-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HDkeIMDdm+k6TuuEN2wn0TGXICiraEi2W891ZLiNkmNefFiE8XWIPxeiamtCEsTy Z6FFP/J+qdIlnk3K7XODSw== 0000950149-99-001021.txt : 19990524 0000950149-99-001021.hdr.sgml : 19990524 ACCESSION NUMBER: 0000950149-99-001021 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19990521 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CYBERGOLD INC CENTRAL INDEX KEY: 0001086937 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-79067 FILM NUMBER: 99632156 BUSINESS ADDRESS: STREET 1: C/O CYBERGOLD INC STREET 2: 2921 ADELINE STREET CITY: BERKELEY STATE: CA ZIP: 94703 BUSINESS PHONE: 5108455000 MAIL ADDRESS: STREET 1: 2921 ADELINE STREET STREET 2: C/O CYBERGOLD INC CITY: BERKELEY STATE: CA ZIP: 94703 S-1 1 CYBERGOLD, INC. FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1999. REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ CYBERGOLD, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7311 94-3212392 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
2921 ADELINE STREET BERKELEY, CALIFORNIA 94703 (510) 845-5000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ A. NATHANIEL GOLDHABER PRESIDENT AND CHIEF EXECUTIVE OFFICER CYBERGOLD, INC. 2921 ADELINE STREET BERKELEY, CALIFORNIA 94703 (510) 845-5000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: CARLA S. NEWELL, ESQ. NORA L. GIBSON, ESQ. ANDREW BAW, ESQ. LINDSAY C. FREEMAN, ESQ. FRANK A. GRANT IV, ESQ. ELISA S. LEE, ESQ. ERIC E. KEPPLER, ESQ. BROBECK, PHLEGER & HARRISON LLP GUNDERSON DETTMER STOUGH SPEAR STREET TOWER VILLENEUVE FRANKLIN & HACHIGIAN, LLP ONE MARKET 155 CONSTITUTION DRIVE SAN FRANCISCO, CA 94105 MENLO PARK, CALIFORNIA 94025 (415) 442-0900 (650) 321-2400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, 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, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------- Common Stock, $0.0001 par value.................... $46,000,000 $12,788 - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o). 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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED , 1999 PROSPECTUS SHARES LOGO COMMON STOCK This is an initial public offering of shares of common stock of Cybergold, Inc. There is currently no public market for these shares. Cybergold expects that the public offering price will be between $ and $ per share. We have applied for admission for trading and quotation of our common stock on the Nasdaq National Market under the symbol "CGLD." Our business involves significant risks. These risks are described under the caption "Risk Factors" beginning on page 6. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ---------------------------
PER SHARE TOTAL Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds, before expenses, to Cybergold..................... $ $
The underwriters may also purchase up to an additional shares of common stock at the public offering price, less the underwriting discounts and commissions, to cover over-allotments. The underwriters expect to deliver the shares against payment in New York, New York on , 1999. --------------------------- SG COWEN CIBC WORLD MARKETS VOLPE BROWN WHELAN & COMPANY , 1999 3 [FRONT COVER OUTSIDE GATEFOLD DESCRIPTION: Color reproduction of Cybergold web site home page with text annotations and artwork describing various components of the home page. RELATED TEXT ANNOTATIONS, CLOCKWISE FROM TOP: - - Services to enhance Cybergold membership value - - Cybergold presents to members a rotating set of featured incentive offers - - "Spend" offers provide members with ability to purchase digital content using Cybergold Micropayments - - A set of changing "earn" offers provide members with opportunities to earn cash for specific online behaviors - - Extra member perks are sponsored by Cybergold merchants - - Web surfers can open a free Cybergold account. No software downloads are needed - - Easy access to popular Internet content enhances member value CYBERGOLD S-1 INSIDE FRONT COVER GATEFOLD DESCRIPTION: 2-page spread color reproduction of three representative Cybergold Web site pages, plus a rendering of a "bank" symbol and the VISA credit card logo. WEB SITE PAGE 1: Reproduction of the Cybergold "Earn" page. RELATED TEXT ANNOTATIONS, CLOCKWISE FROM TOP: - - TOP: Consumers earn cash for online activity. - - NEAR TOP: Tabs enhance member navigation of the Cybergold web site. - - RIGHT SIDE: Cybergold presents merchant offers for members to review and act upon. - - BOTTOM: Reward amounts vary according to the actions requested by merchants and by the value of members' actions to the merchants. - - LEFT BOTTOM: Members read summary descriptions of incentive offers. Clicking on offers provides more information and instructions. - - LEFT TOP: Listing by category provides additional navigational aid. WEB SITE PAGE 2: Reproduction of the Cybergold "Account Management" page. RELATED TEXT ANNOTATIONS, CLOCKWISE FROM TOP: - - TOP: Account management screen enables members to review account status and history. - - BOTTOM RIGHT: Member balance. - - BOTTOM LEFT: Consumer account history. - - TOP LEFT: Account information. UPPER RIGHT SIDE OF PAGE, SYMBOL 1: "bank" symbol annotated with Member transfers Cybergold balance to personal bank account. UPPER RIGHT SIDE OF PAGE, SYMBOL 2: Reproduction of "VISA" logo, annotated with: Member transfers Cybergold balance to VISA account or Member loads Cybergold account from VISA card. 4 WEB SITE PAGE 3: Reproduction of the Cybergold "Spend" page. RELATED TEXT ANNOTATIONS, CLOCKWISE FROM TOP: TOP: Utilizing Cybergold Micropayments, member buys digital content, services and products. Thousands of items are available. NEAR TOP: log-in bar. RIGHT SIDE 1: Cybergold's Multimedia Mart is a source for a wide variety of digital content, services and products provided by merchants and hosted by Cybergold. RIGHT SIDE 2: CD World sells music CDs, DVDs, games and software. RIGHT SIDE 3: BuyCollegeStuff provides college-branded screensaver software. RIGHT SIDE 4: Epitonic is a vendor of independent MP3 music files.] 5 PROSPECTUS SUMMARY The following is only a summary. You should carefully read the more detailed information contained in this prospectus, including our financial statements and related notes. Our business involves significant risks. You should carefully consider the information under the heading "Risk Factors." Unless otherwise noted, all information in this prospectus: (1) assumes that all outstanding shares of our preferred stock are converted into 14,453,186 shares of common stock on the day that this offering is completed; (2) assumes that the underwriters do not exercise their option to purchase additional shares, (3) assumes the exercise of warrants to purchase 576,925 shares of Series D Preferred Stock prior to the completion of this offering and the conversion of such shares to common stock, (4) assumes our reincorporation in Delaware and (5) does not reflect a for reverse stock split to be effected prior to the consummation of the offering. CYBERGOLD, INC. We are a leading provider of online direct marketing and cash-based incentive advertising solutions. We combine a variety of Internet-based direct advertising and marketing services with cash-based online incentive programs to provide flexible, cost-per-action incentive marketing solutions. Our payment structure, in which our advertising and marketing clients are only charged when our members execute specific predefined actions, provides these clients with a known cost per yield for their advertising campaigns. By leveraging our proprietary consumer member database and our targeting capabilities, we are able to offer our clients customized, targeted advertising solutions designed to improve advertisement response rates and reduce customer acquisition costs. The unique capabilities of the Internet create significant opportunities for advertisers, marketers and merchants to develop direct relationships with consumers. Forrester Research estimates that Internet advertising expenditures in 1998 were approximately $1.3 billion and projects Internet advertising expenditures will increase to approximately $10.5 billion in 2003. To date, the majority of Internet advertising has been in the form of passive banner advertising. Decreasing consumer response to banner advertising has led advertisers and marketers to seek alternative forms of online advertising to increase the effectiveness and efficiency of their online marketing efforts. As advertisers and marketers seek to increase the effectiveness and efficiency of their online marketing efforts, they are turning to incentives-based programs, which reward consumers for their attention or specific response to ads and promotions. Most incentives-based programs offer consumers the ability to earn "points" that are redeemable only for limited products, frequent flyer miles or other non-cash, often restricted, rewards. Our online Earn & Spend Community offers our 1.8 million consumer members a broad array of cash-based incentive reward opportunities, whereby members are compensated with cash, rather than non-cash incentives for responding to online marketing offers. The cash earned by our members can be credited to either their VISA or bank accounts from their Cybergold account or be used to purchase digital content, services and products, including software, music, games, credit reporting services and original artistic works and publications through our Earn & Spend Community. We have developed a proprietary micropayment system that enables the cost-effective management of cash-based incentive programs on our Web site and on other Web sites. Our system combined with our Earn & Spend incentives enables the online exchange of inexpensive digital content, services and products which has not previously been economically practical. We believe our solution provides the following benefits: Advertising and Marketing Client Benefits - - Provides advertisers and marketers more flexible and effective marketing tools to induce desired consumer behavior. - - Provides a cost-per-action incentive marketing solution, reducing customer acquisition costs and risk. 3 6 - - Enables advertisers and marketers to better measure the effectiveness of their online advertising campaigns, allowing the review and modification of campaigns at any time to react to consumer response rates. - - Enables our clients to leverage our proprietary member database to offer customized and targeted campaigns. Member Benefits - - Members receive cash for their Internet activity, unlike other incentive reward programs where consumers receive only frequent flier miles, specified products or other non-cash, often restricted, incentive rewards. - - Member choice is increased by enabling consumers to limit the number of advertising and marketing offers they are exposed to and to respond only to advertising and marketing for which they have an interest. Consumers, through our Earn & Spend Community, can spend their cash rewards on a wide variety of digital content, services or products or simply have their cash rewards credited to their VISA or bank accounts. Merchant Benefits - - Enables Internet commerce on a pay-per-transaction basis, offering merchants an alternative revenue source by providing them access to our broad membership base. - - Provides merchants with value-added services, including "non-hosted" and "hosted" services. In "non-hosted" solutions, our micropayment transaction system enables merchants to sell inexpensive items or services on their own Web sites. In "hosted" solutions, we provide the merchants with a complete outsourced suite of Web site hosting, systems administration, transaction processing and integration services, while the merchant only provides the content. Since inception, a total of 144 advertising and marketing clients have offered incentives using our system. Advertising and marketing clients that have used our service include Ask Jeeves, Inc., autobytel.com inc., Cendant Corporation (Netmarket), The Walt Disney Company (Disney Daily Blast, Disney Store Online), Earthlink Network, Inc., GoTo.com, Inc., Interactive Coupon Network (Cool Savings), LifeMinders.com, Inc., New Media and Qwest Communications International Inc. We have entered into strategic relationships with the First National Bank of Omaha, MBNA America Bank, Earthlink Network, Inc., BuySafe.com and others which have enabled us to offer our advertising and marketing clients and members a broad range of incentives and online services. We intend to continue to enter into strategic relationships in order to build our Earn & Spend Community, generate additional traffic to our Web site, increase membership and establish additional sources of revenue. We were incorporated under the name Cyber-Bucks, Inc. in California in October 1994. We subsequently changed our name to CyberGold, Inc. and intend to reincorporate under the name Cybergold, Inc. in Delaware prior to this offering. Our principal executive offices are located at 2921 Adeline Street, Berkeley, California 94703, and our telephone number is (510) 845-5000. Cybergold is our registered trademark. Cybergold Mint and Earn & Spend are our trademarks. This prospectus also contains trademarks of other companies. Our Web site is www.cybergold.com. Information contained on our website does not constitute part of this prospectus. 4 7 THE OFFERING Common Stock we are offering.................. shares Common Stock to be outstanding after the shares offering.................................... Underwriters' over-allotment option........... shares Use of proceeds............................... For general corporate purposes, including working capital and capital expenditures, and for potential strategic acquisitions or investments. See "Use of Proceeds." Dividend policy............................... We do not anticipate paying cash dividends. Proposed Nasdaq National Market symbol........ CGLD
The number of shares of our common stock to be outstanding immediately after the offering is based on the number of shares outstanding on May 18, 1999. This number does not take into account: - 1,875,957 shares of our common stock subject to options outstanding at a weighted average exercise price of $0.19 per share and 1,824,043 shares of common stock reserved for issuance under our stock option plans or other option agreements at March 31, 1999; - 185,000 shares of common stock issuable upon conversion of outstanding options to purchase preferred stock; - 1,500,000 shares of common stock reserved for issuance under our 1999 Omnibus Equity Incentive Plan; - 300,000 shares of common stock reserved for issuance under our 1999 Employee Stock Purchase Plan; and - outstanding warrants to purchase 272,500 shares of our common stock at a weighted average exercise price of $0.30 per share. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following summary financial data is derived and qualified in its entirety by our financial statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------- ------------------ 1996 1997 1998 1998 1999 ------- ------- ------ ------- ------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Total revenues...................................... $ 1 $ 531 $1,005 $ 107 $ 503 Gross margin........................................ 0 238 539 72 258 Loss from operations................................ (2,579) (3,729) (4,683) (1,215) (1,737) Net loss............................................ (2,569) (3,744) (4,604) (1,220) (1,726) Basic and diluted net loss per common share......... $ (0.46) $ (0.63) $(0.87) $ (0.20) $ (0.33) Shares used in computing basic and diluted net loss per common share.................................. 5,618 5,969 6,031 6,020 6,079
The following table presents our summary balance sheet at March 31, 1999, which has been adjusted for the conversion of our preferred stock outstanding as of March 31, 1999 into 11,373,263 shares of common stock, the issuance of 3,076,923 shares of Series D Preferred Stock on May 18, 1999 and the conversion of these shares into an equal number of shares of common stock, the issuance of 576,925 shares of Series D Preferred Stock upon the exercise of warrants and the conversion of these shares into an equal number of shares of common stock, and our sale of shares of our common stock at an assumed public offering price of $ per share in this offering. See "Use of Proceeds" and "Capitalization."
MARCH 31, 1999 ------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- ----------- ----------- (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents................................... $ 2,280 $ Current assets.............................................. 2,403 Total assets................................................ 2,893 Long-term obligations, net of current maturities............ 291 Convertible redeemable preferred stock...................... 6,671 Total stockholders' equity (deficit)........................ (5,978)
5 8 RISK FACTORS You should carefully consider the risks described below before making an investment decision. You should also refer to the other information in this prospectus, including our financial statements and the related notes. The risks and uncertainties described below are not the only ones potentially affecting our company. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial also may become important factors that affect our company. If any of the following risks occur, our business, results of operations or financial condition could be materially harmed. As a result, the trading price of our common stock could decline, and you could lose all or part of your investment. RISKS RELATED TO OUR BUSINESS WE HAVE A HISTORY OF LOSSES AND EXPECT CONTINUED LOSSES FOR THE FORESEEABLE FUTURE We have not achieved profitability in any previous quarter, and given our planned level of operating expenses, we expect to continue to incur operating losses for the foreseeable future. Our retained deficit as of March 31, 1999 was approximately $13.8 million. We plan to increase our operating expenses as we continue to build brand and infrastructure and consequently, our losses will increase in the future. Although we have experienced revenue growth in recent quarters, we cannot be certain that revenues will increase at a rate sufficient to achieve and maintain profitability. If our revenue growth is slower than we anticipate or our operating expenses exceed our expectations, our losses will significantly increase. We may never achieve profitability. Even if we were to achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. See "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information on our operating history and results of operations. WE CANNOT ASSURE YOU THAT WE WILL BE PROFITABLE BECAUSE WE HAVE OPERATED OUR BUSINESS ONLY FOR A SHORT PERIOD OF TIME AND HAVE ONLY A LIMITED OPERATING HISTORY UPON WHICH TO EVALUATE OUR BUSINESS We were incorporated in October 1994 but did not begin to generate meaningful revenues until March 1997. Accordingly, we have only a limited operating history upon which to evaluate our business and prospects. Before buying our common stock, you should carefully consider the risks and difficulties that are frequently encountered by early stage companies in the electronic commerce and direct marketing industries. These risks and difficulties include any: - inability to add new members to our program or retain members; - failure by advertisers, marketers or consumers to adopt and accept online direct marketing; - failure to maintain, expand and develop relationships with advertisers, marketers, partners, third-party Web sites and merchants; - inability to increase awareness of the Cybergold brand; - inability to expand the breadth and depth of services we offer; - lack of broad acceptance of our method for making small payments over the Internet; - inability to develop and upgrade our technology to keep pace with the demands of the electronic commerce, direct marketing and micropayments industries; - failure to enforce and protect our intellectual property rights; 6 9 - inability to hire or retain key employees; - inability to adapt to the changing advertising, marketing and Internet markets; and - inability to predict accurately future results of operations. If we are unsuccessful in addressing these risks and uncertainties, our business, results of operations and financial condition may be harmed. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations" for detailed information on our historical operating results. THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS OF OPERATIONS MAKES IT DIFFICULT TO PREDICT OUR FINANCIAL PERFORMANCE AND MAY ADVERSELY AFFECT THE TRADING PRICE OF OUR COMMON STOCK Our quarterly results of operations have varied in the past and are likely to vary significantly from quarter to quarter. A number of factors are likely to cause these variations, some of which are outside of our control. These factors include: - changes in revenue levels resulting from the advertising and marketing budget cycles of individual advertisers and marketers; - changes in advertising and marketing costs that we incur to attract and retain members; - changes in our pricing policies, the pricing policies of our competitors or the pricing policies for Internet advertising and marketing generally; - our rate of member acquisition and the level of activity of new and existing members; - the number and type of programs and development contracts established with our advertising and marketing clients as well as the impact of the fixed price portion of development contracts on gross margin; - the introduction of new products and services by us or by our competitors; - unexpected costs and delays resulting from the expansion of our operations; and - the occurrence of technical difficulties or unscheduled system downtime. We believe that our revenues will be subject to seasonal fluctuations as a result of general patterns of retail advertising and marketing and consumer purchasing, which are typically higher during the fourth calendar quarter and lower in the following quarter. In addition, expenditures by advertisers and marketers tend to be cyclical, reflecting overall economic conditions and consumer buying patterns. Consequently, our results of operations could be harmed by a downturn in the general economy or a shift in consumer buying patterns. Due to these and other factors, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful and you should not rely upon them as an indication of our future performance. Our operating expenses are based on expected future revenues and are relatively fixed in the short term. If our revenues are lower than expected, we would incur greater than expected losses. In addition, during future periods our operating results likely will fall below the expectations of public market analysts and investors. In this event, the market price of our common stock likely would decline. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 7 10 WE DEPEND ON THE INCREASED ACCEPTANCE OF ONLINE INCENTIVES-BASED DIRECT MARKETING PROGRAMS Our success depends in part on the increased acceptance of online incentives-based direct marketing programs. Although incentive programs have been used extensively in traditional marketing and sales channels, they have only recently begun to be used online. The success of online incentives-based direct marketing programs will depend on the ability of these programs to attract and retain members, advertising and marketing clients and merchants. Our ability to attract and retain members, clients and merchants will depend on our marketing efforts and on the quality of each member, client or merchant experience with our system. The number and relevance of the direct marketing offers we provide and the perceived value of the incentives we offer will be necessary to achieve future success. Our ability to generate revenue from clients and merchants will depend on our ability to differentiate ourselves through the services we provide and technology solutions we offer, as well as our success in generating adequate participation from consumers in our online incentives-based direct marketing programs. The attractiveness of our program to consumers depends in large part on the attractiveness of the incentives we offer. To the extent that our online incentives-based direct marketing program does not achieve market acceptance among members, clients and merchants, our business, results of operations and financial condition would be harmed. OUR SUCCESS DEPENDS ON OUR ABILITY TO MAINTAIN AND EXPAND AN ACTIVE MEMBERSHIP BASE Our success largely depends on our ability to maintain and expand an active membership base. Although we currently have approximately 1.8 million members, we generate the majority of our revenues from a small percentage of our members, and we cannot assure you that the percentage of active members will increase. In addition, approximately 360,000 of our members have requested not to receive e-mail from us. Because our revenues are primarily driven by commissions paid by advertisers and direct marketers based on specific actions taken by our members, if we are unable to induce existing and new members to actively participate in the Cybergold Earn & Spend Community, our business, results of operations and financial condition will be harmed. Although our membership has grown in prior periods, we cannot be certain that our membership growth will continue at current rates or increase in the future. Currently, we attract the majority of our members through co-registration agreements with online partners, whereby registrants for those sites have the option to concurrently sign up for the Cybergold Earn & Spend Community. We believe that the convenience afforded by this co-registration capability is a significant factor in attracting new members. If we were to lose these relationships with our online co-registration partners, we would lose a significant source of new members, and our business, results of operations and financial condition would be harmed. IF OUR ABILITY TO DEPOSIT TO AND TRANSFER FUNDS FROM VISA ACCOUNTS WERE TO BE DISCONTINUED OR IF THIS ABILITY WERE TO BE EXTENDED TO COMPETITORS, OUR BUSINESS COULD BE HARMED Cybergold has a relationship with the First National Bank of Omaha, an acquiring bank for VISA International Service Association (VISA), that enables the transfer of funds from individual Cybergold member accounts to their VISA accounts, as well as from their VISA accounts to their Cybergold accounts. This transaction processing capability required re-engineering of the First National Bank of Omaha's VISA transaction processing system, and would be difficult to replicate with another financial service provider if our relationship with the First National Bank of Omaha were to deteriorate or terminate. The First National Bank of Omaha can terminate the contract at any time with 30 days notice. Currently, under the conditions of our contract, we cannot enter into similar relationships with other credit card providers such as MasterCard, American Express or Discover. However, the First National Bank of Omaha can at its own discretion freely offer similar services to our existing and potential competitors. If we were to lose this relationship with the First National Bank of Omaha, or if 8 11 they were to extend similar services to our competitors, our business, results of operations and financial condition would be harmed. IF WE ARE UNABLE TO ESTABLISH THE CYBERGOLD BRAND, OUR BUSINESS WOULD BE HARMED Developing a strong brand is critical to our business. The reputation of the Cybergold brand will largely depend on our ability to provide a high-quality experience for our clients, members and merchants. We cannot assure you that we will be successful in developing our brand. Any client, member or merchant dissatisfaction with the quality of an experience with our company for reasons within or outside of our control could damage our reputation. Any damage to our reputation could have a material adverse effect on our business, results of operations and financial condition. We intend to spend a portion of the proceeds of this offering to further develop our brand. If we expend additional resources to build the Cybergold brand and do not generate a corresponding increase in revenues as a result of our branding efforts, or if we otherwise fail to promote our brand successfully, our business, results of operations and financial condition would be harmed. IF THE INTERNET FAILS TO GAIN FURTHER ACCEPTANCE AS A MEDIUM FOR ADVERTISING AND MARKETING, OUR BUSINESS WOULD BE HARMED Our business depends on market acceptance of the Internet as a medium for advertising and marketing. Advertisers, marketers and advertising and marketing agencies that have historically relied on traditional forms of advertising and marketing may be reluctant or slow to adopt online advertising and marketing. Many advertisers and marketers have limited or no experience using the Internet as an advertising and marketing medium. In addition, these advertisers and marketers may have allocated only a limited portion of their budgets to online advertising and marketing, or may find online advertising and marketing to be less effective for promoting their products and services than traditional advertising and marketing media, including television, radio and print. Advertisers, marketers, and advertising and marketing agencies that have invested substantial resources in traditional methods of advertising and marketing may also be reluctant to reallocate their resources to online advertising and marketing. The market for online advertising and marketing also depends on the overall growth and acceptance of electronic commerce. If the markets for online advertising and marketing and electronic commerce fail to develop or develop more slowly than we expect, our business, results of operations and financial condition would be harmed. WE DEPEND ON CONSUMER DEMAND FOR MAKING SMALL PAYMENTS OVER THE INTERNET We cannot assure you that the demand for and market acceptance of Internet micropayment services will develop to a sufficient level to support our continued operations or planned expansion, and we also cannot assure you that consumers, Web sites or merchants will utilize a system for micropayment transactions over the Internet. Currently, Internet content and service providers typically use a subscription model to charge for content or services they provide, if they charge consumers directly for their content or services at all. We cannot assure you that these entities will ever adopt a method for accepting small payments for their content or services over the Internet. In addition, the development of a market for micropayments on the Internet may depend on the eventual adoption of a standard micropayment system. There can be no assurance that our micropayment system will be the system adopted by consumers, Web sites, or merchants. If a widespread demand for micropayments does not develop or if another method for micropayments is adopted as a standard, our business, results of operations and financial condition will be harmed. 9 12 WE FACE SIGNIFICANT COMPETITION FROM ONLINE INCENTIVES-BASED ADVERTISING AND MARKETING PROGRAMS AND PROVIDERS OF MICROPAYMENT SYSTEMS We face significant competition from online incentives-based advertising and marketing programs and providers of micropayment systems. We expect competition to increase due to the lack of significant barriers to entry for online business generally and for online incentives programs and micropayment transactions in particular. Currently, several companies offer competitive online incentives programs, including MyPoints.com, Inc. and Netcentives, Inc. We may also face competition from established Internet portals and community Web sites that engage in direct marketing, as well as from traditional advertising agencies and direct marketing companies that may seek to offer online products or services. In addition, financial service organizations, such as banks and credit card companies, or other large organizations may develop competitive micropayment systems and incentives-based advertising and marketing programs. Some of our current and potential competitors have longer operating histories, greater brand recognition, larger client and member bases and significantly greater financial, technical and marketing resources than we do. These advantages may enable them to respond more quickly to new or emerging technologies and changes in customer preferences. These advantages may also allow them to engage in more extensive research and development, undertake extensive far-reaching marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to potential employees, strategic partners and advertisers. As a result, it is possible that our existing competitors or new competitors may rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margin and loss of market share. We may not be able to compete successfully, and competitive pressures may adversely affect our business, results of operations and financial condition. See "Business -- Competition." A SIGNIFICANT PORTION OF OUR QUARTERLY REVENUES IS RECOGNIZED FROM A LIMITED NUMBER OF ADVERTISING AND MARKETING CLIENTS A significant portion of our revenues to date have been recognized from a limited number of advertising and marketing clients. Our five largest clients accounted for approximately 65% and 63% of our revenues for the year ended December 31, 1998 and the quarter ended March 31, 1999, respectively and our ten largest clients accounted for approximately 84% and 85% of our revenues for the year ended December 31, 1998 and the quarter ended March 31, 1999, respectively. We generally do not have long-term contracts with any of our clients, and clients can generally terminate their relationships with us upon specified notice and without penalties. Our client base fluctuates significantly from quarter to quarter primarily as a result of the advertising and marketing budget cycles of individual clients. In addition, to date this fluctuating client base has been drawn from a concentrated group of companies. Revenues from significant clients as a percentage of total revenues are as follows: YEAR ENDED DECEMBER 31, 1998 Qwest Communications International, Inc................... 22% Interactive Coupon Network (Cool Savings)................. 16% THREE MONTHS ENDED MARCH 31, 1999 Qwest Communications International, Inc................... 20% autobytel.com inc......................................... 12% LifeMinders.com, Inc...................................... 11% Cendant Corporation (Netmarket)........................... 11% The Walt Disney Company (Disney Daily Blast, Disney Store Online)................................................ 10%
We expect that the majority of our revenues will continue to depend on sales to a relatively small number of clients and that our client base will continue to vary significantly from quarter to quarter. Any 10 13 negative change in our relationship with or downturn in the business of clients or any general downturn in the businesses of the concentrated group of companies from which our client base is drawn could seriously harm our results of operations. IF WE FAIL TO ADAPT TO RAPID CHANGE IN OUR INDUSTRY OR OUR INTERNALLY DEVELOPED SYSTEMS CANNOT BE MODIFIED PROPERLY FOR INCREASED TRAFFIC OR VOLUME, OUR PRODUCTS AND SERVICES MAY BECOME OBSOLETE Our industry is characterized by rapid change. The introduction of products and services embodying new technologies, the emergence of new industry standards and changing consumer needs and preferences could render our existing services obsolete and unmarketable. Our future success will depend in part on our ability to respond effectively to rapidly changing technologies, industry standards and customer requirements by adapting and improving the performance features and reliability of our services. We may experience technical difficulties that could delay or prevent the successful development, introduction or marketing of new products and services. In addition, any new enhancements to our products and services must meet the requirements of our current and prospective users. We could incur substantial costs to modify our services or infrastructure to adapt to rapid change in our industry. We internally developed our systems for maintaining our Web site processing transactions and maintaining member accounts. If, in the future, we cannot modify these systems to accommodate increased traffic and an increased volume of transactions and orders, we could suffer slower response time, problems with customer service and delays in reporting accurate financial information. During the first three months of 1999, we experienced instances of unscheduled system downtime, which resulted in our Web site being inaccessible for periods ranging from several minutes to several hours and could experience such unscheduled system downtime in the future. WE RELY ON OUR INTELLECTUAL PROPERTY RIGHTS AND MAY BE UNABLE TO PROTECT THESE RIGHTS We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology or business model. Monitoring unauthorized use of our technology and business model is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology and business model. In addition, our business activities may infringe upon the proprietary rights of others, and, from time to time, we have received, and may continue to receive, claims of infringement against us. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Litigation could subject us to significant liability for damages and invalidation of our proprietary rights. These lawsuits, regardless of their success, would likely be time consuming and expensive to resolve and would divert management's time and attention away from our business. Any potential intellectual property litigation could also force us to do one or more of the following: - make significant changes to the structure and operation of our business; - attempt to design around a third party's patent; or - license alternative technology from another party. Implementation of any of these alternatives could be costly and time consuming, and may not be possible. Accordingly, an adverse determination in any litigation that we are a party to would have a material adverse effect on our business, results of operations and financial condition. Cybergold has two issued U.S. Patents covering its business model and software architecture. We also have U.S. and foreign pending patent applications. Cybergold is our only registered trademark, 11 14 although we have applied to register additional trademarks in the United States. We cannot assure you that our patents or trademarks will not be successfully challenged by others or invalidated, that our pending patents will be issued or that our trademark registrations will be approved. If our trademark registrations are not approved because third parties own these trademarks, our use of these trademarks would be restricted unless we entered into arrangements with the third-party owners, which might not be possible on reasonable terms. We generally enter into confidentiality or license agreements with our employees and consultants, and control access to and distribution of our technologies, documentation and other proprietary information. Despite our efforts to protect our proprietary rights from unauthorized use or disclosure, unauthorized parties may attempt to disclose, obtain or use our solutions or technologies. We cannot assure you that the steps we have taken will prevent misappropriation of our solutions or technologies, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States. See "Business -- Intellectual Property" for more information on our intellectual property. ANY FAILURE OF OUR NETWORK INFRASTRUCTURE COULD HARM OUR BUSINESS Our success depends on the capacity, reliability and security of our networking hardware, software and telecommunications infrastructure. We use network servers that are housed at an Internet co-location service provider's data center in San Jose, California. Despite precautions taken by us and the host of our Web site, our system is susceptible to natural and man-made disasters such as earthquakes, fires, floods, power loss and vandalism. Telecommunications failures, computer viruses, electronic break-ins or other similar disruptive problems could adversely affect the operation of our systems. In addition, any technical failure or security problems at our Internet service provider and co-location facility could harm our business, financial condition and results of operations. Our insurance policies may not adequately compensate us for any losses that may occur due to any damages or interruptions in our systems. Accordingly, we could be required to make capital expenditures in the event of unanticipated damage. We do not currently have redundant systems or a formal disaster recovery plan. In addition, our members depend on Internet service providers for access to our Web site. Internet service providers and Web sites have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems. These problems could harm our business, results of operations and financial condition. IF WE FAIL TO MANAGE EXPANSION EFFECTIVELY, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE HARMED Our success will depend in part on our ability to manage our growth and expansion effectively. We plan to expand our technology, sales, administrative and marketing organizations. Our anticipated future expansion may place a significant strain on our management systems and resources. We will need to continue to improve our financial and managerial controls and reporting systems and procedures and to expand, train and manage our workforce. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, we are in the process of moving our operations to new facilities. During this move our technology infrastructure could be more susceptible to technical failures or other disruptive problems. Any such problems could diminish or halt our ability to provide services to our customers, which could harm our business, results of operations and financial condition. 12 15 MANY OF OUR KEY PERSONNEL ARE NEW TO CYBERGOLD AND MAY NOT WORK TOGETHER SUCCESSFULLY A number of people on our management team and sales force have joined our Company in the last 12 months. Our management team has limited experience working together. Our future performance will depend, in part, on our ability to integrate successfully our newly hired executive officers into our management team, and our ability to develop an effective working relationship among management. Our executive officers, who have worked together for only a short time, may not be successful in working together or managing our company. Any dissent among executive officers, or between our officers and our board of directors, could affect our ability to make strategic decisions. See "Management." In addition, the majority of our sales force has joined our Company in the last six months and they have limited experience marketing our services and working together. If our key personnel are unable to market our services and work together successfully, our business, results of operations and financial condition could be harmed. WE MAY NOT BE ABLE TO HIRE OR RETAIN KEY EMPLOYEES Our future success will depend, in part, on our ability to attract and retain highly skilled employees, particularly management, sales and technical personnel. Competition for employees in our industry is intense. We may be unable to retain our key employees or to attract other highly qualified employees in the future. We have experienced difficulty from time to time in attracting the personnel necessary to support the growth of our business, and we may experience similar difficulty in the future. If we are unable to hire or retain key employees, our business, results of operations and financial condition will be harmed. WE MAY FACE RISKS AND COSTS ASSOCIATED WITH POTENTIAL FUTURE ACQUISITIONS We may acquire or make investments in businesses, products, services, or technologies to carry out our business strategy. We do not have any present understanding, nor are we having any discussions relating to any acquisition or investment. If we acquire businesses, products, services or technologies, we could have difficulty in assimilating them into our operations. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition, effecting acquisitions could require use of a significant amount of our available cash. Furthermore, we may have to issue equity or equity-linked securities to pay for future acquisitions, and any such issuance could be dilutive to existing and future stockholders. In addition, acquisitions and investments may have negative effects on our reported results of operations due to acquisition-related charges and amortization of acquired technology and other intangibles. Any of these acquisition-related risks or costs could harm our business, financial condition and operating results. WE FACE RISKS ASSOCIATED WITH EXPANDING OUR BUSINESS INTERNATIONALLY An element of our growth strategy is to introduce our services in international markets. Our participation in international markets will be subject to a number of risks, including foreign government regulations, export license requirements, tariffs and taxes, fluctuations in currency exchange rates, introduction of the European Union common currency, difficulties in managing foreign operations and political and economic instability. To the extent our potential international members are impacted by currency devaluations, general economic crises or other macroeconomic events, the ability of our members to utilize our services could be diminished. In order to help us address some of the risks associated with introducing our services internationally, we believe it will be necessary to establish strategic relationships with international partners. To date, we have not entered into any strategic relationship with any international partners. We cannot assure you that we will be able to establish international relationships, or that if established, they will be successful. In addition, we cannot assure 13 16 you that electronic commerce will develop successfully in international markets or that potential members in these foreign markets will utilize incentives-based marketing programs. Furthermore, we cannot assure you that we will be able to develop banking relationships with foreign banks or overcome any legal restrictions related to offering cash rewards and incentives that exist in foreign jurisdictions. Any failure to develop our business internationally may harm our competitive position and consequently our business. WE MAY NEED MORE WORKING CAPITAL TO EXPAND OUR BUSINESS, AND OUR PROSPECTS FOR OBTAINING ADDITIONAL FINANCING ARE UNCERTAIN We currently anticipate that our available cash resources combined with the net proceeds from this offering will be sufficient to meet our anticipated capital expenditures and working capital requirements through the end of 2000. However, we may need to raise additional funds sooner to fund more rapid expansion, to develop new or enhance existing services or products, to respond to competitive pressures or to acquire complementary products, businesses, or technologies. If additional funds are raised through the issuance of equity or equity-linked securities, the percentage ownership of our stockholders would be reduced. In addition, these securities may have rights, preferences or privileges senior to those of our stockholders. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of potential opportunities, develop or enhance services or products, or otherwise respond to competitive pressures would be significantly limited. Our business, results of operations and financial condition could be harmed by this limitation. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" for a discussion of working capital and capital expenditures. RISKS RELATED TO THE INTERNET INDUSTRY IF WE ARE UNABLE TO SECURELY MAINTAIN AND EXPAND OUR MEMBERSHIP DATABASE, OUR BUSINESS COULD BE HARMED An important feature of our program is our ability to develop and maintain individual member profiles. Security and privacy concerns may cause consumers to resist providing the personal data necessary to support this profiling capability. As a result of these security and privacy concerns, we may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by such breaches. Use of our Cybergold Earn & Spend Community could decline if any compromise of security occurred. In addition, if unauthorized third parties gain access to our system and alter or destroy information in our database, our ability to target direct marketing offers to members would be harmed. We could also be subject to legal claims from members. Any public perception that we engaged in unauthorized release of member information would adversely affect our ability to attract and retain members. Any of these events could have a material adverse effect on our business, results of operations and financial condition. We maintain a database containing information on our members, including their account balances. Our database may be accessed by unauthorized users accessing our systems remotely. If we experience a security breach, the integrity of our database may be jeopardized. Any breach of this type could lead to financial losses through the unauthorized redemption of monies. 14 17 WE COULD BE SUBJECT TO LIABILITY FOR ONLINE CONTENT THAT MAY NOT BE COVERED BY OUR INSURANCE The nature and breadth of information disseminated on our Web site could expose us to liability in various areas, including claims relating to: - programs and promotions we offer; - content and publication of various materials posted on our Web site based on defamation, libel, negligence, personal injury and other legal theories; and - copyright or trademark infringement and wrongful action due to the actions of third parties. Claims of these kind against us would result in our incurring substantial costs and would have a negative impact on our financial and other resources. If there were numerous claims, or if the claims were severe, we would need to implement measures to reduce our exposure and potential liability. Accordingly, we may be required to change our services in such a way that would be less attractive to our advertisers, marketers, merchants and members. This in turn could reduce traffic to our Web site, negatively impact our membership or reduce our revenue from electronic commerce or advertising and marketing. Our general liability insurance may be insufficient to cover expenses and losses in connection with any claims against us. To the extent our insurance coverage does not cover liability or expenses we incur, our business, financial condition and results of operations would be harmed. IF THE INTERNET INFRASTRUCTURE FAILS TO DEVELOP OR BE ADEQUATELY MAINTAINED, OUR BUSINESS WOULD BE HARMED BECAUSE MEMBERS MAY NOT BE ABLE TO ACCESS OUR SERVICES We depend on the Internet infrastructure to provide the performance, capacity and reliability needed to support the anticipated expansion of electronic commerce on the Internet. If Internet usage grows, the Internet infrastructure may not be able to support the demands placed on it by this growth, and its performance and reliability may decline. Among other things, continued development of the Internet infrastructure will require a reliable network backbone with necessary speed, data capacity and security. Currently, there are regular failures of the Internet network infrastructure, and there are likely to be more in the future. These failures may undermine our marketing clients' and our members' confidence in the Internet as a viable commercial medium. Any actual or perceived degradation in the performance of the Internet as a whole could undermine the benefits of our services. In addition, the Internet could lose its viability as a commercial medium due to delays in the development or adoption of new technology required to accommodate increased levels of Internet activity or due to government regulation. If outages or delays occur frequently in the future, electronic commerce and the use of our services could grow more slowly or decline, which could harm our business, results of operations and financial condition. WE MAY BE VULNERABLE TO UNAUTHORIZED ACCESS, COMPUTER VIRUSES AND OTHER DISRUPTION PROBLEMS THAT COULD ADVERSELY AFFECT US Despite the implementation of security measures, our networks may be vulnerable to unauthorized and illegal access, computer viruses and other disruptive problems. Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation of service to users accessing our Web sites, which could have a material adverse effect on our business, results of operations and financial condition. A party who is able to circumvent security measures could misappropriate proprietary information or cause interruptions in our Internet operations. Internet service providers and online service providers have in the past experienced, and may in the future experience, interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees or others. We may be required to expend significant capital or other resources to protect against the 15 18 threat of security breaches or to alleviate problems caused by breaches. Although we intend to continue to implement security measures, we cannot be certain that measures implemented by us will not be circumvented in the future. OUR BUSINESS IS SUBJECT TO RISKS REGARDING SECURE TRANSMISSION OF CONFIDENTIAL INFORMATION OVER PUBLIC NETWORKS A necessity of online commerce and communications is the secure transmission of confidential information over public networks. Our security measures may not prevent security breaches. Any failure to prevent security breaches could harm our business. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication technology to effect secure transmission of confidential information, including customer credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography, or other developments may result in a compromise or breach of the technology used by us to protect customer transaction data. Any such compromise of our security could harm our reputation and, therefore, our business. FUTURE REGULATION OF THE INTERNET COULD RESTRICT THE OPERATION AND GROWTH OF OUR BUSINESS Any new regulation of the Internet could inhibit growth of the Internet and decrease the acceptance of the Internet as a communications and commercial medium, which could have a material and adverse effect on our business. The laws governing the Internet and email services remain largely unsettled. There is no single governmental body overseeing our industry, and many state laws enacted in recent years have different and sometimes inconsistent application to our business. In addition, industry standards and practices by Internet service providers and other third-party e-mail providers vary. Some of these providers have blocked in the past and, at their discretion, may in the future elect to block, all e-mails coming from a specific domain, such as Cybergold, preventing distribution of e-mails from us. POTENTIAL PRIVACY REGULATION In addition, the Federal Trade Commission is considering the adoption of regulations regarding the collection and use of personal information obtained from individuals, especially children, when accessing Web sites. These regulations could restrict our ability to provide demographic data to our advertising and marketing clients. At the international level, the European Union has adopted a directive that will impose restrictions on the collection and use of personal data. This directive could affect U.S. companies that collect information over the Internet from individuals in European Union member countries and may impose restrictions that are more stringent than current Internet privacy standards in the United States. These developments could have an adverse effect on our business, results of operations and financial condition. POTENTIAL CURRENCY REGULATION Our online incentive program rewards are not currently subject to currency regulation in any jurisdiction. If any governmental agency deemed that our rewards are subject to such regulation, our business, financial condition and results of operations could be harmed. POTENTIAL FOREIGN REGULATION Governments of foreign countries may also attempt to regulate electronic commerce. New laws could stall the growth of the Internet and decrease the acceptance of the Internet as a commercial 16 19 medium. In addition, existing laws such as those governing intellectual property and privacy may be interpreted to apply to the Internet. In the event that foreign governments, the federal government, state governments or other governmental authorities adopt, modify or re-interpret laws or regulations relating to the Internet, our business, results of operations and financial condition could be harmed. POTENTIAL ELECTRONIC COMMERCE REGULATION In 1998, the United States government enacted a three-year moratorium prohibiting states and local governments from imposing new taxes on electronic commerce transactions. Upon expiration of this moratorium, if it is not extended, states or other governments may levy sales or use taxes on electronic commerce transactions. An increase in the taxation of electronic commerce transactions may make the Internet less attractive for consumers and businesses which would harm our business. WE FACE A NUMBER OF UNKNOWN RISKS ASSOCIATED WITH THE YEAR 2000 PROBLEM, ANY OF WHICH MAY HARM OUR BUSINESS Many currently installed computer systems and software products are coded to accept only two digit entries in their date code field. Beginning in the Year 2000, these date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and software products used by many companies may need to be upgraded to comply with these Year 2000 requirements. The costs we have incurred and expect to incur related to Year 2000 compliance have not been material to our business, results of operations or financial condition. In the event that our assessment of our Year 2000 readiness is inaccurate, we could be required to expend substantial resources to remedy any unanticipated Year 2000 problems. Costs associated with unanticipated Year 2000 problems and difficulties in remedying these problems by year-end could have a material adverse effect on our business, results of operations and financial condition. The most likely Year 2000 failure scenario attributable to a supplier or customer is a systematic failure beyond our control or the supplier's or customer's immediate control, such as a prolonged data communication, telecommunications or electrical failure. A failure of this sort could prevent members from accessing our Web site and prevent us from operating our business. The primary business risks in the event of such a failure would include lost revenues, increased operating expenses and loss of members. Any of these risks could have a material adverse effect on our business, results of operations and financial condition. We have not yet developed a comprehensive contingency plan to address Year 2000 problems that are not detected and corrected prior to their occurrence. RISKS RELATED TO THE OFFERING OUR EXECUTIVE OFFICERS AND DIRECTORS WILL RETAIN SUBSTANTIAL VOTING CONTROL OVER CYBERGOLD AFTER THE OFFERING WHICH WILL ALLOW THEM TO INFLUENCE THE OUTCOME OF MATTERS SUBMITTED TO STOCKHOLDERS FOR APPROVAL We anticipate that our executive officers, our directors and entities affiliated with them will, in the aggregate, beneficially own approximately % of our outstanding common stock following the completion of this offering, or % assuming exercise of the underwriters option to purchase additional shares. As a result, these stockholders will retain substantial control over matters requiring approval by our stockholders, such as the election of directors and approval of significant corporate transactions. This 17 20 concentration of ownership may also have the effect of delaying or preventing a change in control. See "Principal Stockholders" for more information relating to the ownership positions of our executive officers and directors. SOME OF THE PROVISIONS OF OUR CHARTER DOCUMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD PREVENT A CHANGE IN CONTROL OF CYBERGOLD Some of the provisions of our certificate of incorporation, our bylaws and the Delaware General Corporation Law could make it more difficult for a third party to acquire us, even if a change of control would be beneficial to our stockholders. See "Description of Capital Stock" for more information on our charter provisions and Delaware General Corporation Law. Such provisions include: - authorizing the issuance of up to 5,000,000 shares of "blank check"preferred stock; - providing for a classified board of directors with staggered, three year terms; and - prohibiting certain stockholder action by written consent. THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE IN THE NEAR FUTURE MAY CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE A substantial number of shares of common stock will be available for sale in the public market following this offering, which could adversely affect the market price for our common stock. See "Shares Eligible for Future Sale" for a more detailed description of the eligibility of shares of our common stock for future sale. A PUBLIC MARKET FOR OUR SECURITIES MAY NOT DEVELOP OR BE SUSTAINED There has not been a public market for our common stock. We cannot predict the extent to which investor interest in our common stock will lead to the development of a trading market or how liquid that market might become. The initial public offering price for the shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. You may not be able to resell your shares at or above the initial public offering price. See "Underwriting." OUR STOCK PRICE COULD BE VOLATILE FOLLOWING THIS OFFERING WHICH COULD LEAD TO CLASS ACTION LITIGATION The stock market has experienced significant price and volume fluctuations, and the market prices of technology companies, particularly Internet-related companies, have been highly volatile. Investors may not be able to resell their shares at or above the initial public offering price. In addition, in the past, securities class action litigation has often been instituted against a company following periods of volatility in the company's stock price. This type of litigation could result in substantial costs and could divert our management's attention and resources which could harm our business. YOU WILL EXPERIENCE AN IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR INVESTMENT The initial public offering price of our common stock is substantially higher than what the net tangible book value per share of the common stock will be immediately after this offering. If you purchase our common stock in this offering, you will incur immediate dilution of approximately $ in the net tangible book value per share of our common stock from the price you pay for our common stock (based upon an assumed initial public offering price of $ per share). See "Dilution." The exercise of outstanding options and warrants may result in further dilution. 18 21 MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT INCREASE OUR PROFITS OR MARKET VALUE We intend to use the net proceeds from the sale of the common stock for general corporate purposes, including working capital, and for potential strategic acquisitions or investments. We have not determined how the proceeds will be allocated among the anticipated uses. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase our profitability or our market value. Until the proceeds are needed, we plan to invest them in investment-grade, interest-bearing securities. The failure of management to apply these funds effectively could harm our business. See "Use of Proceeds." YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS BECAUSE THEY ARE INHERENTLY UNCERTAIN This prospectus contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements you should specifically consider various factors, including the risks outlined under "Risk Factors." These factors may cause our actual results to differ materially from any forward-looking statement. In addition, this prospectus contains forward-looking statements attributed to third party industry sources relating to their estimates regarding the growth of Internet use. You should not place undue reliance on these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform such statements to actual results or to changes in our expectations. 19 22 USE OF PROCEEDS We estimate that our net proceeds from the sale of shares of common stock we are offering will be approximately $ million ($ million if the underwriters exercise their over-allotment option in full) at an assumed initial public offering price of $ and after deducting estimated offering expenses of $ and underwriting discounts and commissions payable by us. We expect to use the net proceeds for general corporate purposes, including working capital and capital expenditures. A portion of the net proceeds may also be used to acquire or invest in businesses, technologies, product lines or products that are complementary to our business. We have no current agreements or commitments with respect to any of these acquisitions or investments. Our management will have broad discretion concerning the use of the net proceeds of the offering. Pending these uses, we intend to invest the net proceeds of this offering in investment-grade, interest-bearing securities. DIVIDEND POLICY We have never declared or paid cash dividends on our common stock or other securities and do not currently anticipate paying cash dividends in the future. Our equipment financing obligations currently prohibit the payment of dividends. 20 23 CAPITALIZATION The following table sets forth our capitalization as of March 31, 1999. The pro forma information reflects the sale of 3,076,923 shares of Series D Preferred Stock on May 18, 1999, the issuance of 576,925 shares of Series D Preferred Stock upon the exercise of outstanding warrants, the filing of an amendment to our amended and restated certificate of incorporation to provide for authorized capital stock of 75,000,000 shares of common stock and 5,000,000 shares of undesignated preferred stock and the conversion of all outstanding shares of preferred stock into 15,030,111 shares of common stock on completion of this offering. The pro forma as adjusted information reflects the sale of the shares of common stock offered hereby and the application of the net proceeds we receive from this offering. The outstanding share information excludes 1,958,364 shares of common stock issuable upon exercise of outstanding options as of March 31, 1999 at a weighted average exercise price of $0.19 per share, 185,000 shares of common stock issuable upon conversion of outstanding options to purchase preferred stock, 272,500 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $0.30 per share, 1,500,000 shares of common stock reserved for issuance under our 1999 Omnibus Equity Incentive Plan and 300,000 shares of common stock reserved for issuance under our 1999 Employee Stock Purchase Plan. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the related notes. See "Use of Proceeds" and "Management -- Stock Plans."
