $0.01
per share (the "Acquiror Common Stock"), to be issued pursuant to a registration
under the Securities Act of 1933, as amended (the "Act").
NOW, THEREFORE, in consideration of the premises and the mutual agreements,
provisions and covenants set forth in the Merger Agreement and in this Affiliate
Agreement, it is hereby agreed as follows:
1. The Stockholder hereby agrees that:
(a) The Stockholder may be deemed to be (but does not hereby admit to
be) an "affiliate" of the Target within the meaning of Rule 145 under the
Securities Act of 1933, as amended (the "Securities Act").
(b) The Stockholder agrees not to offer, sell, exchange, transfer,
pledge or otherwise dispose of any of the Acquiror Common Stock unless at
that time either:
(i) such transaction is permitted pursuant to the provisions of
Rule 145(d) under the Securities Act;
(ii) counsel representing the Stockholder, reasonably satisfactory
to Acquiror, shall have advised Acquiror in a written opinion letter
reasonably satisfactory to Acquiror and Acquiror's counsel and upon
which Acquiror and its counsel may rely, that no registration under the
Securities Act is required in connection with the proposed sale,
transfer or other disposition;
(iii) a registration statement under the Securities Act covering
the Acquiror Common Stock proposed to be sold, transferred or otherwise
disposed of, describing the manner and terms of the proposed sale,
transfer or other disposition, and containing a current prospectus, is
filed with the SEC and made effective under the Securities Act; or
(iv) an authorized representative of the SEC shall have rendered
written advice to the Stockholder (sought by the Stockholder or counsel
to the Stockholder, with a copy thereof and of all other related
communications delivered to Acquiror) to the effect that the SEC will
take no action, or that the staff of the SEC will not recommend that the
SEC take action, with respect to the proposed offer, sale, exchange,
transfer, pledge or other disposition if consummated.
(c) All certificates of the Acquiror Common Stock deliverable to the
Stockholder pursuant to the Merger Agreement and in connection with the
Merger and any certificates subsequently issued with respect thereto or in
substitution therefor shall, unless one or more of the alternative
conditions set forth in the subparagraphs of paragraph (b) of this Section
1 shall have occurred, bear a legend substantially as follows:
"The Common Stock represented by this certificate may not be offered,
sold, exchanged, transferred, pledged or otherwise disposed of except in
accordance with the requirements of the Securities Act of 1933, as
amended, and the other conditions specified in that certain Affiliate
Agreement dated , 2000, a copy of which Affiliate Agreement
may be inspected by the holder of this
A-77
273
certificate at the offices of Acquiror, or Acquiror will furnish,
without charge, a copy thereof to the holder of this certificate upon
written request therefor."
(d) The Stockholder will observe and comply with the Securities Act
and the general rules and regulations thereunder, as now in effect and as
from time to time amended and including those hereafter enacted or
promulgated, in connection with any offer, sale, exchange, transfer, pledge
or other disposition of the Acquiror Common Stock or any part thereof.
2. The Stockholder hereby represents and warrants that it has full power
and authority to enter into this Agreement and such Agreement constitutes its
valid and legally binding obligation, enforceable in accordance with its terms
except (i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium, and other laws of general application affecting enforcement of
creditors' rights generally and (ii) as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies.
3. Reports. From and after the Effective Time of the Merger and for so
long as necessary in order to permit the Stockholder to sell the Acquiror Common
Stock pursuant to Rule 145 and, to the extent applicable, Rule 144 under the
Securities Act, Acquiror will file on a timely basis all reports required to be
filed by it pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934, referred to in paragraph (c)(1) of Rule 144 under the Securities Act (or,
if applicable, Acquiror will make publicly available the information regarding
itself referred to in paragraph (c)(2) of Rule 144), in order to permit the
Stockholder to sell, pursuant to the terms and conditions of Rule 145 and the
applicable provisions of Rule 144, the Acquiror Common Stock.
4. Waiver. No waiver by any party hereto of any condition or of any breach
of any provision of this Affiliate Agreement shall be effective unless in
writing.
5. Notices. All notices, requests, demands or other communications that
are required or may be given pursuant to the terms of this Affiliate Agreement
shall be in writing and shall be deemed to have been duly given if delivered by
hand or mailed by registered or certified mail, postage prepaid, as follows:
(a) If to the Stockholder, at the address set forth below the
Stockholder's signature at the end hereof.
(b) If to Acquiror:
Uproar, Inc.
240 West 35th Street
New York, NY 10001
Attention: General Counsel
Fax: (917) 351-2896
Tel: (212) 714-9500
with a copy to:
Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
733 3rd Avenue
New York, NY 10017
Attention: Babak Yaghmaie
Fax: (212) 687-6665
Tel: (212) 687-5222
or to such other address as any party hereto may designate for itself by notice
given as herein provided.
6. Counterparts. For the convenience of the parties hereto, this Affiliate
Agreement may be executed in one or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
document.
A-78
274
7. Successors and Assigns. This Affiliate Agreement shall be enforceable
by, and shall inure to the benefit of and be binding upon, the parties hereto
and their respective successors and assigns. As used herein, the term
"successors and assigns" shall mean, where the context so permits, heirs,
executors, administrators, trustees and successor trustees, and personal and
other representatives.
8. Governing Law. This Affiliate Agreement shall be governed by and
construed, interpreted and enforced in accordance with the laws of the State of
Delaware, without regard to the conflicts of law provisions thereof.
9. Severability. If a court of competent jurisdiction determines that any
provision of this Affiliate Agreement is unenforceable or enforceable only if
limited in time and/or scope, this Affiliate Agreement shall continue in full
force and effect with such provision stricken or so limited.
10. Effect of Headings. The section headings herein are for convenience
only and shall not effect the construction or interpretation of this Affiliate
Agreement.
11. Definitions. All capitalized terms used herein shall have the meaning
defined in the Merger Agreement, unless otherwise defined herein.
IN WITNESS WHEREOF, the parties have caused this Affiliate Agreement to be
executed as of the date first above written.
"ACQUIROR":
UPROAR, INC.
By:
------------------------------------
[ ]
[ ]
"STOCKHOLDER":
By:
------------------------------------
------------------------------------
PRINT NAME
Address:
------------------------------------
------------------------------------
A-79
275
EXHIBIT E
ACQUIROR'S LEGAL OPINION
A-80
276
, 2000
The Former Stockholders of iwin.com, Inc.
iwin.com, Inc.
10940 Wilshire Boulevard
Los Angeles, CA 90024
Ladies and Gentlemen:
We have acted as counsel for Uproar Inc., a Delaware corporation
("Uproar"), in connection with the execution and delivery of the Agreement and
Plan of Reorganization dated July 24, 2000 (the "Merger Agreement") by and among
Uproar, iwin.com Acquisition Corporation ("Merger Sub"), a Delaware corporation
and wholly-owned subsidiary of Uproar, iwin.com, Inc., a Delaware corporation
("iwin.com"), and certain other parties thereto. Pursuant to the terms and
conditions set forth in the Merger Agreement, Merger Sub will merge with and
into iwin.com, the separate corporate existence of Merger Sub shall cease and
iwin.com shall continue as the surviving corporation and a wholly-owned
subsidiary of Uproar (the "Merger"). This opinion is being rendered to you
pursuant to Section 6.2(c) of the Merger Agreement. Capitalized terms not
otherwise defined in this opinion shall have the meaning given them in the
Merger Agreement.
In connection with the opinions expressed herein we have made such
examination of matters of law and of fact as we considered appropriate or
advisable for purposes hereof. As to matters of fact material to the opinions
expressed herein, we have relied upon the representations and warranties as to
factual matters contained in and made by Uproar pursuant to the Merger
Agreement, a certificate of officers of Uproar and other certificates and
statements of government officials. We have also examined originals or copies of
such corporate documents or records of Uproar as we have considered appropriate
for the opinions expressed herein. We have assumed for the purposes of this
opinion that the signatures on documents and instruments examined by us are
authentic, that each document is what it purports to be, and that all documents
submitted to us as copies or facsimiles conform with the originals, which facts
we have not independently verified. We have not conducted a docket search in any
jurisdiction with respect to litigation that may be pending against Uproar or
any of their respective officers or directors or undertaken any further inquiry
other than as stated herein.
In addition, we have reviewed, among other things, originals, or copies
identified to our satisfaction as being true copies, of the Merger Agreement,
and the Schedules and Exhibits thereto. We have also reviewed the Registration
Statement on Form S-4, File No. , initially filed with the Securities and
Exchange Commission (the "SEC") on , 2000, for the purpose of
registering the shares of common stock to be issued to you pursuant to the
Merger Agreement under the Securities Act of 1933, as amended (the "Act")[, as
amended by ,] and oral advice from of the SEC that
the SEC had declared such Registration Statement effective as of p.m.
Eastern Time on , 2000. Such Registration Statement[, as amended,]
when it became effective, is referred to herein as the "Registration Statement."
In rendering this opinion, we have also assumed: (A) that the Merger
Agreement, the Escrow Agreement, dated the date hereof and attached to the
Merger Agreement as Exhibit C thereto (collectively, the "Transaction
Documents"), have been duly and validly executed and delivered by all parties
other than Uproar who are parties thereto and constitute validly binding and
enforceable obligations upon all parties other than Uproar who are parties
thereto; (B) that the representations and warranties made in the Transaction
Documents by all parties other than Uproar and Merger Sub who are parties
thereto are true and correct; (C) that Iwin.com and any stockholders of Iwin.com
that are a corporation or other entity, have filed any required state franchise,
income or similar tax returns and have paid any required state franchise, income
or similar taxes; (D) that there are no facts or circumstances relating to all
parties other than Uproar who are parties to the Transaction Documents that
might prevent such parties from enforcing any of the rights to which our opinion
relates; and (E) that there are no extrinsic agreements or understandings among
the parties to the Transaction Documents that would modify or interpret the
terms of the Transaction Documents or the
A-81
277
respective rights or obligations of the parties thereunder and we are not aware
of the existence of any such agreement or understandings.
