<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CYBERIAN OUTPOST, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 5734 06-1419111
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
27 NORTH MAIN STREET--P.O. BOX 636
KENT, CONNECTICUT 06757
(860)927-2050
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DARRYL PECK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CYBERIAN OUTPOST, INC.
27 NORTH MAIN STREET--P.O. BOX 636
KENT, CONNECTICUT 06757
(860)927-2050
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
STANFORD N. GOLDMAN, JR. ROBERT A. SCHWED
PETER S. LAWRENCE OTHON A. PROUNIS
MICHAEL L. FANTOZZI REBOUL, MACMURRAY, HEWITT,
MINTZ, LEVIN, COHN, FERRIS, MAYNARD & KRISTOL
GLOVSKY AND POPEO, P.C. 45 ROCKEFELLER PLAZA
ONE FINANCIAL CENTER NEW YORK, NY 10111
BOSTON, MA 02111 (212)841-5700
(617)542-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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
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<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
ECURITIES TO BE REGISTEREDS AGGREGATE OFFERING PRICE (1) REGISTRATION FEE
- -------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, no par value....... $63,250,000 $18,659
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</TABLE>
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(1) Estimated solely for purposes of calculating the amount of the
registration fee paid pursuant to Rule 457(o) under the Securities Act of
1933, as amended.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
(SUBJECT TO COMPLETION)
DATED , 1998
SHARES
LOGO
COMMON STOCK
-----------
All of the shares of Common Stock offered hereby are being sold by Cyberian
Outpost, Inc. ("Cyberian Outpost" or the "Company"). Prior to this Offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between $
and $ per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. Application has
been made to have the Common Stock approved for quotation on the Nasdaq
National Market under the symbol "COOL."
-----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY OTHER STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share...................................... $ $ $
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Total(3)....................................... $ $ $
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</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses estimated at $ , payable by the Company.
(3) The Company and the Company's principal stockholder have granted to the
Underwriters a 30-day option to purchase up to and additional
shares of Common Stock, respectively, solely to cover over-allotments, if
any. To the extent the option is exercised, the Underwriters will offer the
shares at the Price to Public shown above. If all such shares are
purchased, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Stockholder will
be $ , $ , $ and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by
them, and subject to their right to reject orders in whole or in part. It is
expected that delivery of such shares of Common Stock will be made at the
offices of BT Alex. Brown Incorporated in Baltimore, Maryland, on or about
,1998.
BT ALEX. BROWN
NATIONSBANC MONTGOMERY
SECURITIES LLC
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
[Cyberian Outpost Logo]
THE COOL PLACE TO SHOP FOR COMPUTER STUFF!
[Graphic depiction of OUTPOST.COM Home Page]
STRATEGIC PARTNERS
[AOL Logo] [Lycos Logo] [StarMedia Logo] [c/net Logo]
[InfoSpace Logo] [Excite Logo] [theglobe.com Logo] [WebCrawler Logo]
THE UNDERWRITERS AND CERTAIN OTHER PERSONS PARTICIPATING IN THIS OFFERING MAY
ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET
PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-
COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
Cyberian Outpost is a registered service mark of the Company and the Company
claims a trademark on Cyberian Express. All other trade names, trademarks or
service marks appearing in this Prospectus are the property of their
respective owners and are not the property of the Company.
<PAGE>
OUTPOST.COM
THE COOL PLACE TO SHOP FOR COMPUTER STUFF!
[Graphic depiction of OUTPOST.COM Home Page]
WHO WE ARE
Cyberian Outpost is a leading global internet retailer of computer products to
the consumer and small office/home office marketplace with one of the largest
selections of hardware, software and peripherals available today.
[Graphic depiction of OUTPOST.COM Search Results Page]
HELPING CUSTOMERS FIND WHAT THEY NEED
Locating products is easy. Customers can browse or search for products by name,
category or manufacturer or check new arrivals for an up-to-the-moment list of
new product releases.
[Graphic depiction of OUTPOST.COM Product Description Page]
INFORMATIVE AND HELPFUL PRODUCT DESCRIPTIONS
Cyberian Outpost product descriptions provide the information consumers need to
make informed buying decisions. Customers can compare product features and learn
about related products.