AS OF MARCH 31, 1999 ----------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------------- ------------ ------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Long-term obligations, net of current maturities.................................... $ 291,425 $ $ Convertible redeemable preferred stock, $0.0001 par value, 8,000,029 shares authorized, 6,283,792 shares issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted...................................... 6,671,480 ------------ ---------- ---------- Stockholders' equity (deficit): ------------ ---------- ---------- Preferred stock, $0.0001 par value, 5,329,971 shares authorized, 5,092,471 shares issued and outstanding, actual; 5,000,000 shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted........... 509 Common stock, $0.0001 par value, 20,000,000 shares authorized, 6,109,017 shares issued and outstanding, actual; 75,000,000 shares authorized, shares issued and outstanding, pro forma; shares authorized, issued and outstanding, pro forma as adjusted............ 611 Stock subscription receivable................... Additional paid-in capital...................... 8,916,025 Deferred compensation........................... (1,143,674) Retained deficit................................ (13,751,771) ------------ ---------- ---------- Total stockholders' equity (deficit).......................... (5,978,300) ------------ ---------- ---------- Total capitalization.................. $ $ $ ============ ========== ==========
21 24 DILUTION The pro forma net tangible book value of our common stock as of March 31, 1999, giving effect to (i) the sale of 3,076,923 shares of Series D Preferred Stock on May 18, 1999, (ii) the issuance of 576,925 shares of Series D Preferred Stock upon the exercise of outstanding warrants and (iii) the conversion of all outstanding shares of preferred stock into common stock on the closing of this offering, was $ , or approximately $ per share of common stock. "Pro forma net tangible book value per share" represents the amount of our total tangible assets reduced by the amount of our total liabilities divided by shares of common stock outstanding after giving effect to the conversion of the preferred stock outstanding as of March 31, 1999 into common stock. After giving effect to the issuance and sale of shares of common stock offered by us and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of March 31, 1999 would have been , or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution in net tangible book value of $ per share to new investors. The following table illustrates the per share dilution: Assumed initial public offering price per share............. $ Pro forma net tangible book value per share as of March 31, 1999............................................... $ Increase per share attributable to new investors.......... Pro forma net tangible book value per share after the offering.................................................. ------ Dilution per share to new investors ======
The following table summarizes on a pro forma basis, giving effect to the conversion of all outstanding shares of preferred stock into common stock on the closing of this offering, as of March 31, 1999, the difference between the number of shares of common stock purchased from us by existing stockholders and by new investors, the total consideration paid to us by existing stockholders and new investors and the average price paid by existing stockholders and by new investors, before deduction of estimated discounts and commissions and estimated offering expenses payable by us.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE -------------------- --------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ---------- ------- --------- Existing stockholders............. $ $ New investors..................... --------- ----- ---------- ----- ------ Totals.................. 100.0% 100.0% ========= ===== ========== ===== ======
As of March 31, 1999, there were options outstanding to purchase a total of 1,875,957 shares of common stock at a weighted average exercise price of $0.19 per share; 185,000 shares of common stock issuable upon conversion of outstanding options to purchase preferred stock; 272,500 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $0.30 per share; 1,500,000 shares of common stock reserved for issuance under our 1999 Omnibus Equity Incentive Plan and 300,000 shares of common stock reserved for issuance under our 1999 Employee Stock Purchase Plan. To the extent outstanding options or warrants are exercised, there will be further dilution to new investors. See "Management -- Stock Plans." 22 25 SELECTED FINANCIAL DATA The selected financial data presented below are derived from the financial statements of Cybergold, Inc. These financial statements have been audited by Arthur Andersen LLP, independent public accountants. The balance sheets as of December 31, 1997 and 1998 and the statements of operations for the years ended December 31, 1996, 1997 and 1998, and the related report, are included elsewhere in this prospectus. The selected financial data presented below as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 are derived from our unaudited financial statements and are not necessarily indicative of the results that may be expected for future periods, including the year ending December 31, 1999. In the opinion of the Company, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position and results of operations for such periods have been included. The selected balance sheet data set forth below, as of December 31, 1997, and 1998 and the statement of operations data for each of the three years in the period ended December 31, 1998, are derived from the Company's financial statements which have been audited by Arthur Andersen LLP, independent public accountants, and which are included elsewhere in this prospectus. The selected financial data as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 are derived from the Company's unaudited financial statements which are included elsewhere in this prospectus and which include, in the opinion of the Company, all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair presentation of its financial position and the results of its operations for those periods. Operating results for the three months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. The Company was formed in 1994 but did not begin meaningful operating activities until 1996. Therefore, no selected financial data is presented for the years ended December 31, 1994 or 1995. The selected financial data set forth below should be read in conjunction with our financial statements and notes and "Management's Discussion and Analysis of Financial Conditions and Results of Operations" included elsewhere in this prospectus. The selected consolidated financial data should be read in conjunction with, and is qualified by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's financial statements and notes thereto included elsewhere in this Prospectus. 23 26
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------- ------------------ 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues Transaction............................ $ 1 $ 457 $ 628 $ 107 $ 333 Custom marketing services and other.... 0 74 377 0 170 ------- ------- ------- ------- ------- Total revenues................. 1 531 1,005 107 503 Cost of revenues......................... 1 293 466 35 244 ------- ------- ------- ------- ------- Gross margin........................... 0 238 539 72 259 ------- ------- ------- ------- ------- Operating expenses: Product development.................... 1,093 1,190 1,700 376 484 Sales and marketing.................... 841 2,162 2,695 791 967 General and administrative............. 645 615 642 120 228 Amortization of deferred compensation........................ 0 0 185 0 316 ------- ------- ------- ------- ------- Total operating expenses....... 2,579 3,967 5,222 1,287 1,995 ------- ------- ------- ------- ------- Loss from operations..................... (2,579) (3,729) (4,683) (1,215) (1,736) Interest income (expense), net........... 10 (15) 79 (5) 11 ------- ------- ------- ------- ------- Net loss............................... $(2,569) $(3,744) $(4,604) $(1,220) $(1,725) Dividend attributable to preferred stockholders........................... -- -- (660) -- (293) ------- ------- ------- ------- ------- Net loss attributable to common stockholders........................... $(2,569) $(3,744) $(5,265) $(1,220) $(2,018) ======= ======= ======= ======= ======= Net loss per common share, Basic and diluted(1)................... $ (0.46) $ (0.63) $ (0.87) $ (0.20) $ (0.33) ======= ======= ======= ======= ======= Weighted average common shares outstanding, Basic and diluted(1)................... 5,618 5,969 6,031 6,020 6,079 ======= ======= ======= ======= ======= Pro forma basic and diluted(1)........... $ (0.31) $ (0.10) ======= ======= Weighted average common shares outstanding, basic and diluted...... 14,915 17,396 ======= =======
- ------------------------- (1) See Note 1 of Notes to Financial Statements for a description of the method used to compute basic and diluted net loss per common share.
DECEMBER 31, --------------------- MARCH 31, 1997 1998 1999 ------- ---------- ----------- (UNAUDITED) (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents............................ $ 1,240 $ 3,175 $ 2,280 Current assets....................................... 1,401 3,592 2,403 Total assets......................................... 1,823 4,040 2,893 Long term obligations, net of current maturities..... 272 226 291 Convertible redeemable preferred stock............... -- 6,379 6,671 Total stockholders' equity (deficit)................. 743 (4,277) (5,978)
24 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements and the notes to those statements that appear elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this prospectus, particularly in "Risk Factors." OVERVIEW We are a leading provider of online direct marketing and cash-based incentive advertising solutions. We combine a variety of Internet-based direct advertising and marketing services with cash-based online incentive programs to provide flexible, cost-per-action incentive marketing solutions. Our payment structure, in which our advertising and marketing clients are only charged when our members execute specific predefined actions, provides these clients with a known cost per yield for their advertising campaigns. By leveraging our proprietary consumer member database and our targeting capabilities, we are able to offer our clients customized, targeted advertising solutions designed to improve advertisement response rates and reduce customer acquisition costs. Cybergold was incorporated in October 1994 and from inception through the second quarter of 1996, we were in an early stage of development, and had no sales and limited operating activities. From the second quarter of 1996 through the first quarter of 1997, operating activities related primarily to developing necessary infrastructure, recruiting personnel, raising capital, initial strategic planning and developing our Web site. In March 1997, we launched our initial service and enrolled our first Cybergold members. In March 1999, we introduced our micropayments system, and launched our Earn & Spend Community. Our membership base increased from approximately 250,000 at December 31, 1997 to approximately 1.0 million at December 31, 1998 and to approximately 1.8 million at May 18, 1999. Although our membership has grown in prior periods, we cannot be certain that our membership growth will continue at current rates or increase in the future. See "Risk Factors -- Our success depends on our ability to maintain and expand an active membership base." Our revenues consist of transaction revenues and custom marketing services and other revenues. Transaction revenues represent fees paid to us each time a member either earns or spends incentive rewards within our system and for micropayments transactions. Our members earn rewards by responding to online advertisements with a specific action such as filling out a survey or registering for services. We are paid a transaction fee by advertisers or marketers and we pay a portion of this fee to our members as a cash reward. We also earn a transaction fee when our members spend their cash rewards to purchase inexpensive digital content, services or products through our site or other sites using our system. These transaction revenues are not recognized until the transaction has been completed. In the case of prepayments by the advertising or marketing client, amounts not yet recognized are included in deferred revenue on the balance sheet. To date, our transaction revenues have been primarily generated from per-transaction fees received from our advertising and marketing clients for incentive programs. Revenues from micropayment transactions have not been material. Our transaction revenues are driven by a number of factors, including: - the number of our advertising and marketing clients; - the size of our membership base; - the number of transactions performed by each member; and - the average revenue per transaction. 25 28 Custom marketing services and other revenues include production and development fees received for customization of marketing programs, fees received for delivering targeted e-mail to our members and fees received for other advertising and marketing services. Production and development fees represent HTML design services, graphic services, engineering and database development and related services. We charge clients for production and development fees on either a fixed price or time and materials basis. Revenue is recognized as these services are performed. These revenues fluctuate based on the number of new programs initiated, type of services, and scope and complexity of each program. The cost of revenues associated with our transaction revenues represent cash rewards paid to our members for completing transactions or actions. We pay our members a portion of the amount received from the advertiser or marketer in return for completing a specified response or action. Gross margin on transaction revenues may fluctuate based on the nature of the incentive programs and the advertisers and marketers in any given period. The cost of revenues associated with custom advertising and marketing services and other revenues primarily consist of costs for production and development personnel and independent contractors, including associated payroll tax, benefits and other indirect costs. Gross margin associated with these revenues varies from contract to contract depending on the specific terms of the individual contract, and may also fluctuate significantly based on the number and size of fixed price contracts that we undertake in any period and our ability to complete them within the anticipated budget. We incurred a net loss of approximately $4.6 million in 1998, and approximately $1.7 million in the three months ended March 31, 1999. As of March 31, 1999 we had a retained deficit of approximately $13.6 million. We plan to increase our operating expenses as we continue to build brand and infrastructure and consequently, our losses will increase in the future. Our limited operating history makes it difficult to forecast future operating results. Although we have experienced revenue growth in recent quarters, we cannot be certain that revenues will increase at a rate sufficient to achieve and maintain profitability. Even if we were to achieve profitability in any period, we may not be able to sustain or increase profitability on a quarterly or annual basis. In connection with the granting of options to purchase our common stock to certain employees, directors and consultants during 1998 and the first quarter of 1999, we recorded deferred compensation of $1.6 million representing the difference between the exercise price of options granted and the deemed fair market value of our common stock at the time of grant. We will amortize this deferred compensation as an expense over the vesting periods of the related options. Total deferred compensation expenses recognized during the year ended December 31, 1998 and the three month period ended March 31, 1999 were $185,000, and $316,000, respectively. 26 29 RESULTS OF OPERATIONS The following table sets forth selected financial data for the periods indicated as a percentage of total revenues. Data for the year ended December 31, 1996 is not presented because we had no material revenues during that period.
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED ---------------- ------------------ 1997 1998 1998 1999 ------ ------ -------- ------ STATEMENT OF OPERATIONS DATA: Revenues: Transaction......................................... 86.0% 62.5% 99.1% 65.2% Custom marketing services and other................. 14.0 37.5 0.9 34.8 ------ ------ -------- ------ Total revenues.............................. 100.0 100.0 100.0 100.0 -------- ------ Cost of revenues...................................... 55.2 46.4 33.3 47.3 ------ ------ Gross margin................................ 44.8 53.6 66.7 52.7 Operating expenses: Product development................................. 224.1 169.0 283.3 95.3 Sales and marketing................................. 407.2 268.2 811.1 200.8 -------- ------ General and administrative.......................... 115.8 63.9 112.0 48.2 -------- ------ Amortization of deferred compensation............... -- 18.4 0.0 64.2 ------ ------ Total operating expenses.................... 747.1 519.5 1,206.4 408.5 ------ ------ -------- ------ Loss from operations.................................. (702.3) (466.0) (1,139.7) (355.8) ======== ====== Interest income (expense), net........................ (2.8) 7.9 10.3 2.2 ------ ------ -------- ------ Net loss.............................................. (705.1)% (458.1)% (1,129.4)% (353.6)% ====== ====== ======== ======
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 REVENUES Our revenues increased 370% to $503,000 in the three months ended March 31, 1999 from $107,000 in the three months ended March 31, 1998. Transaction Revenues. Transaction revenues increased 211% to $333,000 in the three months ended March 31, 1999 from $107,000 in the three months ended March 31, 1998. The increase in transaction revenues is a the result of the growth in our membership base and an increase in the average revenue per transaction. Total membership grew 265% to approximately 1,550,000 as of March 31, 1999 from approximately 425,000 as of March 31, 1998. Custom Marketing Services and Other Revenues. Custom marketing services and other revenues were $170,000 in the three months ended March 31, 1999. We did not generate any custom marketing services and other revenues in the three months ended March 31, 1998. The increase in custom marketing services revenues is primarily the result of a relationship with a single significant customer. We expect custom marketing services and other revenues to fluctuate from period to period. COST OF REVENUES Cost of revenues represents the cash incentives paid to members for performing specified actions in response to advertisements and the personnel costs associated with custom marketing services and other revenues. Cost of revenues increased 597% to $244,000 in the three months ended March 31, 1999 from $35,000 in the three months ended March 31, 1998, and gross margin decreased to 51% from 67% in these respective periods. This decrease in gross margin was primarily due to a change in the mix of 27 30 revenue-generating services, including an increase in lower-margin custom marketing services and other revenues. We expect gross margin to fluctuate in future periods as a result of continued variation in the mix of services we provide, as well as the potential impact of fixed price custom marketing services contracts. PRODUCT DEVELOPMENT COSTS Our product development costs primarily consist of compensation for technology personnel, fees for outside technology consultants, and an allocation of overhead costs. Product development costs increased 29% to $484,000 in the three months ended March 31, 1999 from $376,000 in the three months ended March 31, 1998, but decreased as a percentage of revenues to 96% from 351% in these respective periods. The increase in product development costs was primarily due to the increased hiring of additional technical personnel, including consultants. The decrease in product development expenses as a percentage of revenues is primarily attributable to an increase in revenues as we increased our membership and advertising and marketing clients. In addition, the fixed nature of certain development costs also contributed to the decrease in expense as a percentage of revenues. To date, we have expensed all product development costs as they have been incurred. We expect product development costs to continue to increase as we continue to build features and functionality into our system. SALES AND MARKETING EXPENSES Our sales expenses primarily consist of compensation for sales personnel, expenses for trade shows and an allocation of overhead costs. Our marketing expenses consist primarily of member acquisition expenses, promotions directed towards new and existing incentives-based advertisers and marketers, compensation for marketing personnel and an allocation of overhead costs. Sales and marketing expenses increased 22% to $967,000 in the three months ended March 31, 1999 from $792,000 in the three months ended March 31, 1998, but decreased as a percentage of revenues to 192% from 739% in these respective periods. The increase in sales and marketing expenses is primarily attributable to additional hiring of sales and marketing personnel, increased sales commissions resulting from higher revenues, increased expenses associated with membership acquisition, and increased advertising and promotion expenses. The decrease in sales and marketing expenses as a percentage of revenues is attributable primarily to an increase in revenues as we increased our membership and advertising and marketing clients. We expect sales and marketing expenses to increase as we continue to increase our marketing efforts, expand our direct sales force and open additional regional sales offices. GENERAL AND ADMINISTRATIVE EXPENSES Our general and administrative expenses include compensation for administrative personnel, fees for outside professional advisors and an allocation of overhead costs. General and administrative expenses increased 90% to $228,000 in the three months ended March 31, 1999 from $120,000 in the three months ended March 31, 1998, but decreased as a percentage of revenues to 45% from 112% in these respective periods. The increase in general and administrative expenses resulted from higher professional fees as well as an increase in payroll expenses due to hiring additional administrative personnel. The decrease in general and administrative expenses as a percentage of revenues is primarily attributable to an increase in revenues as we increased our membership and advertising and marketing clients. In addition, the fixed nature of certain general and administrative costs also contributed to the decrease in expenses as a percentage of revenues. We expect that general and administrative expenses will continue to increase as we expand our operations and incur additional costs related to being a public company. 28 31 AMORTIZATION OF DEFERRED COMPENSATION EXPENSE In connection with the granting of options to purchase our common stock to certain employees, directors and consultants during the three months ended March 31, 1999, we recorded deferred compensation representing the difference between the exercise price of options granted and the deemed fair market value of our common stock at the time of grant. Amortization of deferred compensation was $316,000 in the three months ended March 31, 1999. In the three months ended March 31, 1998, we recorded no deferred compensation. INTEREST INCOME (EXPENSE), NET Interest income (expense), net, primarily consists of interest earned on cash balances, including balances in Cybergold member accounts, offset by interest expense incurred with respect to the Company's capital leases and equipment financing obligations. Interest income (expense), net, was $11,000 in the three months ended March 31, 1999 and was a net expense of $5,000 in the three months ended March 31, 1998. The change from net expense to net income resulted primarily from increased interest income on higher cash balances. YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 REVENUES Revenues increased 88% to $1.0 million in the year ended December 31, 1998 from $531,000 in the year ended December 31, 1997. We had no material revenues in 1996. Transaction Revenues. Transaction revenues increased 37% to $628,000 in the year ended December 31, 1998 from $457,000 in the year ended December 31, 1997. The increase in transaction revenues is the result of the growth in our membership base and the average revenue per transaction generated by those members. Total membership grew 320% from approximately 254,000 on December 31, 1997 to approximately 1,066,000 on December 31, 1998. Custom Marketing Services and Other Revenues. Custom marketing services and other revenues increased 409% to $377,000 in the year ended December 31, 1998 from $74,000 in the year ended December 31, 1997. The increase in custom marketing services and other revenues resulted primarily from the initiation of relationships with three significant customers. COST OF REVENUES Cost of revenues increased 59% to $466,000 in the year ended December 31, 1998 from $293,000 in the year ended December 31, 1997, but gross margin increased to 54% from 45% in these respective periods. This increase in gross margin was primarily due to improved gross margin on transaction revenues. PRODUCT DEVELOPMENT COSTS Product development costs increased 42% to $1.7 million in the year ended December 31, 1998 from $1.2 million in the year ended December 31, 1997, but decreased as a percentage of revenues to 169% from 226% in these respective periods. The decrease in product development expenses as a percentage of revenues is primarily attributable to an increase in revenues as we increased our membership and advertising and marketing clients. In addition, the fixed nature of certain development costs also contributed to the decrease in expense as a percentage of revenues. 29 32 Product development costs were $1.1 million in the year ended December 31, 1996. The increase in costs from 1996 to 1997 was primarily due to increased hiring of technical employees and consultants. SALES AND MARKETING EXPENSES Sales and marketing expenses increased 23% to $2.7 million in the year ended December 31, 1998 from $2.2 million in the year ended December 31, 1997, but decreased as a percentage of revenues to 270% from 414% in these respective periods. The increase in sales and marketing expenses is primarily attributable to additional hiring of sales and marketing personnel, increased sales commissions resulting from higher revenues, increased expenses associated with member acquisition, and increased advertising and promotion expenses. The decrease in sales and marketing expenses as a percentage of revenues is attributable primarily to an increase in revenues as we increased our membership and advertising and marketing clients. Sales and marketing expenses were $841,000 in the year ended December 31, 1996. The increase in sales and marketing expenses from 1996 to 1997 is primarily attributable to additional hiring of sales and marketing personnel, increased sales commissions resulting from higher revenues, increased expenses associated with member acquisition, and increased advertising and promotion expenses. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased 4% to $642,000 in the year ended December 31, 1998 from $615,000 in the year ended December 31, 1997, but decreased as a percentage of revenues to 64% from 116% in these respective periods. The increase in general and administrative expenses resulted from higher professional fees as well as an increase in payroll expenses due to hiring additional administrative personnel. The decrease in general and administrative expenses as a percentage of revenues is primarily attributable to an increase in revenues as we increased our membership and advertising and marketing clients. In addition, the fixed nature of certain general and administrative costs also contributed to the decrease in expense as a percentage of revenues. General and administrative expenses were $645,000 in the year ended December 31, 1996. AMORTIZATION OF DEFERRED COMPENSATION EXPENSE In connection with the granting of options to purchase our common stock to certain employees, directors and consultants during the year ended December 31, 1998, we recorded deferred compensation representing the difference between the exercise price of options granted and the deemed fair market value of our common stock at the time of grant. Amortization of deferred compensation in the year ended December 31, 1998 was $185,000. For the years ended December 31, 1997 and 1996 we recorded no deferred compensation. INTEREST INCOME (EXPENSE), NET Interest income (expense), net was $79,000 in the year ended December 31, 1998, compared to a net expense of $15,000 in the year ended December 31, 1997. The change to net interest income from net interest expense is primarily attributable to an increase in the amount of interest earned on cash balances, partially offset by an increase in interest expense generated from capital lease and equipment financing obligations. Interest income (expense), net was $10,000 in the year ended December 31, 1996. The change to net interest expense in 1997 from net interest income in 1996 is primarily attributable to an increase in interest expense generated from capital lease and equipment financing obligations as well as interest on 30 33 investor notes that were paid in full upon completion of the Company's Series B Preferred Stock financing in May 1997. INCOME TAXES We recorded a net loss of $4.6 million for the year ended December 31, 1998. For federal and state tax purposes, no provision for income taxes was recorded, and no tax benefit has been recognized due to the uncertainty of realizing future tax deductions for these losses. As of December 31, 1998, we had net operating loss carryforwards of approximately $9,360,000 for federal and state income tax purposes. The federal and state net operating loss carryforwards begin to expire in the years 2011 and 2005, respectively. Our ability to utilize our net operating loss carryforwards to offset future taxable income, if any, may be restricted as a result of equity transactions that give rise to changes in ownership as defined in the Tax Reform Act of 1986. QUARTERLY RESULTS OF OPERATIONS The following tables set forth certain statement of operations data for the quarters ended March 31, 1999 in dollars and as a percentage of revenues. This data has been derived from our unaudited financial statements and is not necessarily indicative of the results that may be expected for future periods. In our opinion, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position and results of operations for such period have been included.
THREE MONTHS ENDED --------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, 1998 1998 1998 1998 1999 --------- -------- ------------- ------------ --------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues: Transaction........................... $ 107 $ 155 $ 175 $ 191 $ 333 Custom marketing services and other... 0 8 108 261 170 ------- ------- ------- ------- ------- Total revenues................. 107 163 283 452 503 Cost of revenues........................ 35 66 142 223 244 ------- ------- ------- ------- ------- Gross margin................... 72 97 141 229 259 ------- ------- ------- ------- ------- Operating expenses: Product development................... 376 414 430 480 484 Sales and marketing................... 791 637 563 704 967 General and administrative............ 120 119 207 196 228 Amortization of deferred compensation........................ 0 3 30 152 316 ------- ------- ------- ------- ------- Total operating expenses....... 1,287 1,173 1,230 1,532 1,995 ------- ------- ------- ------- ------- Loss from operations.................... (1,215) (1,076) (1,089) (1,303) (1,736) Interest income (expense), net........ (5) 12 16 55 11 ------- ------- ------- ------- ------- Net loss................................ $(1,220) $(1,064) $(1,073) $(1,248) $(1,725) ======= ======= ======= ======= =======
31 34
THREE MONTHS ENDED --------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, 1998 1998 1998 1998 1999 --------- -------- ------------- ------------ --------- AS A PERCENTAGE OF NET REVENUES: Revenues:........................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues.................... 32.7 40.5 50.2 49.3 48.5 --------- ------ ------ ------ ------ Gross margin............... 67.3 59.5 49.8 50.7 51.5 --------- ------ ------ ------ ------ Operating expenses: Product development............... 351.4 253.4 151.9 106.2 96.2 Sales and marketing............... 739.2 389.5 198.9 155.5 192.2 General and administrative........ 112.2 74.9 73.1 43.6 45.3 Amortization of deferred compensation.................... 0.0 1.8 10.7 33.6 62.8 --------- ------ ------ ------ ------ Total operating expenses... 1,202.8 719.6 434.6 338.9 396.5 --------- ------ ------ ------ ------ Loss from operations................ (1,135.5) (660.1) (384.8) (288.2) (345) Interest income (expense), net.... (4.7) 7.4 5.7 12.2 2.2 --------- ------ ------ ------ ------ Net loss............................ (1,140.2)% (652.7)% (379.1)% (276)% (342.8)% ========= ====== ====== ====== ======
Our total revenues have grown in each quarter. Transaction revenues have increased in each quarter as a result of growth in our membership base, the average revenue per transaction generated by these members and the average number of transactions per member. Custom marketing services and other revenues decreased from the quarter ended December 31, 1998 to the quarter ended March 31, 1999 as the result of the timing of recognition of revenue from a single significant contract in the quarter ended December 31, 1998. Gross margin has also fluctuated as a result of quarter to quarter changes in the mix of revenue between higher-margin transaction revenues and lower-margin custom marketing services and other revenues. Our operating expenses have increased significantly from 1996 to 1998 and in the first quarter of 1999 as we have transitioned from the development stage to the commercialization of our services. Sales and marketing expenses fluctuated during 1998, declining sequentially in the second and third quarters of 1998 as a result of changes made to our sales and marketing personnel in an effort to enhance the quality and quantity of advertisers, marketers and new members we attract. Sales and marketing expenses increased during the fourth quarter of 1998 as we added new sales and marketing personnel, including a new Vice President of Sales, and increased promotional expenditures to fuel membership growth and to attract new advertising and marketing clients. We plan to increase our operating expenses as we continue to build brand and infrastructure. Consequently, our losses may increase in the future. Although we have experienced revenue growth in recent periods, we cannot be certain that such growth will continue at its current rate or increase in the future. If our revenue growth is slower than we anticipate or our operating expenses exceed our expectations, our losses will be significantly greater. Our quarterly results of operations have varied in the past, and our revenues and operating results are likely to vary significantly from quarter to quarter. A number of factors are likely to cause these variations, some of which are outside of our control. These factors include: - changes in revenue levels resulting from the advertising and marketing budget cycles of individual advertisers and marketers; - changes in advertising and marketing costs that we incur to attract and retain members; 32 35 - changes in our pricing policies, the pricing policies of our competitors or the pricing policies for Internet advertising and marketing generally; - our rate of member acquisition and the level of activity of new and existing members; - the number and type of programs and development contracts established with our advertising and marketing clients as well as the impact of the fixed price portion of development contracts on gross margin; - the introduction of new products and services by us or by our competitors; - unexpected costs and delays resulting from the expansion of our operations; and - the occurrence of technical difficulties or unscheduled system downtime. We believe that our revenues will be subject to seasonal fluctuations as a result of general patterns of retail advertising and marketing and consumer purchasing, which are typically higher during the fourth calendar quarter and lower in the following quarter. In addition, expenditures by advertisers and marketers tend to be cyclical, reflecting overall economic conditions and consumer buying patterns. As a result, our results of operations could be harmed by a downturn in the general economy or a shift in consumer buying patterns. Due to these and other factors, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful and you should not rely upon them as any indication of our future performance. Our operating expenses are based on our expectations of our future revenues and are relatively fixed in the short term. If our revenues are lower than expected, we would incur greater than expected losses. In addition, during future periods our operating results likely will fall below the expectations of public market analysts and investors. In this event, the market price of our common stock likely would decline. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At December 31, 1998, our cash and cash equivalents consisted primarily of demand deposits and money market funds held by large institutions in the United States and our short-term investments were invested in corporate debt and equity securities maturing in less than one year. Due to the nature of our short-term investments, we have concluded that there is no material market risk exposure. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations primarily from the sale of equity securities to venture capital firms and other individual, institutional and strategic investors. We have also borrowed funds under long-term capital lease and equipment financing facilities. As of March 31, 1999, we had cash and cash equivalents of $330,633 million and $115,196 million outstanding under capital lease and equipment financing facilities. In addition, in May 1999, we completed a Series D convertible preferred stock financing that resulted in net proceeds to us of $8.0 million. Net cash used in operating activities was $3.5 million in 1998, $3.2 million in 1997, $2.3 million in 1996 and $891,000 in the three months ended March 31, 1999. In 1998, the net cash used in operating activities consisted primarily of our net loss, offset in part by an increase in net accounts payable, members payable, membership acquisition payable, depreciation and amortization, and deferred revenue. In 1997, the net cash used in operating activities consisted primarily of our net loss, offset by an increase in depreciation, members payable, membership acquisition payable, and deferred revenue. In 1996, the 33 36 net cash used in operating activities consisted primarily of our net loss, offset in part by an increase in accounts payable and depreciation and amortization. Net cash used in investing activities was $153,000 in 1998, $58,000 in 1997, $387,000 in 1996 and $89,000 in the three months ended March 31, 1999. These amounts were used to acquire property and equipment. Net cash provided by financing activities was $5.6 million in 1998, $4.3 million in 1997, $2.9 million in 1996 and $85,000 in the three months ended March 31, 1999. In 1998, this amount included $5.8 million in proceeds from the issuance of preferred stock, less payments on capital leases. In 1997, this amount included primarily $3.1 million in net proceeds from the issuance of preferred stock, $1.0 million in proceeds from stockholder loans that were subsequently converted into preferred stock, and $250,000 in proceeds from a sale-leaseback transaction related to certain items of computer equipment, less payments on capital leases. In 1996, this amount included primarily $3,000,000 in proceeds from the issuance of preferred stock. Net cash provided by financing activities in the three months ended March 31, 1999 consisted primarily of proceeds from equipment financing. In 1997 and 1998, we entered into various non-cancelable capital lease agreements for certain types of capital expenditures. As a result of these capital lease agreements, we had lease payment obligations of approximately $110,000 in 1997 and $143,000 in 1998. Borrowings under these capital lease arrangements have terms ranging from 36 to 48 months with monthly payments and interest rates ranging from 10.5% to 11.5%. We currently anticipate that our available cash resources combined with the net proceeds from this offering will be sufficient to meet our anticipated working capital and capital expenditure requirements through the end of 2000. However, we may need to raise additional funds sooner to fund more rapid expansion, to develop new or enhance existing services or products, to respond to competitive pressures or to acquire complementary products, businesses or technologies. If adequate funds are not available on acceptable terms, our business, results of operations and financial condition could be harmed. See "Risk Factors -- We may need more working capital to expand our business, and our prospects for obtaining additional financing are uncertain." RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Development or Obtained for Internal Use. SOP No. 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. We do not expect that the adoption of SOP No. 98-1 will have a material impact on our financial statements. In April 1998, the Accounting Standards Executive Committee issued SOP 98-5, Reporting on the Costs of Start-Up Activities. This SOP provides guidance on the financial reporting of start-up costs and organization costs. It requires the costs of the start-up activities and organization costs to be expensed as incurred. The SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The Company adopted the SOP during the year ended December 31, 1998. The adoption of the SOP did not have a material impact on our financial statements. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in their date code field. Beginning in the Year 2000, these date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and 34 37 software products used by many companies may need to be upgraded to comply with these Year 2000 requirements. We designed the software underlying our Web-based programs as well as our Web site and related technology infrastructure to be Year 2000 compliant. However, we rely on third-party hardware and software in the operation of our business. We believe we have identified all of the major information systems used in our internal operations and have substantially completed all modifications, upgrades or replacements to minimize the possibility of a material disruption of our business. The expenditures that we have incurred to date and the expenditures we expect to incur in this regard have not been and are not expected to be material to our business, results of operations and financial condition. We have also contacted the vendors of third-party hardware and software we use in order to gauge their Year 2000 compliance. Based on these vendors' representations and the activities we have conducted, we believe that the third-party hardware and software we use are Year 2000 compliant. We cannot assure you, however, that we will not experience unanticipated negative consequences, including material costs caused by undetected errors or defects in the technology used in our internal systems. If, in the future, it comes to our attention that the software underlying our email or Web-based programs requires modification, or that any of our third-party hardware and software are not Year 2000 compliant, then we will seek to make modifications to our systems. In such case, we expect such modifications will not have a material effect on our results of operations. There can be no assurance, however, that we will be able to modify such systems in a timely and successful manner to comply with the Year 2000 requirements. Any failure to do so could have a material adverse effect on our business, results of operations and financial conditions. We are also vulnerable to systemic failures resulting from Year 2000 problems. These failures could include prolonged data communications, telecommunications or electrical failures. A failure of this type could prevent members from accessing our Web site or prevent us from operating our business. As a result, we could experience lost revenues, increased operating expenses and loss of members. Any of these eventualities could have a material adverse effect on our business, results of operations and financial condition. We have not yet developed a comprehensive contingency plan to address Year 2000 problems that are not detected and corrected prior to their occurrence. 35 38 BUSINESS OVERVIEW We are a leading provider of online direct marketing and cash-based incentive advertising solutions. We combine a variety of Internet-based direct advertising and marketing services with cash-based online incentive programs to provide flexible, cost-per-action incentive marketing solutions. Our payment structure, in which our advertising and marketing clients are only charged when our members execute specific predefined actions, provides these clients with a known cost per yield for their advertising campaigns. By leveraging our proprietary consumer member database and our targeting capabilities, we are able to offer our clients customized, targeted advertising solutions designed to improve advertisement response rates and reduce customer acquisition costs. Our online Earn & Spend Community offers our 1.8 million consumer members a broad array of cash-based incentive reward opportunities, whereby members are compensated with cash, rather than non-cash incentives for responding to online marketing offers. The cash earned by our members can be credited to either their VISA or bank accounts from their Cybergold account or be used to purchase digital content, services and products, including software, music, games, credit reporting services and original artistic works and publications through our Earn & Spend Community. Advertising and marketing clients that have used our service include Ask Jeeves, Inc., autobytel.com inc., Cendant Corporation (NetMarket), The Walt Disney Company, Earthlink Network, Inc., GoTo.com, Inc., Interactive Coupon Network (Cool Savings), LifeMinders.com, Inc., New Media and Qwest Communications International Inc. INDUSTRY BACKGROUND Growth of the Internet and Online Commerce The Internet has emerged rapidly as an important medium for facilitating communication, disseminating information and conducting commerce. International Data Corporation (IDC) estimates that the number of Internet users worldwide exceeded 97 million in 1998 and will grow to approximately 320 million by the end of 2002. IDC also estimates that worldwide commerce over the Internet will reach approximately $426 billion by the end of 2002, up from approximately $32 billion in 1998. The availability of a broad range of content and the acceptance of electronic commerce has driven rapid Internet adoption by businesses and consumers alike, which has in turn stimulated the proliferation of additional content and electronic commerce. Online Advertising and Direct Marketing The Internet possesses unique and commercially powerful characteristics that differentiate it from traditional forms of media, including a lack of geographic or temporal limitations, real time access to dynamic interactive content, and instantaneous connections between advertisers, marketers and consumers. Advertisers and marketers are particularly attracted to the Internet because it enables them to distribute information efficiently, reach potential customers globally and engage in one-to-one customer interaction. These capabilities create significant opportunities for advertisers, marketers and merchants to develop direct relationships with consumers. The Internet also facilitates the efficient collection of valuable customer data and demographic information, enabling advertisers and marketers to develop targeted marketing campaigns directed to existing and potential customers. These characteristics have resulted in the rapid growth of Internet advertising. Forrester Research estimates that Internet advertising expenditures in 1998 were approximately $1.3 billion and projects Internet advertising expenditures to increase to $10.5 billion in 2003. The majority of Internet advertising 36 39 to date has been in the form of passive banner advertising. However, as the number of Web sites and amount of advertising on the Internet has proliferated, we believe decreasing consumer response to banner advertising has led advertisers and marketers to question the effectiveness of such advertising and marketing campaigns. According to NetRatings, click-through rates, used by advertisers to measure the effectiveness of their online efforts, was 0.63% in April 1999. These trends are causing marketers to consider alternative marketing solutions that encourage consumers not only to pay greater attention to marketing messages but also to increase response rates to those messages. Conversely, many consumers prefer to limit the number of advertisements to which they are exposed and prefer to be exposed only to those advertisements for products or services in which they are interested. We believe that the inability of traditional banner advertising to maximize the powerful one-to-one relationships enabled by the Internet has led advertisers to place greater emphasis on online direct marketing as a more effective means to convert Internet users into customers. The Direct Marketing Association estimates that spending on Internet direct marketing will grow from $603 million in 1998 to $5.3 billion in 2003, representing a compound annual growth rate of 54%. Online Incentive Programs As advertisers and marketers seek to increase the effectiveness and efficiency of their online marketing efforts, they are turning to incentives-based programs, which reward consumers for their attention or specific response to ads and promotions. Because advertisers are charged on a cost-per-action basis in these programs, advertisers are provided with a predictable cost for the desired response. In contrast, banner advertisers pay simply for the number of times a banner appears on a Web site page, regardless of how many consumers actually view or click on the banners or whether they take additional actions based on what they read. Most incentives-based programs offer consumers the ability to earn "points" that are redeemable only for limited products, frequent flyer miles or other non-cash rewards. These non-cash incentive programs often have significant limitations on redemption due to the limited items for which rewards can be redeemed as well as various program restrictions. For example, programs offering frequent flyer miles are often restrictive and generally only appeal to consumers who otherwise actively participate in frequent flyer programs. In addition, rewards for participation in online direct marketing programs mostly come in small increments and the redemption opportunities generally require large outlays of points. Therefore, while these programs have the potential to provide significant benefits to advertisers and marketers, they remain limited to a subset of Internet users. Online Payment Mechanisms Traditionally, Internet companies have chosen either to fund the free distribution of content or services through selling banner advertising on their Web sites or to sell their content or services on a subscription basis. However, the increasing amount of online advertising inventory and the decreasing effectiveness of banner advertising is causing the price for banner advertising to decline. According to AdKnowledge, the overall average advertising banner cost per thousand impressions (CPMs) have fallen 7.5% from June 1998 to March 1999. We believe a continued decline in CPM rates will lead Internet content and service providers, many of whom depend on advertising sales as a major source of revenue, to find alternative revenue sources, including the sale of content or services on a per transaction basis. While credit cards have traditionally been the dominant form of payment for Internet transactions, the relatively high costs of processing credit card payments makes them less suitable for inexpensive Internet purchases. In addition, consumers have traditionally been reluctant to use credit cards for inexpensive purchases. As a result, the absence of a broadly accepted online micropayment system has left sales of inexpensive content, services and products economically impractical. 