In connection with our opinion relating to violations of federal or New
York laws, rules or regulations applicable to Uproar, such opinion is limited to
such laws, rules or regulations that in our experience are typically applicable
to a transaction of the nature contemplated by the Transaction Documents.
As used in this opinion, the expression "we are not aware" or the phrase
"to our knowledge" means as to matters of fact that, based on the actual
knowledge of individual attorneys within the firm principally responsible for
handling current matters for Uproar and after an examination of documents
referred to herein and after inquiries of certain officers of Uproar, we find no
reason to believe that the opinions expressed herein are factually incorrect;
but beyond that we have made no factual investigation for the purposes of
rendering this opinion. Specifically, but without limitation, we have made no
inquiries of securities holders or employees (other than obtaining
representations from certain officers of Uproar as described above) of Uproar.
This opinion relates solely to the laws of the State of New York, the
General Corporation Law of the State of Delaware and the federal securities laws
of the United States, and we express no opinion with respect to the effect or
application of any other laws. Special rulings of authorities administering such
laws or opinions of other counsel have not been sought or obtained.
Based upon our examination of and in reliance upon the foregoing and
subject to the limitations, exceptions, qualifications and assumptions set forth
below and except as set forth in the Merger Agreement or the Acquiror Disclosure
Schedule, we are of the opinion that as of the date hereof:
1. Uproar and Merger Sub are each corporations duly incorporated,
validly existing and in good standing under the laws of the State of
Delaware and have all requisite corporate power and authority to own their
respective properties and to conduct their respective businesses as
presently conducted.
2. Uproar and Merger Sub each has all requisite corporate power and
authority to execute, deliver and perform their respective obligations
under the Transaction Documents. The execution, delivery and performance of
Transaction Documents have been duly authorized by all necessary corporate
action of Uproar and Merger Sub, and the Transaction Documents have been
duly executed and delivered by Uproar and Merger Sub. Each of the
Transaction Documents to which it is a party constitutes a legal, valid and
binding obligation of Uproar and/or Merger Sub, enforceable against Uproar
and/or Merger Sub in accordance with its terms; provided, however, that no
opinion is expressed with respect to the enforceability of the indemnity
and escrow obligations of Article VIII of the Merger Agreement.
3. The execution and delivery by Uproar and Merger Sub and the
performance by Uproar and Merger Sub of their respective obligations under
the Transaction Documents do not (i) to our knowledge, violate any
provision of any federal securities, Delaware corporate or New York law,
rule or regulation applicable to Uproar or Merger Sub; (ii) violate any
provision of the Certificate of Incorporation or Bylaws of Uproar or Merger
Sub, (iii) conflict with or constitute a material default under the
provisions of judgments, writs, decrees or orders, if any, specifically
identified in the Acquiror Disclosure Schedule, or (iv) conflict with,
result in a violation of or a default under the provisions of any material
agreement of Uproar set forth on Schedule 1 hereto.
4. To our knowledge, except as may be set forth in the Acquiror
Disclosure Schedule, there is no action, suit, proceeding or investigation
pending against Uproar or Merger Sub before any court or governmental
agency (i) that questions the validity of the Transaction Documents or the
right of Uproar or Merger Sub to enter into the Transaction Documents or
(ii) that, if determined adversely, would be likely to result in a material
adverse change in the financial condition or business of Uproar or Merger
Sub.
A-82
278
5. The shares of common stock to be delivered by Uproar have been
duly authorized and, when issued and delivered in accordance with the terms
of the Merger Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such shares shall not be subject to any
preemptive rights.
6. The Registration Statement has become effective under the Act,
and, to our knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or threatened under the Act.
Our opinions expressed above are specifically subject to the following
limitations, exceptions, qualifications and assumptions:
A. We express no opinion as to the effect of bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting
the relief of debtors or the rights and remedies of creditors generally,
including without limitation the effect of statutory or other law regarding
fraudulent conveyances and preferential transfers.
B. We express no opinion as to compliance or noncompliance with
applicable federal or state antifraud or antitrust statutes, laws, rules
and regulations, including without limitation, the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended.
C. Limitations imposed by state law, federal law or general equitable
principles upon the specific enforceability of any of the remedies,
covenants or other provisions of any applicable agreement and upon the
availability of injunctive relief or other equitable remedies, regardless
of whether enforcement of any such agreement is considered a proceeding in
equity or at law.
D. The effect of court decisions, invoking statutes or principles of
equity, which have held that certain covenants and provisions of agreements
are unenforceable where enforcement of such covenants or provisions under
the circumstances would violate the enforcing party's implied covenant of
good faith and fair dealing.
E. The unenforceability under certain circumstances of provisions
expressly or by implication waiving broadly or vaguely stated rights,
unknown future rights, or defenses to obligations or rights granted by law,
when such waivers are against public policy or prohibited by law.
F. The unenforceability under certain circumstances of provisions to
the effect that rights or remedies are not exclusive, that rights or
remedies may be exercised without notice, that every right or remedy is
cumulative and may be exercised in addition to or with any other right or
remedy, that election of a particular remedy or remedies does not preclude
recourse to one or more remedies, or that failure to exercise or delay in
exercising rights or remedies will not operate as a waiver of any such
right or remedy.
G. Any provisions of the Transaction Documents requiring that waivers
must be in writing may not be binding or enforceable if a non-executory
oral agreement has been created modifying any such provision or an implied
agreement by trade practice or course of conduct has given rise to a
waiver.
H. The unenforceability under certain circumstances of provisions
indemnifying a party against, or requiring contributions toward, that
party's liability for its own wrongful or negligent acts, or where
indemnification or contribution is contrary to public policy. In this
regard we advise you that in the opinion of the Securities and Exchange
Commission, indemnification of directors, officers and controlling persons
of an issuer against liabilities arising under the Securities Act of 1933,
as amended is against public policy and is therefore unenforceable.
This opinion is rendered as of the date first written above solely for your
benefit in connection with the Merger Agreement and may not be delivered to,
quoted or relied upon by any person other than you, or for any other purpose,
without our prior written consent. Our opinion is expressly limited to the
matters set forth above and we render no opinion, whether by implication or
otherwise, as to any other matters relating to
A-83
279
Uproar or Merger Sub. We assume no obligation to advise you of facts,
circumstances, events or developments which hereafter may be brought to our
attention and which may alter, affect or modify the opinions expressed herein.
Very truly yours,
GUNDERSON DETTMER STOUGH VILLENEUVE
FRANKLIN & HACHIGIAN, LLP
A-84
280
EXHIBIT F
EMPLOYMENT AND NONCOMPETITION AGREEMENT
A-85
281
EMPLOYMENT AGREEMENT
This Agreement is entered into as of , 2000 by and between
SCOTT KAUFMAN (the "Employee") and Uproar Inc. (the "Company").
1. DUTIES AND SCOPE OF EMPLOYMENT.
(a) POSITION. For the term of his employment under this Agreement
(the "Employment"), the Company agrees to employ the Employee in the
position of Executive Vice President of Product Development managing the
areas of online marketing, production, technology, customer service and
product development, or in such other position as the Company and the
Employee may subsequently agree.
(b) OBLIGATIONS TO THE COMPANY. During his Employment, the Employee
shall devote his full business efforts and time to the Company. During his
Employment, without the prior written approval of the Company's Chief
Executive Officer, the Employee shall not render services in any capacity
to any other person or entity and shall not act as a sole proprietor,
partner, contractor, officer, or employee of any other person or entity or
as a shareholder of any business that competes with the Company except that
if the competing business is a publicly traded company, Employee may own up
to 2% of the outstanding shares of such company. The Employee shall comply
with the Company's policies and rules, as they may be in effect from time
to time during his Employment.
(c) NO CONFLICTING OBLIGATIONS. The Employee represents and warrants
to the Company that he is under no obligations or commitments, whether
contractual or otherwise, that are inconsistent with his obligations under
this Agreement. The Employee represents and warrants that he will not use
or disclose, in connection with his employment by the Company, any trade
secrets or other proprietary information or intellectual property in which
the Employee or any other person has any right, title or interest and that
his employment by the Company as contemplated by this Agreement will not
infringe or violate the rights of any other person.
(d) COMMENCEMENT DATE. The Employee shall commence full-time
Employment on the date hereof.
2. SALARY. The Company shall pay the Employee as compensation for his
services a base salary at a gross annual rate of not less than $200,000. Such
salary shall be payable in accordance with the Company's standard payroll
procedures. (The annual compensation specified in this Section 2, together with
any increases in such compensation that the Company may grant from time to time,
is referred to in this Agreement as "Base Compensation.")
3. VACATION AND EMPLOYEE BENEFITS. During his Employment, the Employee
shall be eligible for paid vacations in accordance with the Company's standard
policy for similarly-situated employees, as in effect from time to time. During
his Employment, the Employee shall be eligible to participate in any employee
benefit plans maintained by the Company for similarly-situated employees,
subject in each case to the generally applicable terms and conditions of the
plan in question and to the determinations of any person or committee
administering such plan.