[Graphic depiction of OUTPOST.COM Shopping Cart Page and Three-Step Checkout
Pages]
SECURE 3-STEP CHECKOUT
Cyberian Outpost's secure 3-step checkout process--1. Name and address 2.
Selection of shipping method 3. Choice of payment type--makes buying fast and
easy.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the Consolidated Financial
Statements, including the Notes thereto, appearing elsewhere in this
Prospectus. Except as otherwise noted herein, all information in this
Prospectus (i) reflects the reincorporation of the Company from a Connecticut
corporation to a Delaware corporation to be effected in June 1998, (ii)
reflects the amendment of the Company's Certificate of Incorporation to
increase the number of authorized shares of Common Stock and Preferred Stock to
50,000,000 and 10,000,000 shares, respectively, to be effected in June 1998,
(iii) reflects a for stock split of the Company's Common Stock to be
effected in June 1998, (iv) reflects the automatic conversion of all
outstanding shares of the Company's Series A and Series B Convertible Preferred
Stock and Redeemable Series C Convertible Preferred Stock into an aggregate
3,778,948 shares of Common Stock upon the consummation of this Offering (the
"Preferred Stock Conversion"), (v) reflects the termination of certain
contingent warrants to purchase 415,518 shares of Common Stock upon
consummation of this Offering and (vi) assumes no exercise of the Underwriters'
over-allotment option. Unless otherwise indicated, the terms "Company" and
"Cyberian Outpost" refer to Cyberian Outpost, Inc. and its subsidiary.
THE COMPANY
Cyberian Outpost is a leading global Internet retailer of computer hardware,
software and peripheral products to the consumer and small office/home office
marketplace. With more than 115,000 stock keeping units ("SKUs"), Cyberian
Outpost offers an online "superstore" at www.outpost.com that provides one-stop
shopping for domestic and international customers, 24 hours a day, seven days a
week. The Company's online store features a fun, easy to navigate interface,
competitive pricing, extensive product information and powerful search
capabilities. The Cyberian Outpost Web site has quickly become one of the most
widely known and used e-commerce sites and has received recognition from
numerous publications, including The New York Times and BusinessWeek. Cyberian
Outpost also was named "Best Site for Computer Equipment" by Money Magazine in
September 1997 and was cited as an "e-commerce trailblazer" by Forbes ASAP in
April 1998. To enhance Cyberian Outpost's brand recognition and increase
traffic to its online store, the Company has recently entered into strategic
marketing and distribution alliances with America Online, Lycos-Bertelsmann,
StarMedia, c|net, InfoSpace, Excite, WebCrawler, theglobe.com and MetaCrawler.
The Company has grown rapidly since its inception in 1995. Net sales have
increased from $1.9 million for the year ended February 29, 1996 to $22.7
million for the year ended February 28, 1998. During the last four consecutive
fiscal quarters, the Company's quarterly net sales have increased from $3.9
million, to $4.6 million, $6.1 million and $8.1 million, respectively. Of the
more than 103,000 individual customers in over 140 countries worldwide who have
purchased from Cyberian Outpost since inception, more than 90,000 have become
customers since March 1, 1997. In addition, the Company has achieved high
levels of average order size and repeat orders. The Company has an average
order size of approximately $250, a number that the Company believes is
significantly higher than many other online retailers. Repeat customers
accounted for approximately 48% of net sales in fiscal 1998.
The Company believes that its target market of consumers and small
office/home office businesses represents an attractive and rapidly growing
segment of the Web commerce industry. According to Jupiter Communications
("Jupiter"), a market research firm, domestic online consumer purchases
(excluding cars and real estate) are expected to grow from an estimated $2.6
billion in 1997 to approximately $37.5 billion by 2002. Jupiter also estimates
that the single largest Web retail opportunity for the consumer and small
office/home office market is online sales of computer products (including
hardware, software and consumer electronics). By 2002, the online market for
computer products is estimated to reach approximately $10.5 billion in the
United States alone, compared to an estimated domestic online market for
travel, books and music of $8.6 billion, $2.2 billion and $1.2 billion,
respectively.