37 40 Market Opportunity Advertisers, marketers and merchants need more effective means to induce consumers to respond to online advertising and marketing and facilitate the online purchase of inexpensive content, goods and services. While there have been several attempts to address these needs, current incentives-based online advertising and marketing and micropayment solutions have a number of significant limitations. Current incentives-based online advertising and marketing campaigns impose significant limitations on consumer choice, limiting consumers' ability to monetize their time spent online. These shortcomings limit the utility and flexibility of incentives-based online marketing programs and, therefore, consumers' desire to participate. In addition, current transaction processing methods for the distribution of inexpensive content, services and products are prohibitively expensive. There is a need for online incentives-based advertising and marketing and micropayment solutions which effectively target consumers and provide consumers with greater flexibility and purchasing opportunities. THE CYBERGOLD SOLUTION We are a leading provider of online direct marketing and cash-based incentive advertising solutions. We believe that we are the first online company to combine a cash-based incentive program with a direct marketing approach that provides extensive benefits for our advertising and marketing clients, consumer members and merchants. Our Earn & Spend Community has over 1.8 million consumer members, which enables our advertising and marketing clients to offer cost-per-action incentive programs either to our entire member database or to a targeted subset. Users are compensated for responding to online advertisements or promotions by performing certain client-specified actions, such as filling out online surveys or purchasing products or services. Internet users become Cybergold members at no cost by completing a short online registration form on our Web site or on a co-marketer or co-registration Web site. In order to manage these cash-based incentive programs on our Web site and on other sites, we have developed a proprietary transaction system that enables the cost-effective management of cash-based incentive reward programs and micropayment transactions. Our Earn & Spend Community allows our members to earn cash by interacting with offers that appeal to their interests. For example, under a current promotion, members can earn $3.00 for requesting a quote for a new car from our marketing client, autobytel.com inc. The cash earned by our members is deposited in their Cybergold accounts and can then be credited to either their VISA cards or bank accounts or be used to purchase digital content, services and products, including software, music, games and original artistic works and publications. [Earn & Spend Diagram: DESCRIPTION: Presentation of "virtuous circle" diagram. TOP OF DIAGRAM TEXT ANNOTATION: Web surfers encounter Cybergold merchants offering cash incentives in exchange for their online behavior. RIGHT SIDE OF DIAGRAM TEXT ANNOTATION: Members can transfer the money in their Cybergold accounts to their personal VISA or bank account; or they can spend it on digital content. BOTTOM OF DIAGRAM TEXT ANNOTATION: Members can purchase and download digital content, services and products using cash from their Cybergold accounts. LEFT SIDE OF DIAGRAM TEXT ANNOTATION: To increase their account balances, members "load" accounts either by transferring funds from their VISA accounts or by performing incentive transactions with Cybergold merchants.] 38 41 Benefits of our unique incentive programs include: Advertising and Marketing Client Benefits - FLEXIBLE AND EFFECTIVE MARKETING SOLUTION. We provide a variety of advertising and marketing services for our clients, including incentive offers on our Earn & Spend Community site, targeted and untargeted e-mails, and ad campaigns that offer cash incentives directly on third-party sites. We believe our services provide our clients with more effective advertising tools to induce desired consumer behavior, including purchasing, product evaluation and subscriptions. - COST-PER-ACTION PAYMENT STRUCTURE. We provide a cost-per-action incentive marketing solution, in which our clients are only charged when our members take pre-defined actions specified by our clients. In contrast, with banner advertising, advertisers typically pay for a number of impressions on Web sites, regardless of whether consumers click on, or take any action in response to, the banner advertisement. Our cost-per-action solution provides our clients with both a known cost per yield for each advertising and marketing campaign, reducing customer acquisition costs and risk. - MEASURABLE RESULTS. Member actions in response to client marketing messages are instantly recorded in our database, allowing clients to measure the effectiveness of their advertising campaigns on an ongoing basis. Clients are able to review and modify their campaigns at any time to react to customer response rates. - TARGETING CAPABILITY. By leveraging our proprietary member database, we are able to provide customized, targeted campaigns for our clients. This targeting capability enables our clients to focus on specific demographic segments or groups of users that exhibit certain online behavioral patterns. We believe that by focusing on a specific target audience, our clients should increase response rates and reduce their customer acquisition costs. Member Benefits - CASH REWARDS. Unlike other online incentive programs which reward the customer with "points" redeemable for frequent flyer miles, specified products or other non-cash rewards, we reward our members with cash. One Cybergold dollar equals one U.S. dollar. The dollars our members earn are accumulated in a Cybergold account and can be credited to their VISA cards or bank accounts. We also offer a number of online spending opportunities to our members, such as the ability to purchase digital content, services and products, including software, music, games, credit reporting services and original artistic works and publications. - MEMBER CHOICE. Our online incentives programs provide two primary benefits for members. First, members may choose to respond only to advertising and marketing that interests them and provides a sufficient reward to induce their participation. Second, members earn cash rewards which they can choose to spend on online purchases or have credited to their VISA cards or bank accounts. This enables members to pursue advertising and marketing that interests them, increasing the quality of their online experience. Merchant Benefits - NEW REVENUE OPPORTUNITY. Through our micropayments system, we afford merchants who provide inexpensive digital content, services and products an opportunity to participate in Internet commerce on a pay-per-transaction basis. We offer these merchants an alternative revenue source by providing them access to our members, who have cash accounts that can be used for 39 42 inexpensive purchases of digital content, services and products. In addition, if Cybergold members wish to purchase items that cost more than the amount of Cybergold dollars in their accounts, they can deposit additional funds into their Cybergold accounts from their VISA cards. Our broad membership community gives merchants an established base of potential customers. - VALUE-ADDED SERVICES. We provide merchants with "non-hosted" and "hosted" value-added services to sell inexpensive digital content, products and services. In "non-hosted" solutions, our micropayment transaction system enables merchants to sell inexpensive digital content, services and products on their own Web sites. In "hosted" solutions, we provide the merchants with a complete outsourced suite of Web site hosting, systems administration, transaction processing and integration services, and the merchant only provides the content. STRATEGY Our objective is to enhance our leadership position in online direct marketing and incentives-based advertising. We intend to achieve our objective through the following key strategies: Increase Size of Membership Base. We intend to continue to expand our membership base through membership acquisition activities such as co-registration programs, co-marketing programs and advertising on third-party Internet sites. We also plan to initiate offline branding and promotional campaigns using broadcast, print and outdoor advertising in order to attract new members. In addition, we intend to explore international opportunities, including potential strategic alliances, in order to extend the reach of the Cybergold brand. Increase Number of Advertising and Marketing Clients. We are seeking to broaden our advertising and marketing client base by increasing our direct and indirect sales and marketing efforts. We plan to increase significantly the size of our direct sales force and to open additional regional sales offices. In addition, we are seeking to take advantage of existing distribution channels, such as advertising networks, to expand the number of advertisers using our incentive marketing system. Increase Brand Awareness. We are focused on increasing brand awareness to attract and retain members, advertising and marketing clients and merchants. We intend to use a combination of online and offline advertising, direct marketing, public relations and other marketing programs designed to promote the Cybergold brand and build loyalty among our members, clients and merchants. We also intend to develop promotional and media campaigns with well-known Internet companies and offline marketers of branded consumer products and services. Expand Earn & Spend Opportunities to Other Web Sites. Although we currently are primarily a site-centric service, our micropayment technology enables our Earn & Spend capabilities to function on third-party Web sites. To date, a number of Web sites have installed the Cybergold Mint, our electronic commerce payment software, on their servers. We are seeking to aggressively expand Cybergold Mint installations on other Web sites to increase the number of Internet users who are exposed to the Cybergold Earn & Spend Community and establish additional sources of revenue. We are also pursuing strategic relationships with electronic commerce infrastructure vendors to further expand the distribution of the Cybergold Mint technology. Enhance Cybergold Earn & Spend Community. We intend to continue to enhance the Cybergold Earn & Spend Community by increasing the number and variety of incentive offers provided and the breadth of online purchasing opportunities. We are also actively developing a community store site where our members can sell their own inexpensive digital content, services and products to other members. We believe that the Cybergold Earn & Spend Community and our technology enable individuals and businesses to sell inexpensive digital content, services and products that were previously not cost-effective to offer online. 40 43 Pursue Strategic Acquisitions and Relationships. We intend to continue to enter into strategic relationships in order to build our Earn & Spend Community, generate additional traffic to our Web site, increase membership and establish additional sources of revenue. We have entered into strategic relationships with the First National Bank of Omaha, MBNA America Bank, Earthlink Network, Inc., BuySafe.com and others which have enabled us to offer our clients and members a broader selection of advertising opportunities, expanded content and more online services. In addition, we intend to pursue strategic acquisitions of complementary technologies and services in order to expand and enhance our current offering of products and services. CYBERGOLD SERVICES Cybergold serves three main constituencies: advertising and marketing clients, consumer members and merchants. Advertising and marketing clients use Cybergold to cost-effectively acquire new customers with offers and cash incentives. Consumer members use Cybergold to earn cash rewards for responding to offers on our Web site, on third-party Web sites and through e-mail campaigns. Merchants use Cybergold technology as a cost-effective means to sell inexpensive digital content, services and products on a pay-per-transaction basis to the Cybergold membership base. Advertising and Marketing Client Services. We work closely with our advertising and marketing clients to develop marketing campaigns that are tailored to their customer acquisition needs. These programs include: - incentives-based offers and promotions on the Cybergold Web site; - targeted and untargeted e-mail campaigns conducted by us on behalf of our advertising and marketing clients; - programs introduced on our marketing clients' Web sites; and - banner ads placed on various targeted Web sites. Our membership database technology enables us to maintain and track information about our members. We are able to track aspects of member online activity, such as marketing programs in which specific members have participated and online purchases initiated through Cybergold. In addition, we have access to member information gathered by certain of our advertising and marketing clients. We believe that our database of membership information allows us to carefully tailor marketing campaigns to maximize their effectiveness for our clients. Member Services. Internet users become Cybergold members at no cost by completing a short online registration form on our Web site or on a co-marketer or co-registration Web site. Our members earn cash rewards for completing various desired actions, such as viewing an incentive offer, completing a survey or registration form or downloading software. Members can also earn rebates and incentives by purchasing a variety of products or services offered through our Web site or third-party Web sites. In addition, to encourage members to visit our Web site frequently, our members receive free services, including e-mail, chat, stock quotes and news. Existing members are notified of new programs and promotions through periodic e-mail distributions. In contrast to other incentive programs, our members have the opportunity not only to earn cash rewards that are transferable to their VISA cards or bank accounts, but also to spend their Cybergold cash rewards for a variety of goods and services. Cash is transferable to a member's bank account in a minimum amount of $10.00 and to a VISA card in a minimum amount of $5.00. Members are also able to transfer money from VISA cards to their Cybergold accounts to enable them to use our micropayment system to purchase additional digital content, goods and services from merchants. 41 44 We are committed to maintaining the privacy and security of our members. We keep all personal information about our members confidential. Cybergold is a member of TRUSTe, a non-profit organization dedicated to the protection of user privacy and promotion of security online. Merchant Services. We offer merchants the ability to sell digital content, products and services over the Internet in transactions of any size. By eliminating the high transaction costs typically associated with very small credit card transactions, we enable the cost-effective delivery of content such as articles or music for cents rather than dollars. We believe that our micropayment system enables new business models for merchants of digital content, products and services. We offer merchants with two micropayment environment options: - Non-hosted -- a technology and marketing solution where the Cybergold Mint, our electronic commerce payment software, is provided to merchants for use on their own Web sites to sell inexpensive digital content, services and products to online consumers. - Hosted -- a full-service solution where we provide the customer with a complete outsourced suite of Web site hosting, systems administration, transaction processing and integration services while the merchant only provides the content. SALES AND MARKETING Our primary sales strategy is to sell our services directly to advertisers, direct marketers, ad agencies and electronic commerce merchants. We currently sell our services in the United States through a direct sales organization, with seven employees located in the San Francisco Bay Area, metropolitan Dallas and metropolitan New York. Our sales force is dedicated to establishing and maintaining relationships with advertising and marketing clients. Our sales force uses industry directories, press, personal contacts, industry knowledge and Internet search engines to seek likely sales prospects. Recently we have begun to receive sales leads from advertising agencies that have recommended Cybergold to clients. Our marketing organization is composed of marketing communications, product management, product marketing and membership marketing groups. In addition, we also use consultants such as public relations agencies and graphic design firms to assist with marketing activities. Marketing communications is responsible for external public relations activities, managing relationships with the press and industry analysts, and creating marketing collateral materials, such as sales brochures. Product management is responsible for working with our engineering department and our clients to define new products as well as enhancements to existing products and services. Product management also contributes to management development efforts, assists customers with special requirements, and provides additional resources as needed throughout our company. Product marketing is responsible for the content and graphics on our Web site, including the production and implementation of advertising and merchant offers. Product marketing also determines which additional services may be of interest to members, clients and merchants. Membership marketing is focused on expanding our membership base. We use a variety of methods to generate new members, including e-mail campaigns, advertising, and co-registration agreements with certain affiliate partners, as well as referrals by current members and public relations. Currently, we attract the majority of our members through co-registration agreements with online partners, whereby registrants for those sites have the option to concurrently sign up for the Cybergold Earn & Spend Community. We believe that the convenience afforded by this co-registration capability is a significant factor in attracting new members. Currently, we have a network of approximately 55 affiliate partners through which we can attract new members. In addition to these online methods of increasing our membership base, we are currently planning a range of offline marketing campaigns designed to attract new members. 42 45 ADVERTISING AND MARKETING CLIENTS Our advertising and marketing clients pay us commissions each time a member takes an action defined by our clients in response to some online advertising or promotion. Since inception, a total of 144 advertising and marketing clients have offered incentives using our system. In 1997, no client accounted for more than 10% of our revenue. In 1998, Qwest Communications International Inc. and Interactive Coupon Network (CoolSavings) accounted for 22% and 16% of our revenue, respectively. As of March 31, 1999, Qwest Communications International Inc., autobytel.com inc., LifeMinders.com, Inc., Cendant Corporation (Netmarket) and The Walt Disney Company (Disney Daily Blast, Disney Store Online) accounted for 20%, 12%, 11%, 11% and 10% of our revenue, respectively. A representative list of advertising and marketing clients who are using or have used our services is set forth below: - @Backup Corporation - Consumer Info.com, Inc. - LifeMinders.com, Inc. - Alexa Internet - The Walt Disney Company - New Media - Ask Jeeves, Inc. (Disney Daily Blast, - Qwest Communications - autobytel.com inc. Disney Store Online) International, Inc. - Cendant Corporation - Earthlink Network, Inc. - First Premier Bank (Netmarket) - GoTo.com, Inc. (Future Card) - Interactive Coupon - Uproar (E-Pub Services Ltd.) Network (Cool Savings)
STRATEGIC RELATIONSHIPS To date, we have entered into a number of strategic relationships to build our Earn & Spend Community, generate additional traffic to our Web site, increase our membership and generate additional revenue. These strategic relationships include: - The First National Bank of Omaha. Our relationship with the First National Bank of Omaha enables consumers to directly credit their personal VISA accounts with money earned through Cybergold and to credit their Cybergold accounts with funds from their VISA accounts; - MBNA America Bank. Together with MBNA America Bank, we launched the co-branded Cybergold MBNA VISA card, which provides convenient and easy Internet shopping, MBNA's state-of-the-art fraud protection, VISA Platinum Plus cardholder benefits and the potential for cash incentives; - Earthlink. We launched a private-label loyalty program with Earthlink under which Earthlink will utilize our transaction processing and account management technology to implement an incentives-based loyalty program for its members that use their Earthlink credit cards for shopping both on the Internet and offline; and - BuySafe.com. Our relationship with BuySafe.com provides the Cybergold Earn & Spend Community with certain private label merchandising and fulfillment programs. 43 46 TECHNOLOGY We have developed a scaleable technology infrastructure that executes both incentive reward transactions and online micropayments for consumer purchases. There are two proprietary components to our infrastructure: - The Cybergold Mint is our electronic commerce payment software which runs on either our servers or the servers of our clients or merchants. The Cybergold Mint executes both Cybergold incentive reward transactions and online micropayments for consumer purchases. To make world-wide distribution possible, the Cybergold Mint employs a cryptographic system called HMAC-MD5 that offers full 128-bit security without export controls. - The Cybergold payment server is our real-time transaction processing engine. This engine is optimized for high-volume financial transactions and is designed to scale by simply adding additional hardware to our system. The Cybergold payment server communicates with consumer browsers using SSL, the industry-standard Web security protocol, to safeguard all private user information. Our payment server includes property modules for handling: - interactive transactions; - background transactions for off-line incentive programs; - consumer account management and online statements; - VISA and bank (ACH) transfers and charity donations; - transaction reversal and dispute management; - real-time risk management with velocity checking and fraud detection; - context-sensitive help; and - automated customer assistance with escalation to our separate Customer Service system. Typical Cybergold transactions begin when Internet users encounter advertisements offering incentive and/or purchases on our Web site or on third-party Web sites. The merchant Web servers use the Cybergold Mint to generate rewards and payments. The transactions are sent over the Internet to the Cybergold payment servers, which move incentive funds from merchant accounts to member accounts, and move payment funds from member accounts to merchant accounts. The payment servers incorporate a database of user, merchant and offer information. Our technology consists of proprietary programs integrated with third-party hardware and software. Our third-party hardware includes Sybase SQL Servers, Sun Solaris platforms and Apache Web servers, which members access with standard Web browsers such as Netscape Navigator and Microsoft Internet Explorer. We do not require consumers to download any software to process or store micropayments and rewards. We internally developed our systems for maintaining our Web site processing transactions and maintaining member accounts. If, in the future, we cannot modify these systems to accommodate increased traffic and an increased volume of transactions and orders, we could suffer slower response time, problems with customer service and delays in reporting accurate financial information. See "Risk Factors -- If we fail to adapt to rapid change in our industry or our internally developed systems cannot be modified properly for increased traffic or volume." 44 47 COMPETITION The market for online direct advertising and marketing is extremely competitive. In addition, while the market for services that facilitate small-scale electronic commerce transactions is very new, we expect competition in that area to increase dramatically in the near future. We cannot assure you that we will compete successfully in this environment. Our ability to compete in these marketplaces depends on many factors, some of which are beyond our control. Please see "Risk Factors -- We face significant competition from other online incentives-based advertising and marketing programs and providers of micropayment systems" for a list of these factors. Our failure to compete in these marketplaces could have a material adverse effect on our business, results of operations and financial condition. We believe that the principal competitive factors in the online incentives-based advertising market are: - brand recognition; - breadth and depth of content and services; - number and quality of advertising clients; - size of membership base; - ease of use; - transaction speed and security; - quality of service; and - technical expertise. We face significant competition from online incentives-based advertising and marketing programs and providers of micropayment systems. We expect competition to increase due to the lack of significant barriers to entry for online business generally and for online incentives-based direct marketing programs and micropayment transactions in particular. Currently, several companies offer competitive online incentives programs, including MyPoints.com, Inc. and Netcentives Inc. We may also face competition from established Internet portals and community Web sites that engage in direct marketing, as well as from traditional advertising agencies and direct marketing companies that may seek to offer online products or services. In addition, financial service organizations, such as banks and credit card companies, or other large organizations may develop competitive micropayment systems and incentives-based advertising and marketing programs. Some of our current and potential competitors have longer operating histories, greater brand recognition, larger client and member bases and significantly greater financial, technical and marketing resources than we do. These advantages may enable them to respond more quickly to new or emerging technologies and changes in customer preferences. These advantages may also allow them to engage in more extensive research and development, undertake extensive far-reaching marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to potential employees, strategic partners and advertisers. As a result, it is possible that our existing competitors or new competitors may rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margin and loss of market share. We may not be able to compete successfully, and competitive pressures may affect our business, results of operations and financial condition. 45 48 INTELLECTUAL PROPERTY We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology or business model. Monitoring unauthorized use of our technology and business model is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology and business model. In addition, our business activities may infringe upon the proprietary rights of others, and, from time to time, we have received, and may continue to receive, claims of infringement against us. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Litigation could subject us to significant liability for damages and invalidation of our proprietary rights. These lawsuits, regardless of their success, would likely be time consuming and expensive to resolve and would divert management's time and attention away from our business. Any potential intellectual property litigation could also force us to do one or more of the following: - make significant changes to the structure and operation of our business; - attempt to design around a third party's patent; or - license alternative technology from another party. Implementation of any of these alternatives could be costly and time consuming, and may not be possible. Accordingly, an adverse determination in any litigation that we are a party to would have a material adverse effect on our business, results of operations and financial condition. Cybergold has two issued U.S. Patents covering its business model and software architecture: - Patent #5,794,210 covers Attention Brokerage, in which users are compensated for paying attention online to advertisements, promotions, and similar information, and Orthogonal Sponsorship, in which users can apply their earned compensation to purchase digital content or other intellectual property; and - Patent #5,855,008, for Consumer Controlled Privacy Management, in which users establish criteria by which their personal information is released to others, those requesting access to personal data provide their identity, intentions for using the personal data, and may offer compensation to the user for access to the personal data, and the user or an automated process decides whether to release the requested personal data based on the user's criteria and the requester's information. We also have U.S. and foreign pending patent applications. Cybergold is our only registered trademark, although we have applied to register additional trademarks in the United States. We cannot assure you that our patents or trademarks will not be successfully challenged by others or invalidated. If our trademark registrations are not approved because third parties own these trademarks, our use of these trademarks would be restricted unless we entered into arrangements with the third-party owners, which might not be possible on reasonable terms. We generally enter into confidentiality or license agreements with our employees and consultants, and control access to and distribution of our technologies, documentation and other proprietary information. Despite our efforts to protect our proprietary rights from unauthorized use or disclosure, parties may attempt to disclose, obtain or use our solutions or technologies. We cannot assure you that the steps we have taken will prevent misappropriation of our solutions or technologies, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States. 46 49 EMPLOYEES As of April 30, 1999, we had a total of 56 employees. Of those, 28 are in sales and marketing, 19 are in engineering and nine are in general and administrative. We believe that we have good relationships with our employees. We have never had a work stoppage, and none of our employees is represented under a collective bargaining agreement. We believe that our future success will depend in part on our ability to attract, integrate and retain highly motivated sales, marketing, production and technical personnel and upon the continued service of our senior management. Competition for qualified personnel in our industry and geographical locations is intense, and there can be no assurance that we will be successful in attracting, integrating, retaining and motivating a sufficient number of qualified personnel to conduct our business in the future. FACILITIES The Company's current headquarters are located in approximately 6,400 square feet of office space we have leased at 2921 Adeline Street, Berkeley, California. We are leasing this office space in a holdover capacity as our original lease has expired. We have entered into a lease for approximately 15,200 square feet of office space at 436 14th Street, Oakland, California. The lease extends through June 2004, and includes a right of first refusal on additional space which may become available in the building where we will be headquartered. We are in the process of moving our operations to the new facility. During this move our technology system could be susceptible to technical failures or other disruptive problems. Any such problems could diminish or halt our ability to provide services to our customers, which could harm our business, results of operations and financial condition. We believe the office space in the new facility will be adequate to meet our needs for the next six months, and we expect our growth for the next 24 to 36 months to be accommodated by our right of first refusal on additional office space which may become available in our building. We have sales personnel located in the metropolitan areas of Dallas and New York. These personnel work out of home-based offices, and do not receive any additional compensation for the use of their home offices, other than reimbursement for direct expenses such as telephone, office equipment and supplies. We anticipate adding additional field personnel in the future; such personnel may or may not work out of home-based offices, and therefore, we may or may not incur additional expenses relating to the rental of additional office space. 47 50 MANAGEMENT DIRECTORS AND OFFICERS The following table sets forth certain information regarding our directors and officers as of May 18, 1999:
NAME AGE POSITION ---- --- -------- A. Nathaniel Goldhaber.................... 51 President, Chief Executive Officer and Chairman of the Board Steven M. Farber.......................... 40 Chief Operating Officer John D. Steuart........................... 38 Chief Financial Officer Gary Fitts................................ 53 Chief Technology Officer Daniel W. Berger.......................... 40 Vice President, Sales Michael Koifman........................... 50 Vice President, Engineering Larry Weinstein........................... 52 Vice President, Strategic Relationships Pieter Hartsook........................... 51 Vice President, Business Development Christopher D. Alafi, Ph.D.(2)............ 35 Director Jay Chiat(2).............................. 67 Director Garrett P. Gruener(1)..................... 44 Director Regis P. McKenna(2)....................... 59 Director Alan Salzman(1)........................... 45 Director Peter S. Sealey, Ph.D.(1)................. 58 Director
- ------------------------- (1) Member of the Audit Committee (2) Member of the Compensation Committee A. Nathaniel Goldhaber has served as President, Chairman of the Board and Chief Executive Officer since October 1994. Prior to joining Cybergold, Mr. Goldhaber was self-employed as a venture capitalist. Prior to that Mr. Goldhaber was the Chief Executive Officer of Kaleida Labs, Inc., a multimedia joint venture between IBM and Apple Computer, and the Chief Executive Officer of Centram Systems West, a developer of local area networks. Mr. Goldhaber is a Member of the Executive Board of the University of California, Berkeley, College of Letters and Sciences. Mr. Goldhaber received a B.A. from Maharishi International University and an M.A. from the University of California, Berkeley. Steven M. Farber has served as Chief Operating Officer since August 1998. Prior to joining Cybergold, Mr. Farber was the Chief Executive Officer of Interwoven, a provider of open systems for enterprise Web production for Internets and intranets, from March 1997 to March 1998. From 1996 to 1997, he was self-employed as a consultant. From 1995 to 1996, Mr. Farber was a Vice President of Summit Integration Group, a software consulting firm. Prior to that, Mr. Farber served as a Vice President of The Vantive Corporation, a customer relationship management software company. Mr. Farber received a B.S. from Tufts University. John D. Steuart has served as Chief Financial Officer since June 1996. Prior to joining the Company, Mr. Steuart acted as the Chief Financial Officer of Alafi Capital, a venture capital firm, from October 1988 to June 1996. He is a member of the Board of Directors of a number of privately held companies. Mr. Steuart received a B.A. in Economics from the University of California, Berkeley and an M.S. in Business from Golden Gate University. Gary Fitts has served as Chief Technology Officer since July 1995. Prior to joining Cybergold, Mr. Fitts was self-employed as a consultant. He has also served as the Directors of TOPS Technology for SunSelect, a personal computer networking business unit of Sun Microsystems, Inc., and as Vice 48 51 President, Technology, of Sitka Corporation, a networking subsidiary of Sun Microsystems, Inc. Mr. Fitts received a B.A. from Dartmouth College. Daniel W. Berger has served as Vice President, Sales since November 1998. From April 1998 to October 1998, Mr. Berger was Vice President, Sales, at Conduct Software Technologies, Inc., a network software company. From April 1997 to March 1998 Mr. Berger was Vice President, Sales, at Make Systems, Inc., a network design tool vendor. From August 1995 to March 1997, Mr. Berger was self- employed as a software and Internet consultant. Prior to that Mr. Berger was Vice President, Sales, at Seagate Software, a network software company. Mr. Berger received a B.A. from Colby College. Michael Koifman has served as Vice President, Engineering since November 1998. From October 1997 to November 1998, Mr. Koifman was Vice President of Engineering at Blue Pumpkin Software, a developer of workforce management software for call centers. From September 1996 to October 1997, Mr. Koifman served as Manager of Advanced Applications at Siebel Systems, a sales force automation company. Prior to that, Mr. Koifman was a Senior Principal at AMS, a computer consulting company. Mr. Koifman holds an M.S. in Mathematics from St. Petersburg University in St. Petersburg, Russia and an M.S.E.E. in Computer Design from the Institute of Electrical Engineering in St. Petersburg, Russia. Larry Weinstein has served as Vice President, Strategic Projects since February 1999. From February 1998 to February 1999, Mr. Weinstein was the Executive Vice President of Greenleaf Technologies, an encryption technology company. From January 1996 to February 1998, Mr. Weinstein was self-employed as a consultant. Prior to that Mr. Weinstein was a Producer for Frankfurt Balkind Partners, a strategic communications agency. Pieter Hartsook has served as Vice President, Business Development since July 1998. From June 1997 to April 1998, Mr. Hartsook was Vice President, Business Development, at IPT, Inc., a computer software firm. From November 1996 to April 1997, Mr. Hartsook was Vice President, Marketing Analysis, at Apple Computer, Inc., a maker of personal computing products. Prior to joining Apple, Mr. Hartsook was the President of the Hartsook Letter, a market research consulting firm. Mr. Hartsook received a B.A. and an M.L.S. from the University of California, Berkeley. Christopher D. Alafi has served as one of our directors since July 1997. Dr. Alafi is currently a general partner of Alafi Capital Co., a venture capital firm. Prior to joining Alafi Capital in 1995, Dr. Alafi was a visiting scholar in the Department of Chemistry at Stanford University. Dr. Alafi is currently a member of the Board of Directors of a number of private companies. Dr. Alafi received a B.A. from Pomona College and a Ph.D. in Biochemistry from the University of Oxford. Jay Chiat has served as one of our directors since May 1996. Since October 1998 Mr. Chiat has been the Chief Executive Officer of ScreamingMedia.net, an Internet news service. From June 1968 to November 1996, Mr. Chiat served as the Chief Executive Officer of Chiat/Day Advertising, an advertising firm. Mr. Chiat is a member of the Board of Directors of Department 56, Inc., a designer, importer and distributor of collectibles and giftware. Mr. Chiat received a B.S. in Education from Rutgers University and an Executive M.B.A. from the Anderson School at U.C.L.A. Garrett P. Gruener has served as one of our directors since May 1998. Mr. Gruener has been a general partner of Alta Partners L.P., a venture capital firm, since February 1996. Since 1992, Mr. Gruener has been a general partner of certain funds affiliated with Burr, Egan, Deleage & Co., a venture capital firm. Mr. Gruener is a member of the Board of Directors of several private companies. Mr. Gruener received a B.S. from the University of California, San Diego, and an M.A. from the University of California, Berkeley. Regis P. McKenna has served as one of our directors since May 1996. Mr. McKenna has been Chairman of The McKenna Group, a Silicon Valley-based management and marketing consulting firm, 49 52 since 1970. Mr. McKenna serves on the board of the Economic Strategies Institute and is a member of the Council on Competitiveness. Mr. McKenna also serves on the advisory board to Stanford's Graduate School of Business. Mr. McKenna is a trustee of Santa Clara University and is the Chairman of the Board of the Santa Clara University Center for Science, Technology and Society. Mr. McKenna serves as a member of the Board of Directors of Cylink Corporation, a supplier of network information security products. Mr. McKenna received a B.A. from Duquesne University. Alan Salzman has served as one of our directors since May 1998. Mr. Salzman is a founder and managing partner of VantagePoint Venture Partners, a venture capital firm focused on the Internet, data networking and communications services. Prior to joining VantagePoint in 1995, Mr. Salzman was a general partner with Canaan Partners, a venture capital firm. Prior to that Mr. Salzman was a partner with Brobeck, Phleger & Harrison, LLP, a law firm. Mr. Salzman received a B.A. from the University of Toronto, a J.D. from Stanford Law School and an L.L.M. from the University of Brussels. Peter Sealey has served as one of our directors since May 1996. Dr. Sealey has been a Lecturer and an Adjunct Professor of Marketing at the Haas School of Business at the University of California, Berkeley since 1994. In addition, Dr. Sealey has been self-employed as a management consultant, serving primarily technology-oriented companies, during the same period. Prior to that, Dr. Sealey was employed by the Coca-Cola Company for 24 years, where he held a series of senior management positions, including Senior Vice President, Global Marketing. Dr. Sealey serves on the board of directors of Autoweb.com, a consumer automotive Internet service provider, and USWeb Corporation, an Internet professional services and integrated marketing communications services company. Dr. Sealey received a B.S. from the University of Florida, an M.I.A. from Yale University and an M.A. and a Ph.D. from Claremont Graduate University. Classified Board. Our certificate of incorporation provides for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms. As a result, a portion of our board of directors is elected each year. To implement the classified structure, prior to the consummation of the offering, two of the nominees to the board of directors were elected to one-year terms, two were elected to two-year terms, and three were elected to three-year terms. Thereafter, directors will be elected for three-year terms. Christopher D. Alafi and Jay Chiat have been designated Class I directors whose term expires at the 2000 annual meeting of stockholders. A. Nathaniel Goldhaber and Garrett D. Gruener have been designated Class II directors whose term expires at the 2001 annual meeting of stockholders. Regis P. McKenna, Alan Salzman and Peter Sealey have been designated Class III directors whose term expires at the 2002 annual meeting of stockholders. See "Description of Capital Stock -- Antitakeover Effects of Provisions of Certificate of Incorporation, Bylaws and Delaware Law." Executive officers are appointed by the board of directors on an annual basis and serve until their successors have been duly elected and qualified. BOARD COMMITTEES The board of directors has a compensation committee and an audit committee. Compensation Committee. The compensation committee of the board of directors reviews and makes recommendations to the board regarding the compensation and benefits provided to our key executive officers and directors, including stock compensation and loans. In addition, the compensation committee reviews policies regarding compensation arrangements and benefits for all of our employees. As part of the foregoing, the compensation committee also administers our 1999 Omnibus Equity Incentive Plan and 1999 Employee Stock Purchase Plan. The current members of the compensation committee are Messrs. Alafi, Chiat and McKenna. 50 53 Audit Committee. The audit committee of the board of directors reviews and monitors our internal accounting procedures and reviews the results and scope of the annual audit and other services provided by our independent accountants. The audit committee also consults with our management and our independent auditors prior to the presentation of financial statements to stockholders and, as appropriate, initiates inquiries into aspects of our financial affairs. In addition, the audit committee has the responsibility to consider and recommend the appointment of, and to review fee arrangements with, our independent auditors. The current members of the audit committee are Messrs. Gruener, Salzman and Sealey. DIRECTOR COMPENSATION Our directors receive $5,000 for attendance at each Board meeting and $2,500 for attendance at each board committee meeting. In addition, our directors are reimbursed for all reasonable out-of-pocket expenses incurred in connection with their attendance at board and board committee meetings. From time to time, certain directors who are not employees of Cybergold have received grants of options to purchase shares of our common stock. On June 25, 1996, we granted Messrs. Chiat and McKenna each an option to purchase 70,000 shares of our common stock and Mr. Sealey an option to purchase 25,000 shares of our common stock at an exercise price of $0.01 per share. On November 11, 1996, we also granted to Mr. Sealey an option to purchase 45,000 shares of our common stock at an exercise price of $0.15 per share, and on June 19, 1998, we granted him an option to purchase 30,000 shares of our common stock at an exercise price of $0.50 per share. Following this offering, directors will receive automatic option grants under our 1999 Omnibus Equity Incentive Plan. Please see "Stock Plans -- 1999 Omnibus Equity Incentive Plan." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The compensation committee of the board of directors currently consists of Messrs. McKenna, Chiat and Alafi. No interlocking relationship exists between any member of our board of directors or our compensation committee and any member of the board of directors or compensation committee of any other company, and no such interlocking relationship has existed in the past. INDEMNIFICATION In May 1999, the board of directors authorized us to enter into indemnification agreements with each of our directors and executive officers. The form of indemnification agreement provides that we will indemnify our directors and executive officers against any and all of their expenses incurred by reason of their status as a director or executive officer to the fullest extent permitted by Delaware law, our certificate of incorporation and our bylaws. Our certificate of incorporation and bylaws each contain certain provisions relating to the limitation of liability and indemnification of our directors and officers. Our certificate of incorporation provides that our directors will not be personally liable to Cybergold or our stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability: - for any breach of the director's duty of loyalty to Cybergold or our stockholders; - for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; - in respect of certain unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or - for any transaction from which the director derives any improper personal benefit. 51 54 Our certificate of incorporation also provides that if the Delaware General Corporation Law is amended after approval by our stockholders of our certificate of incorporation to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of our directors will be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law. The foregoing provisions of our certificate of incorporation are not intended to limit the liability of our directors or officers for any violation of applicable federal securities laws. In addition, as permitted by Section 145 of the Delaware General Corporation Law, our bylaws provide that: - we are required to indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law; - to the fullest extent permitted by the Delaware General Corporation Law, we are required to advance all expenses incurred by our directors and executive officers in connection with a legal proceeding (subject to certain exceptions); - the rights conferred in the bylaws are not exclusive; - we are authorized to enter into indemnification agreements with our directors, officers, employees and agents; and - we may not retroactively amend our bylaw provisions relating to indemnification. Our bylaws provide that we must indemnify our directors to the fullest extent permitted by Delaware General Corporation Law, including in circumstances in which indemnification is otherwise discretionary under Delaware General Corporation Law. 52 55 EXECUTIVE COMPENSATION The following table sets forth information with respect to compensation for the fiscal year ended December 31, 1998 paid by us for services by our Chief Executive Officer and our two other highest-paid executive officers collectively referred to below as the named executive officers, whose total salary and bonus exceeded $100,000 for services rendered to Cybergold in all capacities during 1998. No executive officer who would otherwise have been included in this table based on salary and bonus earned for fiscal year 1998 has resigned or otherwise been terminated as of the date of this prospectus. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------ AWARDS ------------ ANNUAL COMPENSATION SECURITIES -------------------- UNDERLYING NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) --------------------------- --------- -------- ------------ A. Nathaniel Goldhaber(1)................................ -- -- -- President and Chief Executive Officer John D. Steuart.......................................... 93,940 -- 50,000 Chief Financial Officer Gary Fitts............................................... 123,963 -- -- Chief Technology Officer
- ------------------------- (1) Mr. Goldhaber's annual salary for fiscal year 1999 is $175,000. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth each grant of stock options during the fiscal year ended December 31, 1998 to each of the named executive officers. No stock appreciation rights were granted to these individuals during such year. Each of the options listed in the table is immediately exercisable. The shares purchasable under the options may be repurchased by Cybergold at the original exercise price paid per share if the optionee ceases service before vesting in such shares. The repurchase right lapses and the optionee vests as to 25% of the option shares upon completion of 12 months of service from the vesting start date and the balance in a series of equal monthly installments over the next three years of service. The option shares will vest upon an acquisition of Cybergold by merger or asset sale, unless our repurchase right with respect to the unvested option shares is transferred to the acquiring entity. The exercise price was equal to the fair market value of our common stock as valued by our board of directors on the date of grant. In determining this fair market value, the board of directors took into account the purchase price paid by investors for shares of our preferred stock (taking into account the liquidation preferences and other rights, privileges and preferences associated with such preferred stock) and an evaluation by the board of directors of our revenues, operating history and prospects. The exercise price may be paid in cash, in shares of our common stock valued at fair market value on the exercise date or through a cashless exercise procedure involving a same-day sale of the purchased shares. We may also finance the option exercise by lending the optionee sufficient funds to pay the exercise price for the purchased shares, together with any federal and state income tax liability incurred by the optionee in connection with such exercise. 53 56 The potential realizable value is calculated based on the ten-year term of the option at the time of grant. Stock price appreciation of 5% and 10% is assumed pursuant to rules promulgated by the Securities and Exchange Commission and does not represent our prediction of our stock price performance. The potential realizable value at 5% and 10% appreciation is calculated by assuming that the estimated fair market value on the date of grant appreciates at the indicated rate for the entire term of the option and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. The initial public offering price is higher than the estimated fair market value on the date of grant, and the potential realizable value of the option grants would be significantly higher than the numbers shown in the table if future stock prices were projected to the end of the option term by applying the same annual rates of stock price appreciation to the initial public offering price.
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ---------------------------------------------------- ANNUAL RATES OF NUMBER OF STOCK PRICE SECURITIES % OF TOTAL APPRECIATION UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM OPTIONS TO EMPLOYEES IN PRICE EXPIRATION --------------------- NAME GRANTED(#) FISCAL YEAR(1) ($/SH) DATE 5%($) 10%($) ---- ---------- --------------- -------- ---------- --------- --------- A. Nathaniel Goldhaber..... -- -- -- -- -- -- John D. Steuart(2)......... 50,000 3.8 0.50 01/06/08 15,722 39,844 Gary Fitts................. -- -- -- -- -- --
- ------------------------- (1) Based on a total of 1,313,950 options granted to our employees under our 1996 Stock Option Plan during the 12 months ended December 31, 1998. (2) On May 10, 1999, we granted to Mr. Steuart an option for 200,000 shares of our common stock at an exercise price of $2.60 per share. 100,000 of the option shares vest over a two-year period, and the vesting is accelerated for 50,000 of such shares upon the date of this offering. The remaining 100,000 option shares vest over a four-year period, with 25% of the shares vesting upon the completion of one year of service and the balance vesting upon the completion of each of the next 36 months of service. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth for each of the named executive officers the number of options exercised during the fiscal year ended December 31, 1998 and the number and value of securities underlying unexercised options that are held by the named executive officers as of December 31, 1998. No options were exercised by the named executive officers in fiscal year 1998. No stock appreciation rights were exercised by the named executive officers in fiscal year 1998, and no stock appreciation rights were outstanding at the end of that year.