4. ACCELERATED VESTING. In the event of a Change in Control (as defined in
the Uproar Inc. 2000 Stock Incentive Plan), and effective immediately before
such Change in Control, the Employee will vest in 100% of the unvested shares
under the Employee's option to purchase shares of Iwin.com, Inc. common stock
granted on July 24, 2000 and assumed by the Company pursuant to the merger
agreement between the Company and Iwin.com, Inc. dated July , 2000.
5. BUSINESS EXPENSES. The Company shall reimburse the Employee for all
reasonable business expenses actually incurred on the Company's behalf, upon
presentation of an itemized expense report and appropriate supporting
documentation, all in accordance with the Company's generally applicable
policies.
6. TERM OF EMPLOYMENT. This Agreement shall remain in effect for no longer
than twenty-four (24) months.
A-86
282
(a) BASIC RULE. The Company agrees to continue the Employee's
Employment, and the Employee agrees to remain in Employment with the
Company, from the date hereof until the date when the Employee's Employment
terminates pursuant to section 6 above or subsection (b) or (c) below. The
Employee's Employment with the Company shall be "at will," meaning that
either the Employee or the Company shall be entitled to terminate the
Employee's employment at any time and for any reason, with or without
Cause. Any contrary representations that may have been made to the Employee
shall be superseded by this Agreement. This Agreement shall constitute the
full and complete agreement between the Employee and the Company on the "at
will" nature of the Employee's Employment, which may only be changed in an
express written agreement signed by the Employee and the Chief Executive
Officer.
(b) TERMINATION. The Company may terminate the Employee's Employment
at any time and for any reason (or no reason), and with or without Cause,
by giving the Employee notice in writing. The Employee may terminate his
Employment by giving the Company 30 days' advance notice in writing. The
Employee's Employment shall terminate automatically in the event of his
death.
(c) RIGHTS UPON TERMINATION. Except as expressly provided in Section
6, upon the termination of the Employee's Employment pursuant to this
Section 6, the Employee shall only be entitled to the compensation,
benefits and reimbursements described in Sections 2, 3, 4 and 5 for the
period preceding the effective date of the termination. The payments under
this Agreement shall fully discharge all responsibilities of the Company to
the Employee.
(d) TERMINATION OF AGREEMENT. This Agreement shall terminate when all
obligations of the parties hereunder have been satisfied but no later than
24 months following the effective date of this Agreement. The termination
of this Agreement shall not limit or otherwise affect any of the Employee's
obligations under Section 8.
7. TERMINATION BENEFITS.
(a) GENERAL RELEASE. Any other provision of this Agreement
notwithstanding, Subsections (b), (c), and (d) below shall not apply unless the
Employee (i) has executed a general release (in a form reasonably prescribed by
the Company) of all known and unknown claims that he may then have against the
Company or persons affiliated with the Company and (ii) has agreed not to
prosecute any legal action or other proceeding based upon any such claims.
(b) SEVERANCE PAY. If, during the twenty-four (24) months maximum term of
this Agreement, the Company terminates the Employee's Employment for any reason
other than Cause or Permanent Disability (as defined below) or if Employee
resigns for Good Reason (as defined below), then the Company shall pay the
Employee a severance calculated as follows: The number of months remaining under
this Agreement ("Continuation Period") times Employee's base monthly salary rate
in effect at the time of termination of Employment, less applicable
withholdings. The severance payments will be made in accordance with the
Company's standard payroll procedures, at the Employee's payroll rate, and on
the Company's standard payroll dates.
(c) ACCELERATED VESTING. If the Company terminates the Employee's
Employment for any reason other than Cause or Permanent Disability (as defined
below) or if Employee resigns for Good Reason (as defined below), then with
respect to the Employee's option to purchase shares of Iwin.com, Inc. common
stock granted on July 24, 2000 and assumed by the Company pursuant to the merger
agreement between the Company and Iwin.com, Inc. dated July , 2000, the
Employee will vest in such additional number of option shares as the Employee
would have if he had continued to be employed for one (1) additional year.
(d) HEALTH INSURANCE. If Subsection (b) above applies, and if the Employee
elects to continue his health insurance coverage under the Consolidated Omnibus
Budget Reconciliation Act ("COBRA") following the termination of his Employment,
then the Company shall pay the Employee's monthly premium under COBRA until the
earliest of (i) the close of the Continuation Period, (ii) the expiration of the
Employee's continuation coverage under COBRA or (iii) the date when the Employee
receives substantially equivalent health insurance coverage in connection with
new employment or self-employment.
A-87
283
(e) DEFINITION OF "CAUSE." For all purposes under this Agreement, "Cause"
shall mean:
(i) Any material breach of this Agreement, the Proprietary Information
and Inventions Agreement between the Employee and the Company, or any other
written agreement between the Employee and the Company, provided that the
Employee has been provided notice of such breach and the Employee fails to
cure or is unable to cure such breach within five (5) days of such notice;
(ii) Any material failure to comply with the Company's written
policies or rules as then in effect, provided that the Employee has been
provided notice of such failure and the Employee fails to cure or is unable
to cure such failure within five (5) days of such notice;
(iii) Conviction of, or a plea of "guilty" or "no contest" to, a
felony under the laws of the United States or any state thereof; or
(iv) Any misconduct including, without limitation, the following:
unlawful harassment, discrimination, retaliation, misappropriation or
destruction of assets of the Company or other acts of dishonesty, illegal
or unethical business practices, or fraud or embezzlement.
(f) DEFINITION OF "PERMANENT DISABILITY." For all purposes under this
Agreement, "Permanent Disability" shall mean that the Employee, at the time
notice is given, has failed to perform his duties under this Agreement for a
period of not less than 120 consecutive days (or such longer period as may be
required by law) as the result of his incapacity due to physical or mental
injury, disability or illness.
(g) DEFINITION OF "GOOD REASON." For all purposes under this Agreement,
"Good Reason" shall mean any of the following without Employee's consent:
(i) Requiring Employee to relocate to offices thirty-five (35) or more
miles from 10940 Wilshire Blvd., Los Angeles, California 90024;
(ii) The assignment of Employee to duties inconsistent with his
position as Executive Vice President of Product Development or which
reflect an adverse change in his authority, responsibility, or status as
Executive Vice President of Product Development with the Company;
(iii) Any act, set of facts or omissions that would, under applicable
law, constitute a constructive termination of Employee; or
(iv) The Company's material breach of this Agreement.
8. NON-SOLICITATION AND NON-DISCLOSURE.
(a) NON-SOLICITATION. During the period commencing on the date of this
Agreement and continuing until the first anniversary of the date when the
Employee's Employment terminates for any reason, the Employee shall not directly
or indirectly, personally or through others, on the Employee's own behalf or on
behalf of any other person or entity (i) solicit or attempt to solicit the
employment of any person who is, or at any time during the preceding year was,
an employee of the Company or any of the Company's affiliates or (ii) solicit or
attempt to solicit the business of any customer of the Company or any of the
Company's affiliates with whom the Employee had contact during his Employment.
(b) NON-DISCLOSURE. As an inducement to the Company to enter into this
Employment Agreement, the Employee shall, simultaneously with the execution
hereof, execute the Proprietary Information and Inventions Agreement attached
hereto as Exhibit A.
9. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. This Agreement shall be binding upon any
successor (whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets. For all purposes under this Agreement, the
term "Company" shall include any successor to the Company's business and/or
assets which becomes bound by this Agreement.
A-88
284
(b) EMPLOYEE'S SUCCESSORS. This Agreement and all rights of the Employee
hereunder shall inure to the benefit of, and be enforceable by, the Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
10. MISCELLANEOUS PROVISIONS.
(a) NOTICE. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its General Counsel.
(b) MODIFICATIONS AND WAIVERS. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Employee and by the Chief Executive
Officer of the Company. No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(c) WHOLE AGREEMENT. No other agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement and the
Proprietary Information and Inventions Agreement contain the entire
understanding of the parties with respect to the subject matter hereof.
(d) WITHHOLDING TAXES. All payments made under this Agreement shall be
subject to reduction to reflect taxes or other charges required to be withheld
by law.
(e) CHOICE OF LAW AND SEVERABILITY. This Agreement is executed by the
Company in the State of New York and shall be interpreted in accordance with the
laws of such State (except their provisions governing the choice of law). If any
provision of this Agreement becomes or is deemed invalid, illegal or
unenforceable in any jurisdiction by reason of the scope, extent or duration of
its coverage, then such provision shall be deemed amended to the extent
necessary to conform to applicable law so as to be valid and enforceable or, if
such provision cannot be so amended without materially altering the intention of
the parties, then such provision shall be stricken and the remainder of this
Agreement shall continue in full force and effect. Should there ever occur any
conflict between any provision contained in this Agreement and any present or
future statue, law, ordinance or regulation contrary to which the parties have
no legal right to contract, then the latter shall prevail but the provision of
this Agreement affected thereby shall be curtailed and limited only to the
extent necessary to bring it into compliance with applicable law. All the other
terms and provisions of this Agreement shall continue in full force and effect
without impairment or limitation.
(f) ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement or the breach thereof, or the Employee's Employment or the
termination thereof, shall be settled in New York, New York, by arbitration in
accordance with the National Rules for the Resolution of Employment Disputes of
the American Arbitration Association. The decision of the arbitrator shall be
final and binding on the parties, and judgment on the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. The parties
hereby agree that the arbitrator shall be empowered to enter an equitable decree
mandating specific enforcement of the terms of this Agreement. The Company and
the Employee shall share equally all fees and expenses of the arbitrator. The
Employee hereby consents to personal jurisdiction of the state and federal
courts located in the State of New York for any action or proceeding arising
from or relating to this Agreement or relating to any arbitration in which the
parties are participants.