3
<PAGE>
The Company believes that, as an Internet retailer, it enjoys several key
operating advantages over traditional store- and catalog-based retailers of
computer products. These advantages include:
Attractive economics of the "virtual" store. As an Internet-only
merchant, Cyberian Outpost enjoys structural economic advantages
relative to traditional retailers, including: (i) low-cost and
essentially unlimited "shelf space," (ii) flexible advertising and
affordable merchandising opportunities, (iii) lower personnel
requirements, (iv) scaleable technology and systems that can serve a
fast-growing customer base and (v) the ability to serve a worldwide
customer base from a single, domestic location.
One-stop shop. Because Cyberian Outpost's "shelf space" is low cost and
essentially unlimited, the Company offers a broad selection that would
be economically or physically impractical to stock in a store or to
include in a typical mail-order catalog. Cyberian Outpost currently
offers more than 115,000 hardware, software and peripheral SKUs.
Global customer base. With its global reach, Cyberian Outpost can
deliver a broad selection of products to customers in international,
rural or other locations that cannot support large-scale physical
stores.
Value-added online content. In addition to offering the products
themselves, Cyberian Outpost's site delivers value-added content,
including extensive product descriptions. The Company also offers a free
e-mail newsletter, Cyberian Express, which delivers product information
and updates to over 26,000 subscribers weekly.
Convenient 24-hour shopping. Purchasing items from Cyberian Outpost is
more convenient than shopping in a physical store. The Cyberian Outpost
Web site is open 24 hours a day, seven days a week, and may be reached
from the buyer's home or office.
Customer service. In addition to the product and order tracking
information that is available on Cyberian Outpost's Web site, the
Company provides pre- and post-sales support via both e-mail and toll-
free telephone service.
Low-cost, alternative distribution channel for manufacturers. Cyberian
Outpost offers manufacturers a direct, low-cost retail channel. In
contrast to store-based retailers that often charge for shelf space and
catalog retailers that often require up-front payments, all of Cyberian
Outpost's products are carried free of charge.
In an effort to become the leading global Internet retailer of computer
hardware, software and peripheral products to the consumer and small
office/home office marketplace, the Company is pursuing a strategy consisting
of the following key elements:
Focus on consumer online retailing of computer products. The Company's
merchandising strategy is tailored to consumers in terms of product
selection, site design and selection of affiliate and linking programs.
The Company believes that the www.outpost.com store, with its cartoon
graphics, colorful environment and fun and irreverent edge, enhances its
position as a leading online consumer brand.
Build brand recognition through multiple marketing channels. The Company
seeks to build Cyberian Outpost's brand recognition and expand its
customer base through multiple marketing channels which include (i)
strategic alliances with major Internet content and portal sites, (ii)
Web-based marketing and promotional campaigns, (iii) linking programs
with targeted Web sites and (iv) personalized direct marketing programs
designed to generate repeat sales from existing customers.
Exploit international market opportunities. Cyberian Outpost believes
that the Web offers a unique opportunity for online retailers, who are
not encumbered by historically inefficient distribution mechanisms, to
reach the global market for computer hardware and software products, a
market that the Company believes is approximately equal to the size of
the domestic market for such goods.
4
<PAGE>
Promote repeat purchases. The Company's strategy is to build customer
loyalty and promote repeat buying by providing enhanced product
information, efficient site navigation and search capabilities,
personalized services and targeted communications.
Leverage technology to maximize business impact. The Company's
technology team leverages the unique efficiencies of the Internet to (i)
personalize the user experience, (ii) increase merchandising
effectiveness and (iii) improve operating efficiency. For example,
Cyberian Outpost is developing systems to personalize visitors' shopping
experiences by re-merchandising the store in real-time for individual
shoppers.
The Company was incorporated as a Connecticut corporation in March 1995 and
will be reincorporated in Delaware in June 1998. The Company's principal
offices are located at 27 North Main Street, Kent, Connecticut 06757, and its
telephone number is 860-927-2050.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company...... shares
Common Stock to be outstanding after this shares (1)
Offering................................