VALUE OF NUMBER OF UNEXERCISED SECURITIES UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS AT OPTIONS AT FISCAL YEAR END(#)(1) FISCAL YEAR END($)(2) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- A. Nathaniel Goldhaber.................... -- -- -- -- John D. Steuart........................... 50,000 -- 0 -- Gary Fitts................................ 350,000 -- 49,000 --
54 57 - ------------------------- (1) The options are immediately exercisable for all of the option shares, but any shares purchased under those options will be subject to repurchase by Cybergold, at the original exercise price paid per share, if the optionee ceases service with Cybergold before vesting in such shares. (2) Based on the fair market value of our common stock as determined by our board of directors at the end of 1998 of $0.15 per share, less the exercise price payable or paid for such shares. The fair market value of our common stock at the end of 1998 was estimated by the board of directors on the basis of the purchase price paid by investors for shares of our preferred stock (taking into account the liquidation preferences and other rights, privileges and preferences associated with the preferred stock) and an evaluation by the board of our revenues, operating history and prospects. The initial public offering price is higher than the estimated fair market value at fiscal year-end, and the value of unexercised options would be higher than the numbers shown in the table if the value were calculated by subtracting the exercise price from the initial public offering price. STOCK PLANS 1999 OMNIBUS EQUITY INCENTIVE PLAN Share Reserve. Our board of directors adopted our 1999 Omnibus Equity Incentive Plan on May 18, 1999. Our stockholders will also approve this plan. We have reserved 1,500,000 shares of our common stock for issuance under the 1999 Omnibus Equity Incentive Plan. Any shares not yet issued under our 1996 Stock Option Plan as of the date of this offering will also be available for grant under the 1999 Omnibus Equity Incentive Plan. On January 1 of each year, starting with the year 2000, the number of shares in the reserve will automatically increase by 5% of the total number of shares of common stock that are outstanding at that time or, if less, by 1,500,000 shares. In general, if options or shares awarded under the 1999 Omnibus Equity Incentive Plan or 1996 Stock Option Plan are forfeited, then those options or shares will again become available for awards under the 1999 Omnibus Equity Incentive Plan. We have not yet granted any options under the 1999 Omnibus Equity Incentive Plan. Administration. The compensation committee of our board of directors administers the 1999 Omnibus Equity Incentive Plan. The committee has the complete discretion to make all decisions relating to the interpretation and operation of our 1999 Omnibus Equity Incentive Plan. The committee has the discretion to determine who will receive an award, what type of award it will be, how many shares will be covered by the award, what the vesting requirements will be (if any), and what the other features and conditions of each award will be. The compensation committee may also reprice outstanding options and modify outstanding awards in other ways. Eligibility. The following groups of individuals are eligible to participate in the 1999 Omnibus Equity Incentive Plan: - Employees, - Members of our board of directors who are not employees, and - Consultants. Types of Award. The 1999 Omnibus Equity Incentive Plan provides for the following types of award: - Incentive stock options to purchase shares of our common stock, - Nonstatutory stock options to purchase shares of our common stock, - Restricted shares of our common stock, - Stock appreciation rights, and - Stock units. 55 58 Options. An optionee who exercises an incentive stock option may qualify for favorable tax treatment under Section 422 of the Internal Revenue Code of 1986. On the other hand, nonstatutory stock options do not qualify for such favorable tax treatment. The exercise price for incentive stock options granted under the 1999 Omnibus Equity Incentive Plan may not be less than 100% of the fair market value of our 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 our common stock on the option grant date. Optionees may pay the exercise price by using: - Cash, - Shares of common stock that the optionee already owns, - A full-recourse promissory note, except that the par value of newly issued shares must be paid in cash, - An immediate sale of the option shares through a broker designated by us, or - A loan from a broker designated by us, secured by the option shares. Options vest at the time or times determined by the compensation committee. In most cases, our options vest over the four-year period following the date of grant. Options generally expire 10 years after they are granted, except that they generally expire earlier if the optionee's service terminates earlier. The 1999 Omnibus Equity Incentive Plan provides that no participant may receive options covering more than 500,000 shares in the same year, except that a newly hired employee may receive options covering up to 1,500,000 shares in the first year of employment. Restricted Shares. Restricted shares may be awarded under the 1999 Omnibus Equity Incentive Plan in return for: - Cash, - A full-recourse promissory note, except that the par value of newly issued shares must be paid in cash, - Services already provided to us, and - In the case of treasury shares only, services to be provided to us in the future. Automatic Option Grants Initial Grants. Only the non-employee members of our board of directors will be eligible for option grants under the automatic option grant program. Each non-employee director who first joins our board after the effective date of this offering will receive an initial option for 15,000 shares. That grant will occur when the director takes office. The initial options vest in full on the first year anniversary of the date of grant. Annual Grants. At the time of each of our annual stockholders' meetings, beginning in 2000, each non-employee director who will continue to be a director after that meeting will automatically be granted an annual option for 7,500 shares of our common stock. However, a new non-employee director who is receiving the 15,000-share initial option will not receive the 7,500-share annual option in the same calendar year. The annual options vest in full on the first year anniversary of the date of grant. The exercise price of each non-employee director's option will be equal to the fair market value of our common stock on the option grant date. A director may pay the exercise price by using cash, shares of common stock that the director already owns, or an immediate sale of the option shares through a broker designated by us. The non-employee directors' options have a 10-year term, except that they expire one year after a director leaves the board (if earlier). If a change in control of Cybergold occurs, a non-employee director's option will become fully vested unless the accounting rules applicable to a 56 59 pooling of interests preclude acceleration. Vesting also accelerates if the optionee retires after age 65, dies or is disabled. Stock Appreciation Rights. We may award stock appreciation rights under the 1999 Omnibus Equity Incentive Plan. Each agreement evidencing stock appreciation rights will inform the holder when such rights may be exercised. Stock appreciation rights may be exercised for shares of common stock, cash or a combination of cash and shares. No participant may receive stock appreciation rights for more than 500,000 shares in the same year, except that a newly hired employee may receive stock appreciation rights for up to 1,000,000 shares. Stock Units. We may award stock units under the 1999 Omnibus Equity Incentive Plan. The stock units may be subject to vesting. Stock units may be settled for shares of common stock, cash or a combination of cash and shares. Buy Outs. In our sole discretion, we may offer to buy out for cash an option or authorize an optionee to cash out an option that was previously granted. Deferral of Awards. We may permit a participant to have cash that would be paid to the participant for exercise of a stock appreciation right or settlement of a stock unit credited to a deferred compensation account. We may also permit shares that would be delivered for exercise of an option or stock appreciation right converted into an equal number of stock units or converted into amounts that would be credited to a deferred compensation account. Change in Control. If a change in control of Cybergold occurs, an option or other award under the 1999 Omnibus Equity Incentive Plan will become fully vested if the option or other award is not assumed by the surviving corporation or its parent or if the surviving corporation or its parent does not substitute another award on substantially the same terms. A change in control includes: - A merger of Cybergold after which our own stockholders own 50% or less of the surviving corporation or its parent company, - A sale of all or substantially all of our assets, - A proxy contest that results in the replacement of more than one-third of our directors over a 24-month period, or - An acquisition of 50% or more of our outstanding stock by any person or group, other than a person related to Cybergold (such as a holding company owned by our stockholders). Amendments or Termination. Our board may amend or terminate the 1999 Omnibus Equity Incentive Plan at any time. If our board amends the plan, it does not need to ask for stockholder approval of the amendment unless applicable law requires it. The 1999 Omnibus Equity Incentive Plan will continue in effect indefinitely, unless the board decides to terminate the plan earlier. 1999 EMPLOYEE STOCK PURCHASE PLAN Share Reserve and Administration. Our board of directors adopted our 1999 Employee Stock Purchase Plan on May 18, 1999. Our stockholders will also approve this plan. Our 1999 Employee Stock Purchase Plan is intended to qualify under Section 423 of the Internal Revenue Code. We have reserved 300,000 shares of our common stock for issuance under the plan. On January 1 of each year, starting with the year 2000, the number of shares in the reserve will be automatically increased by 500,000 shares. Our compensation committee of our board of directors administers the plan. 57 60 Eligibility. All of our employees are eligible to participate if they are employed by us for more than 20 hours per week and for more than five months per year. Eligible employees may begin participating in the 1999 Employee Stock Purchase Plan at the start of any offering period. Each offering period lasts 24 months. Overlapping offering periods start on February 1 and August 1 of each year. However, the first offering period will start on the effective date of this offering and end on July 31, 2001. Amount of Contributions. Our 1999 Employee Stock Purchase Plan permits each eligible employee to purchase common stock through payroll deductions. Each employee's payroll deductions may not exceed 15% of the employee's cash compensation. Purchases of our common stock will occur on January 31 and July 31 of each year. Each participant may purchase up to 750 shares on any purchase date (1,500 shares per year). But the value of the shares purchased in any calendar year (measured as of the beginning of the applicable offering period) may not exceed $25,000. Purchase Price. The price of each share of common stock purchased under our 1999 Employee Stock Purchase Plan will be 85% of the lower of: - The fair market value per share of common stock on the date immediately before the first day of the applicable offering period, or - The fair market value per share of common stock on the purchase date. In the case of the first offering period, the price per share under the plan will be 85% of the lower of: - The price per share to the public in this offering, or - The fair market value per share of common stock on the purchase date. Other Provisions. Employees may end their participation in the 1999 Employee Stock Purchase Plan at any time. Participation ends automatically upon termination of employment with Cybergold. If a change in control of Cybergold occurs, our 1999 Employee Stock Purchase Plan will end and shares will be purchased with the payroll deductions accumulated to date by participating employees, unless the plan is assumed by the surviving corporation or its parent. Our board of directors may amend or terminate the 1999 Employee Stock Purchase Plan at any time. Our Chief Executive Officer may also amend the plan in certain respects. If our board increases the number of shares of common stock reserved for issuance under the plan (except for the automatic increases described above), it must seek the approval of our stockholders. CHANGE OF CONTROL ARRANGEMENTS All options and other awards granted under our 1996 Stock Option Plan and our 1999 Omnibus Equity Incentive Plan, including options granted to our named executive officers, will become fully vested if a change in control of Cybergold occurs, unless the options or awards are assumed by the surviving corporation or its parent or if the surviving corporation or its parent substitutes comparable options or awards for options or awards granted under our plans. 58 61 CERTAIN TRANSACTIONS Since January 1, 1996, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we or any of our subsidiaries was or is to be a party in which the amount involved exceeded or will exceed $60,000 and in which any of our directors, executive officers, holder of more than 5% of our Common Stock or any member of the immediate family of such persons had or will have a direct or indirect material interest other than (i) compensation agreements and other arrangements, which are described where required in "Management," and (ii) the transactions described below. In September 1996, we were a party to two agreements by which Mr. Goldhaber sold 100,000 shares of common stock to each of Regis McKenna and Jay Chiat, two of our directors, at a per share purchase price of $0.01, for an aggregate purchase price of $2,000. In May 1996 and January 1998, we entered into consulting agreements with Peter Sealey, one of our directors. Under the May 1996 agreement, we made commitments to issue Dr. Sealey 10,000 shares of common stock and grant him an option to purchase an additional 15,000 shares of common stock. Under the January 1998 agreement, we paid Dr. Sealey $15,000 and made a commitment to grant him an option to purchase 10,000 shares of common stock. In May 1999, we entered into an agreement with Steven Farber, one of our executive officers, under which we agreed to grant Mr. Farber an option to purchase 300,000 shares of common stock at an exercise price of $2.60 per share, such option vesting upon the achievement of certain performance criteria or if such milestones are not achieved, such option will vest in full five years from the date of grant. 50,000 of these shares accelerate on the closing of this offering. We have issued, in private placement transactions, shares of our Preferred Stock as follows: an aggregate of 3,000,000 shares of Series A Preferred Stock in July and September of 1996 at a purchase price of $1.00 per share; 2,092,471 shares of Series B Preferred Stock in June 1997 at a purchase price of $2.00 per share; 6,283,792 shares of Series C Preferred Stock in May and August of 1998 at a purchase price of $0.91 per share; and in May 1999, 3,076,923 shares of Series D Preferred Stock at a purchase price of $2.60 per share, and warrants to purchase an aggregate of 576,925 shares of Series D Preferred Stock at an exercise price of $3.00 per share. Each share of Preferred Stock is convertible into one share of Common Stock, and all such shares of Preferred Stock shall be converted into shares of Common Stock upon the closing of this offering. 59 62 The following table summarizes the shares of Preferred Stock purchased by our named executive officers, directors and 5% stockholders, and entities associated with them, in private placement transactions.
SERIES A SERIES B SERIES C SERIES D INVESTOR(1) PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK(4) ----------- --------------- --------------- --------------- ------------------ A. Nathaniel Goldhaber........ 1,270,000 488,662 -- 100,000 John D. Steuart............... 25,000 6,441 10,989 11,229 Jay Chiat..................... 180,000 66,337 100,000 50,001 Regis P. McKenna.............. 50,000 25,252 54,945 28,626 Peter S. Sealey............... -- 5,000 8,242 2,912 Alafi Capital Company......... 975,000 556,827 -- 405,412 Alta California Partners, L.P.(2)..................... -- -- 3,296,703 872,498 Vantage Point Venture Partners, 1996(3)........... -- -- 2,472,528 872,498
- ------------------------- (1) Shares held by affiliated persons and entities have been aggregated. See "Principal Stockholders." (2) Includes shares held by Alta Embarcadero Partners, LLC. Garrett P. Gruener, one of our directors, is a general partner of the general partner of Alta California Partners, L.P. and a member of Alta Embarcadero Partners, LLC. (3) Alan Salzman, one of our directors, is a managing partner of Vantage Point Venture Partners, 1996. (4) Includes warrants to purchase Series D Preferred Stock. We believe that the transactions set forth above were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. All future transactions, including loans between us and our officers, directors, principal stockholders and their affiliates will be approved by a majority of the board of directors, and will continue to be on terms no less favorable to us than could be obtained from unaffiliated third parties. 60 63 PRINCIPAL STOCKHOLDERS The following table sets forth the beneficial ownership of our common stock as of May 18, 1999 and as adjusted to reflect the sale of the common stock offered hereby for: (1) each person who is known by us to beneficially own more than 5% of our common stock; (2) the chief executive officer and each of our named executive officers, (3) each of our directors; and (4) all of our directors and executive officers as a group. Except as otherwise indicated, we believe that the beneficial owners of the common stock listed below, based on information furnished by such owners, have sole voting and investment power with respect to such shares.
PERCENTAGE OF SHARES BENEFICIALLY OWNED NUMBER OF SHARES ------------------------------- NAME OF BENEFICIAL OWNER(1) BENEFICIALLY BEFORE AFTER EXECUTIVE OFFICERS AND DIRECTORS OWNED OFFERING(1)(2) OFFERING(1)(2) -------------------------------- ---------------- -------------- -------------- A. Nathaniel Goldhaber(3).......................... 7,258,662 34.28% Entities affiliated with Alta California Partners, L.P.(4).......................................... 4,169,201 19.69% VantagePoint Venture Partners, 1996(5)............. 3,345,026 15.80% Alafi Capital Company(6)........................... 1,937,239 9.15% Gary Fitts(7)...................................... 350,000 1.63% John D. Steuart(8)................................. 478,659 2.23% Christopher D. Alafi, Ph.D.(6)..................... 1,937,239 9.15% Jay Chiat(9)....................................... 566,338 2.67% Garrett P. Gruener(4).............................. 4,169,201 19.69% Regis P. McKenna(10)............................... 328,823 1.55% Alan Salzman(5).................................... 3,345,026 15.80% Peter S. Sealey, Ph.D.(11)......................... 116,154 * All directors and officers as a group (14 persons) (12)............................................. 19,546,702 85.21%
- ------------------------- * Represents beneficial ownership of less than 1%. (1) Percentage ownership is based on 21,173,629 shares outstanding as of May 18, 1999, including 14,453,186 shares of common stock issuable upon conversion of all outstanding preferred stock at the closing of this offering and the assumed exercise on a cash basis of 576,925 shares of preferred stock issuable upon exercise of outstanding warrants that terminate upon the closing of this offering. Shares of common stock subject to options currently exercisable or exercisable within 60 days of May 18, 1999 are deemed outstanding for purposes of computing the percentage ownership of the person holding such options but are not deemed outstanding for purposes of computing the percentage ownership of any other person. Except pursuant to the community property laws or as indicated in the footnotes to this table, each stockholder identified in the table possesses sole voting and investment power with respect to all shares of common stock shown as beneficially owned by such stockholder. Unless otherwise indicated, the address of each of the individuals listed in the table is c/o Cybergold, Inc., 2921 Adeline Street, Berkeley, CA 94703. (2) Assumes the underwriters' option to purchase additional shares is not exercised. (3) Includes 23,077 shares of common stock issuable upon exercise of a warrant, and 840,000 shares of common stock which Mr. Goldhaber has made commitments to transfer to a family trust. (4) Includes 4,076,079 shares beneficially owned by Alta California Partners, L.P., and 93,122 shares beneficially owned by Alta Embarcadero Partners LLC. Of these shares, a total of 201,346 are issuable upon exercise of warrants. Garrett P. Gruener, one of our directors, is a general partner of 61 64 the general partner Alta California Partners, L.P. and a member of Alta Embarcadero Partners LLC. The address of Alta California Partners, L.P. and Alta Embarcadero Partners LLC is One Embarcadero Center, Suite 4050, San Francisco, CA 94111. Mr. Gruener disclaims beneficial ownership of the shares held by Alta California Partners, L.P. and Alta Embarcadero Partners LLC, except to the extent of his pecuniary interest therein. (5) Includes 201,346 shares of common stock issuable upon exercise of a warrant. Alan Salzman, one of our directors, is a managing partner of Vantage Point Venture Partners, 1996. The address of Vantage Point Venture Partners, 1996 is 1001 Bayhill Drive, Suite 100, San Bruno, CA 94066. Mr. Salzman disclaims beneficial ownership of the shares held by Vantage Point Venture Partners, 1996, except to the extent of his pecuniary interest therein. (6) Includes 93,557 shares of common stock issuable upon exercise of a warrant. Christopher Alafi, one of our directors, is a general partner of Alafi Capital Company. The address of Alafi Capital Company is 9 Commodore Drive, Suite 405, Emeryville, CA 94608. Dr. Alafi disclaims beneficial ownership of the shares held by Alafi Capital Company, except to the extent of his pecuniary interest therein. (7) Includes 350,000 shares of common stock issuable upon exercise of immediately exercisable options, none of which are subject to our right of repurchase. (8) Includes 250,000 shares of common stock issuable upon exercise of immediately exercisable options, shares of which are subject to our right of repurchase, and 2,591 shares of common stock issuable upon exercise of a warrant. (9) Includes 11,539 shares of common stock issuable upon exercise of a warrant. (10) Includes 70,000 shares of common stock issuable upon exercise of immediately exercisable options, none of which are subject to our right of repurchase, and 6,606 shares of common stock issuable upon exercise of a warrant. (11) Includes 100,000 shares of common stock issuable upon exercise of immediately exercisable options, 11,354 shares of which are subject to our right of repurchase, and 672 shares of common stock issuable upon exercise of a warrant. (12) Includes 1,665,000 shares of common stock issuable upon exercise of immediately exercisable options, shares of which are subject to our right of repurchase, and 540,734 shares of common stock issuable upon exercise of warrants. 62 65 DESCRIPTION OF CAPITAL STOCK GENERAL Upon consummation of this offering, our authorized capital stock will consist of 75,000,000 shares of common stock, $0.0001 par value, and 5,000,000 shares of preferred stock, $0.0001 par value. The following summary of certain provisions of the common stock and the preferred stock does not purport to be complete and is subject to, and qualified in its entirety by, our certificate of incorporation and bylaws and by the provisions of applicable law. COMMON STOCK As of May 18, 1999, there were 20,596,704 shares of common stock outstanding that were held of record by approximately 60 stockholders. There will be shares of Common Stock outstanding (assuming no exercise of the underwriters' over-allotment option and assuming no exercise after March 31, 1999, of outstanding options) after giving effect to the sale of the shares of common stock to the public offered hereby and the conversion of our preferred stock into common stock at a one-to-one ratio. The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available therefor. See "Dividend Policy." In the event of the liquidation, dissolution or winding up of Cybergold, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and nonassessable. PREFERRED STOCK Our certificate of incorporation authorizes 5,000,000 shares of preferred stock. The board of directors has the authority to issue the preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of Cybergold without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of common stock, including the loss of voting control to others. At present, we have no plans to issue any of the preferred stock. WARRANTS As of May 18, 1999,we had outstanding exercisable warrants to purchase an aggregate of 250,000 shares of common stock at $0.15 per share; 22,500 shares of Series B preferred stock at $2.00 per share; and 576,925 shares of Series D preferred stock at $3.00 per share. All unexercised warrants to purchase Series D preferred stock will be automatically exercised (pursuant to net exercise provisions to the extent unexercised) upon the closing of this offering. The warrants to purchase common stock and Series B 63 66 preferred stock, which remain outstanding after this offering, will expire between July 28, 2000 and January 30, 2008. ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW CERTIFICATE OF INCORPORATION AND BYLAWS The certificate of incorporation provides that, effective upon the closing of this offering, all stockholder actions must be effected at a duly called meeting and not by a consent in writing. In addition, we have a classified board of directors such that approximately one-third of the members of the board of directors are elected at each annual meeting of our stockholders. Our bylaws provide that our stockholders may call a special meeting of stockholders only upon a written request of stockholders owning at least 50% of our capital stock. These provisions of the certificate of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control of Cybergold. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the board of directors and in the policies formulated by the board of directors and to discourage certain types of transactions that may involve an actual or threatened change of control of Cybergold. These provisions are designed to reduce the vulnerability of Cybergold to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in our management. See "Risk Factors -- Antitakeover provisions in our charter documents and Delaware law could prevent or delay a change in control of our company." DELAWARE TAKEOVER STATUTE We are subject to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder, unless: - prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; - upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (1) by persons who are directors and also officers and (2) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or - on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. 64 67 Section 203 defines business combination to include: - any merger or consolidation involving the corporation and the interested stockholder; - any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; - subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; - any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or - the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. REGISTRATION RIGHTS After this offering, the holders of 15,302,611 shares of common stock will be entitled to certain rights with respect to the registration of such shares under the Securities Act. Under the terms of our agreement with the holders of such registrable securities, if we proposed to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, such holders are entitled to receive notice of such registration and are entitled to include shares of such common stock therein. Additionally, holders of 15,280,111 shares of common stock are entitled to certain demand registration rights pursuant to which they may require us to file a registration statement under the Securities Act at our expense with respect to their shares of common stock, and we are required to use our best efforts to effect such registration. Further, the holders of such demand rights may require us to file additional registration statements on Form S-1 or Form S-3. All of these registration rights are subject to certain conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares included in such registration and our right not to effect a requested registration within six months following an offering of our securities, including the offering made hereby. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is . 65 68 SHARES ELIGIBLE FOR FUTURE SALE Upon the completion of this offering, we will have shares of common stock outstanding, assuming the issuance of shares of common stock offered hereby and no exercise of options after March 31, 1999. Of these shares, the shares sold in the offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our affiliates, as that term is defined under the Securities Act, may generally only be sold in compliance with the limitations of Rule 144 described below. SALES OF RESTRICTED SHARES The remaining 21,173,629 shares of common stock are deemed restricted shares under Rule 144. The number of shares of common stock available for sale in the public market is limited by restrictions under the Securities Act and lock-up agreements under which the holders of such shares have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this prospectus without the prior written consent of SG Cowen Securities Corporation. On the date of this prospectus, no shares other than the shares offered hereby will be eligible for sale. Beginning 180 days after the date of this prospectus, or earlier with the consent of SG Cowen Securities Corporation, 17,519,781 restricted shares will become available for sale in the public market subject to certain limitations of Rule 144 of the Securities Act. In general, under Rule 144 of the Securities Act as currently in effect, beginning 90 days after this offering, a person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least one year, including a person who may be deemed an affiliate, is entitled to sell within any three-month period a number of shares of common stock that does not exceed the greater of 1% of the then-outstanding shares of our common stock (approximately shares after giving effect to this offering) and the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding such sale. Sales under Rule 144 of the Securities Act are subject to certain restrictions relating to manner of sale, notice and the availability of current public information about us. A person who is not our affiliate at any time during the 90 days preceding a sale, and who has beneficially owned shares for at least two years, would be entitled to sell such shares immediately following this offering without regard to the volume limitations, manner of sale provisions or notice or other requirements of Rule 144 of the Securities Act. However, the transfer agent may require an opinion of counsel that a proposed sale of shares comes within the terms of Rule 144 of the Securities Act prior to effecting a transfer of such shares. Prior to this offering, there has been no public market for our common stock and no predictions can be made of the effect, if any, that the sale or availability for sale of shares of additional common stock will have on the market price of our common stock. Nevertheless, sales of substantial amounts of such shares in the public market, or the perception that such sales could occur, could adversely affect the market price of the common stock and could impair our future ability to raise capital through an offering of our equity securities. OPTIONS As of March 31, 1999, there were a total of 1,958,364 shares of common stock subject to outstanding options under our 1996 Stock Option Plan, of which were vested, and shares of common stock subject to outstanding options issued outside our 1996 Stock Option Plan, all of which were vested. However, all of these shares are subject to lock-up agreements. Rule 701 under the Securities Act provides that shares of common stock acquired on the exercise of outstanding options may be resold by persons other than our affiliates, beginning 90 days after the date of 66 69 this prospectus, subject only to the manner of sale provisions of Rule 144, and by affiliates, beginning 90 days after the date of this prospectus, subject to all provisions of Rule 144 except its one-year minimum holding period. Immediately after the completion of the offering, Cybergold intends to file registration statements on Form S-8 under the Securities Act to register all of the shares of common stock issued or reserved for future issuance under the 1996 Stock Option Plan, our 1999 Omnibus Equity Incentive Plan and our 1999 Employee Stock Purchase Plan, as well as the shares of common stock subject to options issued outside the 1996 Stock Option Plan. On the date 180 days after the effective date of the offering, a total of shares of common stock subject to outstanding options will be vested. After the effective dates of the registration statements on Form S-8, shares purchased upon exercise of options granted pursuant to the 1996 Stock Option Plan, 1999 Omnibus Equity Incentive Plan, 1999 Employee Stock Purchase Plan and outside the 1996 Stock Option Plan generally would be available for resale in the public market. LOCK-UP AGREEMENTS The officers, directors and stockholders of Cybergold have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of the offering. SG Cowen Securities Corporation, however, may in its sole discretion, at any time without notice, release all or any portion of the shares subject to lock-up agreements. 67 70 UNDERWRITING Subject to the terms and conditions of the underwriting agreement dated , 1999, the underwriters named below, through their representatives SG Cowen Securities Corporation, CIBC World Markets Corp. and Volpe Brown Whelan & Company, LLC, have severally agreed to purchase from us the number of shares of common stock set forth opposite their names at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus.
NUMBER OF NAME SHARES ---- --------- SG Cowen Securities Corporation............................. CIBC World Markets Corp..................................... Volpe Brown Whelan & Company, LLC........................... -------- Total............................................. ========
The underwriting agreement provides that the obligations of the underwriters are conditional and may be terminated at their discretion based on their assessment of the state of the financial markets and may also be terminated upon the occurrence of the events specified in the underwriting agreement. The underwriters are severally committed to purchase all of the common stock being offered by Cybergold if any of such shares are purchased (other than those covered by the over-allotment option described below). The underwriters propose to offer the common stock directly to the public at the public offering price set forth on the cover page of this prospectus. The underwriters may offer the common stock to certain dealers at that price less a concession not in excess of $ per share. Dealers may reallow a concession not in excess of $ per share to certain other dealers. After the shares of the common stock are released for sale to the public, the underwriters may vary the offering price and other selling terms from time to time. We have granted to the underwriters an option, exercisable for up to 30 days after the date of this prospectus, to purchase up to additional shares of common stock at the public offering price set forth on the cover of this prospectus to cover over-allotments, if any. If the underwriters exercise their over-allotment option, the underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares of common stock to be purchased by each of them, as shown in the foregoing table, bears to the common stock offered hereby. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the underwriters may be required to make in respect thereof. Cybergold, our directors and officers and existing stockholders who hold an aggregate of shares, together with the holders of options to purchase shares of common stock and holders of warrants to purchase shares of common stock, have agreed that for a period 180 days following the date of this prospectus, without the prior written consent of SG Cowen Securities Corporation, they will not: (1) directly or indirectly, offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of, other than by operation of law, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock (including, without limitation, common stock which may be deemed to be beneficially owned in accordance with the rules and regulations promulgated under the Securities Act); or (2) request or demand registration pursuant to the Securities Act of any shares of common stock owned by them; provided, however, that this restriction shall not apply to any rights they may have to be included in any Company initiated registration of its securities. 68 71 The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions, penalty bids and passive market making in accordance with Regulation M under the Securities Exchange Act of 1934 (the "Exchange Act"). Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by such syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions. In passive market making, market makers in the common stock who are underwriters or prospective underwriters may, subject to certain limitations, make bids for or purchases of the common stock until the time, if any, at which a stabilizing bid is made. These stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the common stock to be higher than it would otherwise be in the absence of these transactions. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. The underwriters have advised us that they do not intend to confirm sales in excess of 5% of the common stock offered hereby to any account over which they exercise discretionary authority. Prior to this offering, there has been no public market of the common stock. Consequently, the initial public offering price will be determined by negotiations between us and the underwriters. Among the factors considered in these negotiations will be prevailing market conditions, the market capitalizations and the stages of development of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, our results of operations in recent periods, the present state of our development and other factors deemed relevant. We estimate that our out of pocket expenses for this offering will be approximately $ . LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, San Francisco, California. EXPERTS The financial statements included in this prospectus and elsewhere in the registration statement, to the extent and for the periods indicated in their report, have been audited by Arthur Andersen LLP, independent public accountants, and are included herein in reliance upon the authority of said firm as experts in giving said reports. 69 72 ADDITIONAL INFORMATION We filed with the Securities and Exchange Commission, or SEC, Washington, D.C. 20549, a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus does not contain all the information set forth in the registration statement and the exhibits and schedules filed therewith. For further information with respect to Cybergold and the common stock offered hereby, reference is made to the registration statement and to the exhibits and schedules filed therewith. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules filed therewith may be inspected without charge at the public reference facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W. Washington, D.C. 20549, and at the SEC's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and copies of all or any part of the registration statement may be obtained from such offices upon payment of the fees prescribed by the SEC. The SEC maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is http://www.sec.gov. Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements and other information will be available for inspection and copying at the regional offices, public reference facilities and web site of the SEC referred to above. 70 73 TABLE OF CONTENTS
PAGE ---- Report of Independent Public Accountants.................... F-2 Balance Sheet as of December 31, 1997, 1998 and March 31, 1999...................................................... F-3 Statements of Operations for the three years in the period ended December 31, 1998 and the three month periods ended March 31, 1998 and 1999................................... F-4 Statements of Stockholders Equity (Deficit) for the three years in the period ended December 31, 1998 and the three month periods ended March 31, 1998 and 1999............... F-5 Statements of Cash Flows for the three years in the period ended December 31, 1998 and the three month periods ended March 31, 1998 and 1999................................... F-6 Notes to Financial Statements............................... F-7
F-1 74 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of CyberGold, Inc.: We have audited the accompanying balance sheets of CyberGold, Inc. (a California corporation) as of December 31, 1997 and 1998, and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended 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 audits. 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, the financial statements referred to above present fairly, in all material respects, the financial position of CyberGold, Inc. as of December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Francisco, California, May 18, 1999 F-2 75 CYBERGOLD, INC. BALANCE SHEETS
DECEMBER 31, MARCH 31, 1999 -------------------------- ---------------------------- 1997 1998 ACTUAL PRO FORMA ---------- ------------ ------------ ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents........................ $1,239,510 $ 3,175,008 $ 2,280,033 Accounts receivable, less allowance for doubtful accounts of $50,000, $30,000 and $30,000, respectively................................... 161,165 390,701 112,650 Prepaid expenses and other current assets........ -- 26,347 10,600 ---------- ------------ ------------ Total current assets...................... 1,400,675 3,592,056 2,403,283 PROPERTY AND EQUIPMENT, net........................ 371,619 407,066 414,583 DEPOSITS AND OTHER ASSETS.......................... 50,364 41,150 74,809 ---------- ------------ ------------ Total assets.............................. $1,822,658 $ 4,040,272 $ 2,892,675 ========== ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT) CURRENT LIABILITIES: Accounts payable................................. $ 142,070 $ 257,267 $ 122,437 Current maturities of long term obligations...... 81,791 136,639 154,404 Member payable................................... 382,203 800,255 912,159 Membership acquisition payable................... 69,775 175,653 287,469 Accrued liabilities.............................. 88,493 167,294 213,687 Deferred revenue................................. 43,134 175,543 217,914 ---------- ------------ ------------ Total current liabilities................. 807,466 1,712,651 1,908,070 LONG TERM OBLIGATIONS, net of current maturities... 272,152 225,550 291,425 ---------- ------------ ------------ Total liabilities......................... 1,079,618 1,938,201 2,199,495 ---------- ------------ ------------ COMMITMENTS AND CONTINGENCIES CONVERTIBLE REDEEMABLE PREFERRED STOCK, $.0001 par value: 8,000,029 shares authorized; 6,283,792 issued and outstanding at December 31, 1998, and March 31, 1999 (preference in liquidation of $5,718,251)...................................... -- 6,378,679 6,671,480 -- ---------- ------------ ------------ STOCKHOLDERS' EQUITY (DEFICIT): Series A convertible preferred stock, $.0001 par value: Authorized shares -- 3,185,000 Issued and outstanding shares -- 3,000,000, 3,000,000, 3,000,000 and 0 respectively..... 300 300 300 -- Preference in liquidation -- $3,000,000 Series B convertible preferred stock, $.0001 par value: Authorized shares -- 2,144,971 Issued and outstanding shares -- 2,067,471, 2,092,471, 2,092,471, and 0 respectively.... 207 209 209 -- Preference in liquidation -- $4,134,939, 4,184,942 and $4,184,942 Common stock, $.0001 par value: Authorized shares -- 21,670,000 Issued and outstanding shares -- 6,018,063, 6,072,267, 6,109,017, and 17,485,280 respectively................................ 602 607 611 1,748 Additional paid-in capital......................... 7,210,077 8,914,716 8,916,025 15,586,877 Deferred compensation.............................. -- (1,459,423) (1,143,674) (1,143,674) Retained (deficit)................................. (6,468,146) (11,733,017) (13,751,771) (13,751,771) ---------- ------------ ------------ ------------ Total stockholders' equity (deficit)...... 743,040 (4,276,608) (5,978,300) 693,180 ---------- ------------ ------------ ------------ Total liabilities and stockholders' equity (deficit)............................... $1,822,658 $ 4,040,272 $ 2,892,675 $ 2,892,675 ========== ============ ============ ============
The accompanying notes are an integral part of these statements. F-3 76 CYBERGOLD, INC. STATEMENTS OF OPERATIONS
QUARTER ENDED YEAR ENDED DECEMBER 31, ------------------------- --------------------------------------- MARCH 31, MARCH 31, 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) REVENUES: Transaction....................... $ 1,000 $ 457,074 $ 628,350 $ 107,408 $ 332,558 Custom marketing services and other.......................... -- 74,342 376,583 -- 170,178 ----------- ----------- ----------- ----------- ----------- Total revenues............ 1,000 531,416 1,004,933 107,408 502,736 COST OF REVENUES.................... 671 293,171 466,118 35,282 244,417 ----------- ----------- ----------- ----------- ----------- Gross margin.............. 329 238,245 538,815 72,126 258,319 ----------- ----------- ----------- ----------- ----------- OPERATING EXPENSES: Product development............... 1,093,433 1,190,047 1,700,421 375,273 484,249 Sales and marketing............... 840,586 2,162,413 2,694,601 792,196 967,189 General and administrative........ 645,298 614,816 641,837 119,837 227,671 Amortization of deferred compensation................... -- -- 184,778 -- 315,749 ----------- ----------- ----------- ----------- ----------- Total operating expenses..... 2,579,317 3,967,276 5,221,637 1,287,306 1,994,858 ----------- ----------- ----------- ----------- ----------- Loss from operations......... (2,578,988) (3,729,031) (4,682,822) (1,215,180) (1,736,539) INTEREST INCOME (EXPENSE), net...... 10,198 (15,292) 78,381 (4,913) 10,586 ----------- ----------- ----------- ----------- ----------- Net loss.................. (2,568,790) (3,744,323) (4,604,441) (1,220,093) (1,725,953) DIVIDEND ATTRIBUTABLE TO PREFERRED STOCKHOLDERS...................... -- -- (660,430) -- (292,801) ----------- ----------- ----------- ----------- ----------- NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS...................... $(2,568,790) $(3,744,323) $(5,264,871) $(1,220,093) $(2,018,754) =========== =========== =========== =========== =========== NET LOSS PER COMMON SHARE, Basic and diluted........................... $ (0.46) $ (0.63) $ (0.87) $ (0.20) $ (0.33) =========== =========== =========== =========== =========== Pro forma basic and diluted....... $ (0.31) $ (0.10) =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, Basic and diluted.... 5,618,411 5,969,233 6,030,590 6,019,514 6,079,042 =========== =========== =========== =========== =========== Pro forma basic and diluted....... 14,914,618 17,395,777 =========== ===========