(g) NO ASSIGNMENT. This Agreement and all rights and obligations of the
Employee hereunder are personal to the Employee and may not be transferred or
assigned by the Employee at any time. The Company may assign its rights under
this Agreement to any entity that assumes the Company's obligations hereunder in
connection with any sale or transfer of all or a substantial portion of the
Company's assets to such entity.
A-89
285
(h) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
--------------------------------------
SCOTT KAUFMAN
UPROAR INC.
By
--------------------------------------
Title:
--------------------------------------
A-90
286
EXHIBIT G
TARGET'S LEGAL OPINION
A-91
287
, 2000
FORM OF OMM OPINION
Uproar Inc.
240 West 35th Street
New York, New York 10001
Ladies and Gentlemen:
We have acted as special counsel to iwin.com, Inc., a Delaware corporation
(the "Company"), in connection with the transactions contemplated by the
Agreement and Plan of Reorganization dated July 25, 2000 (the "Merger
Agreement") by and among the Company, Uproar Inc. ("Uproar"), iwin.com
Acquisition Corporation ("Merger Sub"), Fredrick Kruger, as Stockholders' Agent
(the "Stockholders' Agent"), and the Principal Stockholders named therein
providing for the merger (the "Merger") of Merger Sub with and into the Company.
In connection with the Merger Agreement and the Merger, the Company, Uproar, the
Stockholders' Agent and The Chase Manhattan Bank, as Escrow Agent, have entered
into an Escrow Agreement dated , 2000 (the "Escrow Agreement"). We
are providing this opinion to you at the request of the Company pursuant to
Section 6.3(e) of the Merger Agreement. The Merger Agreement and the Escrow
Agreement are collectively referred to herein as the "Transaction Documents."
Except as otherwise indicated, capitalized terms used in this opinion and
defined in the Merger Agreement will have the meanings given in the Merger
Agreement.
In our capacity as such counsel, we have examined originals or copies of
those corporate and other records and documents we considered appropriate. As to
relevant factual matters, we have relied upon, among other things, the Company's
factual representations in the Transaction Documents and factual representations
in a certificate of the [Chief Operating Officer and Secretary] of the Company
dated , 2000. In addition, we have obtained and relied upon those
certificates of public officials we considered appropriate.
We have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals and the conformity with originals of all
documents submitted to us as copies. We have assumed that each natural person
who is a party to the Transaction Documents has sufficient legal capacity to
enter into and carry out his or her obligations under the Transaction Documents.
In addition, we have assumed that there are no extrinsic agreements or
understandings among the parties to the Transaction Documents that would modify
or interpret the terms of the Transaction Documents or the respective rights or
obligations of the parties thereunder; we are not aware of the existence of any
such agreement or understandings. To the extent the Company's obligations depend
on the enforceability of the Transaction Documents against other parties to the
Transaction Documents, we have assumed that the Transaction Documents are
enforceable against the other parties thereto.
On the basis of such examination, our reliance upon the assumptions in this
opinion and our consideration of those questions of law we considered relevant,
subject to the limitations and qualifications in this opinion and except as set
forth in the Merger Agreement and the Target Disclosure Letter, we are of the
opinion that:
1. The Company has been duly incorporated, and is validly existing in
good standing under the laws of the State of Delaware, with corporate power
to own its properties and assets, to carry on its business as described in
the Registration Statement under the caption ["Business of iwin.com"], to
enter into the Transaction Documents, and to perform its obligations under
the Transaction Documents. The Company is qualified as a foreign
corporation to do business in the State of California and the State of New
York, and is in good standing in such States.
2. The execution, delivery and performance of each of the Transaction
Documents has been duly authorized by all necessary corporate action on the
part of the Company, and each of the Transaction Documents has been duly
executed and delivered by the Company.
3. Each of the Transaction Documents constitutes the legally valid and
binding obligation of the Company, enforceable against the Company in
accordance with its terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or
affecting creditors'
A-92
288
rights generally (including, without limitation, fraudulent conveyance
laws) and by general principles of equity, including, without limitation,
concepts of materiality, reasonableness, good faith and fair dealing and
the possible unavailability of specific performance or injunctive relief,
regardless of whether considered in a proceeding in equity or at law.
4. The authorized capital stock of the Company consists of 35,000,000
shares of common stock, $0.001 par value per share ("Common Stock"), and
20,000,000 shares of preferred stock, $0.001 par value per share
("Preferred Stock"). Based solely upon a review of the Company's corporate
minute books and stock ledger, the completeness and accuracy of which has
been certified to us by the Company, there are 7,068,189 shares of Common
Stock issued and outstanding immediately prior to the Effective Time and
8,525,692 shares of Preferred Stock issued and outstanding immediately
prior to the Effective Time, of which 2,250,000 shares of Preferred Stock
have been designated as Series A Preferred Stock, 5,177,865 shares of
Preferred Stock have been designated as Series B Preferred Stock, and
1,097,827 shares of Preferred Stock have been designated as Series C
Preferred Stock.
5. Based solely upon a review of records certified to us as the
charter documents of the Company and its corporate minute books since
[specify date], and except as otherwise disclosed in Section 2.2 of the
Merger Agreement, the authorized but unissued shares of capital stock of
Company are not subject to any warrants, options, rights or commitments
granted by the Company, and the Company is not obligated to issue, purchase
or redeem any shares of the Company's capital stock.
6. The Company's execution and delivery of, and performance of its
obligations, on or prior to the date hereof under, the Transaction
Documents do not (i) violate the Company's Fourth Amended and Restated
Certificate of Incorporation or the Company's Bylaws, (ii) violate, breach,
or result in a default under, any existing obligation of or restriction on
the Company under any Material Contract specifically listed on Schedule
2.26 of the Merger Agreement, [insert if any disclosure for item 2.9 or
(iii) breach or otherwise violate any existing obligation of or restriction
on the Company under any order, judgment or decree of any California or
federal court or governmental authority binding on the Company identified
in item 2.9 of the Target Disclosure Letter].
7. The execution and delivery by the Company of, and performance of
its obligations, on or prior to the date hereof under the Transaction
Documents does not violate the current Delaware General Corporation Law or
any current California statute, rule or regulation that we have, in the
exercise of customary professional diligence, recognized as applicable to
the Company or to transactions of the type contemplated by the Transaction
Documents.
8. We have not given substantive attention on behalf of the Company
to, or represented the Company in connection with, any actions, suits or
proceedings pending or threatened against the Company before any court,
arbitrator or governmental agency which seeks to affect the enforceability
of the Merger Agreement.
Our opinion in paragraph 3 above as to the enforceability of the
Transaction Documents is subject to (i) the unenforceability under certain
circumstances of broadly or vaguely stated waivers or waivers of rights granted
by law where the waivers are against public policy or prohibited by law and (ii)
the unenforceability under certain circumstances of choice of law provisions.
We advise you that Section 9.7 of the Agreement, which provides for
exclusive jurisdiction of the courts of the State of Delaware and federal courts
sitting in that State, may not be binding on the courts in the forum(s) selected
or excluded.
We express no opinion with respect to your ability to collect attorneys'
fees and costs in an action involving the Transaction Documents if you are not
the prevailing party in that action (we call your attention to the effect of
Section 1717 of the California Civil Code, which provides that where a contract
permits one party thereto to recover attorneys' fees, the prevailing party in
any action to enforce any provision of the contract shall be entitled to recover
its reasonable attorneys' fees).
A-93
289
We express no opinion as to any provision of the Transaction Documents
requiring written amendments or waivers of the Transaction Documents insofar as
it suggests that oral or other modifications, amendments or waivers could not be
effectively agreed upon by the parties or that the doctrine of promissory
estoppel might not apply.
We express no opinion as to compliance or noncompliance with applicable
federal or state antifraud or antitrust statutes, laws, rules and regulations,
including without limitation, the Hart-Scott-Rodino Antitrust Improvement Act of
1976, as amended.
We express no opinion as to the enforceability of the indemnity and escrow
obligations of Article VIII of the Merger Agreement or as to the enforceability
under certain circumstances of provisions indemnifying a party against, or
requiring contributions toward, that party's liability for its own wrongful or
negligent acts, or where indemnification or contribution is contrary to public
policy. In this regard we advise you that in the opinion of the Securities and
Exchange Commission, indemnification of directors, officers and controlling
persons of an issuer against liabilities arising under the Securities Act of
1933, as amended, is against public policy and is therefore unenforceable.
The law covered by this opinion is limited to the current laws of the State
of California and the current Delaware General Corporation Law. We express no
opinion as to the laws of any other jurisdiction and no opinion regarding the
statutes, administrative decisions, rules, regulations or requirements of any
county, municipality, subdivision or local authority of any jurisdiction.
This opinion is furnished by us as special counsel for the Company and may
be relied upon by you only in connection with the Transaction Documents. It may
not be used or relied upon by you for any other purpose or by any other person,
nor may copies be delivered to any other person, without in each instance our
prior written consent. This opinion is expressly limited to the matters set
forth above and we render no opinion, whether by implication or otherwise, as to
any other matters. We assume no obligation to update or supplement this opinion
to reflect any facts or circumstances which may hereafter come to our attention,
or any changes in laws which may hereafter occur.
Respectfully submitted,
A-94
290
EXHIBIT H
LOCK-UP AGREEMENT
A-95
291
, 2000
Uproar Inc.