Use of proceeds.......................... For the payment of sales and
marketing expenses, including
payments associated with strategic
alliances, capital expenditures
associated with technology and
systems upgrades, expansion of the
Company's headquarters location, and
other general corporate purposes,
including working capital.
Proposed Nasdaq National Market Symbol... COOL
</TABLE>
- --------
(1) Excludes 573,000 and 680,366 shares of Common Stock reserved for issuance
upon the exercise of stock options and warrants, respectively, outstanding
on February 28, 1998, at weighted average exercise prices of $4.48 and
$6.68 per share, respectively. Also excludes (i) 45,000 and 105,604 shares
of Common Stock issuable upon the exercise of stock options and warrants,
respectively, issued after February 28, 1998, at weighted average exercise
prices of $22.78 and $7.96 per share, respectively, and (ii) 635,000 shares
of Common Stock issuable upon the exercise of stock options to be granted
to employees upon consummation of this Offering at the initial public
offering price.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
PERIOD FROM MARCH
6, 1995 (DATE OF YEARS ENDED FEBRUARY 28,
INCEPTION) THROUGH --------------------------
FEBRUARY 29, 1996 1997 1998
------------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AND
OPERATING DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................... $1,852 $ 10,790 $ 22,681
Cost of sales.................. 1,689 9,535 20,525
------ ------------ ------------
Gross profit................. 163 1,255 2,156
Operating expenses:
Sales and marketing (1)...... 218 1,407 5,943
General and administrative... 259 805 1,623
Technology and development... 54 382 1,058
------ ------------ ------------
Total operating expenses... 531 2,594 8,624
------ ------------ ------------
Operating loss............... (368) (1,339) (6,468)
Other income (expense), net
(2)........................... (4) 1 (624)
------ ------------ ------------
Net loss..................... $ (372) $ (1,338) $ (7,092)
====== ============ ============
Basic and diluted net loss per
common share (3).............. $(0.21) $ (0.65) $ (3.21)
====== ============ ============
Weighted average basic and
diluted common shares
outstanding (3)............... 1,748 2,048 2,211
====== ============ ============
OPERATING DATA:
Customers (4).................. 5,500 32,500 81,000
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28, 1998
-----------------------------------
PRO FORMA AS
ACTUAL PRO FORMA (5) ADJUSTED (6)
------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 7,325 $19,452 $
Working capital............................ 824 15,700
Total assets............................... 10,940 23,066
Notes payable.............................. 2,750 --
Redeemable convertible preferred stock..... 5,991 --
Total stockholders' (deficit) equity....... (3,671) 17,196
</TABLE>
- --------
(1) Sales and marketing expense for the year ended February 28, 1998 includes a
charge of $703,897 representing the fair value of common stock warrants
issued in connection with a marketing agreement. See Note 6(a) to
Consolidated Financial Statements.
(2) Other income (expense), net for the year ended February 28, 1998 includes a
charge of $567,563 representing the amortization of the original issue
discount in connection with a note payable. See Notes 3 and 6(a) to
Consolidated Financial Statements.
(3) See Note 1 to Consolidated Financial Statements for an explanation of the
determination of the number of common shares used in computing the amount
of basic and diluted net loss per common share.
(4) Cumulative number of customers who have purchased products from the Company
from its inception in March 1995 through the end of each period.
(5) Represents actual data adjusted to give effect to the following
transactions (the "Series B and C Transactions") as if they had been
completed on February 28, 1998: (i) the repayment of a $2.0 million short-
term note, (ii) the conversion of a $750,000 convertible debenture into
163,043 shares of Series B Convertible Preferred Stock, (iii) the issuance
of 1,895,125 shares of Redeemable Series C Convertible Preferred Stock,
together with 105,604 Common Stock warrants and 284,269 contingent
warrants, for aggregate net proceeds of approximately $14.1 million and
(iv) the Preferred Stock Conversion. See "Certain Transactions."
(6) Represents pro forma data adjusted to give effect to the sale of the Common
Stock in this Offering at an assumed initial public offering price of $
per share and the application of the estimated net proceeds therefrom.