The accompanying notes are an integral part of these statements. F-4 77 CYBERGOLD, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK ----------------------------------------- SERIES A SERIES B COMMON STOCK ADDITIONAL ------------------- ------------------- ------------------- PAID IN DEFERRED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION ---------- ------ ---------- ------ ---------- ------ ----------- ------------ BALANCE, DECEMBER 31, 1995........ -- $ -- -- $ -- 5,600,000 $ 560 $ 63,465 $ -- Issuance of Series A preferred stock.......................... 3,000,000 300 -- -- -- -- 2,999,700 -- Exercise of common stock options........................ -- -- -- -- 70,000 7 693 -- Net loss......................... -- -- -- -- -- -- -- -- ---------- ----- ---------- ----- ---------- ------ ----------- ----------- BALANCE, DECEMBER 31, 1996........ 3,000,000 300 -- -- 5,670,000 567 3,063,858 -- Issuance of Series B preferred stock.......................... -- -- 2,067,471 207 -- -- 4,134,732 -- Exercise of common stock options........................ -- -- -- -- 405,563 41 15,644 -- Repurchase of stock options...... -- -- -- -- (57,500) (6) (4,157) -- Net loss......................... -- -- -- -- -- -- -- -- ---------- ----- ---------- ----- ---------- ------ ----------- ----------- BALANCE, DECEMBER 31, 1997........ 3,000,000 300 2,067,471 207 6,018,063 602 7,210,077 -- Issuance of Series B preferred stock.......................... -- -- 25,000 2 -- -- 49,998 -- Accretion of Series C redemption premium........................ -- -- -- -- -- -- -- -- Exercise of common stock options........................ -- -- -- -- 92,641 9 10,820 -- Repurchase of stock options...... -- -- -- -- (38,437) (4) (380) -- Deferred compensation............ -- -- -- -- -- -- 1,644,201 (1,644,201) Amortization of deferred compensation................... -- -- -- -- -- -- -- 184,778 Net loss......................... -- -- -- -- -- -- -- -- ---------- ----- ---------- ----- ---------- ------ ----------- ----------- BALANCE, DECEMBER 31, 1998........ 3,000,000 300 2,092,471 209 6,072,267 607 8,914,716 (1,459,423) Accretion of Series C redemption..................... -- -- -- -- -- -- -- -- Exercise of common stock options........................ -- -- -- -- 36,750 4 1,309 -- Amortization of deferred compensation................... -- -- -- -- -- -- -- 315,749 Net loss......................... -- -- -- -- -- -- -- -- ---------- ----- ---------- ----- ---------- ------ ----------- ----------- BALANCE, MARCH 31, 1999 (unaudited)...................... 3,000,000 $ 300 2,092,471 $ 209 6,109,017 $ 611 $ 8,916,025 $(1,143,674) Conversion of Series A preferred...................... (3,000,000) (300) -- -- 3,000,000 300 -- -- Conversion of Series B preferred...................... -- -- (2,092,471) (209) 2,092,471 209 -- -- Conversion of Series C preferred...................... -- -- -- -- 6,283,792 628 6,670,852 -- ---------- ----- ---------- ----- ---------- ------ ----------- ----------- PRO FORMA BALANCE, MARCH 31, 1999 (unaudited)...................... -- $ -- -- $ -- 17,485,280 $1,748 $15,586,877 $(1,143,674) ========== ===== ========== ===== ========== ====== =========== =========== RETAINED DEFICIT TOTAL ------------ ----------- BALANCE, DECEMBER 31, 1995........ $ (155,033) $ (91,008) Issuance of Series A preferred stock.......................... -- 3,000,000 Exercise of common stock options........................ -- 700 Net loss......................... (2,568,790) (2,568,790) ------------ ----------- BALANCE, DECEMBER 31, 1996........ (2,723,823) 340,902 Issuance of Series B preferred stock.......................... -- 4,134,939 Exercise of common stock options........................ -- 15,685 Repurchase of stock options...... -- (4,163) Net loss......................... (3,744,323) (3,744,323) ------------ ----------- BALANCE, DECEMBER 31, 1997........ (6,468,146) 743,040 Issuance of Series B preferred stock.......................... -- 50,000 Accretion of Series C redemption premium........................ (660,430) (660,430) Exercise of common stock options........................ -- 10,829 Repurchase of stock options...... -- (384) Deferred compensation............ -- -- Amortization of deferred compensation................... -- 184,778 Net loss......................... (4,604,441) (4,604,441) ------------ ----------- BALANCE, DECEMBER 31, 1998........ (11,733,017) 4,276,608 Accretion of Series C redemption..................... (292,801) (292,801) Exercise of common stock options........................ -- 1,313 Amortization of deferred compensation................... -- 315,749 Net loss......................... (1,725,953) (1,725,953) ------------ ----------- BALANCE, MARCH 31, 1999 (unaudited)...................... $(13,751,771) $(5,978,300) Conversion of Series A preferred...................... -- -- Conversion of Series B preferred...................... -- -- Conversion of Series C preferred...................... -- 6,671,480 ------------ ----------- PRO FORMA BALANCE, MARCH 31, 1999 (unaudited)...................... $(13,751,771) $ 693,180 ============ ===========
The accompanying notes are an integral part of these statements. F-5 78 CYBERGOLD, INC. STATEMENTS OF CASH FLOWS
QUARTER ENDED YEAR ENDED DECEMBER 31, ------------------------- --------------------------------------- MARCH 31, MARCH 31, 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................... $(2,568,790) $(3,744,323) $(4,604,441) $(1,220,093) $(1,725,953) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation.................... 101,050 190,859 269,158 61,075 81,709 Amortization of deferred compensation.................. -- -- 184,778 -- 315,749 Changes in assets and liabilities: Accounts receivable........... -- (161,165) (229,536) 63,421 278,051 Prepaid expenses and other current assets............. (22,375) (27,989) (17,133) (8,507) (17,912) Accounts payable.............. 148,310 (6,240) 115,197 71,222 (134,830) Members payable............... -- 382,203 418,052 133,989 111,904 Membership acquisition payable.................... -- 69,775 217,694 5,225 111,816 Accrued liabilities........... 38,392 50,101 (33,015) (39,785) 46,393 Deferred revenue.............. -- 43,134 132,409 13,495 42,371 ----------- ----------- ----------- ----------- ----------- Net cash used in operating activities............... (2,303,413) (3,203,645) (3,546,837) (919,958) (890,702) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment....................... (387,472) (57,564) (152,922) (23,185) (89,226) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of capital lease obligations..................... -- (114,549) (143,437) (18,879) (40,084) Proceeds from equipment financing....................... -- -- -- -- 123,724 Proceeds from sale leaseback transaction..................... -- 250,000 -- -- -- Proceeds from loans from stockholders.................... -- 1,000,000 -- -- -- Repayments of advances from stockholder..................... (91,008) -- -- -- -- Proceeds from issuance of preferred stock........................... 3,000,000 3,134,939 5,768,249 99,796 -- Proceeds from exercise of stock options, net of repurchases..... 700 11,522 10,445 -- 1,313 ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities..... 2,909,692 4,281,912 5,635,257 80,917 84,953 ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... 218,807 1,020,703 1,935,498 (862,226) (894,975) CASH AND CASH EQUIVALENTS: Balance at beginning of period..... -- 218,807 1,239,510 1,239,510 3,175,008 =========== =========== =========== =========== =========== Balance at end of period........... $ 218,807 $ 1,239,510 $ 3,175,008 $ 377,284 $ 2,280,033 =========== =========== =========== =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest............. $ -- $ 35,800 $ 71,086 $ 16,261 $ 19,536 Acquisition of property and equipment using capital leases.......................... 120,600 97,892 151,683 61,970 -- Conversion of stockholder loans into preferred stock............ -- 1,000,000 -- -- --
The accompanying notes are an integral part of these statements. F-6 79 CYBERGOLD, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NATURE OF OPERATIONS CyberGold, Inc. (the Company) was incorporated in California in 1994. The Company did not have any significant operations prior to 1996. The Company is engaged in the business of providing on-line direct marketing and cash based incentive advertising solutions for on-line advertisers and marketers. Additionally, the Company provides custom marketing services which include production and development of marketing programs, delivery of targeted e-mail to CyberGold members, design of customer web sites and third party engineering functions. As of December 31, 1998, the Company had a retained deficit of approximately $11.7 million and has continued to incur losses during 1999. During May 1999, the Company issued redeemable convertible preferred stock, as further discussed in Note 4, in the amount of $8 million. Management believes that this financing will be sufficient for it to meet its obligations through at least December 31, 1999. The industry in which the Company operates is very specialized and is subject to a number of industry-specific risk factors, including, but not limited to, rapidly changing technologies, significant numbers of new entrants, dependence on key individuals, competition from similar products and from larger companies, customer preferences, the need for the continued successful development, marketing and selling of its products and services, the need for financing, and the need for positive cash flows from operations. INTERIM FINANCIAL STATEMENTS The accompanying financial statements as of March 31, 1999 and for the quarters ended March 31, 1998 and 1999 are unaudited, but in the opinion of management, include all adjustments consisting of normal recurring adjustments necessary for a fair presentation of results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted, although the Company believes that the disclosures included are adequate to make the information presented not misleading. Results for the quarter ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. UNAUDITED PRO FORMA PRESENTATION The unaudited pro forma balance sheet and statement of stockholders' equity (deficit) as of March 31, 1999 reflects the automatic conversion of all outstanding shares of convertible preferred stock into 11,373,263 shares of common stock which will occur upon the closing of the Company's proposed initial public offering. SIGNIFICANT CUSTOMERS Two customers individually accounted for 22 and 16 percent, respectively, of the Company's total revenue during the year ended December 31, 1998. No individual customer exceeded 10 percent of total revenue during the year ended December 31, 1997. F-7 80 CYBERGOLD, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) At December 31, 1998, one of these customers accounted for 78 percent of accounts receivable. These amounts have been paid subsequent to December 31, 1998. CASH EQUIVALENTS For the statements of cash flows, the Company treats financial instruments as cash equivalents if the original maturity of such instruments is three months or less. FINANCIAL INSTRUMENTS Financial instruments consist of cash equivalents, accounts receivable, accounts payable and debt. The estimated fair value of these financial instruments approximates their carrying value. PROPERTY AND EQUIPMENT Property and equipment are carried at cost and for financial reporting purposes, depreciation is computed using the straight-line method over estimated useful lives of three years for all assets. Maintenance and repair expenditures are charged to expense when incurred. MEMBER ACQUISITION PAYABLE Member acquisition payable represents amounts due to advertising partners for new member sign-ups that are originated from a partner web site. REVENUE RECOGNITION AND COST OF REVENUES The Company earns revenue from certain member transactions and from custom marketing and other services. Transaction revenues are earned each time a member either earns or spends incentive rewards within the system and for micropayment transactions. Transaction revenues are recognized as revenue upon completion of the specific action related to the transaction fee. Custom marketing services and other revenues include production and development fees received for customization of marketing programs, fees received for delivering targeted e-mail to the Company's members and fees received for other advertising and marketing services. Production and development fees represent HTML design services, graphic services, engineering and database development and related services. Revenue is recognized as these services are performed. Prepayments by advertising or marketing clients for transaction fees or custom marketing services are included in deferred revenue on the accompanying balance sheets. The cost of revenues associated with our transaction revenues represent cash rewards paid to our members for completing transactions. The cost of revenues associated with custom advertising and marketing services and other revenues primarily consist of costs for production and development personnel and independent contractors. Any unpaid rewards due to members are recorded in members payable in the accompanying balance sheets. F-8 81 CYBERGOLD, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) PRODUCT DEVELOPMENT Product development costs include expenses related to the development and enhancement of the Company's product offerings. Product development costs are expensed as incurred. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. Actual results could differ from those estimates. NET LOSS PER SHARE Basic net loss per share is calculated by dividing net loss by the weighted average common shares outstanding during the period. Diluted income per share is calculated by dividing the net income by the weighted average common shares outstanding adjusted for all potential common shares, which includes shares issuable upon the exercise of outstanding common stock options, warrants and other contingent issuances of common stock. The Company has losses for all periods presented and, accordingly, such potential common shares are excluded from the computation of diluted net loss per share, as their effect is antidilutive. Potentially dilutive securities include the following:
DECEMBER 31, --------------------------------------- MARCH 31, 1996 1997 1998 1999 ---------- ---------- ----------- ---------- Options to purchase common stock.... 1,018,063 1,184,500 1,866,602 1,875,957 Warrants to purchase common stock... 250,000 250,000 250,000 250,000 Warrants to purchase preferred stock............................. -- 220,000 207,500 207,500 ---------- ---------- ----------- ---------- Series A preferred stock............ 3,000,000 3,000,000 3,000,000 3,000,000 Series B preferred stock............ -- 2,067,471 2,092,471 2,092,471 Redeemable preferred stock.......... -- -- 6,283,792 6,283,792 ========== ========== =========== ========== Total..................... 4,268,063 6,721,971 13,700,365 13,709,720 ========== ========== =========== ==========
PRO FORMA NET LOSS PER SHARE (UNAUDITED) The calculation of pro forma net loss per share assumes that all series of convertible shares have been converted into common stock as of the original issuance date. NEW ACCOUNTING STANDARDS During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." The Company has no other comprehensive income amounts for any of the periods presented. The Company also adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." As of December 31, 1998, management has concluded that the Company only operates in one segment and exclusively in the United States. In March 1998, the American Institute of Certified Public Accountants issued SOP No. 98-1, "Software for Internal Use." The Company does not expect the adoption of SOP No. 98-1 to have a material impact on its financial statements. F-9 82 CYBERGOLD, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is not expected to have a material impact on the Company's financial position or results of operations. 2. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
DECEMBER 31, ---------------------- MARCH 31, 1997 1998 1999 --------- --------- ---------- Computer equipment and software............ $ 625,610 $ 923,127 $ 979,576 Furniture and fixtures..................... 25,817 30,465 63,145 Leasehold improvements..................... 12,101 14,541 14,541 --------- --------- ---------- 663,528 968,133 1,057,262 Accumulated depreciation................... (291,909) (561,067) (642,679) --------- --------- ---------- $ 371,619 $ 407,066 $ 414,583 ========= ========= ==========
Depreciation expense for property and equipment was $101,050, $190,859, and $269,158 for the years ended December 31, 1996, 1997, and 1998, respectively. Included in property and equipment at December 31, 1997 and 1998 are depreciated amounts of approximately $372,000 and $278,000, respectively, related to assets acquired under capital leases. 3. INCOME TAXES: Significant components of net deferred tax assets as of December 31 were:
1997 1998 ----------- ----------- Net operating loss carryforwards..................... $ 1,997,200 $ 3,744,037 R&D credit carryforward.............................. 147,482 274,163 Other................................................ 5,347 25,028 ----------- ----------- Gross deferred tax assets.................. 2,150,029 4,043,228 Deferred tax valuation allowance..................... (2,150,029) (4,043,228) ----------- ----------- Net deferred tax asset..................... $ -- $ -- =========== ===========
As of December 31, 1998, the Company had tax net operating loss carryforwards of approximately $9,360,000 for federal and state income tax purposes. These carryforwards begin to expire in 2011 and 2005, respectively. In addition, the Company has research and development tax credit carryforwards of $156,821 and $117,342 for federal and state income tax purposes, respectively, which begin to expire in 2011. A valuation allowance has been provided to offset gross deferred tax assets due to the uncertainty surrounding the realizability of such assets. F-10 83 CYBERGOLD, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Tax Reform Act of 1986 contains provisions that may limit the net operating loss carryforwards and research and development credits available to be used in any given year should certain events occur, including the sale of equity securities and other changes in ownership. There can be no assurance that the Company will be able to utilize net operating loss carryforwards and credits before expiration. 4. CONVERTIBLE REDEEMABLE PREFERRED STOCK: During 1998 and 1999, the Company amended and restated its articles of incorporation to allow for the issuance of 8,000,029 shares of Series C Convertible Redeemable Preferred Stock (Series C Stock) and 3,850,000 shares of Series D Convertible Redeemable Preferred Stock (Series D Stock). During the period from May 1998 through August 1998, the Company issued 6,283,792 shares of Series C Stock at $0.91 per share. During May 1999, the Company issued 3,076,923 shares of Series D Stock at $2.60 per share. The holders of Series C Stock and Series D Stock shall be entitled to receive noncumulative dividends of $.0455 per annum and $.13 per annum, respectively, as declared by the Board of Directors. The Series C Stock and Series D Stock has preference in liquidation over common stock and Series A and B Preferred (see Note 5) equal to a liquidation value of $0.91 and $2.60 per share, respectively. Each share of Series C Stock and Series D Stock is convertible, at the option of the holder, into a share of common stock at the Initial Conversion Price, as defined. Each share will automatically convert into shares of common stock at the Initial Conversion Price upon the earlier of (a) the Company's sale of its common stock in a firm commitment underwritten initial public offering, the public offering price of which was not less than $6.50 per share and $15,000,000 in the aggregate or (b) the date specified by written consent of 67 percent of the holders of the then outstanding shares of preferred stock. At any time after May 15, 2003, the holders of not less than 67 percent of the then outstanding Series C Stock and Series D Stock may request for the redemption of the Series C Stock and Series D Stock at $1.82 per share and $5.20 per share, respectively. This related redemption premium is being accreted over the period from the issuance of the respective stock through May 15, 2003. For the year ended December 31, 1998, and for the quarter ended March 31, 1999, the accretion charged to retained deficit was $660,430 and $292,801, respectively. In connection with the issuance of Series D Stock, the Company also issued warrants to purchase 576,923 warrants of Series D Stock an exercise price of $3.00. 5. STOCKHOLDERS EQUITY: COMMON STOCK The holders of common stock are entitled to one vote per share. Subject to preferences on outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors. In the event of liquidation, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock. The common stock has no preemptive, conversion or other subscription rights. F-11 84 CYBERGOLD, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) PREFERRED STOCK Pursuant to the Company's Series A preferred stock agreement entered into in May 1996, 3,000,000 shares of Series A preferred stock were sold to the existing stockholder and other investors at a price of $1.00 per share in July 1996. Upon liquidation, merger or acquisition of the Company, provided sufficient assets are available, Series A preferred stockholders would receive $1.00 per share plus any declared but unpaid dividends. On June 28, 1996, the Company issued to one of the new Series A investors a warrant to purchase 250,000 shares of common stock at $0.15 per share. The value of this warrant at June 28, 1996, was determined not to be material. Pursuant to the Company's Series B preferred stock agreement entered into in June 1997, 2,067,471 shares of Series B preferred stock were sold to the existing stockholders and other investors at a price of $2.00 per share. Of the total number of shares sold, 515,421 shares were issued upon the conversion of stockholder notes (the Notes). The Notes were entered into in early 1997 by the existing stockholders as bridge financing. The Notes accrued interest at 8 percent. Upon liquidation, merger or acquisition of the Company, provided sufficient assets are available, Series B preferred stockholders would receive $2.00 per share plus any declared but unpaid dividends. Conversion of Series A preferred stock and Series B preferred stock into common stock is at the option of the preferred stockholders. Each share of preferred stock is convertible into such number of shares of common stock determined by dividing the issuance price by the conversion price, which is determined at the time of the conversion. The conversion price for Series A and Series B preferred stock was initially set at $1.00 and $2.00 per share, respectively. This conversion price is subject to adjustment upon the occurrence of certain events. Conversion of the preferred stock is automatic upon the earlier of (a) the Company's sale of its common stock in a firm commitment underwritten initial public offering, the offering price of which is not less than $2.73 and the proceeds of which are greater than $15,000,000; or (b) the date specified by written consent of the holders of the then outstanding shares of Series A, Series B, Series C and Series D stock, acting together as a single class. In connection with the capital leases described in Note 6, the Company issued warrants to the lessor to purchase 17,500 shares of Series A preferred stock at $1.00 per share, 5,000 shares of Series B preferred stock at $2.00 per share. The value of these warrants at the grant dates was determined not to be material, based on the Black-Scholes pricing model. At December 31, 1998, 15,000,029 shares of common stock, equivalent to the number of shares of preferred stock authorized, were reserved for issuance upon conversion of preferred stock. Each share of preferred stock conveys the right to the stockholder of one vote. 6. COMMITMENTS AND CONTINGENCIES: LEASE COMMITMENTS The Company entered into a sale leaseback transaction during 1997 related to the leasing of certain computer equipment. No gain or loss was recognized on this sale. During 1999, the Company moved its headquarters to Oakland, California and entered into an operating lease that expires in June 2004. F-12 85 CYBERGOLD, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) As of December 31, 1998, future minimum lease commitments are as follows:
OPERATING CAPITAL LEASE LEASE PAYMENTS PAYMENTS ---------- --------- 1999.................................................... $ 217,790 $ 196,013 2000.................................................... 341,100 166,456 2001.................................................... 370,800 83,498 2002.................................................... 407,700 15,414 2003.................................................... 427,500 -- Thereafter.............................................. 180,000 -- ---------- --------- Total......................................... $1,944,890 461,381 ========== Less: Interest component................................ (99,192) --------- Present value of minimum lease payments................. 362,189 Less: Current maturities................................ (136,639) --------- Long-term capital obligations........................... $ 225,550 =========
Interest expense on capital leases amounted to $0, $35,800 and $71,086 for the years ended December 31, 1996, 1997, and 1998 respectively. Rent expense for the years ended December 31, 1996, 1997, and 1998, was $103,529, $150,730 and $139,749, respectively. EMPLOYMENT AGREEMENTS During 1998, the Company entered into employment agreements with three officers that provide for minimum annual base salaries, bonus entitlements and issuance of common stock options upon the achievement of certain objectives. Should these objectives not be achieved, these options vest over five years. The employment agreements were effective as of the hire date of each respective officer and may be terminated by either party. As of December 31, 1998, the Company accrued approximately $32,000 in the accompanying balance sheet for accrued bonuses in relation to these agreements. EQUIPMENT CREDIT LINE During February 1999, the Company entered into an equipment credit line agreement. This credit line is to be used solely for capital expenditures. Maximum borrowings under this line are $400,000. Interest of approximately 18 percent and principal are payable monthly, over a three year period. At March 31, 1999, the Company had amounts outstanding under this line of $115,196. Of this amount, $4,760 is included in current maturities of long-term obligations in the accompanying balance sheet with the remainder included in long-term obligations, net of current maturities. 7. STOCK OPTION PLAN: Under the terms of the Company's Employee Stock Option Plan (the Plan) adopted in June 1996, options to purchase shares of the Company's common stock are granted to employees, consultants and directors. Options currently outstanding vest at 25 percent on the first anniversary of the grant date and 1/36 per month thereafter. Each option shall terminate 10 years after the date of grant. In addition, the option holder is entitled to exercise prior to the option's vesting as long as he or she is still an employee. F-13 86 CYBERGOLD, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Should the employee subsequently leave, the Company has the right to repurchase the shares that had not vested at the departure date. At December 31, 1998 and March 31, 1999, 85,157 and 81,251 shares of common stock were subject to repurchase, respectively, under this provision. A summary of the status of the Company's stock option plan at December 31, 1998 and changes during the years ended December 1996, 1997, and 1998, and three months ended March 31, 1999, are presented in the table below:
WEIGHTED WEIGHTED OPTIONS OUTSTANDING AVERAGE AVERAGE -------------------------- EXERCISE FAIR VALUE OF QUALIFYING NONQUALIFYING TOTAL PRICE OPTIONS GRANTED ---------- ------------- --------- -------- --------------- Balance, December 31, 1995...... -- -- -- $ -- Granted....................... 1,371,500 12,500 1,384,000 0.04 $0.04 Canceled...................... (295,937) -- (295,937) 0.03 Exercised..................... (57,500) (12,500) (70,000) 0.01 --------- -------- --------- Balance, December 31, 1996...... 1,018,063 -- 1,018,063 0.04 Granted....................... 501,500 160,000 661,500 0.23 $0.05 Canceled...................... (147,000) -- (147,000) 0.10 Exercised..................... (348,063) -- (348,063) 0.04 --------- -------- --------- Balance, December 31, 1997...... 1,024,500 160,000 1,184,500 0.13 Granted....................... 1,013,600 300,350 1,313,950 0.31 $0.68 Canceled...................... (485,977) (91,667) (577,644) 0.40 Exercised..................... (52,604) (1,600) (54,204) 0.19 --------- -------- --------- Balance, December 31, 1998...... 1,499,519 367,083 1,866,602 0.19 Granted....................... 78,000 112,500 190,500 0.15 $1.88 Canceled...................... (54,395) (90,000) (144,395) 0.40 Exercised..................... (30,000) (6,750) (36,750) 0.04 --------- -------- --------- Balance, March 31, 1999......... 1,575,531 382,833 1,875,957 0.19 ========= ======== =========
Options outstanding, exercisable, and vested by price range at December 31, 1998, are as follows:
WEIGHTED RANGE OF AVERAGE EXERCISE NUMBER REMAINING NUMBER NUMBER PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE VESTED - --------- ----------- ---------------- ----------- -------- 0.$50... 389,852 9.0 389,852 205,558 0.01 478,000 7.4 478,000 454,895 0.15 998,750 9.5 998,750 159,986 --------- -------- -------- 1,866,602 1,866,602 820,439 ========= ======== ========
During 1997, the Company entered into agreements that granted options to purchase 185,000 shares of Series A preferred stock to consultants at $1.00 per share. The options were fully vested at December 31, 1998. The value of these options at the grant date (as determined using the Black-Scholes model), was not material. In connection with the granting of certain stock options to employees, directors and consultants during 1998, the Company recorded deferred compensation of $1,644,201. This deferred compensation is F-14 87 CYBERGOLD, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) being amortized over the expected service periods of the grantees, generally four years. Amortization of deferred compensation for the year ended December 31, 1998, was $184,778. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Had compensation expense for the Plan been determined based on the fair value at the grant dates, as prescribed in SFAS No. 123, the Company's net loss and net loss per share would have been as follows:
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, --------------------------------------- ------------------------- 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- Net loss: As reported.............. $(2,568,790) $(3,744,323) $(5,264,871) $(1,220,093) $(2,018,754) Pro forma................ (2,582,025) (3,779,438) (5,349,881) (1,220,093) (2,018,754) Basic and diluted net loss per common share: As reported.............. $ (0.46) $ (0.63) $ (0.87) $ (0.20) $ (0.33) Pro forma................ (0.46) (0.63) (0.89) (0.20) (0.33)
The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for the grants: expected dividend yield of 0 percent in all periods; expected volatility of 0 percent in all periods; weighted average risk-free interest rates ranging from 4.45 percent to 6.28 percent for all periods presented in the table above; and expected lives of four years for all periods. 8. COMPENSATION AND RETIREMENT PLANS: On May 18, 1999, the Board of Directors adopted the following plans: 1999 OMNIBUS EQUITY INCENTIVE PLAN -- The Company has reserved 1,500,000 shares of common stock for issuance under this plan. Options may be granted under this plan to employees, directors and consultants and will not be granted at less than 100 percent of the fair market value of the common stock on the option grant date. These options will generally vest over four years and expire ten years after the date of grant. At May 18, 1999, no options were outstanding under this plan. 1999 EMPLOYEE STOCK PURCHASE PLAN -- The Company has reserved 300,000 shares of common stock for issuance under this plan and only employees are eligible. Employees can purchase stock through payroll deductions which may not exceed 15 percent of the employee's cash compensation. The purchase price per share of common stock will be no less than 85 percent of the fair market value of the stock at the date of grant. At May 18, 1999, no purchases had been made under this plan. 401(K) DEFINED CONTRIBUTION PLAN -- The Company also sponsors a defined contribution 401(k) retirement plan for all employees who have completed at least 30 days of service. Participants may elect to defer up to 15 percent of their current annual salary, not to exceed $10,000. The Company does not match contributions. 9. RELATED PARTIES: During the years ended December 31, 1996, 1997, and 1998, the president of the Company and majority common stockholder was not paid a salary. F-15 88 [BACK INSIDE COVER Description: 15 color photographs of Cybergold members, laid out in a staggered pattern. (See attached layout). Each photo approx. 1.5 inches x 1.5 inches. Each photograph is captioned with name and occupation. Cybergold logo, approximately 1 inch x 2 inches, in center of page. CAPTIONS: Carrie Applebaum Marketing Manager/Hebrew Teacher Stacey Trask Waitress Glenn Randle Graphic Designer Ian Dalec Field Engineer Chris Trim Police Officer/Mountain Biker Jonathan Peacock Tech Support Engineer/Skier Voltaire Moise Artist Jessica Burrows Media Planner Frank Siegel Software Developer Devora Kanter Nonprofit Volunteer Dick Kerner Financial Planner Roxanne Castillo Paralegal Ryan Dadasovich QA Manager/Musician Nicole Ylagan Supply Technician/Singer Colette Sandstedt Filmmaker]
89 - ------------------------------------------------------ - ------------------------------------------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL AND SEEKING OFFERS TO BUY SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THE PROSPECTUS OR ANY SALE OF THE COMMON STOCK. --------------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary................... 3 Risk Factors......................... 6 Forward-Looking Statements........... 19 Use of Proceeds...................... 20 Dividend Policy...................... 20 Capitalization....................... 21 Dilution............................. 22 Selected Financial Data.............. 23 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 25 Business............................. 36 Management........................... 48 Certain Transactions................. 59 Principal Stockholders............... 61 Description of Capital Stock......... 63 Shares Eligible for Future Sale...... 66 Underwriting......................... 68 Legal Matters........................ 69 Experts.............................. 69 Additional Information............... 71 Index to Financial Statements........ F-1
--------------------------- UNTIL , 1999 (25 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ SHARES LOGO COMMON STOCK --------------------------- PROSPECTUS --------------------------- SG COWEN CIBC WORLD MARKETS VOLPE BROWN WHELAN & COMPANY , 1999 - ------------------------------------------------------ - ------------------------------------------------------ 90 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fees. SEC Registration fee........................................ $ 12,788 NASD fee.................................................... $ 5,100 Nasdaq National Market listing fee.......................... Printing and engraving expenses............................. Legal fees and expenses..................................... Accounting fees and expenses................................ Blue sky fees and expenses.................................. $ 3,000 Transfer agent fees......................................... Miscellaneous fees and expenses............................. -------- Total............................................. ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law authorizes a court to award or a corporation's Board of Directors to grant indemnification to directors and officers, including reimbursement for expenses incurred, in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"). Article VI, Section 6.1, of the Registrant's Bylaws provides for mandatory indemnification of its directors and permissible indemnification of officers and employees to the maximum extent permitted by the Delaware General Corporation Law. The Registrant's Certificate of Incorporation provides that, pursuant to Delaware law, its directors shall not be liable for monetary damages for breach of the directors' fiduciary duty as directors to the Company and its stockholders. This provision in the Certificate of Incorporation does not eliminate the directors' fiduciary duty, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Company for acts or omissions 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 unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. The Registrant has entered into Indemnification Agreements with its officers and directors, a form of which is attached as Exhibit 10.1 hereto and incorporated herein by reference. The Indemnification Agreements provide the Registrant's officers and directors with further indemnification to the maximum extent permitted by the Delaware General Corporation Law. Reference is made to Section 7 of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors of the Registrant against certain liabilities. II-1 91 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since January 1, 1996, the Company has issued and sold the following unregistered securities pursuant to the exemption from the registration requirements of the Securities Act of 1933 as amended (the "Act"), provided by Sections 3(a)(10) or 4(2) of the Act or Rule 701 of the Act: (1) On May 18, 1999, CyberGold, Inc., a California corporation ("Cybergold California") incorporated a wholly-owned subsidiary, Cybergold, Inc., a Delaware corporation (Cybergold Delaware) for purposes of reincorporating into Delaware. In connection with the reincorporation, Cybergold Delaware will issue shares of its common stock to the holders of common stock of Cybergold California, such that the holders of common stock of CyberGold California will receive a proportionate interest in Cybergold Delaware common stock. The issuance of the securities and such reincorporation will be exempt from the registration requirements of the Act, due to the exemptions from registration provided by Sections 3(a)(10) and 4(2) thereof. (2) In July and September of 1996, we issued 3,000,000 shares of Series A preferred stock to a group of private accredited investors for an aggregate consideration of $3,000,000 pursuant to Section 4(2) of the Act. (3) In July 1996, we issued a warrant to purchase 250,000 shares of common stock to a private accredited investor at an exercise price of $0.15 pursuant to Section 4(2) of the Act. (4) In June 1997, we issued 2,092,471 shares of Series B preferred stock to a group of private accredited investors for an aggregate consideration of $4,234,942 pursuant to Section 4(2) of the Act. (5) In March 1997, we issued warrants to an equipment lessor to purchase 22,500 shares of Series B preferred stock at an exercise price of $2.00 pursuant to Section 4(2) of the Act. (6) In May and August 1998, we issued 6,283,792 shares of Series C preferred stock to a group of private accredited investors for an aggregate consideration of $5,655,750 pursuant to Section 4(2) of the Act. (7) On May 18, 1999, we issued 3,076,923 shares of Series D preferred stock to a group of private accredited investors for an aggregate consideration of $7,999,999.80 pursuant to Section 4(2) of the Act. (8) On May 18, 1999, we issued warrants to purchase a total of 576,925 shares of Series D preferred stock at an exercise price of $3.00 to a group of private accredited investors pursuant to Section 4(2) of the Act. (9) Since 1996, we have issued options to purchase common stock to employees, directors and consultants pursuant to Section 4(2) and Rule 701 of the Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement (preliminary form). 3.1 Registrant's Certificate of Incorporation 3.2 Registrant's Amended and Restated Certificate of Incorporation, to be effective upon the closing of the offering 3.3 Registrant's Bylaws 4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3 4.2* Specimen Common Stock Certificate
II-2 92
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4.3 Amended and Restated Investors' Rights Agreement, dated May 18, 1999 5.1* Opinion of Gunderson Dettmer Stough Franklin Villeneuve & Hachigian, LLP 10.1 Form of Indemnification Agreement 10.2* 1996 Stock Plan 10.3* 1999 Omnibus Equity Incentive Plan 10.4* 1999 Employee Stock Purchase Plan 10.5* Standard Office Lease, by and between Central Building LLC and the Registrant, dated March 25, 1999. 10.6* Commercial Lease, by and between Weilman Treloar & Co. and the Registrant, dated December 20, 1995. 10.7* Merchant Transaction Processing Agreement between the First National Bank of Omaha and the Registrant, as amended July 21, 1997. 10.8* Letter of Agreement between Earthlink Network, Inc. and the Registrant, dated August 10, 1998. 10.9* Master Lease Agreement, between the Registrant and LINC Capital, Inc., dated March 17, 1997. 10.10* Senior Loan and Security Agreement No. 6209, between the Registrant and Phoenix Leasing Incorporated, dated December 10, 1998. 10.11* Agreement, between the Registrant and Audits & Surveys Worldwide, Inc., dated March 17, 1997. 10.12* Affinity Agreement between the Registrant and MBNA America Bank, N.A., dated November 20, 1998. 10.13* Digital Assistant Memorandum of Understanding, between the Registrant and Qwest Communications Corporation, as amended November 25, 1998. 23.1 Independent Auditors' Consent. 23.2 Consent of Counsel (See Exhibit 5.1). 24.1 Power of Attorney (See Page II-5). 27.1 Financial Data Schedule (Fiscal 1998 and three months ended March 31, 1999).
- --------------- * To be filed by amendment ITEM 17. UNDERTAKINGS The Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the Delaware General Corporation Law, the Certificate of Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, 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 the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a II-3 93 court of appropriate jurisdiction the question of 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. The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 94 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Berkeley, State of California, on this 21st day of May, 1999. CYBERGOLD, INC. By: /s/ A. NATHANIEL GOLDHABER ------------------------------------ A. Nathaniel Goldhaber President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints A. Nathaniel Goldhaber and John Steuart, and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE --------- ----- ---- /s/ A. NATHANIEL GOLDHABER President, Chief Executive May 21, 1999 - --------------------------------------------------- Officer (Principal Executive A. Nathaniel Goldhaber Officer) and Director /s/ JOHN STEUART Chief Financial Officer May 21, 1999 - --------------------------------------------------- (Principal Financial and John Steuart Accounting Officer) /s/ CHRISTOPHER ALAFI Director May 21, 1999 - --------------------------------------------------- Christopher Alafi /s/ JAY CHIAT Director May 21, 1999 - --------------------------------------------------- Jay Chiat
II-5 95
SIGNATURE TITLE DATE --------- ----- ---- /s/ GARRETT GRUENER Director May 21, 1999 - --------------------------------------------------- Garrett Gruener /s/ REGIS MCKENNA Director May 21, 1999 - --------------------------------------------------- Regis McKenna /s/ ALAN SALZMAN Director May 21, 1999 - --------------------------------------------------- Alan Salzman /s/ PETER SEALEY Director May 21, 1999 - --------------------------------------------------- Peter Sealey
II-6 96 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement (preliminary form). 3.1 Registrant's Certificate of Incorporation 3.2 Registrant's Amended and Restated Certificate of Incorporation, to be effective upon the closing of the offering 3.3 Registrant's Bylaws 4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3 4.2* Specimen Common Stock Certificate 4.3 Amended and Restated Investors' Rights Agreement, dated May 18, 1999 5.1* Opinion of Gunderson Dettmer Stough Franklin Villeneuve & Hachigian, LLP 10.1 Form of Indemnification Agreement 10.2* 1996 Stock Plan 10.3* 1999 Omnibus Equity Incentive Plan 10.4* 1999 Employee Stock Purchase Plan 10.5* Standard Office Lease, by and between Central Building LLC and the Registrant, dated March 25, 1999. 10.6* Commercial Lease, by and between Weilman Treloar & Co. and the Registrant, dated December 20, 1995. 10.7* Merchant Transaction Processing Agreement between the First National Bank of Omaha and the Registrant, as amended July 21, 1997. 10.8* Letter of Agreement between Earthlink Network, Inc. and the Registrant, dated August 10, 1998. 10.9* Master Lease Agreement, between the Registrant and LINC Capital, Inc., dated March 17, 1997. 10.10* Senior Loan and Security Agreement No. 6209, between the Registrant and Phoenix Leasing Incorporated, dated December 10, 1998. 10.11* Agreement, between the Registrant and Audits & Surveys Worldwide, Inc., dated March 17, 1997. 10.12* Affinity Agreement between the Registrant and MBNA America Bank, N.A., dated November 20, 1998. 10.13* Digital Assistant Memorandum of Understanding, between the Registrant and Qwest Communications Corporation, as amended November 25, 1998. 23.1 Independent Auditors' Consent. 23.2 Consent of Counsel (See Exhibit 5.1). 24.1 Power of Attorney (See Page II-5). 27.1 Financial Data Schedule (Fiscal 1998 and three months ended March 31, 1999).