240 West 35th Street
New York, New York 10001
Dear Sirs:
As an inducement to Uproar, Inc. ("Uproar") to execute and perform its
obligations under the Agreement and Plan of Reorganization, dated July 24, 2000,
among Uproar, iwin Acquisition Corp., a wholly owned subsidiary of Uproar
("Merger Sub"), iwin.com, Inc. ("Target") and certain other parties thereto,
pursuant to which Merger Sub will merge with and into Target and Target shall
survive as a wholly-owned subsidiary of Acquiror (the "Merger"), the undersigned
hereby agrees that from the closing date of the Merger (the "Closing Date") and
until 180 days after the Closing Date, the undersigned will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, any
shares of common stock, $0.01 par value, of Uproar (the "Securities") it shall
have received pursuant to the Merger, or securities convertible into or
exchangeable or exercisable for any shares of Securities, enter into a
transaction which would have the same effect, or enter into any swap, hedge or
other arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of the Securities, whether any such aforementioned
transaction is to be settled by delivery of the Securities or such other
securities, in cash or otherwise, or publicly disclose the intention to make any
such offer, sale, pledge or disposition, or to enter into any such transaction,
swap, hedge or other arrangement, without, in each case, the prior written
consent of Uproar.
Any Securities received upon exercise of options granted to the undersigned
will also be subject to this Agreement.
Any Securities acquired by the undersigned in the open market will not be
subject to this Agreement. A transfer of Securities to an affiliate (as such
term is defined in Rule 405 of the Securities Act of 1933, as amended), or to a
family member or to a trust or as a gift may be made, provided the transferee
agrees to be bound in writing by the terms of this Agreement.
In furtherance of the foregoing, the Company and its transfer agent and
registrar are hereby authorized to decline to make any transfer of shares of
Securities if such transfer would constitute a violation or breach of this
Agreement.
This Agreement shall be binding on the undersigned and the successors,
heirs, personal representatives and assigns of the undersigned.
Very truly yours,
--------------------------------------
Name:
A-96
292
ANNEX B
OPINION OF BEAR, STEARNS & CO. INC.
B-1
293
[BEAR STEARNS LETTERHEAD]
August 30, 2000
The Board of Directors
Uproar Inc.
240 West 35th Street
New York, NY 10001
Ladies and Gentlemen:
We understand that Uproar Inc. ("Uproar"), iwin Acquisition Corporation,
iwin.com, Inc. ("iwin") and certain shareholders of iwin have entered into an
Agreement and Plan of Reorganization dated July 25, 2000 (the "Agreement"),
pursuant to which all outstanding capital stock of iwin will be converted into
shares of common stock of Uproar, and all outstanding options of iwin will be
assumed by Uproar, the number and exercise price of all options to be adjusted
appropriately (the "Merger"). You have advised us that pursuant to the
Agreement, Uproar will issue up to 13,000,186 shares of Uproar common stock and
assume all outstanding options and warrants of iwin as contemplated in the
Agreement (the "Consideration").
You have asked us to render our opinion as to whether the Consideration
paid is fair, from a financial point of view, to Uproar.
In the course of performing our review and analyses for rendering this
opinion, we have:
- reviewed the Agreement;
- reviewed Uproar's Registration Statement on Form S-1 dated March 26,
2000, and its Quarterly Reports on Form 10-Q for the periods ended March
31 and June 30, 2000;
- reviewed certain internal operating and financial information relating to
Uproar's business and prospects provided to Bear Stearns by Uproar
management, including income statement, cash flow, and balance sheet
projections for Uproar for the two year period ending December 31, 2001;
- reviewed certain estimates of cost savings and other combination benefits
expected to result from the Merger, prepared and provided to us by
Uproar's management;
- met with certain members of Uproar's senior management to discuss
Uproar's business, operations, historical and projected financial results
and future prospects;
- reviewed certain operating and financial information relating to iwin's
business and prospects including audited financial statements for the
year ending December 31, 1999 and unaudited financial statements for the
quarterly periods ended March 31 and June 30, 2000, provided to Bear
Stearns by iwin's management, and income statement and cash flow
projections for the two year period ending December 31, 2001 provided to
Bear Stearns by iwin management (and as further adjusted downward by
senior management of Uproar);
- met with certain members of iwin senior management to discuss iwin's
business, operations, historical and projected financial results and
future prospects;
- reviewed the historical prices, trading multiples and trading volume of
the common shares of Uproar;
- reviewed publicly available financial data, stock market performance data
and trading multiples of companies which we deemed generally comparable
to iwin;
- reviewed the terms of recent mergers and acquisitions of companies which
we deemed generally comparable to Uproar, iwin and the Merger;
- reviewed the pro forma financial results, financial condition and
capitalization of Uproar, giving effect to the Merger; and
- conducted such other studies, analyses, inquiries and investigations as
we deemed appropriate.
B-2
294
Uproar Inc.
August 30, 2000
Page 2
We have relied upon, without independent verification, the accuracy and
completeness of the financial and other information, including without
limitation the projections provided to us by Uproar and iwin and the synergy
estimates provided by Uproar. With respect to Uproar's and iwin's projected
financial results and the potential synergies that could be achieved upon
consummation of the Merger, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the senior managements of Uproar and iwin as to the expected future
performance of Uproar and iwin, respectively. We have not independently verified
any such information or the projections and synergy estimates provided to us,
and we have further relied upon the assurances of the senior managements of
Uproar and iwin that they are unaware of any facts that would make the
information, projections and synergy estimates provided to us incomplete or
misleading.
In arriving at our opinion, we have not performed or obtained any
independent appraisal of the assets or liabilities of Uproar and iwin, nor have
we been furnished with any such appraisals. We have assumed that the Merger will
qualify as a tax-free "reorganization" within the meaning of the Internal
Revenue Code. We have assumed that the Merger will be consummated in a timely
manner and in accordance with the terms of the Agreement without any regulatory
limitations, restrictions, conditions, amendments or modifications that
collectively would have an adverse effect on Uproar.
We do not express any opinion as to the price or range of prices at which
the shares of common stock of Uproar may trade subsequent to announcement of the
Merger or prices or range of prices at which Uproar will trade after the
consummation of the Merger.
Bear Stearns has been previously engaged by Uproar to provide certain
investment banking and financial advisory services for which we received
customary fees. In the ordinary course of business, Bear Stearns may actively
trade the securities of Uproar for our own account and for the account of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
It is understood that this letter is provided to the Board of Directors of
Uproar for its use in consideration of the proposed Merger. This opinion does
not constitute a recommendation to the Board of Directors of Uproar or any
holders of Uproar common stock as to how to vote in connection with the Merger.
This opinion does not address Uproar's underlying business decision to pursue
the Merger, the relative merits of the Merger as compared to any alternative
business strategies that might exist for Uproar or the effects of any other
transaction in which Uproar might engage. This letter is not to be used for any
other purpose, or be reproduced, disseminated, quoted from or referred to at any
time, in whole or in part, without our prior written consent; provided, however,
that this letter may be included in its entirety in any joint proxy
statement/prospectus to be distributed to the holders of Uproar common stock in
connection with the Merger. Our opinion is subject to the assumptions and
conditions contained herein and is necessarily based on economic, market and
other conditions, and the information made available to us, as of the date
hereof. We assume no responsibility to, and do not intend to, update or revise
our opinion based on circumstances or events occurring after the date hereof.
Based on and subject to the foregoing, it is our opinion that, as of the
date hereof, the Consideration paid is fair, from a financial point of view, to
Uproar.
Very truly yours,
BEAR, STEARNS & CO. INC.
By:
- ---------------------------------------------------
Edward M. Rimland
Senior Managing Director
B-3
295
ANNEX C
DELAWARE GENERAL CORPORATION LAW
C-1
296
SEC. 262 APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d)of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale
C-2
297
of all or substantially all of the assets of the corporation. If the certificate
of incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise
C-3
298
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
C-4
299
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
C-5
300
ANNEX D
EASDAQ SUPPLEMENTAL INFORMATION
D-1
301
This addendum contains the additional information that Uproar Inc.
("Uproar", or the "Company") is required to provide in connection with Uproar's
request for admission to listing on EASDAQ of up to 14,008,303 new shares of
Uproar's common stock (the "New Shares") which are to be issued in connection
with the merger described elsewhere in this joint proxy statement/prospectus.
TRANSFERABILITY OF THE NEW SHARES
The New Shares will be freely transferable and fully paid-up.
AVAILABLE INFORMATION
Companies admitted to trading on EASDAQ are required to publish relevant
financial and other information regularly and to keep the public informed of all
events likely to affect the market price of their securities. Annual and
quarterly reports, as well as the Company's certificate of incorporation,
bylaws, financial statements and any other corporate documents will be filed
with EASDAQ. Price-sensitive information will be made available to investors
through the EASDAQ Reuters Company Reporting System ("ECR").
The EASDAQ rules require that, except in unusual circumstances, the Company
must promptly disclose to the public any information that would be expected to
be price sensitive or to affect the value of its common stock or influence
investors' decisions. The Company must also notify and provide details to the
EASDAQ Market Authority of the intended disclosure of any such information prior
to its release to the public.
The EASDAQ rules further require that the Company must provide an annual
report, including audited consolidated financial statements, within three months
after the end of the financial year. The annual report must disclose all
material information relating to the Company and its subsidiaries. The EASDAQ
rules also require that the Company must provide unaudited quarterly reports for
the first, second and third quarters of the Company's financial year, within two
months after the end of the relevant quarter.