7
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to other information contained in this Prospectus,
before purchasing the shares of Common Stock offered hereby. This Prospectus
contains forward-looking statements. Prospective investors are cautioned that
any such forward-looking statements are not guarantees of future performance
and involve risks and uncertainties. Actual events or results may differ
materially from those discussed in the forward-looking statements as a result
of various factors, including the risk factors set forth below and the matters
set forth in this Prospectus generally.
Limited Operating History; Accumulated Deficit; Anticipated Losses. The
Company was founded in March 1995 and began selling computer products in May
1995. Accordingly, the Company has a limited operating history on which to
base an evaluation of its business and prospects. The Company's prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of development, particularly
companies in new and rapidly evolving markets such as online commerce. Such
risks for the Company include, but are not limited to, the changing nature and
unpredictability of its business environment and the difficulty of managing
growth. To address these risks, the Company must, among other things, maintain
and increase its customer base, implement and successfully execute its
business and marketing strategies, continue to develop and upgrade its
technology and transaction-processing systems, improve its Web site, provide
superior customer service and order fulfillment, respond to competitive
developments, and attract, retain and motivate qualified personnel. There can
be no assurance that the Company will be successful in addressing such risks,
and the failure to do so could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
Since inception, the Company has incurred significant losses, and as of
February 28, 1998 had an accumulated deficit of $8.8 million. The Company
believes that its success will depend in large part on its ability to (i)
extend its brand position, (ii) provide its customers with outstanding value
and a superior shopping experience and (iii) achieve sufficient sales volume
to realize economies of scale. Accordingly, the Company intends to invest
heavily in marketing and promotion, Web site development and technology and
operating infrastructure development. As a result, the Company believes that
it will incur substantial operating losses for the foreseeable future and that
such losses will increase over the near term. Because the Company has
relatively low product gross margins, achieving profitability given planned
investment levels depends upon the Company's ability to generate and sustain
substantially increased revenue levels. During the early stages of its
development, the Company has experienced a significant revenue growth rate. As
the Company matures, however, such growth rate will decline. There can be no
assurance that the Company will successfully continue to increase revenues,
achieve or maintain profitability or generate cash from operations in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Unpredictability of Future Revenues; Potential Fluctuations in Operating
Results; Seasonality. As a result of the Company's limited operating history
and the emerging nature of the markets in which it competes, the Company may
not be able to accurately predict its revenues. The Company's current and
future expense levels are based largely on its investment plans and estimates
of future revenues. Sales and operating results generally depend on the volume
of, timing of and ability to fulfill orders received, which are difficult to
forecast. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues in relation to the Company's planned expenditures would
have an immediate adverse effect on the Company's business, prospects,
financial condition and results of operations. Further, as a strategic
response to changes in the competitive environment, the Company may from time
to time make certain unforeseen pricing, service or marketing decisions the
cost of which could have a material adverse effect on its business, prospects,
financial condition and results of operations. See "Business--Competition."
8
<PAGE>
The Company expects to experience significant fluctuations in its future
operating results due to a variety of factors, many of which are outside the
Company's control. Factors that may adversely affect the Company's operating
results include (i) the Company's ability to retain existing customers,
attract new customers at a steady rate and maintain customer satisfaction,
(ii) the Company's ability to manage its fulfillment activities and maintain
gross margins, (iii) the announcement or introduction of new Web sites,
services and products by the Company, its strategic partners and its
competitors, (iv) the success of the Company's strategic alliances, (v) price
competition or higher wholesale prices in the industry, (vi) mix of product
sales, (vii) seasonality of sales typically experienced by retailers, (viii)
the level of use of the Internet and online services and consumer acceptance
of the Internet and other online services for the purchase of consumer
products such as those offered by the Company, (ix) the Company's ability to
upgrade and develop its systems and infrastructure and attract new personnel
in a timely and effective manner, (x) the level of traffic on the Company's
Web site, (xi) technical difficulties, system downtime or Internet brownouts,
(xii) the amount and timing of operating costs and capital expenditures
relating to expansion of the Company's business, operations and
infrastructure, (xiii) the level of merchandise returns experienced by the
Company, (xiv) governmental regulation and (xv) general economic conditions
and economic conditions specific to the Internet, online commerce and the
industry. In view of the rapidly evolving nature of the Company's business and
its limited operating history, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and should
not be relied upon as an indication of future performance. The Company also
expects that it will experience seasonality in its business, reflecting a
combination of seasonal fluctuations in Internet usage and traditional retail
seasonality patterns. Sales in the traditional retail computer industry are
higher in the fourth calendar quarter of each year than in the preceding three
quarters. To date, the Company's limited operating history and rapid growth
make it difficult to ascertain the effects of seasonality on its business.