- --------------- * To be filed by amendment EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 _____________ SHARES CYBERGOLD, INC. COMMON STOCK UNDERWRITING AGREEMENT [DATE] SG COWEN SECURITIES CORPORATION CIBC WORLD MARKETS VOLPE BROWN WHELAN & COMPANY As Representatives of the several Underwriters c/o SG Cowen Securities Corporation Financial Square New York, New York 10005 Dear Sirs: 1. INTRODUCTORY. Cybergold, Inc., a Delaware corporation (the "Company"), proposes to sell, pursuant to the terms of this Agreement, to the several underwriters named in Schedule A hereto (the "Underwriters," or, each, an "Underwriter"), an aggregate of ____ shares of Common Stock, $____ par value (the "Common Stock") of the Company. The aggregate of ____ shares so proposed to be sold is hereinafter referred to as the "Firm Stock". The Company also proposes to sell to the Underwriters, upon the terms and conditions set forth in Section 3 hereof, up to an additional ______ shares of Common Stock (the "Optional Stock"). The Firm Stock and the Optional Stock are hereinafter collectively referred to as the "Stock". SG Cowen Securities Corporation ("SG Cowen"), CIBC World Markets and Volpe Brown Whelan & Company are acting as representatives of the several Underwriters and in such capacity are hereinafter referred to as the "Representatives." 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to, and agrees with, the several Underwriters that: a. A registration statement on Form S-1 (File No. 333-__) (the "Initial Registration Statement") in respect of the Stock has been filed with the Securities and Exchange Commission (the "Commission"); the Initial Registration Statement and any post-effective amendment thereto, each in the form heretofore delivered to you, and, excluding exhibits thereto, to you for each of the other Underwriters, have been declared effective by the Commission in such form; other than a registration statement, if any, increasing the size of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Securities Act") and the rules and regulations (the "Rules and Regulations") of the Commission thereunder, which became effective upon filing, no other document with respect to the Initial Registration Statement has heretofore been filed with the Commission; and no stop 1 2 order suspending the effectiveness of the Initial Registration Statement, any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) of the Rules and Regulations, is hereinafter called a "Preliminary Prospectus"); the various parts of the Initial Registration Statement and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and including the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act and deemed by virtue of Rule 430A under the Securities Act to be part of the Initial Registration Statement at the time it was declared effective, each as amended at the time such part of the Initial Registration Statement became effective or such part of the Rule 462(b) Registration Statement, if any, became or hereafter becomes effective, are hereinafter collectively called the "Registration Statements"; and such final prospectus, in the form first filed pursuant to Rule 424(b) under the Securities Act, is hereinafter called the "Prospectus." No document has been or will be prepared or distributed in reliance on Rule 434 under the Securities Act. No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission. b. The Registration Statement conforms (and the Rule 462(b) Registration Statement, if any, the Prospectus and any amendments or supplements to either of the Registration Statements or the Prospectus, when they become effective or are filed with the Commission, as the case may be, will conform) in all material respects to the requirements of the Securities Act and the Rules and Regulations and do not and will not, as of the applicable effective date (as to the Registration Statements and any amendment thereto) and as of the applicable filing date (as to the Prospectus and any amendment or supplement thereto) contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the foregoing representations and warranties shall not apply to information contained in or omitted from the Registration Statements or the Prospectus or any such amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein. c. The Company and each of its subsidiaries (as defined in Section 15) have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation, are duly qualified to do business and are in good standing as foreign corporations in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, and have all power and authority necessary to own or hold their respective properties and to conduct the businesses in which they are engaged, except where the failure to so qualify or have such power or authority would not have, singularly or in the aggregate, a material adverse effect on the condition (financial or otherwise), results of operations, business or prospects of the Company and its subsidiaries taken as a whole (a "Material Adverse Effect"). The Company owns or controls, directly or indirectly, only the following corporations, associations or other entities: _______. 2 3 d. This Agreement has been duly authorized executed and delivered by the Company. e. The Stock to be issued and sold by the Company to the Underwriters hereunder has been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued, fully paid and nonassessable and free of any preemptive or similar rights and will conform to the description thereof contained in the Prospectus. f. The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description thereof contained in the Prospectus. g. All the outstanding shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued, are fully paid and nonassessable and, except to the extent set forth in the Prospectus, are owned by the Company directly or indirectly through one or more wholly-owned subsidiaries, free and clear of any claim, lien, encumbrance, security interest, restriction upon voting or transfer or any other claim of any third party. h. The execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such actions result in any violation of the provisions of the charter or by-laws of the Company or any of its subsidiaries or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties or assets. i. Except for the registration of the Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act and applicable state securities laws in connection with the purchase and distribution of the Stock by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby. j. Arthur Andersen LLP, who have expressed their opinions on the audited financial statements [and related schedules] included in the Registration Statements and the Prospectus are independent public accountants as required by the Securities Act and the Rules and Regulations. k. The financial statements, together with the related notes [and schedules], included in the Prospectus and in each Registration Statement fairly present the financial position and the results of operations and changes in financial position of the Company at the respective dates or 3 4 for the respective periods therein specified. Such statements and related notes [and schedules] have been prepared in accordance with generally accepted accounting principles applied on a consistent basis except as may be set forth in the Prospectus. l. Neither the Company nor any of its subsidiaries has sustained, since the date of the latest audited financial statements included in the Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since such date, there has not been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the business, general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries taken as a whole, otherwise than as set forth or contemplated in the Prospectus. m. Except as set forth in the Prospectus, there is no legal or governmental proceeding pending to which the Company or any of its subsidiaries is a party or of which any property or assets of the Company or any of its subsidiaries is the subject which, singularly or in the aggregate, if determined adversely to the Company or any of its subsidiaries, might have a Material Adverse Effect or would prevent or adversely affect the ability of the Company to perform its obligations under this Agreement; and to the best of the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others. n. Neither the Company nor any of its subsidiaries (i) is in violation of its charter or by-laws, (ii) is in default in any respect, and no event has occurred which, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its property or assets is subject or (iii) is in violation in any respect of any law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may be subject except any violations or defaults which, singularly or in the aggregate, would not have a Material Adverse Effect. o. The Company and each of its subsidiaries possess all licenses, certificates, authorizations and permits issued by, and have made all declarations and filings with, the appropriate state, federal or foreign regulatory agencies or bodies which are necessary or desirable for the ownership of their respective properties or the conduct of their respective businesses as described in the Prospectus except where any failures to possess or make the same, singularly or in the aggregate, would not have a Material Adverse Effect, and the Company has not received notification of any revocation or modification of any such license, authorization or permit and has no reason to believe that any such license, certificate, authorization or permit will not be renewed. 4 5 p. Neither the Company nor any of its subsidiaries is or, after giving effect to the offering of the Stock and the application of the proceeds thereof as described in the Prospectus will become an "investment company" within the meaning of the Investment Company Act of 1940, as amended and the rules and regulations of the Commission thereunder. q. Neither the Company nor any of its officers, directors or affiliates has taken or will take, directly or indirectly, any action designed or intended to stabilize or manipulate the price of any security of the Company, or which caused or resulted in, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any security of the Company. r. The Company and its subsidiaries own or possess the right to use all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by them for the conduct of their respective businesses, and the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company and its subsidiaries with respect to the foregoing. The Company's business as now conducted and as proposed to be conducted does not and will not infringe or conflict with any patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses or other intellectual property or franchise right of any person. Except as described in the Prospectus, no claim has been made against the Company alleging the infringement by the Company of any patent, trademark, service mark, trade name, copyright, trade secret, license in or other intellectual property right or franchise right of any person. s. The Company and each of its subsidiaries have good and marketable title in fee simple to, or have valid rights to lease or otherwise use, all items of real or personal property which are material to the business of the Company and its subsidiaries taken as a whole, in each case free and clear of all liens, encumbrances, claims and defects that may result in a Material Adverse Effect. t. No labor disturbance by the employees of the Company or any of its subsidiaries exists or, to the best of the Company's knowledge, is imminent which might be expected to have a Material Adverse Effect. The Company is not aware that any key employee or significant group of employees of the Company or any subsidiary plans to terminate employment with the Company or any such subsidiary. u. No "prohibited transaction" (as defined in Section 406 of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"), or Section 4975 of the Internal Revenue Code of 1986, as amended from time to time (the "Code")) or "accumulated funding deficiency" (as defined in Section 302 of ERISA) or any of the events set forth in Section 4043(b) of ERISA (other than events with respect to which the 30-day notice requirement under Section 4043 of ERISA has been waived) has occurred with respect to any employee benefit plan which could have a Material Adverse Effect; each employee benefit plan is in compliance in all material respects with applicable law, including ERISA and the Code; the Company has not incurred and does not 5 6 expect to incur liability under Title IV of ERISA with respect to the termination of, or withdrawal from, any "pension plan"; and each "pension plan" (as defined in ERISA) for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which could cause the loss of such qualification. v. There has been no storage, generation, transportation, handling, treatment, disposal, discharge, emission, or other release of any kind of toxic or other wastes or other hazardous substances by, due to, or caused by the Company or any of its subsidiaries (or, to the best of the Company's knowledge, any other entity for whose acts or omissions the Company or any of its subsidiaries is or may be liable) upon any of the property now or previously owned or leased by the Company or any of its subsidiaries, or upon any other property, in violation of any statute or any ordinance, rule, regulation, order, judgment, decree or permit or which would, under any statute or any ordinance, rule (including rule of common law), regulation, order, judgment, decree or permit, give rise to any liability, except for any violation or liability which would not have, singularly or in the aggregate with all such violations and liabilities, a Material Adverse Effect; there has been no disposal, discharge, emission or other release of any kind onto such property or into the environment surrounding such property of any toxic or other wastes or other hazardous substances with respect to which the Company or any of its subsidiaries have knowledge, except for any such disposal, discharge, emission, or other release of any kind which would not have, singularly or in the aggregate with all such discharges and other releases, a Material Adverse Effect. w. The Company and its subsidiaries each (i) have filed with all necessary federal, state and foreign income and franchise tax returns, (ii) have paid all federal sate, local and foreign taxes due and payable for which it is liable, and (iii) do not have any tax deficiency or claims outstanding or assessed or, to the best of the Company's knowledge, proposed against it which could reasonably be expected to have a Material Adverse Effect. x. The Company and each of its subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar businesses in similar industries. y. The Company and each of its subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. z. The minute books of the Company and each of its subsidiaries have been made available to the Underwriters and counsel for the Underwriters, and such books (i) contain a 6 7 complete summary of all meetings and actions of the directors and shareholders of the Company and each of its subsidiaries since the time of its respective incorporation through the date of the latest meeting and action, and (ii) accurately in all material respects reflect all transactions referred to in such minutes. aa. There is no franchise, lease, contract, agreement or document required by the Securities Act or by the Rules and Regulations to be described in the Prospectus or to be filed as an exhibit to the Registration Statements which is not described or filed therein as required; and all descriptions of any such franchises, leases, contracts, agreements or documents contained in the Registration Statements are accurate and complete descriptions of such documents in all material respects. bb. No relationship, direct or indirect, exists between or among the Company on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company on the other hand, which is required to be described in the Prospectus and which is not so described. cc. No person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statements or otherwise, except for persons and entities who have expressly waived such right or who have been given proper notice and have failed to exercise such right within the time or times required under the terms and conditions of such right. dd. Neither the Company nor any of its subsidiaries own any "margin securities" as that term is defined in Regulations G and U of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), and none of the proceeds of the sale of the Stock will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Securities to be considered a "purpose credit" within the meanings of Regulation G, T, U or X of the Federal Reserve Board. ee. Neither the Company nor any of its subsidiaries is a party to any contract, agreement or understanding with any person that would give rise to a valid claim against the Company or the Underwriters for a brokerage commission, finder's fee or like payment in connection with the offering and sale of the Stock. ff. No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in the Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith. gg. The Company has reviewed its operations and that of its subsidiaries and any third parties with which the Company or any of its subsidiaries has a material relationship to evaluate the extent to which the business or operations of the Company or any of its subsidiaries will be affected by the Year 2000 Problem. As a result of such review, the Company has no reason to believe, and does not believe, that the Year 2000 Problem will have a Material Adverse Effect. The "Year 2000 Problem" as used herein means any significant risk that computer hardware or 7 8 software used in the receipt, transmission, processing, manipulation, storage, retrieval, retransmission or other utilization of data or in the operation of mechanical or electrical systems of any kind will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively as in the case of dates or time periods occurring prior to January 1, 2000. hh. The Stock has been approved for listing subject to notice of issuance on the NASDAQ Stock Market's National Market. 3. PURCHASE SALE AND DELIVERY OF OFFERED SECURITIES. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees, to sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to purchase from the Company that number of shares of Firm Stock (rounded up or down, as determined by SG Cowen in its discretion, in order to avoid fractions) obtained by multiplying ___ shares of Firm Stock by a fraction the numerator of which is the number of shares of Firm Stock set forth opposite the name of such Underwriter in Schedule A hereto and the denominator of which is the total number of shares of Firm Stock. The purchase price per share to be paid by the Underwriters to the Company for the Stock will be $_____ per share (the "Purchase Price"). The Company will deliver the Firm Stock to the Representatives for the respective accounts of the several Underwriters (in the form of definitive certificates, issued in such names and in such denominations as the Representatives may direct by notice in writing to the Company given at or prior to 12:00 Noon, New York time, on the second full business day preceding the First Closing Date (as defined below) against payment of the aggregate Purchase Price therefor by wire transfer to an account at a bank acceptable to SG Cowen, payable to the order of the Company. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligations of each Underwriter hereunder. The time and date of the delivery and closing shall be at 10:00 A.M., New York time, on ________, 1999, in accordance with Rule 15c6-1 of the Exchange Act. The time and date of such payment and delivery are herein referred to as the "First Closing Date". The First Closing Date and the location of delivery of, and the form of payment for, the Firm Stock may be varied by agreement between the Company and SG Cowen. The Company shall make the certificates for the Stock available to the Representatives for examination on behalf of the Underwriters in New York, New York at least twenty-four hours prior to the First Closing Date. For the purpose of covering any over-allotments in connection with the distribution and sale of the Firm Stock as contemplated by the Prospectus, the Underwriters may purchase all or less than all of the Optional Stock. The price per share to be paid for the Optional Stock shall be the Purchase Price. The Company agrees to sell to the Underwriters the number of shares of Optional Stock specified in the written notice by SG Cowen described below and the Underwriters agree, severally and not jointly, to purchase such shares of Optional Stock. Such 8 9 shares of Optional Stock shall be purchased for the account of each Underwriter in the same proportion as the number of shares of Firm Stock set forth opposite such Underwriter's name bears to the total number of shares of Firm Stock (subject to adjustment by SG Cowen to eliminate fractions). The option granted hereby may be exercised as to all or any part of the Optional Stock at any time, and from time to time, not more than thirty (30) days subsequent to the date of this Agreement. No Optional Stock shall be sold and delivered unless the Firm Stock previously has been, or simultaneously is, sold and delivered. The right to purchase the Optional Stock or any portion thereof may be surrendered and terminated at any time upon notice by SG Cowen to the Company. The option granted hereby may be exercised by written notice being given to the Company by SG Cowen setting forth the number of shares of the Optional Stock to be purchased by the Underwriters and the date and time for delivery of and payment for the Optional Stock. Each date and time for delivery of and payment for the Optional Stock (which may be the First Closing Date, but not earlier) is herein called the "Option Closing Date" and shall in no event be earlier than two (2) business days nor later than five (5) business days after written notice is given. (The Option Closing Date and the First Closing Date are herein called the "Closing Dates".) The Company will deliver the Optional Stock to the Underwriters (in the form of definitive certificates, issued in such names and in such denominations as the Representatives may direct by notice in writing to the Company given at or prior to 12:00 Noon, New York time, on the second full business day preceding the Option Closing Date against payment of the aggregate Purchase Price therefor in federal (same day) funds by certified or official bank check or checks or wire transfer to an account at a bank acceptable to SG Cowen payable to the order of the Company. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligations of each Underwriter hereunder. The Company shall make the certificates for the Optional Stock available to the Representatives for examination on behalf of the Underwriters in New York, New York not later than 10:00 A.M., New York Time, on the business day preceding the Option Closing Date. The Option Closing Date and the location of delivery of, and the form of payment for, the Optional Stock may be varied by agreement between the Company and SG Cowen. The several Underwriters propose to offer the Stock for sale upon the terms and conditions set forth in the Prospectus. 4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the several Underwriters that: a. The Company will prepare the Rule 462(b) Registration Statement, if necessary, in a form approved by the Representatives and file such Rule 462(b) Registration Statement with the Commission on the date hereof; prepare the Prospectus in a form approved by the Representatives and file such Prospectus pursuant to Rule 424(b) under the Securities Act not later than the second business day following the execution and delivery of this Agreement; make no further amendment or any supplement to the Registration Statements or to the Prospectus to 9 10 which the Representatives shall reasonably object by notice to the Company after a reasonable period to review; advise the Representatives, promptly after it receives notice thereof, of the time when any amendment to either Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Representatives with copies thereof; advise the Representatives, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, of the suspension of the qualification of the Stock for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statements or the Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or suspending any such qualification, use promptly its best efforts to obtain its withdrawal. b. If at any time prior to the expiration of nine months after the effective date of the Initial Registration Statement when a prospectus relating to the Stock is required to be delivered any event occurs as a result of which the Prospectus as then amended or supplemented would include any untrue statement of a material fact, or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Securities Act, the Company will promptly notify the Representatives thereof and upon their request will prepare an amended or supplemented Prospectus which will correct such statement or omission or effect such compliance. The Company will furnish without charge to each Underwriter and to any dealer in securities as many copies as the Representatives may from time to time reasonably request of such amended or supplemented Prospectus; and in case any Underwriter is required to deliver a prospectus relating to the Stock nine months or more after the effective date of the Initial Registration Statement, the Company upon the request of the Representatives and at the expense of such Underwriter will prepare promptly an amended or supplemented Prospectus as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Securities Act. c. To furnish promptly to each of the Representatives and to counsel for the Underwriters a signed copy of each of the Registration Statements as originally filed with the Commission, and each amendment thereto filed with the Commission, including all consents and exhibits filed therewith. d. To deliver promptly to the Representatives in New York City such number of the following documents as the Representatives shall reasonably request: (i) conformed copies of the Registration Statements as originally filed with the Commission and each amendment thereto (in each case excluding exhibits), (ii) each Preliminary Prospectus, (iii) the Prospectus (not later than 10:00 A.M., New York time, of the business day following the execution and delivery of this Agreement) and any amended or supplemented Prospectus (not later than 10:00 A.M., New York City time, on the business day following the date of such amendment or supplement). 10 11 e. To make generally available to its shareholders as soon as practicable, but in any event not later than eighteen months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Securities Act), an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Securities Act and the Rules and Regulations (including, at the option of the Company, Rule 158). f. The Company will promptly take from time to time such actions as the Representatives may reasonably request to qualify the Stock for offering and sale under the securities or Blue Sky laws of such jurisdictions as the Representatives may designate and to continue such qualifications in effect for so long as required for the distribution of the Stock; provided that the Company and its subsidiaries shall not be obligated to qualify as foreign corporations in any jurisdiction in which they are not so qualified or to file a general consent to service of process in any jurisdiction; g. During the period of five years from the date hereof, the Company will deliver to the Representatives and, upon request, to each of the other Underwriters, (i) as soon as they are available, copies of all reports or other communications furnished to shareholders and (i) as soon as they are available, copies of any reports and financial statements furnished or filed with the Commission pursuant to the Exchange Act or any national securities exchange or automatic quotation system on which the Stock is listed or quoted. h. The Company will not directly or indirectly offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of any shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock for a period of 180 days from the date of the Prospectus without the prior written consent of SG Cowen other than the Company's sale of the Stock hereunder and the issuance of shares pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans existing on the date hereof or pursuant to currently outstanding options, warrants or rights. The Company will cause each officer, director and shareholder listed in Schedule B to furnish to the Representatives, prior to the First Closing Date, a letter, substantially in the form of Exhibit I hereto, pursuant to which each such person shall agree not to directly or indirectly offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of any shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock for a period of 180 days from the date of the Prospectus, without the prior written consent of SG Cowen. i. The Company will supply the Representatives with copies of all correspondence to and from, and all documents issued to and by, the Commission in connection with the registration of the Stock under the Securities Act. j. Prior to each of the Closing Dates, the Company will furnish to the Representatives, as soon as they have been prepared, copies of any unaudited interim consolidated financial statements of the Company for any periods subsequent to the periods covered by the financial statements appearing in the Registration Statement and the Prospectus. k. Prior to each of the Closing Dates, the Company will not issue any press release or other communication directly or indirectly or hold any press conference with respect to the 11 12 Company, its condition, financial or otherwise, or earnings, business affairs or business prospects (except for routine oral marketing communications in the ordinary course of business and consistent with the past practices of the Company and of which the Representatives are notified), without the prior written consent of the Representatives, unless in the judgment of the Company and its counsel, and after notification to the Representatives, such press release or communication is required by law. l. In connection with the offering of the Stock, until SG Cowen shall have notified the Company of the completion of the resale of the Stock, the Company will not, and will cause its affiliated purchasers (as defined in Regulation M under the Exchange Act) not to, either alone or with one or more other persons, bid for or purchase, for any account in which it or any of its affiliated purchasers has a beneficial interest, any Stock, or attempt to induce any person to purchase any Stock; and not to, and to cause its affiliated purchasers not to, make bids or purchase for the purpose of creating actual, or apparent, active trading in or of raising the price of the Stock. m. The Company will not take any action prior to the Option Closing Date which would require the Prospectus to be amended or supplemented pursuant to Section 4(b); n. The Company will apply the net proceeds from the sale of the Stock as set forth in the Prospectus under the heading "Use of Proceeds". 5. PAYMENT OF EXPENSES. The Company agrees with the Underwriter to pay (a) the costs incident to the authorization, issuance, sale, preparation and delivery of the Stock and any taxes payable in that connection; (b) the costs incident to the Registration of the Stock under the Securities Act; (c) the costs incident to the preparation, printing and distribution of the Registration Statement, Preliminary Prospectus, Prospectus any amendments and exhibits thereto, the costs of printing, reproducing and distributing the "Agreement Among Underwriters" between the Representatives and the Underwriters, the Master Selected Dealers' Agreement, the Underwriters' Questionnaire and this Agreement by mail, telex or other means of communications; (d) the fees and expenses (including related fees and expenses of counsel for the Underwriters) incurred in connection with filings made with the National Association of Securities Dealers; (e) any applicable listing or other fees; (f) the fees and expenses of qualifying the Stock under the securities laws of the several jurisdictions as provided in Section 4(f) and of preparing, printing and distributing Blue Sky Memoranda and Legal Investment Surveys (including related fees and expenses of counsel to the Underwriters); (g) all fees and expenses of the registrar and transfer agent of the Stock; and (h) all other costs and expenses incident to the performance of the obligations of the Company under this Agreement (including, without limitation, the fees and expenses of the Company's counsel and the Company's independent accountants); provided that, except as otherwise provided in this Section 5 and in Section 9, the Underwriters shall pay their own costs and expenses, including the fees and expenses of their counsel, any transfer taxes on the Stock which they may sell and the expenses of advertising any offering of the Stock made by the Underwriters. 12 13 6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The respective obligations of the several Underwriters hereunder are subject to the accuracy, when made and on each of the Closing Dates, of the representations and warranties of the Company contained herein, to the accuracy of the statements of the Company made in any certificates pursuant to the provisions hereof, to the performance by the Company of their obligations hereunder, and to each of the following additional terms and conditions: a. No stop order suspending the effectiveness of either the Registration Statements shall have been issued and no proceedings for that purpose shall have been initiated or threatened by the Commission, and any request for additional information on the part of the Commission (to be included in the Registration Statements or the Prospectus or otherwise) shall have been complied with to the reasonable satisfaction of the Representatives. The Rule 462(b) Registration Statement, if any, and the Prospectus shall have been timely filed with the Commission in accordance with Section 4(a). b. None of the Underwriters shall have discovered and disclosed to the Company on or prior to the Closing Date that the Registration Statement or the Prospectus or any amendment or supplement thereto contains an untrue statement of a fact which, in the opinion of counsel for the Underwriters, is material or omits to state any fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein not misleading. c. All corporate proceedings and other legal matters incident to the authorization, form and validity of each of this Agreement, the Stock, the Registration Statement and the Prospectus and all other legal matters relating to this Agreement and the transactions contemplated hereby shall be reasonably satisfactory in all material respects to counsel for the Underwriters, and the Company shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters. d. Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP shall have furnished to the Representatives such counsel's written opinion, as counsel to the Company, addressed to the Underwriters and dated the Closing Date, in form and substance reasonably satisfactory to the Representatives, to the effect that: (i) The Company and each of its subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation, are duly qualified to do business and are in good standing as foreign corporations in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, and have all power and authority necessary to own or hold their respective properties and to conduct the businesses in which they are engaged, except where the failure to so qualify or have such power or authority would not have, singularly or in the aggregate, a Material Adverse Effect. (ii) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company, including the Stock 13 14 being delivered on the Closing Date, have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description thereof contained in the Prospectus. (iii) All the outstanding shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued, are fully paid and nonassessable and, except to the extent set forth in the Prospectus, are owned by the Company directly or indirectly through one or more wholly-owned subsidiaries, free and clear of any claim, lien, encumbrance, security interest, restriction upon voting or transfer or any other claim of any third party. (iv) There are no preemptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any shares of the Stock pursuant to the Company's charter or by-laws or any agreement or other instrument known to such counsel. (v) This Agreement has been duly authorized, executed and delivered by the Company. (vi) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel after reasonable investigation to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the properties or assets of the Company or any of its subsidiaries is subject, nor will such actions result in any violation of the Charter or by-laws of the Company or of any of its subsidiaries or any statute or any order, rule or regulation of any court or governmental agency or body or court having jurisdiction over the Company or any of its subsidiaries or any of their properties or assets. (vii) Except for the registration of the Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act and applicable state securities laws in connection with the purchase and distribution of the Stock by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby. (viii) The description in the Registration Statement and Prospectus of statutes, legal or governmental proceedings and contracts and other documents are accurate in all material respects; and to the best of such counsel's knowledge, there are no statutes, legal or governmental proceedings, contracts or other documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement which are not described or filed as required. (ix) To the best of such counsel's knowledge, neither the Company nor any of its subsidiaries (i) is in violation of its charter or by-laws, (ii) is in default, and no event has occurred, which, with notice or lapse of time or both, would constitute a default, in the due performance or observance of any term, covenant or condition contained in any agreement or 14 15 instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject or (iii) is in violation of any law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may be subject or has failed to obtain any license, permit, certificate, franchise or other governmental authorization or permit necessary to the ownership of its property or to the conduct of its business except, in the case of clauses (ii) and (iii), for those defaults, violations or failures which, either individually or in the aggregate, would not have a Material Adverse Effect. (x) To the best of such counsel's knowledge and other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property or asset of the Company or any of its subsidiaries is the subject which, singularly or in the aggregate, if determined adversely to the Company or any of its subsidiaries, might have a Material Adverse Effect or would prevent or adversely affect the ability of the Company to perform its obligations under this Agreement; and, to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others. (xi) The Registration Statement was declared effective under the Securities Act as of the date and time specified in such opinion, the Rule 462(b) Registration Statement, if any, was filed with the Commission on the date specified therein, the Prospectus was filed with the Commission pursuant to the subparagraph of Rule 424(b) of the Rules and Regulations specified in such opinion on the date specified therein and no stop order suspending the effectiveness of the Registration Statement has been issued and, to the knowledge of such counsel, no proceeding for that purpose is pending or threatened by the Commission. (xii) The Registration Statements, as of the respective effective dates and the Prospectus, as of its date, and any further amendments or supplements thereto, as of their respective dates, made by the Company prior to the Closing Date (other than the financial statements and other financial data contained therein, as to which such counsel need express no opinion) complied as to form in all material respects with the requirements of the Securities Act and the Rules and Regulations (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) when they were filed with the Commission complied as to form in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission thereunder. (xiii) To the best of such counsel's no person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statements or otherwise, except for persons and entities who have expressly waived such right or who have been given proper notice and have failed to exercise such right within the time or times required under the terms and conditions of such right. (xiv) Neither the Company nor any of its subsidiaries is an "investment company" within the meaning of the Investment Company Act and the rules and regulations of the Commission thereunder. 15 16 Such counsel shall also have furnished to the Representatives a written statement, addressed to the Underwriters and dated the Closing Date, in form and substance satisfactory to the Representatives, to the effect that (x) such counsel has acted as counsel to the Company in connection with the preparation of the Registration Statements (y) based on such counsel's examination of the Registration Statements and such counsel's investigations made in connection with the preparation of the Registration Statements and "conferences with certain officers and employees of and with auditors for and counsel to the Company," such counsel has no reason to believe that the Registration Statements, as of the respective effective dates, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading, or that the Prospectus contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading when they were filed with the Commission; it being understood that such counsel need express no opinion as to the financial statements or other financial data contained in the Registration Statement or the Prospectus. The foregoing opinion and statement may be qualified by a statement to the effect that such counsel has not independently verified the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus and takes no responsibility therefor except to the extent set forth in the opinion described in clause (viii) above. e. Patent Counsel to the Company shall have furnished to the Representatives such counsel's written opinion, as counsel to the Company, addressed to the Underwriters and dated the Closing Date, in the form substantially similar to that attached as Exhibit A. f. The Representatives shall have received from Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, such opinion or opinions, dated the Closing Date, with respect to such matters as the Underwriters may reasonably require, and the Company shall have furnished to such counsel such documents as they request for enabling them to pass upon such matters. g. At the time of the execution of this Agreement, the Representatives shall have received from Arthur Andersen LLP a letter, addressed to the Underwriters and dated such date, in form and substance satisfactory to the Representatives (i) confirming that they are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of the Securities Act and the Rules and Regulations and (ii) stating the conclusions and findings of such firm with respect to the financial statements and certain financial information contained or incorporated by reference in the Prospectus. h. On the Closing Date, the Representatives shall have received a letter (the "bring-down letter") from Arthur Andersen LLP addressed to the Underwriters and dated the Closing Date confirming, as of the date of the bring-down letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus as of a date not more than three business days prior to the date of the bring-down letter), the conclusions and findings of such firm with respect to the financial 16 17 information and other matters covered by its letter delivered to the Representatives concurrently with the execution of this Agreement pursuant to Section 6(g). i. The Company shall have furnished to the Representatives a certificate, dated the Closing Date, of its Chairman of the Board, its President or a Vice President and its chief financial officer stating that (i) such officers have carefully examined the Registration Statements and the Prospectus and, in their opinion, the Registration Statements as of their respective effective dates and the Prospectus, as of each such effective date, did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) since the effective date of the Initial Registration Statement no event has occurred which should have been set forth in a supplement or amendment to the Registration Statements or the Prospectus, (iii) to the best of their knowledge after reasonable investigation, as of the Closing Date, the representations and warranties of the Company in this Agreement are true and correct and the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date, and (iv) subsequent to the date of the most recent financial statements in the Prospectus, there has been no material adverse change in the financial position or results of operation of the Company and its subsidiaries, or any change, or any development including a prospective change, in or affecting the condition (financial or otherwise), results of operations, business or prospects of the Company and its subsidiaries taken as a whole, except as set forth in the Prospectus. j. Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus (ii) since such date there shall not have been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the business, general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in clause (i) or (ii), is, in the judgment of the Representatives, so material and adverse as to make it impracticable or inadvisable to proceed with the sale or delivery of the Stock on the terms and in the manner contemplated in the Prospectus. k. No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any governmental agency or body which would, as of the Closing Date, prevent the issuance or sale of the Stock; and no injunction, restraining order or order of any other nature by any federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance or sale of the Stock. l. Subsequent to the execution and delivery of this Agreement (i) no downgrading shall have occurred in the rating accorded the Company's debt securities by any "nationally recognized statistical rating organization," as that term is defined by the Commission for 17 18 purposes of Rule 436(g)(2) of the Rules and Regulations and (ii) no such organization shall have publicly announced that it has under surveillance or review (other than an announcement with positive implications of a possible upgrading), its rating of any of the Company's debt securities. m. Subsequent to the execution and delivery of this Agreement there shall not have occurred any of the following: (i) trading in securities generally on the New York Stock Exchange or the American Stock Exchange or in the over-the-counter market, or trading in any securities of the Company on any exchange or in the over-the-counter market, shall have been suspended or minimum prices shall have been established on any such exchange or such market by the Commission, by such exchange or by any other regulatory body or governmental authority having jurisdiction, (ii) a banking moratorium shall have been declared by Federal or state authorities, (iii) the United States shall have become engaged in hostilities, there shall have been an escalation in hostilities involving the United States or there shall have been a declaration of a national emergency or war by the United States or (iv) there shall have occurred such a material adverse change in general economic, political or financial conditions (or the effect of international conditions on the financial markets in the United States shall be such) as to make it, in the judgment of the Representatives, impracticable or inadvisable to proceed with the sale or delivery of the Stock on the terms and in the manner contemplated in the Prospectus. n. The Nasdaq National Market System shall have approved the Stock for listing, subject only to official notice of issuance and evidence of satisfactory distribution. o. SG Cowen shall have received the written agreements, substantially in the form of Exhibit B hereto, of the officers, directors and shareholders of the Company listed in Schedule B to this Agreement. p. All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Underwriters. 7. INDEMNIFICATION AND CONTRIBUTION. a. The Company shall indemnify and hold harmless each Underwriter, its officers, employees, representatives and agents and each person, if any, who controls any Underwriter within the meaning of the Securities Act (collectively the "Underwriter Indemnified Parties" and each an "Underwriter Indemnified Party") against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which that Underwriter Indemnified Party may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of or is based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Prospectus, either of the Registration Statements or the Prospectus or in any amendment or supplement thereto; (ii) the omission or alleged omission to state in any Preliminary Prospectus, either of the Registration Statements or the Prospectus or in any amendment or supplement thereto a material fact required to be stated therein or necessary to make the statements therein not misleading; or (iii) any act or failure to act, or any alleged act or failure to act, by any Underwriter in connection with, or relating in any 18 19 manner to, the Stock or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon matters covered by clause (i) or (ii) above, (provided that the Company shall not be liable in the case of any matter covered by this clause (iii) to the extent that it is determined in a final judgement by a court of competent jurisdiction that such loss, claim, damage, liability or action resulted directly from any such act or failure to act undertaken or omitted to be taken by such Underwriter through its gross negligence or wilful misconduct) and shall reimburse each Underwriter Indemnified Party promptly upon demand for any legal or other expenses reasonably incurred by that Underwriter Indemnified Party in connection with investigating or preparing to defend or defending against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon (i) an untrue statement or alleged untrue statement in or omission or alleged omission from the Preliminary Prospectus, either of the Registration Statements or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for use therein, which information the parties hereto agree is limited to the Underwriter's Information (as defined in Section 17). This indemnity agreement is not exclusive and will be in addition to any liability which the Company might otherwise have and shall not limit any rights or remedies which may otherwise be available at law or in equity to each Underwriter Indemnified Party. b. Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, its officers, employees, representatives and agents, each of its directors and each person, if any, who controls the Company within the meaning of the Securities Act (collectively the "Company Indemnified Parties" and each a "Company Indemnified Party") against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which the Company Indemnified Parties may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of or is based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Prospectus, either of the Registration Statements or the Prospectus or in any amendment or supplement thereto or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of that Underwriter specifically for use therein, and shall reimburse the Company Indemnified Parties for any legal or other expenses reasonably incurred by such parties in connection with investigating or preparing to defend or defending against or appearing as third party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred; provided that the parties hereto hereby agree that such written information provided by the Underwriters consists solely of the Underwriter's Information. This indemnity agreement is not exclusive and will be in addition to any liability which the Underwriters might otherwise have and shall not limit any rights or remedies which may otherwise be available at law or in equity to the Company Indemnified Parties. 19 20 c. Promptly after receipt by an indemnified party under this Section 7 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 7, notify the indemnifying party in writing of the claim or the commencement of that action; provided, however, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 7 except to the extent it has been materially prejudiced by such failure; and, provided, further, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 7. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 7 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that any indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment thereof has been specifically authorized by the indemnifying party in writing, (ii) such indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party and in the reasonable judgment of such counsel it is advisable for such indemnified party to employ separate counsel or (iii) the indemnifying party has failed to assume the defense of such action and employ counsel reasonably satisfactory to the indemnified party, in which case, if such indemnified party notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party, it being understood, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for all such indemnified parties, which firm shall be designated in writing by SG Cowen, if the indemnified parties under this Section 7 consist of any Underwriter Indemnified Party, or by the Company if the indemnified parties under this Section 7 consist of any Company Indemnified Parties. Each indemnified party, as a condition of the indemnity agreements contained in Sections 7(a) and 7(b), shall use all reasonable efforts to cooperate with the indemnifying party in the defense of any such action or claim. Subject to the provisions of Section 7(d) below, no indemnifying party shall be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with its written consent or if there be a final judgment for the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. 20 21 d. If at any time an indemnified party shall have requested that an indemnifying party reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by this Section 7 effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the request for reimbursement, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. e. If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under Section 7(a) or 7(b), then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Stock or if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other with respect to such offering shall be deemed to be in the same proportion as the total net proceeds from the offering of the Stock purchased under this Agreement (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters with respect to the Stock purchased under this Agreement, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement or omission; provided that the parties hereto agree that the written information furnished to the Company through the Representatives by or on behalf of the Underwriters for use in any Preliminary Prospectus, either of the Registration Statements or the Prospectus consists solely of the Underwriter's Information. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 7(e) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 7(e) shall be deemed to include, for purposes of this Section 7(e), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7(e), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Stock underwritten by it and distributed to the public were offered to the public less the amount of any damages which such Underwriter has otherwise paid 21 22 or become liable to pay by reason of any untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. f. The Underwriters' obligations to contribute as provided in this Section 7(f) are several in proportion to their respective underwriting obligations and not joint. 8. TERMINATION. The obligations of the Underwriters hereunder may be terminated by SG Cowen, in its absolute discretion by notice given to and received by the Company prior to delivery of and payment for the Firm Stock if, prior to that time, any of the events described in Sections 6(j), 6(l) or 6(m) have occurred or if the Underwriters shall decline to purchase the Stock for any reason permitted under this Agreement. 9. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If (a) this Agreement shall have been terminated pursuant to Section 8 or 10, (b) the Company shall fail to tender the Stock for delivery to the Underwriters for any reason permitted under this Agreement, or (c) the Underwriters shall decline to purchase the Stock for any reason permitted under this Agreement, the Company shall reimburse the Underwriters for the fees and expenses of their counsel and for such other out-of-pocket expenses as shall have been reasonably incurred by them in connection with this Agreement and the proposed purchase of the Stock, and upon demand the Company shall pay the full amount thereof to the SG Cowen. If this Agreement is terminated pursuant to Section 10 by reason of the default of one or more Underwriters, the Company shall not be obligated to reimburse any defaulting Underwriter on account of those expenses. 10. SUBSTITUTION OF UNDERWRITERS. a. If any Underwriter or Underwriters shall default in its or their obligations to purchase shares of Stock hereunder and the aggregate number of shares which such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed ten percent (10%) of the total number of shares underwritten, the other Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the shares which such defaulting Underwriter or Underwriters agreed but failed to purchase. If any Underwriter or Underwriters shall so default and the aggregate number of shares with respect to which such default or defaults occur is more than ten percent (10%) of the total number of shares underwritten and arrangements satisfactory to the Representatives and the Company for the purchase of such shares by other persons are not made within forty-eight (48) hours after such default, this Agreement shall terminate. b. If the remaining Underwriters or substituted Underwriters are required hereby or agree to take up all or part of the shares of Stock of a defaulting Underwriter or Underwriters as provided in this Section 10, (i) the Company shall have the right to postpone the Closing Dates for a period of not more than five (5) full business days in order that the Company may effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement or supplements to the Prospectus which may 22 23 thereby be made necessary, and (ii) the respective numbers of shares to be purchased by the remaining Underwriters or substituted Underwriters shall be taken as the basis of their underwriting obligation for all purposes of this Agreement. Nothing herein contained shall relieve any defaulting Underwriter of its liability to the Company or the other Underwriters for damages occasioned by its default hereunder. Any termination of this Agreement pursuant to this Section 10 shall be without liability on the part of any non-defaulting Underwriter or the Company, except expenses to be paid or reimbursed pursuant to Sections 5 and 9 and except the provisions of Section 7 shall not terminate and shall remain in effect. 11. SUCCESSORS; PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to the benefit of and be binding upon the several Underwriters, the Company and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person other than the persons mentioned in the preceding sentence any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person; except that the representations, warranties, covenants, agreements and indemnities of the Company contained in this Agreement shall also be for the benefit of the Underwriter Indemnified Parties, and the indemnities of the several Underwriters shall also be for the benefit of the Company Indemnified Parties. 12. SURVIVAL OF INDEMNITIES, REPRESENTATIONS, WARRANTIES, ETC. The respective indemnities, covenants, agreements, representations, warranties and other statements of the Company and the several Underwriters, as set forth in this Agreement or made by them respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter, the Company or any person controlling any of them and shall survive delivery of ad payment for the Stock. 13. NOTICES. All statements, requests, notices and agreements hereunder shall be in writing, and: a. if to the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission to SG Securities Corporation, Attention: _______________ (Fax: (212) ____________; b. if to the Company shall be delivered or sent by mail, telex or facsimile transmission to Cybergold, Inc., Attention: _________ (Fax: (510) 845-5257); 14. DEFINITION OF CERTAIN TERMS. For purposes of this Agreement, (a) "business day" means any day on which the New York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules and Regulations. 15. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 16. UNDERWRITERS' INFORMATION. The parties hereto acknowledge and agree that, for all purposes of this Agreement, the Underwriters' Information consists solely of the following 23 24 information in the Prospectus: the statements concerning the Underwriters contained in the first three paragraphs, the table and the seventh and eighth paragraphs under the heading "Underwriting." 17. AUTHORITY OF THE REPRESENTATIVES. In connection with this Agreement, you will act for and on behalf of the several Underwriters, and any action taken under this Agreement by the Representatives will be binding on all the Underwriters. 18. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. 19. GENERAL. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. In this Agreement, the masculine, feminine and neuter genders and the singular and the plural include one another. The section headings in this Agreement are for the convenience of the parties only and will not affect the construction or interpretation of this Agreement. This Agreement may be amended or modified, and the observance of any term of this Agreement may be waived, only by a writing signed by the Company and the Representatives. 20. COUNTERPARTS. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 24 25 If the foregoing is in accordance with your understanding of the agreement between the Company and the several Underwriters, kindly indicate your acceptance in the space provided for that purpose below. Very truly yours, CYBERGOLD, INC. By: ------------------------------------- Name: Title: Accepted as of the date first above written: SG COWEN SECURITIES CORPORATION CIBC WORLD MARKETS VOLPE BROWN WHELAN & COMPANY Acting on their own behalf and as Representatives of several Underwriters referred to in the foregoing Agreement. By: SG COWEN SECURITIES CORPORATION By: -------------------------------- Name: Title: 25 26 SCHEDULE A
Number of Number of Firm Shares Optional to be Shares to Name Purchased be Purchased ---- --------- ------------ SG Cowen Securities Corporation __________ __________ CIBC World Markets __________ __________ Volpe Brown Whelan & Company __________ __________ Total __________ __________ ========== ==========