Copies of all documents filed by the Company with EASDAQ will be made
available for inspection at the Company's executive offices at 240 West 35th
Street, New York, New York 10001 (USA) and at the offices of EASDAQ, 56 Rue de
Colonies, Bte.15, B-1000 Brussels, Belgium. Copies of such documents will be
made available to investors, free of charge, upon written request to the Company
at its above-mentioned office.
EASDAQ SETTLEMENT AND CLEARANCE
The following summarises the Company's understanding of the operation of
the clearing system on EASDAQ.
Uproar's shares of common stock are quoted on EASDAQ in USD. Transactions
in Uproar's shares on EASDAQ will be settled in USD through the Euroclear and
Clearstream Banking System or any other Euroclear or Clearstream Banking
eligible currency through the Euroclear or Clearstream Banking System. Morgan
Guaranty Trust Company of New York, Brussels Office, is operator of the
Euroclear System. Clearstream Banking is a societe anonyme under Luxembourg law.
Euroclear and Clearstream Banking are DTC indirect participants. Investors in
Uproar's shares on EASDAQ must have a securities account with a financial
institution that directly or indirectly has access to Euroclear or Clearstream
Banking. Stockholders holding Uproar's shares in certificated form outside of
the Euroclear System will need to deposit the shares into the settlement system
before being able to trade the shares on EASDAQ.
Euroclear and Clearstream Banking hold securities and book-entry interest
in securities for their direct participants and facilitate the clearance and
settlement of securities transactions between their respective participants, and
between their participants and participants of certain other securities
intermediaries, including DTC, through electronic book-entry changes in accounts
of such participants or other securities intermediaries.
D-2
302
Euroclear and Clearstream Banking provide their respective participants,
among other things, with safekeeping, administration, clearance and settlement,
securities lending and borrowing, and related services. Euroclear and
Clearstream Banking have established an electronic bridge between their two
systems across which their respective participants may settle trades with each
other.
Euroclear and Clearstream Banking participants are investment banks,
securities brokers and dealers, banks, central banks, supranationals,
custodians, investment managers, foreign depositories, corporations, trust
companies and certain other organisations and include certain of the
underwriters.
Euroclear and Clearstream Banking will, on behalf of participants, collect
all dividends, interest, cash distributions and any other payments received by
it and will notify participants as to the amounts to which they are entitled and
the date when such amounts are due. Dividends, interest, commission, charges and
taxes will be credited or debited when due and received. It will be the
responsibility of the participants to pass on all dividends, interest,
distributions and other amounts and payments and any information received from
Euroclear and Clearstream Banking to their clients. Any dividends will be
payable in USD.
In case of any corporate action to be taken by Uproar, Euroclear and
Clearstream Banking will inform their participants of such action and take up
new shares, rights or the like on their behalf or ask for their instructions
regarding such action. Euroclear and Clearstream Banking will also give notice
to their participants holding shares if and when an ordinary or extraordinary
meeting of shareholders is called, giving the date and place of the meeting in
order to vote. Upon request Euroclear and Clearstream Banking will make
available all necessary material to effect proxy voting. Uproar or its
registrar, secretary or paying agent will inform Euroclear and Clearstream
Banking of the aforementioned transactions.
Persons proposing to trade Uproar's shares on EASDAQ should inform
themselves about the costs of such trading, including any taxes that might arise
from such trade.
TAXATION OF BELGIAN INVESTORS
The following is a summary of certain Belgian tax consequences of the
acquisition, ownership and disposition of the Company's shares of common stock.
It is based on the tax laws applicable in Belgium as in effect at the date of
this joint proxy statement/prospectus, and is subject to changes in Belgian law,
including changes that could have retroactive effect. The following summary does
not take into account or discuss the tax laws of any country other than Belgium,
nor does it take into account the individual circumstances of each investor.
Prospective investors in the ordinary shares are advised to consult their
own tax advisors as to the Belgian and other tax consequences of the
acquisition, ownership and disposition of the ordinary shares.
BELGIAN INDIRECT TAXES
In principle, a stamp tax is levied upon the subscription of new shares and
the purchase and sale in Belgium of shares through a professional intermediary.
The rate applicable to subscriptions of new shares is 0.35 per cent but there is
a limit of 10,000 Belgian francs ("BEF"), or EUR 248, per transaction. The rate
applicable for secondary sales and purchases in Belgium of shares through a
professional intermediary is 0.17 per cent, but there is a limit of BEF 10,000
or EUR 248 per transaction.
An exemption is available to professional intermediaries (e.g., credit
institutions), insurance companies, pension funds and collective investment
vehicles who are acting for their own account. A non-resident stockholder who is
acting for his own account will also be entitled to an exemption from this stamp
tax, provided that he delivers to the issuer or the professional intermediary,
as the case may be, an affidavit confirming his non-resident status in Belgium.
TAXATION OF DIVIDENDS
For Belgian income tax purposes, the gross amount of all distributions made
by the Company (other than the repayment of paid-in capital) is in general taxed
as a dividend.
D-3
303
Belgian Withholding Tax
Dividends distributed on shares of common stock are, in principle, subject
in Belgium to a withholding tax at the rate of 25 per cent, when paid or
attributed through an intermediary in Belgium. No dividend withholding tax is
due if the shareholder is a company subject to Belgian corporate income tax.
Belgian law provides for a reduction of the 25 per cent withholding tax rate to
15 per cent with regard to dividends on shares issued as of January 1, 1994 by
public offer, and on certain shares issued as of January 1, 1994 other than by
public offer provided that a number of conditions are met (e.g. shares which are
not issued to the public must be registered shares or must be held in "open
custody" in Belgium). Because these conditions are met in the case of the
Shares, and the Company has not renounced to the benefit of the lower
withholding rate, the withholding tax rate applicable to the Shares is in
principle 15 per cent.
For stockholders who are not Belgian residents, dividends which are not
paid or attributed through an intermediary or paying agent in Belgium are in
principle not subject to withholding tax in Belgium.
Income Tax for Belgian Resident Individuals
In the hands of an individual Belgian resident who is holding his shares as
a private investment, rather than as a business asset, the Belgian dividend
withholding tax is a final tax. In such case, to the extent tax is withheld by a
Belgian intermediary, the dividends need not be reported in the individual's
annual income tax return. If no withholding tax has been levied (i.e. in case of
payment or attribution outside Belgium), the individual must report the
dividends in his tax returns as dividend income. He will be taxed at the
separate rate of 25 per cent (or at the separate rate of 15 per cent if the
reduced rate applies), to be increased by a municipal surcharge (varying, in
general, from 6 per cent to 9 per cent of the federal income tax).
In the hands of an individual Belgian resident whose shares are effectively
connected with his business, the dividends are taxable at the ordinary rates for
business income (i.e., varying from 25 per cent to 55 per cent to be increased
by the municipal surcharge and an additional crisis contribution of up to 3 per
cent of the tax due). Any Belgian withholding tax is creditable against the
final income tax due, provided that the holder has the full ownership of the
shares at the time of payment of the dividends and provided that the dividend
distribution does not entail a reduction in value of, or capital loss on, the
shares.
Income Tax for Belgian Resident Companies
Dividends received by Belgian resident companies are, in principle, subject
to corporate income tax at the rate of 40.17 per cent (i.e., the standard rate
of 39 per cent increased by the crisis contribution).
However, provided that the dividends benefit from the so-called
"dividend-received deduction," only up to 95 per cent of the dividends received
will be deductible from the other income of the book year. In order to benefit
from the deduction, the company must not fall within one of the categories of
which the dividends are expressly excluded from the "dividend-received
deduction", e.g., companies which are not subject to a company tax or which are
subject to a company tax regime which is significantly more advantageous than
the Belgian tax regime. As Uproar's shares are traded on EASDAQ and provided
Uproar continues to have an active business in the US, the taxation requirement
will be met. Under the minimum holding requirement, the recipient company should
hold, at the time of payment of the dividends, an equity participation in Uproar
of at least 5 per cent or having an acquisition value of at least BEF
50,000,000. The dividend-received deduction also applies, even if the minimum
holding requirement is not fulfilled, if the recipient company is identified as
a credit institution mentioned in Article 56, (Section) 1 of the Belgian Income
Tax Code of 1992, as an insurance company mentioned in Article 56, (Section) 2,
2(DEGREE), h of the Belgium Income tax Code of 1992, as a broker dealer as
mentioned in Article 47 of the Law of 6 April 1995, or as an investment company,
as defined in Article 2, (Section) 2, 6(DEGREE) of the Belgian Income Tax Code
1992.
If the company benefits from a tax exemption or a tax rate of less than 15
per cent, the dividend-received deduction will be disallowed. If the applicable
tax rate varies from 15 per cent to 25 per cent, the dividend received deduction
is likely to apply, although no assurance can be given in this respect in the
absence of a ruling from the Belgian Tax Authorities.
D-4
304
Any Belgian dividend withholding tax can, in principle, be credited against
the company's final income tax, provided that the company has the full ownership
of the shares at the time of the payment or attribution of the dividends and
provided that the dividend distribution does not entail a reduction in value of
or capital loss on the shares.
Income Tax for Belgian Resident Entities Subject to the Legal Entities Tax
(Pension Funds, etc.)
The payment of dividends to a Belgian legal entity is subject to Belgian
withholding tax at the rate of 25 per cent (or the reduced rate of 15 per cent),
which must be withheld by the receiving legal entity itself. If a Belgian
intermediary intervenes in the payment of dividends to a Belgian legal entity,
the tax is to be withheld by the intermediary. In that event the receiving legal
entity has no withholding obligation.
The Belgian dividend withholding tax is a final tax for entities subject to
the Legal Entities Tax.