Need for Additional Capital. The Company's operations to date have consumed
substantial amounts of capital, and the Company expects capital and operating
expenditures to increase over the next several years in connection with
efforts to expand its business. The Company believes that the net proceeds
from this Offering, investment securities and existing cash will be sufficient
to support the Company's operations for at least the next 12 months, although
there can be no assurance that the Company will not have additional capital
needs prior to the end of such period. The Company may be required to raise
additional capital to continue to support its business operations, including
obligations to strategic partners and third-party manufacturers. In the event
that such additional financing is necessary, the Company may seek to raise
such funds through public or private equity or debt financing or other means.
No assurance can be given that additional financing will be available when
needed, or that, if available, such financing will be obtained on terms
favorable to the Company or its shareholders. To the extent that the Company
raises additional capital by issuing equity securities, dilution to existing
shareholders may result. In the event that adequate funds are not available,
the Company's business, financial condition and results of operations may be
materially adversely affected. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Competition. The online commerce market is new, rapidly evolving and
intensely competitive. Current and new competitors can launch new sites at a
relatively low cost. In addition, the computer products retail industry is
intensely competitive. The Company currently or potentially competes with a
variety of other companies. These competitors include (i) various traditional
computer retailers including CompUSA and MicroCenter, (ii) various mail-order
retailers including CDW, MicroWarehouse, Insight, PC Connection and Creative
Computers, (iii) various Internet-focused computer retailers including
Egghead.com, software.net Corporation and NECX Direct, (iv) various
manufacturers that sell directly over the Internet including Dell, Gateway,
Apple and many software companies, (v) a number of online service providers
including America Online and the Microsoft Network that offer computer
products directly or in partnership with other retailers, (vi) some non-
computer retailers such as Wal-Mart that sell a limited selection of computer
products in their stores and (vii) computer products distributors which may
develop direct channels to the consumer market. Increased competition from
these and other sources could require the Company to respond to competitive
pressures by establishing pricing, marketing and other programs or seeking out
additional strategic alliances or
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acquisitions which may be less favorable to the Company than would otherwise
be established or obtained, and thus could have a material adverse effect on
the business, prospects, financial condition and results of operations of the
Company. See "Business--Competition."
The Company believes that the principal competitive factors in its market
are brand recognition, selection, price, variety of value-added services, ease
of use, site content, fulfillment, reliability, quality of search tools,
customer service and technical expertise. Many of the Company's current and
potential competitors have longer operating histories, larger customer bases,
greater brand recognition, and significantly greater financial, marketing and
other resources than the Company. In addition, online retailers may be
acquired by, receive investments from or enter into other commercial
relationships with larger, well-established and well-financed companies as use
of the Internet and other online services increases. The Company is aware that
certain of its competitors have and may continue to adopt aggressive pricing
or inventory availability policies and devote substantially more resources to
Web site and systems development than the Company. Increased competition may
result in reduced operating margins, loss of market share and a diminished
brand franchise, any of which would have a material adverse effect on the
Company. Moreover, companies that control access to Internet commerce
transactions through network access or Web browsers currently promote, and
will likely continue to promote, competitors of the Company. In addition, new
technologies and the expansion of existing technologies may increase the
competitive pressures on the Company. See "Business--Competition."
International Sales. International sales accounted for approximately 36% of
the Company's revenues in fiscal 1998. The Company believes that its ability
to increase its net sales will require expansion of its sales in foreign
markets. There can be no assurance, however, that the Company will be able to
maintain or increase international market demand for its products. In
addition, international sales are subject to numerous risks, including
political and economic instability in foreign markets, restrictive trade
policies of foreign governments, economic conditions in local markets,
potentially adverse tax consequences and the burdens of complying with a wide
variety of foreign laws. There can be no assurance that such factors will not
have a material adverse effect upon the Company's future revenues from
international sales and, consequently, the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--Strategy."