26 27 SCHEDULE B [LIST OF SHAREHOLDERS SUBJECT TO SECTION 4(H)] 27 28 EXHIBIT A PATENT OPINION 28 29 EXHIBIT B LOCK-UP AGREEMENT 5/6/99 SG Cowen Securities Corporation Volpe Brown Whelan & Company CIBC World Markets As representatives of the several Underwriters c/o SG Cowen Securities Corporation Financial Square New York, New York 10005 Re: Cybergold, Inc. Initial Public Offering Dear Sirs: The undersigned is a shareholder of Cybergold, Inc., a California corporation. Cybergold, Inc. plans to reincorporate in Delaware as Cybergold, Inc. (the "Company") prior to its initial public offering (the "Offering"). In order to induce SG Cowen Securities Corporation ("SG Cowen"), Volpe Brown Whelan & Company and CIBC World Markets (together with SG Cowen, the "Representatives"), to enter in to a certain underwriting agreement with Company, with respect to the public offering of shares of the Company's Common Stock, par value $0.001 per share ("Common Stock"), the undersigned hereby agrees that for a period of 180 days following the date of the final prospectus filed by the Company with the Securities and Exchange Commission in connection with such public offering, the undersigned will not, without the prior written consent of SG Cowen, directly or indirectly, offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of any shares of Common Stock (including, without limitation, Common Stock which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations promulgated under the Securities Act of 1933, as the same may be amended or supplemented from time to time (such shares, the "Beneficially Owned Shares")) or securities convertible into or exercisable or exchangeable in Common Stock.; provided, however, that such restriction shall not apply to any securities purchased after the Offering. In addition, the undersigned hereby waives, from the date hereof until the expiration of the 180 day period following the date of the Company's final Prospectus, any and all right, if any, to request or demand registration pursuant to the Securities Act of any shares of Common Stock that are registered in the name of the undersigned or that are Beneficially Owned Shares; 29 30 provided, however, that this waiver shall not apply to any right the undersigned may have to be included in any Company-initiated registration of its securities. Anything contained herein to the contrary notwithstanding, any person to whom shares of Common Stock or Beneficially Owned Shares are transferred from the undersigned shall be bound by the terms of this Agreement. The undersigned hereby consent to the placing of legends and/or stop transfer orders with the transfer agent of the Common Stock with respect to any shares of Common Stock or Beneficially owned Shares. [SIGNATORY] By: ------------------------------------- Name: Title: 30 EX-3.1 3 CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF CYBERGOLD, INC. ARTICLE I The name of this corporation is Cybergold, Inc. ARTICLE II A. The address of the registered office of this corporation in the State of Delaware is 15 E. North Street, in the City of Dover, County of Kent. The name of its registered agent at such address is Incorporating Services, Ltd. B. The name and mailing address of the incorporator of this corporation is: Frank Grant Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 155 Constitution Dr., Menlo Park, California 94025 ARTICLE III The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV A. Classes of Stock. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is forty-two million seven hundred thousand (42,700,000) shares. Twenty-five million five hundred twenty thousand (25,520,000) shares shall be Common Stock, par value $0.001 per share. Seventeen million one hundred eighty thousand (17,180,000) shares shall be Preferred Stock, par value $0.001 per share, of which three million one hundred eighty-five thousand (3,185,000) shares shall be designated Series A Preferred Stock, two million one hundred forty-four thousand nine hundred seventy-one (2,144,971) shares shall be designated Series B Preferred Stock, eight million twenty-nine (8,000,029) shares shall be designated Series C Preferred Stock and three million eight hundred fifty thousand (3,850,000) shares shall be designated Series D Preferred Stock. B. Rights, Preferences and Restrictions of Preferred Stock. The Preferred Stock authorized by this Certificate of Incorporation may be issued from time to time in one or more series. The rights, preferences, privileges and restrictions granted to and imposed on the 1 2 Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock, are as follows: 1. Dividend Provisions. The holders of shares of Series A, Series B, Series C and Series D Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this corporation) on the Common Stock of this corporation, at the rate of (i) in the case of the Series A Preferred Stock, $.05 per share per annum, (ii) in the case of the Series B Preferred Stock, $.10 per share per annum, (iii) in the case of the Series C Preferred Stock, $.0455 per share per annum, and (iv) in the case of the Series D Preferred Stock, $.13 per share per annum, or, if greater (as determined on a per annum basis and on an as converted basis for the Series A, Series B, Series C and Series D Preferred Stock), an amount equal to that paid on any other outstanding shares of this corporation, payable when, as and if declared by the Board of Directors. Such dividends shall not be cumulative. 2. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of this corporation, either voluntary or involuntary, the holders of Series C Preferred Stock and Series D Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of the Series A Preferred Stock, the holders of the Series B Preferred Stock or the holders of the Common Stock by reason of their ownership thereof, (i) in the case of the Series C Preferred Stock, an amount per share equal to the sum of (A) $0.91 for each outstanding share of Series C Preferred Stock (the "Original Series C Issue Price") and (B) an amount equal to declared but unpaid dividends on such share (subject to adjustment of such fixed dollar amounts for any stock splits, stock dividends, combinations, recapitalizations or the like), and (ii) in the case of the Series D Preferred Stock, an amount per share equal to the sum of (A) $2.60 for each outstanding share of Series D Preferred Stock (the "Original Series D Issue Price") and (B) an amount equal to declared but unpaid dividends on such share (subject to adjustment of such fixed dollar amounts for any stock splits, stock dividends, combinations, recapitalizations or the like). If upon the occurrence of such event, the remaining assets and funds thus distributed among the holders of the Series C Preferred Stock and Series D Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire assets and funds of the corporation legally available for distribution shall be distributed ratably among the holders of the Series C Preferred Stock and Series D Preferred Stock in proportion to full preferential amount each such holder is otherwise entitled to receive under this subsection (a). (b) Upon completion of the distribution required by subsection (a) of this Section 2, if assets remain in this corporation, the holders of Series A Preferred Stock and Series B Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of the Common Stock by reason of their ownership thereof, (i) in the case of the Series A Preferred Stock, an amount per 2 3 share equal to the sum of (A) $1.00 for each outstanding share of Series A Preferred Stock (the "Original Series A Issue Price") and (B) an amount equal to declared but unpaid dividends on such share (subject to adjustment of such fixed dollar amounts for any stock splits, stock dividends, combinations, recapitalizations or the like), and (ii) in the case of the Series B Preferred Stock, an amount per share equal to the sum of (A) $2.00 for each outstanding share of Series B Preferred Stock (the "Original Series B Issue Price") and (B) an amount equal to declared but unpaid dividends on such share (subject to adjustment of such fixed dollar amounts for any stock splits, stock dividends, combinations, recapitalizations or the like). If upon the occurrence of such event, the remaining assets and funds thus distributed among the holders of the Series A Preferred Stock and Series B Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire assets and funds of the corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock and Series B Preferred Stock in proportion to full preferential amount each such holder is otherwise entitled to receive under this subsection (b). (c) Upon completion of the distributions required by subsections (a) and (b) of this Section 2, all of the remaining assets of the corporation available for distribution to stockholders shall be distributed among the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Common Stock pro rata based on the number of shares of Common Stock held by each (assuming full conversion of all such Preferred Stock). (d) (i) For purposes of this Section 2, a liquidation, dissolution or winding up of this corporation shall be deemed to be occasioned by, or to include, (A) the acquisition of the corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) that results in the transfer of fifty percent (50%) or more of the outstanding voting power of this corporation; or (B) a sale of all or substantially all of the assets of the corporation. (ii) In any of such events, if the consideration received by the corporation is other than cash, its value will be deemed its fair market value. Any securities shall be valued as follows: (A) Securities not subject to investment letter or other similar restrictions on free marketability covered by (B) below: (1) If traded on a securities exchange or through the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the thirty (30)-day period ending three (3) days prior to the closing; (2) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty (30)-day period ending three (3) days prior to the closing; and 3 4 (3) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the corporation and the holders of at least a majority of the voting power of all then outstanding shares of Preferred Stock. (B) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (A) (1), (2) or (3) to reflect the approximate fair market value thereof, as mutually determined by the corporation and the holders of at least a majority of the voting power of all then outstanding shares of such Preferred Stock. (iii) In the event the requirements of this subsection 2(d) are not complied with, this corporation shall forthwith either: (A) cause such closing to be postponed until such time as the requirements of this Section 2 have been complied with; or (B) cancel such transaction, in which event the rights, preferences and privileges of the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in subsection 2(d)(iv) hereof. (iv) The corporation shall give each holder of record of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and/or Series D Preferred Stock written notice of such impending transaction not later than twenty (20) days prior to the stockholders' meeting called to approve such transaction, or twenty (20) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and the corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after the corporation has given the first notice provided for herein or sooner than ten (10) days after the corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of such Preferred Stock. 3. Redemption. (a) At any time after May 15, 2003, but within ninety (90) days after the receipt by this corporation of a written request from the holders of not less than sixty-seven percent (67%) of the then outstanding Series C Preferred Stock and Series D Preferred Stock (voting together as a single class and not as separate series, and on an as-converted basis) that all or, if less than all, a specified percentage of such holders' shares of Series C Preferred 4 5 Stock and Series D Preferred Stock (which percentage of Series C Preferred Stock and Series D Preferred Stock shall be equal for such holder) be redeemed, and concurrently with surrender by such holders of the certificates representing such shares, this corporation shall, to the extent it may lawfully do so, redeem in three (3) equal annual installments (each payment date being referred to herein as a "Redemption Date") the shares specified in such request by paying in cash therefor (i) $1.82 per share of Series C Preferred Stock (as adjusted for any stock splits, stock dividends, recapitalizations or the like) (the "Series C Redemption Price") and (ii) $5.20 per share of Series D Preferred Stock (as adjusted for any stock splits, stock dividends, recapitalizations or the like) (the "Series D Redemption Price"). The number of shares of Series C Preferred Stock and Series D Preferred Stock that this corporation shall be required to redeem on any one Redemption Date shall be equal to the amount determined by dividing (x) the aggregate number of shares of Series C Preferred Stock and Series D Preferred Stock outstanding immediately prior to such Redemption Date that have been requested to be redeemed pursuant to this Section 3(a) by (y) the number of remaining Redemption Dates (including the Redemption Date to which such calculation applies). (b) At least fifteen (15) but no more than thirty (30) days prior to each Redemption Date, written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series C Preferred Stock and Series D Preferred Stock to be redeemed, at the address last shown on the records of this corporation for such holder, notifying such holder of the redemption to be effected on the applicable Redemption Date, specifying the number of shares to be redeemed from such holder, the Redemption Date, the applicable Redemption Price, the place at which payment may be obtained and calling upon such holder to surrender to this corporation, in the manner and at the place designated, his, her or its certificate or certificates representing the shares to be redeemed (the "Redemption Notice"). Except as provided in subsection (3)(c), on or after each Redemption Date, each holder of Series C Preferred Stock and Series D Preferred Stock to be redeemed on such Redemption Date shall surrender to this corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the Series C Redemption Price and Series D Redemption Price, as the case may be, of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (c) From and after each Redemption Date, unless there shall have been a default in payment of the Series C Redemption Price or Series D Redemption Price, all rights of the holders of shares of Series C Preferred Stock or Series D Preferred Stock designated for redemption on such Redemption Date in the Redemption Notice as holders of Series C Preferred Stock or Series D Preferred Stock (except the right to receive the Series C Redemption Price or Series D Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of this corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of this corporation legally available for redemption of shares of Series C Preferred Stock and Series D Preferred Stock on a Redemption Date are insufficient to redeem the total number of shares of Series C Preferred Stock and Series D Preferred Stock to be 5 6 redeemed on such date, those funds that are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares to be redeemed such that each holder of shares of Series C Preferred Stock or Series D Preferred Stock receives the same percentage of the Series C Redemption Price or the Series D Redemption Price, as the case may be. The shares of Series C Preferred Stock and Series D Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of this corporation are legally available for the redemption of shares of Series C Preferred Stock or Series D Preferred Stock, such funds will immediately be used to redeem the balance of the shares that this corporation has become obliged to redeem on any Redemption Date but that it has not redeemed. 4. Conversion. The holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and/or Series D Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share with respect to the Series A Preferred Stock or Series B Preferred Stock and, with respect to the Series C Preferred Stock or Series D Preferred Stock, at any time after the date of issuance of such share of Series C Preferred Stock or Series D Preferred Stock and on or prior to the fifth day prior to the Redemption Date, if any, as may have been fixed in any Redemption Notice with respect to such share of Series C Preferred Stock or Series D Preferred Stock, at the office of this corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series A Issue Price, the Original Series B Issue Price, the Original Series C Issue Price or the Original Series D Issue Price, as applicable, by the Conversion Price applicable to such share, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial Conversion Price per share for shares of Series A Preferred Stock shall be the Original Series A Issue Price, the initial Conversion Price per share of Series B Preferred Stock shall be the Original Series B Issue Price, the initial Conversion Price per share of Series C Preferred Stock shall be the Original Series C Issue Price and the initial Conversion Price per share of Series D Preferred Stock shall be the Original Series D Issue Price; provided, however, that the Conversion Price for the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be subject to adjustment as set forth in subsection 4(d). (b) Automatic Conversion. Each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such series immediately upon the earlier of (i) the corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended, the public offering price of which was not less than $6.50 per share (as adjusted to reflect subsequent stock dividends, stock splits, combinations or recapitalization) and $15,000,000 in the aggregate or (ii) the date specified by written consent or agreement of the holders of sixty-seven percent (67%) of the then outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, acting together as a single class. 6 7 (c) Mechanics of Conversion. Before any holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, and shall give written notice to this corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act of 1933, the conversion may, at the option of any holder tendering Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock shall not be deemed to have converted such Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock until immediately prior to the closing of such sale of securities. (d) Conversion Price Adjustments of Preferred Stock for Certain Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be subject to adjustment from time to time as follows: (i) (A) (1) If the corporation shall issue, after the date upon which any shares of Series D Preferred Stock were first issued (the "Series D Purchase Date") any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price for the Series C Preferred Stock in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for each of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (including shares of Common Stock deemed to be issued pursuant to subsection 4(d)(i)(E)(1) or (2)) plus the number of shares of Common Stock that the aggregate consideration received by the corporation for such issuance would purchase at the Conversion Price then in effect for the Series C Preferred Stock; and the denominator of which 7 8 shall be the number of shares of Common Stock outstanding immediately prior to such issuance (including shares of Common Stock deemed to be issued pursuant to subsection 4(d)(i)(E)(1) or (2)) plus the number of shares of such Additional Stock. Consequently, in the event that this corporation issues any Additional Stock for a per share price below the Original Series A Issue Price or the Original Series B Issue Price but for a per share price at or above the Original Series C Issue Price, there shall be no adjustment of the applicable Conversion Price of such series of Preferred Stock. (2) If the corporation shall issue, after the Series D Purchase Date any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price for the Series D Preferred Stock in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for the Series D Preferred Stock in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (including shares of Common Stock deemed to be issued pursuant to subsection 4(d)(i)(E)(1) or (2)) plus the number of shares of Common Stock that the aggregate consideration received by the corporation for such issuance would purchase at the Conversion Price then in effect for the Series D Preferred Stock; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (including shares of Common Stock deemed to be issued pursuant to subsection 4(d)(i)(E)(1) or (2)) plus the number of shares of such Additional Stock. (B) No adjustment of the Conversion Price for the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subsections (E)(3) and (E)(4), no adjustment of such Conversion Price pursuant to this subsection 4(d)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. 8 9 (E) In the case of the issuance (whether before, on or after the Series D Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 4 (d)(i) and subsection 4(d)(ii): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options, rights or securities were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D)), if any, received by the corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of, or in exchange (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for, any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to this corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof (unless such options or rights or convertible or exchangable securities were merely deemed to be included in the numerator and denominator for purposes of determining the number of shares of Common Stock outstanding for purposes of subsection 4(d)(i)(A)), the Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change; provided, however, that no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities and provided further that no additional adjustment shall be made with respect to any change in the number of shares of Common Stock deliverable 9 10 or in the consideration payable to this corporation resulting from application of the antidilution provisions of subsection 4(d)(i)(E) hereof. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities (unless such options, rights or securities were merely deemed to be included in the numerator and denominator for purposes of determining the number of shares of Common Stock outstanding for purposes of subsection 4(d)(i)(A)), shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities that remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 4(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 4(d)(i)(E)(3) or (4). (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 4(d)(i)(E)) by this corporation after the Series D Purchase Date other than: (A) shares of Common Stock issued pursuant to a transaction described in subsection 4(d)(iii) hereof; (B) up to 511,600 shares of Common Stock issuable or issued to employees, consultants, directors or vendors (if in transactions with primarily non-financing purposes) of this corporation directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of this corporation; (C) shares of Common Stock issued on conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock; (D) up to an aggregate of 185,000 shares of Series A Preferred Stock issuable or issued to consultants and employees upon the exercise of options; (E) up to 22,500 shares of Series B Preferred Stock issuable or issued to LINC Capital Management upon the exercise of warrants; (F) up to 250,000 shares of Common Stock issuable or issued upon the exercise of warrants dated July 2, 1996; 10 11 (G) shares of Common Stock issuable or issued pursuant to the execution of lease line or other credit agreements; (H) shares of Common Stock issuable or issued in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise; or (I) shares of Common Stock issued or issuable (1) in a public offering before or in connection with which all outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock will be converted to Common Stock or (2) upon exercise of warrants or rights granted to underwriters in connection with such a public offering. (iii) In the event the corporation should at any time or from time to time after the Series D Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents. (iv) If the number of shares of Common Stock outstanding at any time after the Series D Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (e) Other Distributions. In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in 4(d)(i), then, in each such case for the purpose of this subsection 4(e), the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the corporation into which their shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or 11 12 Series D Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the corporation entitled to receive such distribution. (f) Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or Section 2) provision shall be made so that the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (g) No Impairment. This corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock against impairment. (h) No Fractional Shares and Certificate as to Adjustments. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock pursuant to this Section 4, this corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock a certificate setting forth 12 13 such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such series of Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock. (i) Notices of Record Date. In the event of any taking by this corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, this corporation shall mail to each holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (j) Reservation of Stock Issuable Upon Conversion. This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to this Certificate of Incorporation. (k) Notices. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this corporation. 5. Voting Rights. (a) General Voting Rights. The holder of each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall have the right to one vote for each share of Common Stock into which such 13 14 Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares into which shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward). (b) Voting for the Election of Directors. As long as two million (2,000,000) or more of the shares of Series C Preferred Stock originally issued remain outstanding (subject to appropriate adjustment for any stock split, reverse stock split, stock dividend, recapitalization or similar transaction), the holders of such shares of Series C Preferred Stock shall be entitled to elect two (2) members of the Board of Directors of this corporation at each annual (or special) election of directors. As long as seven hundred fifty thousand (750,000) or more of the shares of Series D Preferred Stock originally issued remain outstanding (subject to appropriate adjustment for any stock split, reverse stock split, stock dividend, recapitalization or similar transaction), the holders of such shares of Series D Preferred Stock shall be entitled to elect one (1) member of the Board of Directors of this corporation at each annual (or special) election of directors. The remaining members of the Board of Directors of this corporation shall be elected at each annual (or special) election of directors as follows: (i) the holders of outstanding shares of Series A Preferred Stock, Series B Preferred Stock and Common Stock (voting together as a single class and not as a separate series, and, with respect to the Series A Preferred Stock and Series B Preferred Stock, on an as-converted basis) shall be entitled to elect two (2) members of the Board of Directors of this corporation at each annual (or special) election of directors; and (ii) each additional member of the Board of Directors, if any, shall be elected by the vote of the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Common Stock (voting together as a single class and not as a separate series, and, with respect to the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, on an as-converted basis). In the case of any vacancy (other than a vacancy caused by removal) in the office of a director occurring among the directors elected by the holders of a class or series of stock pursuant to this Section 5(b), the remaining directors so elected by that class or series may by affirmative vote of a majority thereof, elect a successor or successors to hold office for the unexpired term of the director or directors whose place or places shall be vacant. Any director who shall have been elected by the holders of a class or series of stock or by any directors so elected as provided in the immediately preceding sentence hereof may be removed during the aforesaid term of office, either with or without cause, by, and only by, the affirmative vote of the holders of the shares of the class or series of stock entitled to elect such director or directors, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders, and any vacancy thereby created may be filled by the holders 14 15 of that class or series of stock represented at the meeting or pursuant to unanimous written consent. 6. Protective Provisions. So long as any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock are outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, voting together as a single class and not as separate series, and on an as-converted basis: (a) sell, convey, or otherwise dispose of or encumber all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the corporation is disposed of; (b) authorize or issue, or obligate itself to issue, any other equity security, including any other security convertible into or exercisable for any equity security, having a preference over the Series D Preferred Stock with respect to dividends, liquidation, redemption or voting; (c) increase the size of the Board of Directors from eight (8) members; or (d) redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any share or shares of Common Stock; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the corporation or any subsidiary pursuant to agreements under which the corporation has the option to repurchase such shares at cost upon the occurrence of certain events, such as the termination of employment. In addition, and even if authorized by the foregoing, this corporation shall not alter or change the rights, preferences or privileges of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock so as to adversely affect the rights, preferences or privileges of shares of any of such series without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of any such series so adversely affected. 7. Status of Converted Stock. In the event any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock shall be redeemed or converted pursuant to Section 3 or Section 4 hereof, the shares so converted shall be canceled and shall not be issuable by the corporation. The Certificate of Incorporation of this corporation shall be appropriately amended to effect the corresponding reduction in the corporation's authorized capital stock. 15 16 C. Common Stock. 1. Dividend Rights. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. Liquidation Rights. Upon the liquidation, dissolution or winding up of the corporation, the assets of the corporation shall be distributed as provided in Section 2 of Division (B) of this Article IV hereof. 3. Redemption. The Common Stock does not have a right of redemption. 4. Voting Rights. The holder of each share of Common Stock shall have the right to one vote, and shall be entitled to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. ARTICLE V Except as otherwise provided in this Certificate of Incorporation, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind any or all of the Bylaws of the corporation. ARTICLE VI The number of directors of the corporation shall be fixed from time to time by a Bylaw or amendment thereof duly adopted by the Board of Directors or by the stockholders. A director appointed by the Board of Directors to fill a vacancy shall serve for the remainder of the term of the vacated directorship he or she is filling. ARTICLE VII Elections of directors need not be by written ballot unless the Bylaws of the corporation shall so provide. At all elections of directors, the stockholders of this corporation shall be entitled to cumulative voting in such election of directors in accordance with Section 214 of the General Corporation Law and the Bylaws of this corporation. ARTICLE VIII Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the corporation may be kept (subject to any provision 16 17 contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the corporation. ARTICLE IX Any action required to be taken or that may be taken at any annual or special meeting of the stockholders of this corporation may be taken without a meeting. ARTICLE X A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this Certificate of Incorporation to authorize corporation action further eliminating or limiting the personal liability of directors then liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law as so amended. Any repeal or modification of the foregoing provisions of this Article X by the stockholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. ARTICLE XI To the fullest extent permitted by applicable law, this corporation is also authorized to provide indemnification of (and advancement of expenses to) such agents (and any other persons to which Delaware law permits this corporation to provide indemnification) through Bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the General Corporation Law of the State of Delaware, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to this corporation, its stockholders, and others. Any repeal or modification of any foregoing provisions of this Article XI shall not adversely affect any right or protection of a director, officer, agent or other person existing at the time of, or increase the liability of any director of this corporation with respect to any acts or omissions of such director, officer or agent occurring prior to such repeal or modification. 17 18 ARTICLE XII This corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose of forming a corporation to do business both within and without the State of Delaware and in pursuance of the General Corporation Law of Delaware, does make and file this Certificate, hereby declaring and certifying that the facts herein stated are true, and accordingly has hereunto set his hand this 17th day of May, 1999. IN WITNESS WHEREOF, the undersigned has executed this Certificate of Incorporation on this 17th day of May, 1999. ----------------------------- Frank Grant Incorporator 18 EX-3.2 4 AMENDED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF CYBERGOLD, INC. A DELAWARE CORPORATION (PURSUANT TO SECTIONS 228, 242 AND 245 OF THE DELAWARE GENERAL CORPORATION LAW) Cybergold, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "General Corporation Law") DOES HEREBY CERTIFY: FIRST: That the Corporation was originally incorporated on May 17, 1999, pursuant to the General Corporation Law. SECOND: That the Board of Directors duly adopted resolutions proposing to amend and restate the Certificate of Incorporation of the Corporation, declaring said amendment and restatement to be advisable and in the best interests of the Corporation and its stockholders, and authorizing the appropriate officers of the Corporation to solicit the consent of the stockholders therefor, which resolution setting forth the proposed amendment and restatement is as follows: "RESOLVED, that the Certificate of Incorporation of the Corporation be amended and restated in its entirety as follows: ARTICLE I The name of the corporation is Cybergold, Inc. (the "Corporation"). ARTICLE II The address of the registered office of the Corporation in the State of Delaware is 15 East North Street, in the City of Dover, County of Kent. The name of its registered agent at such address is Incorporating Services, Ltd. ARTICLE III The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. 2 ARTICLE IV The Corporation is authorized to issue two classes of stock to be designated common stock ("Common Stock") and preferred stock ("Preferred Stock"). The number of shares of Common Stock authorized to be issued is Seventy-Five Million (75,000,000), par value $0.001 per share, and the number of Preferred Stock authorized to be issued is Five Million (5,000,000), par value $0.001 per share. The Preferred Stock may be issued from time to time in one or more series, without further stockholder approval. The Board of Directors is hereby authorized, in the resolution or resolutions adopted by the Board of Directors providing for the issue of any wholly unissued series of Preferred Stock, within the limitations and restrictions stated in this Amended and Restated Certificate of Incorporation (the "Restated Certificate"), to fix or alter the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices, and the liquidation preferences of any wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them, and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. ARTICLE V Except as otherwise provided in this Restated Certificate, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind any or all of the Bylaws of the Corporation. ARTICLE VI The number of directors of the Corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors. The Board of Directors shall be and is divided into three classes, Class I, Class II and Class III. Such classes shall be as nearly equal in number of directors as possible. Each director shall serve for a term ending on the third annual meeting following the annual meeting at which such director was elected; provided, however, that the directors first elected to Class I shall serve for a term ending on the annual meeting of stockholders for fiscal year 2000, the directors first elected to Class II shall serve for a term ending on the annual meeting of stockholders for fiscal year 2001, and the directors first elected to Class III shall serve for a term ending on the annual meeting of stockholders for fiscal year 2002. The foregoing notwithstanding, each director shall serve until his successor shall have been duly elected and qualified, unless he shall resign, become disqualified, disabled or shall otherwise be removed. At each annual election, directors chosen to succeed those whose terms then expire shall be of the same class as the directors they succeed, unless by reason of any 2 3 intervening changes in the authorized number of directors, the Board shall designate one or more directorships whose term then expires as directorships of another class in order more nearly to achieve equality of number of directors among the classes. Notwithstanding the rule that the three classes shall be as nearly equal in number of directors as possible, in the event of any change in the authorized number of directors each director then continuing to serve as such shall nevertheless continue as a director of the class of which he is a member until the expiration of his current term, or his prior death, resignation or removal. If any newly created directorship may, consistently with the rule that the three classes shall be as nearly equal in number of directors as possible, be allocated to either class, the Board shall allocate it to that of the available class whose term of office is due to expire at the earliest date following such allocation. ARTICLE VII Elections of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide. ARTICLE VIII Except as otherwise provided in this Amended and Restated Certificate, any action required or permitted to be taken by the stockholders of the Corporation must be effected at an annual or special meeting of the stockholders of the Corporation, and no action required to be taken or that may be taken at any annual or special meeting of the stockholders of the Corporation may be taken by written consent. ARTICLE IX A director of the Corporation shall, to the fullest extent permitted by the General Corporation Law as it now exists or as it may hereafter be amended, not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the General Corporation Law is amended, after approval by the stockholders of this Article, to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law, as so amended. Any amendment, repeal or modification of this Article IX, or the adoption of any provision of this Amended and Restated Certificate of Incorporation inconsistent with this Article IX, by the stockholders of the Corporation shall not apply to or adversely affect any right or protection of a director of the Corporation existing at the time of such amendment, repeal, modification or adoption. 3 4 ARTICLE X In addition to any vote of the holders of any class or series of the stock of the Corporation required by law or by this Amended and Restated Certificate of Incorporation, the affirmative vote of the holders of a majority of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend or repeal any provision of this Amended and Restated Certificate of Incorporation not specified in the preceding sentence. ARTICLE XI To the fullest extent permitted by applicable law, the Corporation is authorized to provide indemnification of (and advancement of expenses to) agents of the Corporation (and any other persons to which General Corporation Law permits the Corporation to provide indemnification) through bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the General Corporation Law, subject only to limits created by applicable General Corporation Law (statutory or non-statutory), with respect to actions for breach of duty to the Corporation, its stockholders, and others. Any amendment, repeal or modification of the foregoing provisions of this Article XI shall not adversely affect any right or protection of a director, officer, agent, or other person existing at the time of, or increase the liability of any director of the Corporation with respect to any acts or omissions of such director, officer or agent occurring prior to, such amendment, repeal or modification. * * * * THIRD: The foregoing amendment and restatement was approved by the holders of the requisite number of shares of said corporation in accordance with Section 228 of the General Corporation Law. FOURTH: That said amendment and restatement was duly adopted in accordance with the provisions of Section 242 and 245 of the General Corporation Law. 4 5 IN WITNESS WHEREOF, the undersigned has signed this Certificate this ____ day of __________, 1999. ------------------------------------- A. Nat Goldhaber Chief Executive Officer and President ATTEST: - -------------------------------------- John Steuart Assistant Secretary EX-3.3 5 REGISTRANT'S BYLAWS 1 EXHIBIT 3.3 BYLAWS OF CYBERGOLD, INC., A DELAWARE CORPORATION 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I OFFICE AND RECORDS................................................................1 Section 1.1 Delaware Office........................................................1 Section 1.2 Other Offices..........................................................1 Section 1.3 Books and Records......................................................1 ARTICLE II STOCKHOLDERS.....................................................................1 Section 2.1 Annual Meeting.........................................................1 Section 2.2 Special Meeting........................................................1 Section 2.3 Place of Meeting.......................................................1 Section 2.4 Notice of Meeting......................................................2 Section 2.5 Quorum and Adjournment.................................................2 Section 2.6 Proxies................................................................2 Section 2.7 Notice of Stockholder Business and Nominations.........................2 Section 2.8 Procedure for Election of Directors....................................5 Section 2.9 Inspectors of Elections; Opening and Closing the Polls.................5 Section 2.10 Consent of Stockholders in Lieu of Meeting.............................5 ARTICLE III BOARD OF DIRECTORS..............................................................6 Section 3.1 General Powers.........................................................6 Section 3.2 Number, Tenure and Qualifications......................................6 Section 3.3 Regular Meetings.......................................................6 Section 3.4 Special Meetings.......................................................6 Section 3.5 Notice.................................................................6 Section 3.6 Conference Telephone Meetings..........................................7 Section 3.7 Quorum.................................................................7 Section 3.8 Vacancies..............................................................7 Section 3.9 Committee..............................................................7 Section 3.10 Removal................................................................8 ARTICLE IV OFFICERS.........................................................................8 Section 4.1 Elected Officers.......................................................8 Section 4.2 Election and Term of Office............................................8 Section 4.3 Chairman of the Board..................................................8 Section 4.4 President and Chief Executive Officer..................................8 Section 4.5 Secretary..............................................................8 Section 4.6 Treasurer..............................................................9 Section 4.7 Removal................................................................9 Section 4.8 Vacancies..............................................................9 ARTICLE V STOCK CERTIFICATES AND TRANSFERS..................................................9 Section 5.1 Stock Certificates and Transfers.......................................9
3 ARTICLE VI INDEMNIFICATION.................................................................10 Section 6.1 Right to Indemnification...............................................10 Section 6.2 Prepayment of Expenses.................................................10 Section 6.3 Claims.................................................................10 Section 6.4 Nonexclusivity of Rights...............................................11 Section 6.5 Amendment or Repeal....................................................11 Section 6.6 Other Indemnification and Prepayment of Expenses.......................11 ARTICLE VII MISCELLANEOUS PROVISIONS.......................................................11 Section 7.1 Fiscal Year............................................................11 Section 7.2 Dividends..............................................................11 Section 7.3 Seal...................................................................11 Section 7.4 Waiver of Notice.......................................................11 Section 7.5 Audits.................................................................11 Section 7.6 Resignations...........................................................11 Section 7.7 Contracts..............................................................12 Section 7.8 Proxies................................................................12 ARTICLE VIII AMENDMENTS....................................................................12 Section 8.1 Amendments.............................................................12
4 ARTICLE I OFFICES AND RECORDS Section 1.1 Delaware Office. The registered office of the Corporation in the State of Delaware shall be located in the City of Dover, County of Kent. Section 1.2 Other Offices. The Corporation may have such other offices, either within or without the State of Delaware, as the Board of Directors may designate or as the business of the Corporation may from time to time require. Section 1.3 Books and Records. The books and records of the Corporation may be kept at the Corporation's headquarters in Berkeley, California or at such other locations outside the State of Delaware as may from time to time be designated by the Board of Directors. ARTICLE II STOCKHOLDERS Section 2.1 Annual Meeting. The annual meeting of the stockholders of the Corporation shall be held at such date, place and/or time as may be fixed by resolution of the Board of Directors. Section 2.2 Special Meeting. A. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the president and shall be called by the president or secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning at least ten percent (10%) in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. B. Notwithstanding the above provisions of this Section 2.2(A), effective upon a closing of an initial public offering of the Corporation's securities pursuant to a registration statement filed under the Securities Act of 1933, as amended, a special meeting of the stockholders of the corporation may be called only by the President, the Chairman of the Board or by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors which the Corporation would have if there were no vacancies (the "Whole Board"), or at the request in writing of stockholders owning at least fifty percent (50%) in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Section 2.3 Place of Meeting. The Board of Directors may designate the place of meeting for any meeting of the stockholders. If no designation is made by the Board of Directors, the place of meeting shall be the principal office of the Corporation. 5 Section 2.4 Notice of Meeting. Written or printed notice, stating the place, day and hour of the meeting and the purposes for which the meeting is called, shall be prepared and delivered by the Corporation not less than ten days nor more than sixty days before the date of the meeting, either personally, or by mail, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, addressed to the stockholder at his address as it appears on the stock transfer books of the Corporation. Such further notice shall be given as may be required by law. Meetings may be held without notice if all stockholders entitled to vote are present (except as otherwise provided by law), or if notice is waived by those not present. Any previously scheduled meeting of the stockholders may be postponed and (unless the Certificate of Incorporation otherwise provides) any special meeting of the stockholders may be cancelled, by resolution of the Board of Directors upon public notice given prior to the time previously scheduled for such meeting of stockholders. Section 2.5 Quorum and Adjournment. Except as otherwise provided by law or by the Certificate of Incorporation, the holders of a majority of the voting power of the outstanding shares of the Corporation entitled to vote generally in the election of directors (the "Voting Stock"), represented in person or by proxy, shall constitute a quorum at a meeting of stockholders, except that when specified business is to be voted on by a class or series voting separately as a class or series, the holders of a majority of the voting power of the shares of such class or series shall constitute a quorum for the transaction of such business. The chairman of the meeting or a majority of the shares of Voting Stock so represented may adjourn the meeting from time to time, whether or not there is such a quorum (or, in the case of specified business to be voted on by a class or series, the chairman or a majority of the shares of such class or series so represented may adjourn the meeting with respect to such specified business). No notice of the time and place of adjourned meetings need be given except as required by law. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Section 2.6 Proxies. At all meetings of stockholders, a stockholder may vote by proxy executed in writing by the stockholder or as may be permitted by law, or by his duly authorized attorney-in-fact. Such proxy must be filed with the Secretary of the Corporation or his representative at or before the time of the meeting. Section 2.7 Notice of Stockholder Business and Nominations. A. Annual Meeting of Stockholders. (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders: (a) pursuant to the Corporation's notice of meeting delivered pursuant to Section 2.4 of these Bylaws; (b) by or at the direction of the Chairman of the Board or the Board of Directors; or (c) by any stockholder of the Corporation who is entitled to vote at the meeting, who has complied with the notice procedures set forth in 2 6 clauses (2) and (3) of this paragraph (A) of this Bylaw and who was a stockholder of record at the time such notice was delivered to the Secretary of the Corporation. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to a clause (c) of paragraph (A)(1) of this Bylaw, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than seventy days nor more than ninety days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than twenty days, or delayed by more than seventy days, from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of the seventieth day prior to such annual meeting or the ten day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder, including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Bylaw to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least eighty days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. 3 7 B. Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting pursuant to Section 2.4 of these Bylaws. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who is entitled to vote at the meeting, who complies with the notice procedures set forth in this Bylaw and who is a stockholder of record at the time such notice is delivered to the Secretary of the Corporation. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as are specified in the Corporation's Notice of Meeting, if the stockholder's notice as required by paragraph (A)(2) of this Bylaw shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the ninetieth day prior to such special meeting and not later than the close of business on the later of the seventieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. C. General. (1) Only persons who are nominated in accordance with the procedures set forth in this Bylaw shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Bylaw. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Bylaw and, if any proposed nomination or business is not in compliance with this Bylaw, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this Bylaw, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Bylaw, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. 4 8 Section 2.8 Procedure for Election of Directors. Election of directors at all meetings of the stockholders at which directors are to be elected shall be by written ballot, and, except as otherwise set forth in the Certificate of Incorporation with respect to the right of the holders of any series of Preferred Stock or any other series or class of stock to elect additional directors under specified circumstances, a plurality of the votes cast thereat shall elect directors. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all matters other than the election of directors submitted to the stockholders at any meeting shall be decided by the affirmative vote of a majority of the voting power of the outstanding Voting Stock present in person or represented by proxy at the meeting and entitled to vote thereon. Section 2.9 Inspectors of Elections; Opening and Closing the Polls. A. The Board of Directors by resolution shall appoint one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives of the Corporation, to act at the meeting and make a written report thereof. One or more persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed to act, or if all inspectors or alternates who have been appointed are unable to act, at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall have the duties prescribed by the General Corporation Law of the State of Delaware. B. The chairman of the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting. Section 2.10 Consent of Stockholders in Lieu of Meeting. A. Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Any written consent may be revoked by a writing received by the Secretary of the Corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary. B. Notwithstanding the above provisions of this Section 2.10(A), effective upon a closing of an initial public offering of the Corporation's securities pursuant to a registration statement filed under the Securities Act of 1933, as amended, the stockholders of 5 9 the Corporation may not take action by written consent without a meeting but must take any such actions at a duly called annual or special meeting. ARTICLE III BOARD OF DIRECTORS Section 3.1 General Powers. The business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors. In addition to the powers and authorities by these Bylaws expressly conferred upon them, the Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law, by the Certificate of Incorporation or by these Bylaws required to be exercised or done by the stockholders. Section 3.2 Number, Tenure and Qualifications. Subject to the rights of the holders of any series of Preferred Stock, or any other series or class of stock as set forth in the Certificate of Incorporation, to elect directors under specified circumstances, the number of directors shall initially be seven and shall be fixed from time to time thereafter by a majority of the Board of Directors. Section 3.3 Regular Meetings. A regular meeting of the Board of Directors shall be held without notice other than this Bylaw immediately after, and at the same place as, each annual meeting of stockholders. The Board of Directors may, by resolution, provide the time and place for the holding of additional regular meetings without notice other than such resolution. Section 3.4 Special Meetings. Special meetings of the Board of Directors shall be called at the request of the Chairman of the Board, the President or a majority of the Board of Directors. The person or persons authorized to call special meetings of the Board of Directors may fix the place and time of the meetings. Section 3.5 Notice. Notice of any special meeting shall be given to each director at his business or residence in writing or by telegram or by telephone communication. If mailed, such notice shall be deemed adequately delivered when deposited in the United States mails so addressed, with postage thereon prepaid, at least five days before such meeting. If by telegram, such notice shall be deemed adequately delivered when the telegram is delivered to the telegraph company at least twenty-four hours before such meeting. If by facsimile transmission, such notice shall be transmitted at least twenty-four hours before such meeting. If by telephone, the notice shall be given at least twelve hours prior to the time set for the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice of such meeting, except for amendments to these Bylaws as provided under Section 8.1 of Article VIII hereof. A meeting may be held at any time without notice if all the directors are present (except as otherwise provided by law) or if those not present waive notice of the meeting in writing, either before or after such meeting. 6 10 Section 3.6 Conference Telephone Meetings. Members of the Board of Directors, or any committee thereof, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. Section 3.7 Quorum. A whole number of directors equal to at least a majority of the Whole Board shall constitute a quorum for the transaction of business, but if at any meeting of the Board of Directors there shall be less than a quorum present, a majority of the directors present may adjourn the meeting from time to time without further notice. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 3.8 Vacancies. Subject to the rights of the holders of any series of Preferred Stock, or any other series or class of stock as set forth in the Certificate of Incorporation, to elect additional directors under specified circumstances, and unless the Board of Directors otherwise determines, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Whole Board shall shorten the term of any incumbent director. Section 3.9 Committee. A. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent permitted by law and to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. B. Unless the Board of Directors otherwise provides, each committee designated by the Board of Directors may make, alter and repeal rules for the conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to these Bylaws. 7 11 Section 3.10 Removal. Subject to the rights of the holders of any series of Preferred Stock, or any other series or class of stock as set forth in the Certificate of Incorporation, to elect additional directors under specified circumstances, any director, or the entire Board of Directors, may be removed from office at any time, with or without cause, only by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3 %) of the voting power of the then outstanding Voting Stock, voting together as a single class. ARTICLE IV OFFICERS Section 4.1 Elected Officers. The elected officers of the Corporation shall be a Chairman of the Board, a President, a Secretary, a Treasurer, and such other officers as the Board of Directors from time to time may deem proper. The Chairman of the Board shall be chosen from the directors. All officers chosen by the Board of Directors shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article IV. Such officers shall also have powers and duties as from time to time may be conferred by the Board of Directors or by any committee thereof. Section 4.2 Election and Term of Office. The elected officers of the Corporation shall be elected annually by the Board of Directors at the regular meeting of the Board of Directors held after each annual meeting of the stockholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as convenient. Subject to Section 4.7 of these Bylaws, each officer shall hold office until his successor shall have been duly elected and shall have qualified or until his death or until he shall resign. Section 4.3 Chairman of the Board. The Chairman of the Board shall preside at all meetings of the Board. Section 4.4 President and Chief Executive Officer. The President and Chief Executive Officer shall be the general manager of the Corporation, subject to the control of the Board of Directors, and as such shall preside at all meetings of shareholders, shall have general supervision of the affairs of the Corporation, shall sign or countersign or authorize another officer to sign all certificates, contracts, and other instruments of the Corporation as authorized by the Board of Directors, shall make reports to the Board of Directors and shareholders, and shall perform all such other duties as are incident to such office or are properly required by the Board of Directors. If the Board of Directors creates the office of Chief Executive Officer as a separate office from President, the President shall be the chief operating officer of the corporation and shall be subject to the general supervision, direction, and control of the Chief Executive Officer unless the Board of Directors provides otherwise. Section 4.5 Secretary. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and directors and all other notices required by law or by these Bylaws, and in case of his absence or refusal or neglect so to do, any such notice may be given by any person thereunto directed by the Chairman of the Board or the President, or by the Board 8 12 of Directors, upon whose request the meeting is called as provided in these Bylaws. He shall record all the proceedings of the meetings of the Board of Directors, any committees thereof and the stockholders of the Corporation in a book to be kept for that purpose, and shall perform such other duties as may be assigned to him by the Board of Directors, the Chairman of the Board or the President. He shall have custody of the seal of the Corporation and shall affix the same to all instruments requiring it, when authorized by the Board of Directors, the Chairman of the Board or the President, and attest to the same. Section 4.6 Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate receipts and disbursements in books belonging to the Corporation. The Treasurer shall deposit all moneys and other valuables in the name and to the credit of the Corporation in such depositaries as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors the Chairman of the Board, or the President, taking proper vouchers for such disbursements. The Treasurer shall render to the Chairman of the Board, the President and the Board of Directors, whenever requested, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond for the faithful discharge of his duties in such amount and with such surety as the Board of Directors shall prescribe. Section 4.7 Removal. Any officer elected by the Board of Directors may be removed by the Board of Directors whenever, in their judgment, the best interests of the Corporation would be served thereby. No elected officer shall have any contractual rights against the Corporation for compensation by virtue of such election beyond the date of the election of his successor, his death, his resignation or his removal, whichever event shall first occur, except as otherwise provided in an employment contract or an employee plan. Section 4.8 Vacancies. A newly created office and a vacancy in any office because of death, resignation, or removal may be filled by the Board of Directors for the unexpired portion of the term at any meeting of the Board of Directors. ARTICLE V STOCK CERTIFICATES AND TRANSFERS Section 5.1 Stock Certificates and Transfers. A. The interest of each stockholder of the Corporation shall be evidenced by certificates for shares of stock in such form as the appropriate officers of the Corporation may from time to time prescribe. The shares of the stock of the Corporation shall be transferred on the books of the Corporation by the holder thereof in person or by his attorney, upon surrender for cancellation of certificates for the same number of shares, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, and with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require. 9 13 B. The certificates of stock shall be signed, countersigned and registered in such manner as the Board of Directors may by resolution prescribe, which resolution may permit all or any of the signatures on such certificates to be in facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. ARTICLE VI INDEMNIFICATION Section 6.1 Right to Indemnification. The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (an "Indemnitee") who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he, or a person for whom he is the legal representative, is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys' fees) reasonably incurred by such Indemnitee. Notwithstanding the preceding sentence, except as otherwise provided in Section 6.3, the Corporation shall be required to indemnify an Indemnitee in connection with a proceeding (or part thereof) commenced by such Indemnitee only if the commencement of such proceeding (or part thereof) by the Indemnitee was authorized by the Board of Directors of the Corporation. Section 6.2 Prepayment of Expenses. The Corporation shall pay the expenses (including attorneys' fees) incurred by an Indemnitee in defending any proceeding in advance of its final disposition, provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the Indemnitee to repay all amounts advanced if it should be ultimately determined that the Indemnitee is not entitled to be indemnified under this Article VI or otherwise. Section 6.3 Claims. If a claim for indemnification or payment of expenses under this Article VI is not paid in full within sixty days after a written claim therefor by the Indemnitee has been received by the Corporation, the Indemnitee may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the Corporation shall have the burden of proving that the Indemnitee is not entitled to the requested indemnification or payment of expenses under applicable law. 10 14 Section 6.4 Nonexclusivity of Rights. The rights conferred on any Indemnitee by this Article VI shall not be exclusive of any other rights which such Indemnitee may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, these Bylaws, agreement, vote of stockholders or disinterested directors or otherwise. Section 6.5 Amendment or Repeal. Any repeal or modification of the foregoing provisions of this Article VI shall not adversely affect any right or protection hereunder of any Indemnitee in respect of any act or omission occurring prior to the time of such repeal or modification. Section 6.6 Other Indemnification and Prepayment of Expenses. This Article VI shall not limit the right of the Corporation, to the extent and in the manner permitted by law, to indemnify and to advance expenses to persons other than Indemnitees when and as authorized by appropriate corporate action. ARTICLE VII MISCELLANEOUS PROVISIONS Section 7.1 Fiscal Year. The fiscal year of the Corporation shall begin on the first day of April and end on the thirty-first day of March of each year. Section 7.2 Dividends. The Board of Directors may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and its Certificate of Incorporation. Section 7.3 Seal. The corporate seal shall have inscribed the name of the Corporation thereon and shall be in such form as may be approved from time to time by the Board of Directors. Section 7.4 Waiver of Notice. Whenever any notice is required to be given to any stockholder or director of the Corporation under the provisions of the General Corporation Law of the State of Delaware, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at, nor the purpose of, any annual or special meeting of the stockholders of the Board of Directors need be specified in any waiver of notice of such meeting. Section 7.5 Audits. The accounts, books and records of the Corporation shall be audited upon the conclusion of each fiscal year by an independent certified public accountant selected by the Board of Directors, and it shall be the duty of the Board of Directors to cause such audit to be made annually. Section 7.6 Resignations. Any director or any officer, whether elected or appointed, may resign at any time by serving written notice of such resignation on the Chairman of the Board, the President or the Secretary, and such resignation shall be deemed to be effective 11 15 as of the close of business on the date said notice is received by the Chairman of the Board, the President, or the Secretary or at such later date as is stated therein. No formal action shall be required of the Board of Directors or the stockholders to make any such resignation effective. Section 7.7 Contracts. Except as otherwise required by law, the Certificate of Incorporation or these Bylaws, any contracts or other instruments may be executed and delivered in the name and on the behalf of the Corporation by such officer or officers of the Corporation as the Board of Directors may from time to time direct. Such authority may be general or confined to specific instances as the Board may determine. The Chairman of the Board, the President or any Vice President may execute bonds, contracts, deeds, leases and other instruments to be made or executed for or on behalf of the Corporation. Subject to any restrictions imposed by the Board of Directors or the Chairman of the Board, the President or any Vice President of the Corporation may delegate contractual powers to others under his jurisdiction, it being understood, however, that any such delegation of power shall not relieve such officer of responsibility with respect to the exercise of such delegated power. Section 7.8 Proxies. Unless otherwise provided by resolution adopted by the Board of Directors, the Chairman of the Board, the President or any Vice President may from time to time appoint any attorney or attorneys or agent or agents of the Corporation, in the name and on behalf of the Corporation, to cast the votes which the Corporation may be entitled to cast as the holder of stock or other securities in any other corporation or other entity, any of whose stock or other securities may be held by the Corporation, at meetings of the holders of the stock and other securities of such other corporation or other entity, or to consent in writing, in the name of the Corporation as such holder, to any action by such other corporation or other entity, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal or otherwise, all such written proxies or other instruments as he may deem necessary or proper in the premises. ARTICLE VIII AMENDMENTS Section 8.1 Amendments. These Bylaws may be amended, altered, added to, rescinded or repealed at any meeting of the Board of Directors or of the stockholders, provided notice of the proposed change was given in the notice of the meeting and, in the case of a meeting of the Board of Directors, in a notice given no less than twenty-four hours prior to the meeting; provided, however, that, notwithstanding any other provisions of these Bylaws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the stock required by law, the Certificate of Incorporation or these Bylaws, the affirmative vote of the holders of at least 80 percent of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required in order for stockholders to alter, amend or repeal any provision of these Bylaws or to adopt any additional bylaw. 12 16 CERTIFICATE OF SECRETARY OF CYBERGOLD, inc. The undersigned, A. Nathaniel Goldhaber, hereby certifies that he is the duly elected and acting Secretary of Cybergold, Inc., a Delaware corporation (the "Corporation"), and that the Bylaws attached hereto constitute the Bylaws of said Corporation as duly adopted by the Directors on May 17, 1999. IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name this 17th day of May, 1999. --------------------------------- A. Nathaniel Goldhaber Secretary EX-4.3 6 AMENDED & RESTATED INVESTOR'S RIGHTS AGREEMENT 1 EXHIBIT 4.3 CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT MAY 18, 1999 2 TABLE OF CONTENTS