Income Tax for Belgian Non-Residents
A Belgian non-resident, who does not carry on business in Belgium through a
Belgian establishment (or permanent establishment) to which shares are
attributable, will not be subject to any Belgian income tax other than the
dividend withholding tax which might be due on the dividends paid through the
intermediary of a Belgian paying agent.
A Belgian non-resident company carrying on a business in Belgium through a
Belgian establishment (or permanent establishment) to which the shares are
attributable will be subject to the same tax rules as those discussed for
Belgian resident companies.
CAPITAL GAINS TAXATION
Individual Belgian residents holding shares as a private investment and
entities subject to Legal Entities Tax are not subject to the Belgian capital
gains taxation on the disposal of such shares. Individual Belgian residents may,
however, be subject to a 33 per cent tax (to be increased with the municipal
surcharge and the crisis contribution) if the capital gain is deemed to be
"speculative."
Individual Belgian residents whose holding of shares is effectively
connected with a business are taxable at the ordinary progressive income tax
rates for business income on any capital gains realised on the disposal of such
shares.
Belgian resident companies are not subject to capital gains taxation
provided that the dividends received on the shares qualify for the
"dividend-received deduction". It is not necessary to satisfy the minimum
holding requirement.
Belgian resident entities subject to the Legal Entities Tax are not subject
to the Belgian capital gains taxation on the disposal of the Shares.
Belgian non-residents who do not carry on a business in Belgium through a
Belgian establishment (or permanent establishment) to which the shares are
attributable, are not subject to any Belgian capital gains taxation on the
disposal of the shares. Capital gains realised by Belgian non-resident companies
carrying on a business in Belgium through a Belgian establishment (or permanent
establishment) to which the shares are attributable, are subject to the same tax
rules as those discussed of Belgian resident companies.
THE SUMMARY OF TAX CONSEQUENCES SET FORTH ABOVE IS FOR GENERAL INFORMATION
ONLY. ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS AS TO THE PARTICULAR
TAX CONSEQUENCES OF THE SHARES TO THEM, INCLUDING THE APPLICABILITY AND EFFECT
OF STATE AND LOCAL TAX LAW OR FOREIGN TAX LAWS NOT DISCUSSED ABOVE, AND OF
POSSIBLE CHANGES IN TAX LAW.
D-5
305
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Uproar's Certificate of Incorporation in effect as of the date hereof, and
Uproar's Certificate of Incorporation to be in effect upon the closing of the
merger (collectively, the "Certificate") provides that, except to the extent
prohibited by the Delaware General Corporation Law, as amended, or DGCL,
Uproar's directors shall not be personally liable to the Uproar or its
stockholders for monetary damages for any breach of fiduciary duty as directors
of the Uproar. Under the DGCL, the directors have a fiduciary duty to Uproar
which is not eliminated by this provision of the Certificate and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
non-monetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to Uproar, for acts or omissions which are found by a court of
competent jurisdiction to be not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are prohibited by DGCL. This provision
also does not affect the directors' responsibilities under any other laws, such
as the Federal securities laws or state or Federal environmental laws. Uproar
has obtained liability insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director:
- for any breach of the director's duty of loyalty to the corporation or
its stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- arising under Section 174 of the DGCL; or
- for any transaction from which the director derived an improper personal
benefit.
The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise. The Certificate eliminates the personal liability
of directors to the fullest extent permitted by Section 102(b)(7) of the DGCL
and provides that Uproar shall fully indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director or
officer of Uproar, or is or was serving at the request of Uproar as a director
or officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement and Plan of Reorganization, dated July 25, 2000,
by and among the Registrant, iwin Acquisition Corporation,
iwin, various stockholders of iwin and their appointed agent
(included as Annex A to this registration statement and
incorporated herein by reference).
3.1(2) Certificate of Incorporation of Uproar Inc.
3.2* Certificate of Correction of Certificate of Incorporation of
Uproar Inc.
3.3(2) Bylaws of Uproar Inc.
3.4(2) Certificate of Incorporation of Uproar Ltd.
II-1
306
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.5(2) Memorandum of Association of Uproar Ltd.
3.6(2) Bye-laws of Uproar Ltd.
3.7(1) Certificate of Domestication of Uproar Ltd.
3.8(1) Certificate of Ownership and Merger of Uproar Inc. with and
into Uproar Ltd.
4.1(3) Specimen stock certificate.
4.2(5) Internet Game Development Agreement, dated January 12, 1999,
by and between Pearson Television, Inc. and the Registrant.
4.3(1) Registration Rights Agreement, dated February 2, 2000, by
and between Registrant and Trans Cosmos USA, Inc.
4.4 Form of Voting Agreement, dated July 25, 2000, by and
between iwin and various stockholders of Uproar (included as
part of Exhibit B to Annex A of this registration statement
and incorporated herein by reference).
4.5 Form of Target Affiliate Agreement to be executed by the
Registrant and various affiliates of iwin (included as
Exhibit D to Annex A of this registration statement and
incorporated herein by reference).
4.6 Form of Escrow Agreement to be executed by the Registrant,
iwin, the appointed agent of the iwin stockholders, and the
escrow agent (included as Exhibit C to Annex A of this
registration statement and incorporated herein by
reference).
4.7 Form of Lock-Up Agreement to be executed by the Registrant
and various stockholders of iwin (included as Exhibit H to
Annex A of this registration statement and incorporated
herein by reference).
4.8 Registration Rights Agreement, dated August 7, 2000, among
the Registrant, Tulchinsky-Stern Trust Co. Ltd. and the
other persons listed therein.
4.9 See Exhibit 3.1 and 3.2 for provisions of the Certificate of
Incorporation and Bylaws defining the rights of holders of
common stock.
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1(3) Uproar Ltd. 1999 Share Option/Share Issuance Plan.
10.2(4) Uproar Inc. 2000 Stock Incentive Plan.
10.3(2) Employment Agreement, dated September 6, 1999, by and
between Kenneth D. Cron and the Registrant.
10.4(1) Employment Agreement dated September 6, 1999, by and between
Christopher R. Hassett and the Registrant.
10.5(2) Employment Agreement, dated December 20, 1999, by and
between Michael K. Simon and the Registrant.
10.6 Employment Agreement, to be entered into by and between
Scott Kaufman and the Registrant (included as Exhibit F to
Annex A of this registration statement and incorporated
herein by reference).
10.7 Agreement and Plan of Merger, dated August 7, 2000, by and
among the Registrant, Uproar Acquisition Corporation, Take
Aim Holdings Ltd., and the shareholders and warrantholders
listed therein.
10.8(2) Lease agreement, as amended, dated April 19, 1999, by and
between Nassau Bay Associates, L.P., and the Registrant.
10.9(2) Lease agreement, dated November 9, 1999, by and between
Golden Van Associates, LLC, and the Registrant.
10.10(2) Lease agreement, dated September 7, 1998, by and between ANU
Kft. and the Registrant.
10.11(5) Internet Game Development Agreement, dated January 12, 1999,
by and between Pearson Television, Inc. and the Registrant.
II-2
307
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.12* Amended and Restated Internet Game Development Agreement,
dated July 24, 2000, by and between Pearson Television, Inc.
and the Registrant.
10.13(6) License and Services Agreement, dated September 29, 1999, by
and between Telefonica Interactiva de Contenidos and the
Registrant.
10.14(1) Agreement and Plan of Reorganization, dated April 29, 2000,
by and between the Registrant and PrizePoint Entertainment
Corporation.
10.15(1) Common Stock Purchase Agreement, dated February 2, 2000, by
and between the Registrant and Trans Cosmos USA, Inc.
10.16 Form of Voting Agreement, dated July 25, 2000, by and
between the Registrant and various stockholders of iwin
(included as part of Exhibit B to Annex A of this
registration statement and incorporated herein by
reference).
10.17 Form of Opinion of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP regarding certain tax aspects of
the merger.
10.18 Form of Opinion of O'Melveny & Myers LLP regarding certain
tax aspects of the merger.
13.1(7) Form 10-Q as filed with the SEC by the Registrant on August
8, 2000.
16.1(1) Letter from PricewaterhouseCoopers LLP.
21.1* List of Subsidiaries.
23.1 Consent of KPMG LLP.
23.2 Consent of KPMG Hungaria Kft.
23.3 Consent of Ernst & Young LLP.
23.4 Consent of Bear, Stearns & Co. (included as Annex B and
incorporated herein by reference).
23.5 Consent of Arthur Andersen LLP.
24.1 Powers of attorney (see signature page).
27.1(7) Financial Data Schedule.
99.1* Form of Proxy of Uproar.
99.2* Form of Proxy of iwin.
- ---------------
* Previously filed.
(1) Incorporated by reference to the Registrant's registration statement on Form
S-1, filed December 21, 1999, and Amendment No. 1 to such registration
statement, filed on February 7, 2000.
(2) Incorporated by reference to the Registrant's registration statement on Form
S-1, filed December 21, 1999.
(3) Incorporated by reference to the Registrant's registration statement on Form
S-1, filed December 21, 1999, and Amendment No. 5 to such registration
statement, filed on March 16, 2000.
(4) Incorporated by reference to the Registrant's definitive Proxy Statement for
the Annual Meeting of Stockholders, dated April 10, 2000.
(5) Incorporated by reference to the Registrant's registration statement on Form
S-1, filed December 21, 1999, and Amendment No. 4 to such registration
statement, filed on March 13, 2000.