Risk of System Failure; Single Site and Order Interface. The Company's
success, in particular its ability to successfully receive and fulfill orders
and provide high-quality customer service, largely depends on the efficient
and uninterrupted operation of its computer and communications hardware
systems. Substantially all of the Company's computer and communications
hardware required for Web access is managed by a third-party provider located
in New Jersey. The Company is dependent on the services of this provider, and
its systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquake and
similar events. The Company does not presently have a formal disaster recovery
plan and does not carry sufficient business interruption insurance to
compensate it for losses that may occur. Despite the implementation of network
security measures by the Company, its servers are vulnerable to computer
viruses, physical or electronic break-ins and similar disruptions, which could
lead to interruption, delays, loss of data or the inability to accept and
fulfill customer orders. The occurrence of any of the foregoing risks could
have a material adverse effect on the Company's business, financial condition
and results of operation. See "Business--Technology and Systems."
Risk of Capacity Constraints; Reliance on Internally Developed Systems. A
key element of the Company's strategy is to generate a high volume of traffic
on, and use of, its Web site. Accordingly, the satisfactory performance,
reliability and availability of the Company's Web site, transaction-processing
systems and network infrastructure are critical to the Company's reputation
and its ability to attract and retain customers and maintain adequate customer
service levels. The Company's revenues depend on the number of visitors who
shop on its Web site, the size of their orders and the volume of orders it
fulfills. The Company uses an internally developed system for its Web site,
search engine and material portions of its transaction processing and order
management. The Company's inability to add additional software and hardware or
to develop and upgrade its existing
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technology or network infrastructure to accommodate increased traffic on its
Web site or increased sales volume through its transaction processing and
order management systems may cause unanticipated system disruptions, slower
response times, degradation in levels of customer service, impaired quality
and speed of order fulfillment, and delays in reporting accurate financial
information. Any system interruptions that result in the unavailability of the
Company's Web site or reduced order fulfillment performance would reduce the
volume of products sold and the attractiveness of the Company's product and
service offerings. In addition, although the Company works to prevent
unauthorized access to Company data, it is impossible to completely eliminate
this risk. There can be no assurance that the Company will be able in a timely
manner to effectively upgrade and expand its transaction processing and order
management systems or to integrate smoothly any newly developed or purchased
modules with its existing systems. Any inability to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Technology and Systems."
Dependence on Outside Fulfillment House. The Company houses its inventory in
a leased warehouse located in Wilmington, Ohio. In addition to warehousing
services, the manager of the warehouse also provides order fulfillment
services for the Company. The Company is therefore dependent on the warehouse
manager for timely, accurate order fulfillment. Although the warehouse manager
operates a secure facility, its systems and operations are vulnerable to
damage or interruption from fire, flood, power loss, telecommunications
failure, break-ins, earthquake and similar events. The Company does not
presently have redundant systems or a formal disaster recovery plan and does
not carry sufficient business interruption insurance to compensate it for
losses that may occur. The occurrence of any of the foregoing risks could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Warehousing and Fulfillment."
Management of Continued Growth; New Management Team. The Company has rapidly
and significantly expanded its operations, and anticipates that further
significant expansion will be required to address potential growth in its
customer base and market opportunities. Although there can be no assurance of
further significant expansion, to date the Company's expansion has placed, and
is expected to continue to place a significant strain on the Company's
management, operational and financial resources. From March 1995 to May 1,
1998, the Company expanded from two to 78 full-time and five part-time
employees. Several members of the Company's senior management have only
recently joined the Company, including its Executive Vice President and Chief
Financial Officer, Chief Technology Officer, Vice President of Sales and Vice
President and General Merchandise Manager. The Company's new employees include
a number of key managerial, technical and operations personnel who have not
yet been fully integrated into the Company, and the Company expects to add
additional key personnel in the near term. To manage any material growth of
its operations and personnel, the Company will be required to improve existing
transaction-processing, operational and financial systems, procedures and
controls, and to expand, train and manage its already growing employee base.