Page ---- 1. Registration Rights......................................................................1 1.1 Definitions.....................................................................1 1.2 Request for Registration........................................................2 1.3 Company Registration............................................................4 1.4 Obligations of the Company......................................................4 1.5 Furnish Information.............................................................5 1.6 Expenses of Registration........................................................5 1.7 Underwriting Requirements.......................................................6 1.8 Delay of Registration...........................................................7 1.9 Indemnification.................................................................7 1.10 Reports Under Securities Exchange Act of 1934..................................9 1.11 Assignment of Registration Rights..............................................9 1.12 Market Stand-Off Agreement....................................................10 1.13 Form S-3 Registration.........................................................10 1.14 Termination of Registration Rights............................................11 2. Covenants of the Company................................................................11 2.1 Delivery of Financial Statements...............................................12 2.2 Inspection.....................................................................12 2.3 Termination of Information and Inspection Covenants............................12 2.4 Right of First Offer...........................................................13 2.5 Board of Directors.............................................................14 2.6 Sales by Founder...............................................................16 2.7 Key-Man Insurance..............................................................18 2.8 Observer Rights................................................................19 2.9 Restrictions on Future Issuance of Stock.......................................19 2.10 Termination of Certain Covenants..............................................20 3. Miscellaneous...........................................................................20 3.1 Successors and Assigns.........................................................20 3.2 Governing Law..................................................................20 3.3 Counterparts...................................................................20 3.4 Titles and Subtitles...........................................................20 3.5 Notices........................................................................20 3.6 Expenses.......................................................................20 3.7 Amendments and Waivers.........................................................20 3.8 Severability...................................................................21 3.9 Aggregation of Stock...........................................................21 3.10 Entire Agreement..............................................................21 3.11 Prior Agreement...............................................................21 3.12 Public Announcement...........................................................21
Schedule A Schedule of Investors 3 AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT is made as of the 18th day of May, 1999, by and among CyberGold, Inc., a California corporation (the "Company"), and the investors listed on Schedule A hereto, each of which is herein referred to as an "Investor" and A. Nathaniel Goldhaber (the "Founder"). RECITALS WHEREAS, the Company and certain of the Investors (the "Prior Investors") possess registration and other investor rights granted pursuant to that certain Amended and Restated Investors' Rights Agreement dated May 15, 1998, between the Company, the persons listed on the Schedule of Investors attached thereto and A. Nathaniel Goldhaber (the "Prior Agreement"); WHEREAS, certain of the Investors (the "Series D Investors") are parties to the Series D Preferred Stock and Warrant Purchase Agreement of even date herewith (the "Series D Agreement") between the Company and the investors listed on the Schedule of Investors attached thereto, pursuant to which the Company will sell, and the Series D Investors will acquire, shares of the Company's Series D Preferred Stock and warrants to purchase shares of the Company's Series D Preferred Stock (the "Series D Warrants"); WHEREAS, in order to induce the Company to enter into the Series D Agreement and to induce the Series D Investors to invest funds in the Company pursuant to the Series D Agreement, the Prior Investors and the Company hereby agree to waive their rights under the Prior Agreement, and the Investors and the Company hereby agree that this Agreement shall govern the rights of the Investors to cause the Company to register shares of Common Stock issuable to the Investors and certain other matters as set forth herein; and WHEREAS, the Series D Investors and the Company have agreed, pursuant to the terms of the Series D Agreement, to enter into this Agreement; NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the Prior Investors hereby agree that the Prior Agreement shall be superseded and replaced in its entirety by this Agreement, and the parties hereto further agree as follows: 1. Registration Rights. The Company covenants and agrees as follows: 1.1 Definitions. For purposes of this Section 1: (a) The term "Act" means the Securities Act of 1933, as amended. (b) The term "Form S-3" means such form under the Act as in effect on the date hereof or any registration form under the Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. 4 (c) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.11 hereof. (d) The term "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. (e) The term "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document. (f) The term "Registrable Securities" means (i) the Common Stock issuable or issued upon conversion of the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, (ii) the Common Stock issuable or issued upon conversion of the Company's Series D Preferred Stock issued upon exercise of the Series D Warrants, (iii) any Common Stock of the Company issued upon exercise of the Warrant to Purchase Shares of Capital Stock of CyberGold, Inc. dated July 2, 1996 between Intel Corporation and the Company, and (iv) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for, or in replacement of, the shares referenced in (i), (ii) and (iii), above, excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which his rights under this Section 1 are not assigned. (g) The number of shares of "Registrable Securities" outstanding shall be determined by the number of shares of Common Stock outstanding that are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities that are, Registrable Securities. (h) The term "SEC" shall mean the Securities and Exchange Commission. 1.2 Request for Registration. (a) Subject to the conditions of this Section 1.2, if the Company shall receive, at any time after six (6) months following the effective date of the first registration statement for a public offering of securities of the Company (other than a registration statement relating either to the sale of securities to employees of the Company pursuant to a stock option, stock purchase or similar plan or a SEC Rule 145 transaction), a written request from the Holders of fifteen percent (15%) or more of the Registrable Securities then outstanding that the Company file a registration statement under the Act covering the registration of such Registrable Securities, then the Company shall: (i) within twenty (20) days of the receipt thereof, give written notice of such request to all Holders; and 2 5 (ii) subject to the limitations of subsection 1.2(b), effect as soon as practicable, and in any event within sixty (60) days of the receipt of such request, the registration under the Act of all Registrable Securities which the Holders request to be registered in a written request received by the Company within twenty (20) days of the mailing of such notice by the Company in accordance with Section 3.5. (b) If the Holders initiating the registration request hereunder ("Initiating Holders") intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to subsection 1.2(a) and the Company shall include such information in the written notice referred to in subsection 1.2(a). The underwriter will be selected by the Holders of a majority in interest of the shares to be registered in such registration and shall be reasonably acceptable to the Company. In such event, the right of any Holder to include his Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in subsection 1.4(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 1.2, if the underwriter advises the Company in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders thereof, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each Holder; provided, however, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. (c) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 1.2, a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer taking action with respect to such filing for a period of not more than one hundred twenty (120) days after receipt of the request of the Initiating Holders; provided, however, that the Company may not utilize this right more than once in any twelve (12) month period. (d) In addition, the Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to this Section 1.2: (i) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, 3 6 unless the Company is already subject to service in such jurisdiction and except as may be required under the Act; (ii) After the Company has effected two (2) registrations pursuant to this Section 1.2 and such registrations have been declared or ordered effective; (iii) During the period starting with the date sixty (60) days prior to the Company's good faith estimate of the date of filing of, and ending on a date one hundred eighty (180) days after the effective date of, a registration subject to Section 1.3 hereof; provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; or (iv) If the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made pursuant to Section 1.13 below. 1.3 Company Registration. If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for itself, for the Holders or for shareholders other than the Holders) any of its stock or other securities under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan, a registration relating to a corporate reorganization or other transaction under Rule 145 of the Act or a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities which are also being registered), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 3.5, the Company shall, subject to the provisions of Section 1.7, use all reasonable efforts to cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. 1.4 Obligations of the Company. Whenever required under Section 1.2 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for a period of up to one hundred twenty (120) days or until the distribution contemplated in the Registration Statement has been completed; provided, however, that such 120-day period shall be extended for a period of time equal to the period the Holder refrains from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration 4 7 statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, unless the Company is already subject to service in such jurisdiction and except as may be required by the Act. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed. (h) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration. 1.5 Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 1.3 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. 1.6 Expenses of Registration. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Sections 1.2, 1.3 and 1.13, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the 5 8 Company shall be borne by the Company. Notwithstanding the foregoing, the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 1.2 or Section 1.13 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses pro rata based upon the number of Registrable Securities that were to be requested in the withdrawn registration), unless, in the case of a registration requested under Section 1.2, the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand registration pursuant to Section 1.2; provided, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any such expenses and shall retain their rights pursuant to Section 1.2. 1.7 Underwriting Requirements. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 1.3 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities to be so included to be apportioned pro rata among the selling Holders according to the total amount of securities entitled to be included therein owned by each selling Holder or in such other proportions as shall mutually be agreed to by such selling Holders) but in no event shall the Registrable Securities held by the Holders to be included in the offering be reduced until all of the securities, including Registrable Securities, of shareholders who are officers, directors or employees of the Company are first excluded entirely from such offering by the underwriters. Further, in no event shall the amount of securities of the selling Holders included in the offering be reduced below ten percent (10%) of the total amount of securities included in such offering, unless such offering is the initial public offering of the Company's securities in which case the selling Holders may be excluded entirely if the underwriters make the determination described above and no other shareholder's securities are included. For purposes of the preceding parenthetical concerning apportionment, for any selling Holder that is a partnership or corporation, the partners, retired partners and shareholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling Holder," and any pro-rata reduction with respect to such "selling Holder" shall be based upon the aggregate amount of Registrable Securities owned by all such related entities and individuals. 6 9 1.8 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.9 Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the 1934 Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, or the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, or the 1934 Act or any state securities law; and the Company will pay to each such Holder, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, or the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.9(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; 7 10 provided, however, that the indemnity agreement contained in this subsection 1.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that, in no event shall any indemnity under this subsection 1.9(b) exceed the gross proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 1.9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.9, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.9. (d) If the indemnification provided for in this Section 1.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. 8 11 (f) The obligations of the Company and Holders under this Section 1.9 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. 1.10 Reports Under Securities Exchange Act of 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after ninety (90) days after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and (c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company), the Act and the 1934 Act (at any time after it has become subject to such reporting requirements), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 1.11 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities that (i) is a subsidiary, parent, partner, limited partner, retired partner or shareholder of a Holder, (ii) is a Holder's family member or trust for an individual Holder, or (iii) after such assignment or transfer, holds at least 25,000 shares of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations), provided: (a) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; (b) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement, including without limitation the provisions of Section 1.12 below; and (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the 9 12 partnership; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under this Section 1. 1.12 "Market Stand-Off" Agreement. Each Holder hereby agrees that it will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the Company's initial public offering and ending on the date specified by the Company and the managing underwriter (such period not to exceed one hundred eighty (l80) days) (i) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (whether such shares or any such securities are then owned by the Holder or are thereafter acquired), or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing provisions of this Section 1.13 shall apply only to the Company's initial public offering of equity securities, shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement, and shall only be applicable to the Holders if all officers and directors and greater than five percent (5%) shareholders of the Company enter into similar agreements. The underwriters in connection with the Company's initial public offering are intended third party beneficiaries of this Section 1.12 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. Notwithstanding the foregoing, the obligations described in this Section 1.12 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-14 or Form S-15 or similar forms which may be promulgated in the future. 1.13 Form S-3 Registration. If the Company shall receive from any Holder or Holders a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are 10 13 specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 1.13: (i) if Form S-3 is not available for such offering by the Holders; (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriter's discounts or commissions) of less than $3,000,000; (iii) if the Company shall furnish to the Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than one hundred twenty (120) days after receipt of the request of the Holder or Holders under this Section 1.13; provided, however, that the Company shall not utilize this right more than once in any twelve (12) month period; (iv) if the Company has, preceding the date of such request, already effected three (3) registrations on Form S-3 for Holders pursuant to this Section 1.13; (v) if the Company has, within the twelve (12) month period preceding the date of such request, already effected two (2) registrations on Form S-3 for the Holders pursuant to this Section 1.13; or (vi) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. 1.14 Termination of Registration Rights. (a) No Holder shall be entitled to exercise any right provided for in this Section 1 after five (5) years following the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the initial firm commitment underwritten offering of its securities to the general public. (b) In addition, the right of any Holder to request inclusion in any registration pursuant to Section 1.3 shall terminate as to such Holder on the closing of the first Company-initiated registered public offering of Common Stock of the Company if all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may immediately be sold under Rule 144 during any ninety (90) day period, or on such date after the closing of the first Company-initiated registered public offering of Common Stock of the Company as all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may immediately be sold under Rule 144 during any ninety (90) day period; provided, however, that the provisions of this Section 1.13(b) shall not apply to any Holder who owns more than two percent (2%) of the Company's outstanding stock until such time as such Holder owns less than two percent (2%) of the outstanding stock of the Company. 2. Covenants of the Company. 11 14 2.1 Delivery of Financial Statements. The Company shall deliver to each Investor: (a) as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of shareholder's equity as of the end of such year, and a statement of cash flows such year, such year-end financial reports to be in reasonable detail, prepared in accordance with generally accepted accounting principles and audited and certified by independent public accountants of nationally recognized standing selected by the Company; (b) as soon as practicable, but in any event within forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Company, an unaudited income statement, statement of cash flows for such fiscal quarter and an unaudited balance sheet and a statement of shareholder's equity as of the end of such fiscal quarter; (c) within thirty (30) days of the end of each month, an unaudited income statement and statement of cash flows and balance sheet for and as of the end of such month, in reasonable detail; (d) as soon as practicable, but in any event thirty (30) days prior to the end of each fiscal year, a budget and business plan for the next fiscal year, prepared on a monthly basis, including balance sheets, income statements and statements of cash flows for such months and, as soon as prepared, any other budgets or revised budgets prepared by the Company; and (e) such other information relating to the financial condition, business, prospects or corporate affairs of the Company as the Investor or any assignee of the Investor may from time to time request; provided, however, that the Company shall not be obligated under this subsection (e) or any other subsection of Section 2.1 to provide information which it deems in good faith to be a trade secret or similar confidential information. 2.2 Inspection. The Company shall permit each Investor, at such Investor's expense, to visit and inspect the Company's properties, to examine its books of account and records and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by the Investor; provided, however, that the Company shall not be obligated pursuant to this Section 2.2 to provide access to any information which it reasonably considers to be a trade secret or similar confidential information. 2.3 Termination of Information and Inspection Covenants. The covenants set forth in Sections 2.1 and 2.2 shall terminate as to Investors and be of no further force or effect when the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the firm commitment underwritten offering of its securities to the general public is consummated or when the Company first becomes subject to the periodic reporting requirements of Sections 12(g) or 15(d) of the 1934 Act, whichever event shall first occur. 12 15 2.4 Right of First Offer. Subject to the terms and conditions specified in this paragraph 2.4, the Company hereby grants to each Investor a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). For purposes of this Section 2.4, Investor includes any general partners and affiliates of an Investor. An Investor shall be entitled to apportion the right of first offer hereby granted it among itself and its partners and affiliates in such proportions as it deems appropriate. Each time the Company proposes to offer any shares of, or securities convertible into or exercisable for any shares of, any class of its capital stock ("Shares"), the Company shall first make an offering of such Shares to each Investor in accordance with the following provisions: (a) The Company shall deliver a notice in accordance with Section 3.5 ("Notice") to the Investors stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such Shares. (b) By written notification received by the Company, within twenty (20) calendar days after receipt of the Notice, the Investor may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares which equals the proportion that the number of shares of Common Stock issued and held, or issuable upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock then held by such Investor bears to the total number of shares of Common Stock of the Company then outstanding (assuming full conversion and exercise of all convertible or exercisable securities). The Company shall promptly, in writing, inform each Investor that elects to purchase all the shares available to it (a "Fully Exercising Investor") of any other Investor's failure to do likewise. During the ten (10) day period commencing after such information is given, each Fully-Exercising Investor may elect to purchase that portion of the Shares for which Investors were entitled to subscribe but which were not subscribed for by the Investors that is equal to the proportion that the number of shares of Common Stock issued and held, or issuable upon conversion of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock then held, by such Fully-Exercising Investor bears to the total number of shares of Common Stock issued and held, or issuable upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock then held, by all Fully-Exercising Investors that wish to purchase some of the unsubscribed shares. (c) If all Shares that Investors are entitled to obtain pursuant to subsection 2.4(b) are not elected to be obtained as provided in subsection 2.4(b) hereof, the Company may, during the ninety (90) day period following the expiration of the period provided in subsection 2.4(b) hereof, offer the remaining unsubscribed portion of such Shares to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated within ninety (90) days of 13 16 the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to the Investors in accordance herewith. (d) The right of first offer in this paragraph 2.4 shall not be applicable (i) to the issuance or sale of shares of Common Stock (or options therefor) to employees for the primary purpose of soliciting or retaining their employment, provided each employee executes an agreement in the form then approved by the Company's Board of Directors and such grant or issuance is approved by the Company's Board of Directors; (ii) to or after consummation of a bona fide, firmly underwritten public offering of shares of Common Stock, registered under the Act pursuant to a registration statement on Form S-1, with an aggregate offering price of at least $15,000,000; (iii) the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities; (iv) the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise; or (v) the issuance of stock, options, warrants or other securities or rights to persons or entities with which the Company has business relationships (such as consultants, directors, and personal property and equipment lease lines) provided such issuances are for other than primarily equity financing purposes. (e) The right of first offer set forth in this Section 2.4 may not be assigned or transferred. 2.5 Board of Directors. (a) With respect to those members of the Company's Board of Directors that the Articles of Incorporation provide are to be elected by the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Common Stock (voting together as a single class and not as a separate series, and, with respect to the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, on an as-converted basis), the Founder and the Investors hereby agree to vote all of their shares of Common Stock and Preferred Stock now owned or hereafter acquired as necessary to accomplish the nomination and election of two (2) independent industry representatives that are mutually agreed upon by a majority of the directors elected by (i) the holders of the Series D Preferred Stock, (ii) the holders of the Series C Preferred Stock and (iii) the holders of outstanding shares of Series A Preferred Stock, Series B Preferred Stock and Common Stock (voting together as a single class and not as a separate series, and, with respect to the Series A Preferred Stock and Series B Preferred Stock, on an as-converted basis). (b) Should the provisions of this Section 2.5 be construed to constitute the granting of proxies, such proxies shall be deemed coupled with an interest and are irrevocable for the term of this Agreement. It is agreed and understood that monetary damages would not adequately compensate an injured party for the breach of this Section 2.5 by any party, that this Section 2.5 shall be specifically enforceable, and that any breach or threatened breach of this Section 2.5 shall be the proper subject of a temporary or permanent injunction or restraining order. Further, each party hereto waives any claim or defense that there is an adequate remedy at law for such breach or threatened breach. 14 17 (c) This Section 2.5 shall terminate in its entirety and be of no further force or effect upon the earlier to occur of: (i) the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the firm commitment underwritten offering of its securities to the general public is consummated, the public offering price of which was not less than $6.50 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations), and $15,000,000 in aggregate proceeds to the Company; (ii) the date upon which the Company first becomes subject to the periodic reporting requirements of Sections 12(g) or 15(d) of the 1934 Act; or (iii) May 15, 2008. 15 18 2.6 Sales by Founder. (a) For purposes of this Section 2.6; (i) "Stock" shall mean shares of the Company's Common Stock and Preferred Stock now owned or subsequently acquired by the Founder, (ii) "Preferred Stock" shall mean the Company's outstanding Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and any other series of Preferred Stock issued by the Company hereafter, and (iii) "Common Stock" shall mean (w) the Company's Common Stock, (x) shares of Common Stock issuable or issued upon conversion of the Company's outstanding Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and/or Series D Preferred Stock, (y) shares of Common Stock issuable upon exercise of outstanding options or warrants to the extent such options or warrants are then exercisable and/or the stock issuable thereupon would not be subject to repurchase by the Company, and (z) shares of Common Stock issuable upon conversion of any outstanding convertible securities. (b) If the Founder proposes to sell or transfer any shares of Stock in one or more related transactions which will result in the cumulative transfer of 10% or more of the Founder's total holdings of Stock, then Founder shall promptly give written notice (the "Notice") to the Company and the Investors at least twenty (20) days prior to the closing of such sale or transfer. The Notice shall describe in reasonable detail the proposed sale or transfer including, without limitation, the number of shares of Stock to be sold or transferred, the nature of such sale or transfer, the consideration to be paid, and the name and address of each prospective purchaser or transferee. (c) Each Investor shall have the right, exercisable upon written notice to Founder within fifteen (15) days after receipt of the Notice, to participate in such sale of Stock on the same terms and conditions. To the extent one or more of the Investors exercise such right of participation in accordance with the terms and conditions set forth below, the number of shares of Stock that Founder may sell in the transaction shall be correspondingly reduced. (d) Each Investor may sell all or any part of that number of shares of Stock equal to the product obtained by multiplying (i) the aggregate number of shares of Stock covered by the Notice by (ii) a fraction, the numerator of which is the number of shares of Common Stock (including shares of Common Stock issuable upon conversion of Preferred Stock) owned by the Investor at the time of the sale or transfer and the denominator of which is the total number of shares of Stock owned by Founder plus the number of shares of Common Stock (including shares of Common Stock issuable upon conversion of Preferred Stock) owned by all of the Investors at the time of the sale or transfer. (e) If any Investor fails to elect to fully participate in Founder's sale pursuant to this Section 2.6, Founder shall promptly give notice of such failure to the Investors who did so elect (the "Participants"). Such notice may be made by telephone if confirmed in writing within two (2) days. The Participants shall have five (5) days from the date such notice was given to agree to sell their pro rata share of the unsold portion. For purposes of this paragraph, a Participant's pro rata share shall be the ratio of (i) the number of shares of Common 16 19 Stock (including shares of Common Stock issuable upon conversion of Preferred Stock) held by such Participant to (ii) the number of shares of Common Stock (including shares of Common Stock issuable upon conversion of Preferred Stock) held by all the Participants and Founder. (f) Each Participant shall effect its participation in the sale by promptly delivering to Founder for transfer to the prospective purchaser one or more certificates, properly endorsed for transfer, which represent: (i) the type and number of shares of Common Stock which such Participant elects to sell; or (ii) that number of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and/or Series D Preferred Stock which is at such time convertible into the number of shares of Common Stock which such Participant elects to sell; provided, however, that if the prospective purchaser objects to the delivery of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and/or Series D Preferred Stock in lieu of Common Stock, such Participant shall convert such Preferred Stock into Common Stock and deliver Common Stock as provided above. The Company agrees to make any such conversion concurrent with the actual transfer of such shares to the purchaser. (g) The stock certificate or certificates that the Participant delivers to the Founder pursuant to paragraph 2.6(f) shall be transferred to the prospective purchaser in consummation of the sale of the Stock pursuant to the terms and conditions specified in the Notice, and the Founder shall concurrently therewith remit to such Participant that portion of the sale proceeds to which such Participant is entitled by reason of its participation in such sale. To the extent that any prospective purchaser or purchasers prohibits such assignment or otherwise refuses to purchase shares or other securities from a Participant exercising its rights of co-sale hereunder, the Founder shall not sell to such prospective purchaser or purchasers any Stock unless and until, simultaneously with such sale, the Founder shall purchase such shares or other securities from such Participant for the same consideration and on the same terms and conditions as the proposed transfer described in the Notice. The exercise or non-exercise of the rights of the Participants hereunder to participate in one or more sales of Stock made by the Founder shall not adversely affect their rights to participate in subsequent sales of Stock subject to Section 2.6 (i). (h) If none of the Investors elect to participate in the sale of the Stock subject to the Notice, the Founder may, not later than sixty (60) days following delivery to the Company and each of the Investors of the Notice, conclude a transfer of not less than all of the Stock covered by the Notice on terms and conditions not more favorable to the transferor than those described in the Notice. Any proposed transfer on terms and conditions more favorable than those described in the Notice, as well as any subsequent proposed transfer of any of the Stock by the Founder, shall again be subject to the co-sale rights of the Stockholders and shall require compliance by the Founder with the procedures described in this Section 2.6. (i) Notwithstanding the foregoing, the co-sale rights of the Investors shall not apply to (i) any pledge of Stock made pursuant to a bona fide loan transaction that creates a mere security interest, (ii) any transfer to the ancestors, descendants or spouse or to 17 20 trusts for the benefit of such persons or Founder; (iii) any bona fide gift; provided that (w) Founder shall inform the Investors of such pledge, transfer or gift prior to effecting it and (x) the pledgee, transferee or donee shall furnish the Investors with a written agreement to be bound by and comply with all provisions of this Section 2.6 of this Agreement. Such transferred Stock shall remain "Stock" hereunder, and such pledgee, transferee or donee shall be treated as a "Founder" for purposes of this Agreement, (iv) the sale of any Stock to the public pursuant to a registration statement filed with, and declared effective by, the SEC under the Act, or (v) the sale of any Stock to the Company. (j) In the event the Founder should sell any Stock in contravention of the co-sale rights of the Investors under this Agreement (a "Prohibited Transfer"), the Investors, in addition to such other remedies as may be available at law, in equity or hereunder, shall have the put option provided in (k) below, and the Founder shall be bound by the applicable provisions of such option. (k) In the event of a Prohibited Transfer, each Investor shall have the right to sell to the Founder the type and number of shares of Stock equal to the number of shares each Investor would have been entitled to transfer to the purchaser under Section 2.6(d) hereof had the Prohibited Transfer been effected pursuant to and in compliance with the terms hereof. Such sale shall be made on the following terms and conditions: (i) The price per share at which the shares are to be sold to the Founder shall be equal to the price per share paid by the purchaser to the Founder in the Prohibited Transfer. The Founder shall also reimburse each Investor for any and all fees and expense, including legal fees and expenses, incurred pursuant to the exercise or the attempted exercise of the Investor's rights under Section 2.6. (ii) Within ninety (90) days after the later of the dates on which the Investor (w) received notice of the Prohibited Transfer or (x) otherwise become aware of the Prohibited Transfer, each Investor shall, if exercising the option created hereby, deliver to the Founder the certificate or certificates representing shares to be sold, each certificate to be properly endorsed for transfer. (iii) The Founder shall, upon receipt of the certificate or certificates for the shares to be sold by an Investor, pursuant to this subparagraph, pay the aggregate purchase price therefor and the amount of reimbursable fees and expenses, as specified in Section 2.6(k)(i) of this Agreement, in cash or by other means acceptable to the Investor. (iv) Notwithstanding the foregoing, any attempt by Founder to transfer Stock in violation of Section 2.6 hereof shall be void and the Company agrees it will not effect such a transfer nor will it treat any alleged transferee as the holder of such shares without the written consent of a majority in interest of the Investors. 2.7 Key-Man Insurance. The Company shall use its best efforts to obtain from financially sound and reputable insurers term life insurance on the life of A. Nathaniel Goldhaber in the amount of $1,000,000. Such policy shall name the Company as loss 18 21 payee and shall not be cancelable by the Company without prior approval of the Board of Directors. 2.8 Observer Rights. (a) As long as Vantage Point Venture Partners ("Vantage Point") owns not less than seventy-five percent (75%) of the shares of the Series C Preferred Stock it purchased pursuant to the Series C Preferred Stock Purchase Agreement by and among the Company and the Investors listed on Schedule A thereto, dated May 15, 1998 (the "Series C Agreement"), (or an equivalent amount of Common Stock issued upon conversion thereof) and does not have a representative on the Company's Board of Directors, the Company shall invite a representative of Vantage Point to attend all meetings of its Board of Directors in a nonvoting observer capacity and, in this respect, shall give such representative copies of all notices, minutes, consents, and other materials that it provides to its directors; provided, however, that such representative shall agree to hold in confidence and trust and to act in a fiduciary manner with respect to all information so provided; and, provided further, that the Company reserves the right to withhold any information and to exclude such representative from any meeting or portion thereof if access to such information or attendance at such meeting could adversely affect the attorney-client privilege between the Company and its counsel or would result in disclosure of trade secrets to such representative or if such Investor or its representative is a direct competitor of the Company. (b) As long as CGI, LLC ("CGI") owns not less than seventy-five percent (75%) of the shares of the Series D Preferred Stock it purchased pursuant to the Series D Preferred Stock and Warrant Purchase Agreement by and among the Company and the Investors listed on Schedule A thereto of even date herewith (the "Series D Agreement"), (or an equivalent amount of Common Stock issued upon conversion thereof) and does not have a representative on the Company's Board of Directors, the Company shall invite a representative of CGI to attend all meetings of its Board of Directors in a nonvoting observer capacity and, in this respect, shall give such representative copies of all notices, minutes, consents, and other materials that it provides to its directors; provided, however, that such representative shall agree to hold in confidence and trust and to act in a fiduciary manner with respect to all information so provided; and, provided further, that the Company reserves the right to withhold any information and to exclude such representative from any meeting or portion thereof if access to such information or attendance at such meeting could adversely affect the attorney-client privilege between the Company and its counsel or would result in disclosure of trade secrets to such representative or if such Investor or its representative is a direct competitor of the Company. 2.9 Restrictions on Future Issuance of Stock. The Company hereby covenants and agrees that it shall not issue any shares of Series D Preferred Stock, other than shares of Series D Preferred Stock issued pursuant to the Series D Agreement or pursuant to exercise of the Series D Warrants, without the prior written consent of at least sixty-seven percent (67%) of the voting power of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock (voting together as a single class and not as separate series, and on an as-converted basis). 19 22 2.10 Termination of Certain Covenants. The covenants set forth in Sections 2.5, 2.6, 2.7, 2.8 and 2.9 shall terminate and be of no further force or effect upon the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the firm commitment underwritten offering of its securities to the general public. 3. Miscellaneous. 3.1 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Registrable Securities). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 3.2 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 3.3 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. 3.4 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 3.5 Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page hereof, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 3.6 Expenses. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 3.7 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this 20 23 paragraph shall be binding upon each holder of any Registrable Securities then outstanding, each future holder of all such Registrable Securities, and the Company. 3.8 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 3.9 Aggregation of Stock. All shares of Registrable Securities held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 3.10 Entire Agreement. This Agreement (including the Exhibits hereto, if any) constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 3.11 Prior Agreement. The Prior Agreement is hereby superseded in its entirety and shall be of no further force or effect. 3.12 Public Announcement. Neither the Company nor any Investor (other than Intel Corporation) shall use Intel Corporation's or its affiliates names or refer to Intel Corporation or its affiliates directly or indirectly in connection with Intel Corporation's or its affiliates relationship with the Company in any advertisement, news release, or professional or trade publication, or in any other manner, unless otherwise required by law or with Intel Corporation's prior written consent, which consent will generally not be granted. The parties agree that there will be no press release or other public statement issued by any party relating to this Agreement or the transactions contemplated hereby unless required by law or mutually agreed to, and further agree to keep the terms of this Agreement, the Series A Preferred Stock Purchase Agreement dated July 2, 1996 (the "Series A Agreement"), the Series B Preferred Stock Purchase Agreement dated June 12, 1997 (the "Series B Agreement"), the Series C Agreement, and the Warrant issued to Intel Corporation (the "Intel Warrant") in strictest confidence, it being understood that the restriction shall not prohibit disclosure to the parties' counsel, accountants, and professional advisors. If the Company determines that it is required by law or under the rules and regulations of the SEC to disclose the terms and conditions of the Agreement, the Series A Agreement, the Series B Agreement, the Series C Agreement or the Intel Warrant, it shall, a reasonable time before making any such disclosure or filing, consult with Intel Corporation regarding such disclosure or filing and seek confidential treatment for such portions of those agreements as may be reasonably requested by Intel Corporation. Notwithstanding the above, the Company may disclose the existence and terms and conditions of this Agreement, the Series A Agreement, the Series B Agreement, the Series C Agreement and the Intel Warrant to bona fide potential investors who are under obligations of nondisclosure, similar to those contained herein and which the Company believes in good faith are seriously considering investing in the Company. 21 24 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPANY: CYBERGOLD, INC. By: ---------------------------------------------- A. Nathaniel Goldhaber President Address: 2921 Adeline Street Berkeley, California 94703 SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 25 FOUNDER: ------------------------------------------------- A. Nathaniel Goldhaber Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 26 INVESTOR: ALTA CALIFORNIA PARTNERS, L.P. By: Alta California Management Partners, L.P. By: ---------------------------------------------- General Partner ALTA EMBARCADERO PARTNERS, LLC By: ---------------------------------------------- Member Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 27 VANTAGEPOINT VENTURE PARTNERS 1996 By: VantagePoint Associates LLC By: ---------------------------------------------- Alan Salzman Managing Member Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 28 ALAFI CAPITAL CORPORATION By: ---------------------------------------------- Print Name: -------------------------------------- Title: ------------------------------------------- Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 29 ------------------------------------------------- Jay Chiat Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 30 E.S. FISHBURNE AND PATRICIA M. FISHBURNE, JTWROS By: ---------------------------------------------- Print Name: -------------------------------------- Title: ------------------------------------------- Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 31 ------------------------------------------------- A. Nathaniel Goldhaber Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 32 ------------------------------------------------- Regis McKenna Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 33 LEVINE FAMILY TRUST By: ---------------------------------------------- Print Name: -------------------------------------- Title: ------------------------------------------- Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 34 REESE M. JONES 1996 CHARITABLE REMAINDER UNITRUST By: ---------------------------------------------- Print Name: -------------------------------------- Title: ------------------------------------------- Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 35 ------------------------------------------------- Frank Richards Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 36 ------------------------------------------------- Daniel J. Schwinn Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 37 ------------------------------------------------- Peter Sealey Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 38 ------------------------------------------------- John Steuart Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 39 ------------------------------------------------- Bradford C. Webb Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 40 ------------------------------------------------- Bruce R. Katz Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 41 ------------------------------------------------- Wolter Link Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 42 ------------------------------------------------- Joshua Mailman Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 43 ZINSMEYER TRUSTS PARTNERSHIP By: ---------------------------------------------- Print Name: -------------------------------------- Print Title: ------------------------------------- Address: 7777 Bonhomme Street, Suite 1400 Clayton, Missouri 63105-1301 SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 44 GC&H INVESTMENTS By: ---------------------------------------------- Print Name: -------------------------------------- Print Title: ------------------------------------- Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 45 OSPREY VENTURES, L.P. By: ---------------------------------------------- Print Name: -------------------------------------- Print Title: ------------------------------------- Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 46 CGI, LLC By: CG Investors, LLC Its Manager By: ---------------------------------------------- Phillip E. Himelstein Managing Member Address: --------------------------------------- --------------------------------------- --------------------------------------- Telephone: --------------------------------------- Facsimile: --------------------------------------- SIGNATURE PAGE TO CYBERGOLD, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 47 SCHEDULE A SCHEDULE OF INVESTORS Alafi Capital Company Alta California Partners, L.P. Alta Embarcadero Partners, LLC CGI, LLC Jay Chiat Defta Partners E.S. Fishburne and Patricia M. Fishburne, JTWROS Charles H. Finnie Abe H. Frumkin GC&H Investments A. Nathaniel Goldhaber George Hara Intel Corporation Bruce R. Katz Levine Family Trust Walter Link Joshua Mailman Regis McKenna Paul H. Levine and Burgess Lea Levine, JTWROS Osprey Ventures, L.P. Reese M. Jones 1996 Charitable Remainder Unitrust Frank Richards Frank Richards and Marsia Richards Daniel J. Schwinn Peter Sealey Frank G. Slaughter John Steuart VantagePoint Venture Partners 1996 Bradford C. Webb Dean Witter CUST FBO Bradford C. Webb IRA Rollover DTD 11/21/97 Zinsmeyer Trusts Partnership EX-10.1 7 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.1 INDEMNIFICATION AGREEMENT THIS AGREEMENT (the "Agreement") is made and entered into as of May __, 1999, between CYBERGOLD, INC., a Delaware corporation ("the Company"), and ____________________ ("Indemnitee"). WITNESSETH THAT: WHEREAS, Indemnitee performs a valuable service for the Company; and WHEREAS, the Board of Directors of the Company has adopted Bylaws (the "Bylaws") providing for the indemnification of the officers and directors of the Company to the maximum extent authorized by Section 145 of the Delaware General Corporation Law, as amended ("Law"); and WHEREAS, the Bylaws and the Law, by their nonexclusive nature, permit contracts between the Company and the officers or directors of the Company with respect to indemnification of such officers or directors; and WHEREAS, in accordance with the authorization as provided by the Law, the Company may purchase and maintain a policy or policies of directors' and officers' liability insurance ("D & O Insurance"), covering certain liabilities which may be incurred by its officers or directors in the performance of their obligations to the Company; and WHEREAS, in recognition of past services and in order to induce Indemnitee to continue to serve as an officer or director of the Company, the Company has determined and agreed to enter into this contract with Indemnitee; NOW, THEREFORE, in consideration of Indemnitee's service as an officer or director after the date hereof, the parties hereto agree as follows: 1. Indemnity of Indemnitee. The Company hereby agrees to hold harmless and indemnify Indemnitee to the full extent authorized or permitted by the provisions of the Law, as such may be amended from time to time, and Article VII of the Bylaws, as such may be amended. In furtherance of the foregoing indemnification, and without limiting the generality thereof: (a) Proceedings Other Than Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section l(a) if, by reason of his Corporate Status (as hereinafter defined), he is, or is threatened to be made, a party to or participant in any Proceeding (as hereinafter defined) other than a Proceeding by or in the right of the Company. Pursuant to this Section 1(a), Indemnitee shall be indemnified against all Expenses (as hereinafter defined), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if he acted in good faith 2 and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. (b) Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(b) if, by reason of his Corporate Status, he is, or is threatened to be made, a party to or participant in any Proceeding brought by or in the right of the Company. Pursuant to this Section 1(b), Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; provided, however, that, if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that the Court of Chancery of the State of Delaware shall determine that such indemnification may be made. (c) Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified to the maximum extent permitted by law against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. 2. Additional Indemnity. In addition to, and without regard to any limitations on, the indemnification provided for in Section 1, the Company shall and hereby does indemnify and hold harmless Indemnitee against all Expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf if, by reason of his Corporate Status, he is, or is threatened to be made, a party to or participant in any Proceeding (including a Proceeding by or in the right of the Company), including, without limitation, all liability arising out of the negligence or active or passive wrongdoing of Indemnitee. The only limitation that shall exist upon the Company's obligations pursuant to this Agreement shall be that the Company shall not be obligated to make any payment to Indemnitee that is finally determined (under the procedures, and subject to the presumptions, set forth in Sections 6 and 7 hereof) to be unlawful under Delaware law. 3. Contribution in the Event of Joint Liability. (a) Whether or not the indemnification provided in Sections 1 and 2 hereof is available, in respect of any threatened, pending or completed action, suit or proceeding 2 3 in which Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), Company shall pay, in the first instance, the entire amount of any judgment or settlement of such action, suit or proceeding without requiring Indemnitee to contribute to such payment and Company hereby waives and relinquishes any right of contribution it may have against Indemnitee. Company shall not enter into any settlement of any action, suit or proceeding in which Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding) unless such settlement provides for a full and final release of all claims asserted against Indemnitee. (b) Without diminishing or impairing the obligations of the Company set forth in the preceding subparagraph, if, for any reason, Indemnitee shall elect or be required to pay all or any portion of any judgment or settlement in any threatened, pending or completed action, suit or proceeding in which Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), Company shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in proportion to the relative benefits received by the Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, from the transaction from which such action, suit or proceeding arose; provided, however, that the proportion determined on the basis of relative benefit may, to the extent necessary to conform to law, be further adjusted by reference to the relative fault of Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, in connection with the events that resulted in such expenses, judgments, fines or settlement amounts, as well as any other equitable considerations which the law may require to be considered. The relative fault of Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, shall be determined by reference to, among other things, the degree to which their actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary, and the degree to which their conduct is active or passive. (c) Company hereby agrees to fully indemnify and hold Indemnitee harmless from any claims of contribution which may be brought by officers, directors or employees of the Company other than Indemnitee who may be jointly liable with Indemnitee. 4. Indemnification for Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. 5. Advancement of Expenses. Notwithstanding any other provision of this Agreement, the Company shall advance all Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee's Corporate Status within ten (10) days 3 4 after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 5 shall be unsecured and interest free. Notwithstanding the foregoing, the obligation of the Company to advance Expenses pursuant to this Section 5 shall be subject to the condition that, if, when and to the extent that the Company determines that Indemnitee would not be permitted to be indemnified under applicable law, the Company shall be entitled to be reimbursed, within thirty (30) days of such determination, by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Company that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any advance of Expenses until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). 6. Procedures and Presumptions for Determination of Entitlement to Indemnification. It is the intent of this Agreement to secure for Indemnitee rights of indemnity that are as favorable as may be permitted under the law and public policy of the State of Delaware. Accordingly, the parties agree that the following procedures and presumptions shall apply in the event of any question as to whether Indemnitee is entitled to indemnification under this Agreement: (a) To obtain indemnification (including, but not limited to, the advancement of Expenses and contribution by the Company) under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification. (b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 6(a) hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case by one of the following three methods, which shall be at the election of Indemnitee: (1) by a majority vote of the disinterested directors, even though less than a quorum, or (2) by independent legal counsel in a written opinion, or (3) by the stockholders. (c) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 6(b) hereof, the Independent Counsel shall be selected as provided in this Section 6(c). The Independent Counsel shall be selected by 4 5 Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors). Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in Section 13 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 6(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 6(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 6(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 6(c), regardless of the manner in which such Independent Counsel was selected or appointed. (d) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 6(a) of this Agreement. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence. (e) Indemnitee shall be deemed to have acted in good faith if Indemnitee's action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. Whether or not the foregoing provisions of this Section 6(e) are satisfied, it shall in any event be presumed that Indemnitee has at all times acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence. 5 6 (f) If the person, persons or entity empowered or selected under Section 6 to determine whether Indemnitee is entitled to indemnification shall not have made a determination within thirty (30) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such 30 day period may be extended for a reasonable time, not to exceed an additional fifteen (15) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating documentation and/or information relating thereto; and provided, further, that the foregoing provisions of this Section 6(g) shall not apply if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 6(b) of this Agreement and if (A) within fifteen (15) days after receipt by the Company of the request for such determination the Board of Directors or the Disinterested Directors, if appropriate, resolve to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy five (75) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat. (g) Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel, member of the Board of Directors, or stockholder of the Company shall act reasonably and in good faith in making a determination under the Agreement of the Indemnitee's entitlement to indemnification. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (h) The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any action, claim or proceeding to which Indemnitee is a party is resolved in any manner other than by adverse judgment against Indemnitee (including, without limitation, settlement of such action, claim or proceeding with or without payment of money or other consideration) it shall be presumed that Indemnitee has been successful on the merits or otherwise in such action, suit or proceeding. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence. 6 7 7. Remedies of Indemnitee. (a) In the event that (i) a determination is made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 5 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 6(b) of this Agreement within 90 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 6 of this Agreement, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification. Indemnitee shall commence such proceeding seeking an adjudication within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 7(a). The Company shall not oppose Indemnitee's right to seek any such adjudication. (b) In the event that a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 7 shall be conducted in all respects as a de novo trial, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination under Section 6(b). (c) If a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 7, absent a prohibition of such indemnification under applicable law. (d) In the event that Indemnitee, pursuant to this Section 7, seeks a judicial adjudication of his rights under, or to recover damages for breach of, this Agreement, or to recover under any directors' and officers' liability insurance policies maintained by the Company the Company shall pay on his behalf, in advance, any and all expenses (of the types described in the definition of Expenses in Section 13 of this Agreement) actually and reasonably incurred by him in such judicial adjudication, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of expenses or insurance recovery. (e) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 7 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement. 7 8 8. Non-Exclusivity; Survival of Rights; Insurance; Subrogation. (a) The rights of indemnification as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the certificate of incorporation of the Company, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in the Law, whether by statute or judicial decision, permits greater indemnification than would be afforded currently under the Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy. (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents or fiduciaries of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. 9. Exception to Right of Indemnification. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification under this Agreement with respect to any Proceeding brought by Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding or making of such claim shall have been approved by the Board of Directors of the Company or (b) such Proceeding is being brought by the Indemnitee to assert, interpret or enforce his rights under this Agreement. 10. Duration of Agreement. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an officer or director of the 8 9 Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any Proceeding (or any proceeding commenced under Section 7 hereof) by reason of his Corporate Status, whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as an officer or director of the Company or any other Enterprise at the Company's request. 11. Security. To the extent requested by the Indemnitee and approved by the Board of Directors of the Company, the Company may at any time and from time to time provide security to the Indemnitee for the Company's obligations hereunder through an irrevocable bank line of credit, funded trust or other collateral. Any such security, once provided to the Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee. 12. Enforcement. (a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as an officer or director of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as an officer or director of the Company. (b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof. 13. Definitions. For purposes of this Agreement: (a) "Corporate Status" describes the status of a person who is or was a director, officer, employee or agent or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the express written request of the Company. (b) "Disinterested Director" means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (c) "Enterprise" shall mean the Company and any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is 9 10 or was serving at the express written request of the Company as a director, officer, employee, agent or fiduciary. (d) "Expenses" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding. (e) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. (f) "Proceeding" includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal, administrative or investigative, in which Indemnitee was, is or will be involved as a party or otherwise, by reason of the fact that Indemnitee is or was a director of the Company, by reason of any action taken by him or of any inaction on his part while acting as an officer or director of the Company, or by reason of the fact that he is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other Enterprise; in each case whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement; and excluding one initiated by an Indemnitee pursuant to Section 7 of this Agreement to enforce his rights under this Agreement. 14. Severability. If any provision or provisions of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, illegal or otherwise unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; and (b) to the fullest extent 10 11 possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby. 15. Modification and Waiver. No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 16. Notice By Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification covered hereunder. The failure to so notify the Company shall not relieve the Company of any obligation which it may have to the Indemnitee under this Agreement or otherwise unless and only to the extent that such failure or delay materially prejudices the Company. 17. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to Indemnitee, to the address set forth below Indemnitee signature hereto. (b) If to the Company, to: 2921 Adeline Street Berkeley, California 94703 Attention: Chief Executive Officer or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be. 18. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. 19. Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. 11 12 20. Governing Law. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware without application of the conflict of laws principles thereof. 21. Gender. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. 12 13 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. CYBERGOLD, INC. By:____________________________________ Name: A. Nathaniel Goldhaber Title: Chief Executive Officer --------------------------------------- Print Name of Indemnitee --------------------------------------- Signature of Indemnitee Address: --------------------------------------- --------------------------------------- --------------------------------------- --------------------------------------- EX-23.1 8 INDEPENDENT AUDITORS' CONSENT 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this registration statement. May 21, 1999 ARTHUR ANDERSEN LLP San Francisco, California EX-27.1 9 FINANCIAL DATA SCHEDULE
5 YEAR 3-MOS DEC-31-1998 DEC-31-1998 JAN-01-1998 JAN-01-1999 DEC-31-1998 MAR-31-1999 3,175,008 2,280,033 0 0 420,701 142,650 30,000 30,000 0 0 3,592,056 2,403,283 968,133 1,057,262 561,067 642,679 4,040,272 2,892,675 1,712,651 1,908,070 225,550 291,425 6,378,679 6,671,480 509 509 607 611 (4,276,608) (5,979,420) 4,040,272 2,892,675 1,004,933 0 1,004,933 502,736 0 0 466,118 244,417 5,221,637 1,994,858 25,000 0 75,402 19,536 (4,604,441) (1,725,953) 0 0 0 0 0 0 0 0 0 0 (4,604,441) (1,725,953) (0.87) (0.33) (0.87) (0.33)
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