(6) Incorporated by reference to the Registrant's registration statement on Form
S-1, filed December 21, 1999, and Amendment No. 2 to such registration
statement, filed on February 18, 2000. Confidential treatment for certain
provisions have been granted by the SEC. Omitted material for which
confidential treatment has been granted has been filed separately.
(7) Incorporated by reference to the Registrant's Form 10-Q, filed August 8,
2000.
(b) FINANCIAL STATEMENT SCHEDULES
None.
II-3
308
ITEM 22. UNDERTAKINGS.
(1) The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) To remove from the registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(2) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
undersigned registrant undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(3) Uproar undertakes that every prospectus (i) that is filed pursuant to
paragraph (2) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Uproar pursuant to the foregoing provisions, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Uproar of expenses incurred
or paid by a director, officer or controlling person of Uproar in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(5) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(6) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one
II-4
309
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(7) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
310
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in New York, New York, on
the fifteenth day of September 2000.
UPROAR INC.
(Registrant)
Date: September 15, 2000
By: /s/ KENNETH D. CRON
------------------------------------
Kenneth D. Cron
Chairman of the Board of Directors
and
Chief Executive Officer
(DULY AUTHORIZED OFFICER)
POWER OF ATTORNEY
We, the undersigned officers and directors of Uproar Inc., hereby severally
constitute and appoint Kenneth D. Cron, our true and lawful attorney, with full
power to him singly, to sign for us and in our names in the capacities indicated
below, any amendments to this registration statement, and generally to do all
things in our names and on our behalf in such capacities to enable Uproar Inc.
to comply with the provisions of the Securities Act of 1933, as amended, and all
the requirements of the Securities and Exchange Commission.
SIGNATURE TITLE(S) DATE
--------- -------- ----
/s/ THOMAS E. DOOLEY Director September 4, 2000
- ---------------------------------------------------
Thomas E. Dooley
/s/ CATHERINE V. MACKAY Director September 4, 2000
- ---------------------------------------------------
Catherine V. Mackay
/s/ MICHAEL K. SIMON Executive Vice President, September 4, 2000
- --------------------------------------------------- President of International
Michael K. Simon and Director
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
this report has been signed below by the following persons on behalf of
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE
--------- -------- ----
/s/ KENNETH D. CRON Chairman of the Board of September 15, 2000
- --------------------------------------------------- Directors and Chief
Kenneth D. Cron Executive Officer (Principal
Executive Officer)
II-6
311
SIGNATURE TITLE(S) DATE
--------- -------- ----
* President, Chief Operating September 15, 2000
- --------------------------------------------------- Officer and Director
Christopher R. Hassett
* Chief Financial Officer September 15, 2000
- --------------------------------------------------- (Principal Financial and
Joel E. Wilhite Accounting Officer)
* Director September 15, 2000
- ---------------------------------------------------
Thompson B. Barnhardt
* Director September 15, 2000
- ---------------------------------------------------
Thomas E. Dooley
* Director September 15, 2000
- ---------------------------------------------------
Esther Dyson
* Director September 15, 2000
- ---------------------------------------------------
James J. Geddes, Jr.
* Director September 15, 2000
- ---------------------------------------------------
Catherine V. Mackay
* Executive Vice President, September 15, 2000
- --------------------------------------------------- President of International
Michael K. Simon and Director
*By: Kenneth D. Cron, attorney-in-fact.
II-7
312
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement and Plan of Reorganization, dated July 25, 2000,
by and among the Registrant, iwin Acquisition Corporation,
iwin, various stockholders of iwin and their appointed agent
(included as Annex A to this registration statement and
incorporated herein by reference).
3.1(2) Certificate of Incorporation of Uproar Inc.
3.2* Certificate of Correction of Certificate of Incorporation of
Uproar Inc.
3.3(2) Bylaws of Uproar Inc.
3.4(2) Certificate of Incorporation of Uproar Ltd.
3.5(2) Memorandum of Association of Uproar Ltd.
3.6(2) Bye-laws of Uproar Ltd.
3.7(1) Certificate of Domestication of Uproar Ltd.
3.8(1) Certificate of Ownership and Merger of Uproar Inc. with and
into Uproar Ltd.
4.1(3) Specimen stock certificate.
4.2(5) Internet Game Development Agreement, dated January 12, 1999,
by and between Pearson Television, Inc. and the Registrant.
4.3(1) Registration Rights Agreement, dated February 2, 2000, by
and between Registrant and Trans Cosmos USA, Inc.
4.4 Form of Voting Agreement, dated July 25, 2000, by and
between iwin and various stockholders of Uproar (included as
part of Exhibit B to Annex A of this registration statement
and incorporated herein by reference).
4.5 Form of Target Affiliate Agreement to be executed by the
Registrant and various affiliates of iwin (included as
Exhibit D to Annex A of this registration statement and
incorporated herein by reference).
4.6 Form of Escrow Agreement to be executed by the Registrant,
iwin, the appointed agent of the iwin stockholders, and the
escrow agent (included as Exhibit C to Annex A of this
registration statement and incorporated herein by
reference).
4.7 Form of Lock-Up Agreement to be executed by the Registrant
and various stockholders of iwin (included as Exhibit H to
Annex A of this registration statement and incorporated
herein by reference).
4.8 Registration Rights Agreement, dated August 7, 2000, among
the Registrant, Tulchinsky-Stern Trust Co. Ltd. and the
other persons listed therein.
4.9 See Exhibit 3.1 and 3.2 for provisions of the Certificate of
Incorporation and Bylaws defining the rights of holders of
common stock.
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1(3) Uproar Ltd. 1999 Share Option/Share Issuance Plan.
10.2(4) Uproar Inc. 2000 Stock Incentive Plan.
10.3(2) Employment Agreement, dated September 6, 1999, by and
between Kenneth D. Cron and the Registrant.
10.4(1) Employment Agreement dated September 6, 1999, by and between
Christopher R. Hassett and the Registrant.
10.5(2) Employment Agreement, dated December 20, 1999, by and
between Michael K. Simon and the Registrant.
10.6 Employment Agreement, to be entered into by and between
Scott Kaufman and the Registrant (included as Exhibit F to
Annex A of this registration statement and incorporated
herein by reference).
313
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.7 Agreement and Plan of Merger, dated August 7, 2000, by and
among the Registrant, Uproar Acquisition Corporation, Take
Aim Holdings Ltd., and the shareholders and warrantholders
listed therein.
10.8(2) Lease agreement, as amended, dated April 19, 1999, by and
between Nassau Bay Associates, L.P., and the Registrant.
10.9(2) Lease agreement, dated November 9, 1999, by and between
Golden Van Associates, LLC, and the Registrant.
10.10(2) Lease agreement, dated September 7, 1998, by and between ANU
Kft. and the Registrant.
10.11(5) Internet Game Development Agreement, dated January 12, 1999,
by and between Pearson Television, Inc. and the Registrant.
10.12* Amended and Restated Internet Game Development Agreement,
dated July 24, 2000, by and between Pearson Television, Inc.
and the Registrant.
10.13(6) License and Services Agreement, dated September 29, 1999, by
and between Telefonica Interactiva de Contenidos and the
Registrant.
10.14(1) Agreement and Plan of Reorganization, dated April 29, 2000,
by and between the Registrant and PrizePoint Entertainment
Corporation.
10.15(1) Common Stock Purchase Agreement, dated February 2, 2000, by
and between the Registrant and Trans Cosmos USA, Inc.
10.16 Form of Voting Agreement, dated July 25, 2000, by and
between the Registrant and various stockholders of iwin
(included as part of Exhibit B to Annex A of this
registration statement and incorporated herein by
reference).
10.17 Form of Opinion of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP regarding certain tax aspects of
the merger.
10.18 Form of Opinion of O'Melveny & Myers LLP regarding certain
tax aspects of the merger.
13.1(7) Form 10-Q as filed with the SEC by the Registrant on August
8, 2000.
16.1(1) Letter from PricewaterhouseCoopers LLP.
21.1* List of Subsidiaries.
23.1 Consent of KPMG LLP.
23.2 Consent of KPMG Hungaria Kft.
23.3 Consent of Ernst & Young LLP.
23.4 Consent of Bear, Stearns & Co. (included as Annex B and
incorporated herein by reference).
23.5 Consent of Arthur Andersen LLP.
24.1 Powers of attorney (see signature page).
27.1(7) Financial Data Schedule.
99.1* Form of Proxy of Uproar.
99.2* Form of Proxy of iwin.
- ---------------
* Previously filed.
(1) Incorporated by reference to the Registrant's registration statement on Form
S-1, filed December 21, 1999, and Amendment No. 1 to such registration
statement, filed on February 7, 2000.
(2) Incorporated by reference to the Registrant's registration statement on Form
S-1, filed December 21, 1999.
(3) Incorporated by reference to the Registrant's registration statement on Form
S-1, filed December 21, 1999, and Amendment No. 5 to such registration
statement, filed on March 16, 2000.
(4) Incorporated by reference to the Registrant's definitive Proxy Statement for
the Annual Meeting of Stockholders, dated April 10, 2000.
314
(5) Incorporated by reference to the Registrant's registration statement on Form
S-1, filed December 21, 1999, and Amendment No. 4 to such registration
statement, filed on March 13, 2000.
(6) Incorporated by reference to the Registrant's registration statement on Form
S-1, filed December 21, 1999, and Amendment No. 2 to such registration
statement, filed on February 18, 2000. Confidential treatment for certain
provisions have been granted by the SEC. Omitted material for which
confidential treatment has been granted has been filed separately.
(7) Incorporated by reference to the Registrant's Form 10-Q, filed August 8,
2000.