Further, the Company's management will be required to maintain and expand its
relationships with various distributors, other Web sites and other Web service
providers, Internet and other online service providers and other third parties
necessary to the Company's business. There can be no assurance that the
Company's current and planned personnel, systems, procedures and controls will
be adequate to support the Company's future operations, that management will
be able to hire, train, retain, motivate and manage required personnel or that
the Company's management will be able to successfully identify, manage and
exploit existing and potential market opportunities. If the Company is unable
to manage growth effectively, its business, prospects, financial condition and
results of operations will be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Employees."
Dependence on Key Personnel; Need for Additional Personnel. The Company's
performance is substantially dependent on the continued services and
performance of its senior management and other key personnel, particularly
Darryl Peck, President and Chief Executive Officer. The Company's performance
also depends on the Company's ability to retain and motivate its other
officers and key employees. The loss of the services of any of its executive
officers or other key employees could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company's future success also depends
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on its ability to identify, attract, hire, train, retain and motivate other
highly skilled technical, managerial, editorial, merchandising, marketing and
customer service personnel. Competition for such personnel is intense, and
there can be no assurance that the Company will be able to successfully
attract, assimilate or retain sufficiently qualified personnel. The failure to
retain and attract the necessary technical, managerial, editorial,
merchandising, marketing and customer service personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Employees" and "Management."
Dependence on Continued Growth of Online Commerce. The Company's future
revenues and any future profits are substantially dependent upon the
willingness of consumers to accept the Internet as an effective medium of
commerce. Rapid growth in the use of and interest in online services is a
recent phenomenon, and there can be no assurance that acceptance and use will
continue to develop or that a sufficiently broad base of consumers will adopt,
and continue to use, the Internet and other online services as a medium of
commerce. Demand and market acceptance for recently introduced services and
products over the Internet are subject to a high level of uncertainty and
there exist few proven services and products. The Company relies on consumers
who have historically used traditional means of commerce to purchase
merchandise. For the Company to be successful, these consumers must accept and
utilize novel ways of conducting business and obtaining information.
The Internet may not be accepted by consumers as a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that online
services continue to experience significant growth in the number of users,
their frequency of use or an increase in their bandwidth requirements, there
can be no assurance that the infrastructure of the Internet and other online
services will be able to support the demands placed upon them. In addition,
Internet services could lose their viability due to delays in the development
or adoption of new standards and protocols required to handle increased levels
of online service activity or due to increased governmental regulation.
Changes in or insufficient availability of telecommunications services to
support Internet services also could result in slower response times and
adversely affect usage of the Internet and other online services generally and
Cyberian Outpost in particular. If use of the Internet and other online
services does not continue to grow or grows more slowly than expected, if the
infrastructure for Internet services does not effectively support growth that
may occur, or if the Internet does not become a viable commercial marketplace,
the Company's business, financial condition and results of operations would be
materially adversely affected.
Rapid Technology Change. To remain competitive, the Company must continue to
enhance and improve the responsiveness, functionality and features of its
store. The online commerce industry is characterized by rapid technological
change, changes in user and customer requirements and preferences, frequent
new product and service introductions embodying new technologies and the
emergence of new industry standards and practices that could render the
Company's existing Web site and proprietary technology and systems obsolete.
The Company's success will depend, in part, on its ability to license leading
technologies useful in its business, enhance its existing services, develop
new services and technology that address the increasingly sophisticated and
varied needs of its customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely
basis. The development of Web site and other proprietary technology entails
significant technical and business risks. There can be no assurance that the
Company will successfully use new technologies effectively or adapt its Web
site, proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards. If the Company is unable, for
technical, legal, financial or other reasons, to adapt in a timely manner in
response to changing market conditions or customer requirements, its business,
financial condition and results of operations would be materially adversely
affected. See "Business--Technology and Systems."
Reliance on Certain Vendors. While the Company purchases its merchandise
from many different vendors, during fiscal 1998, 38% and 10%, respectively, of
its products were purchased through two major distributors, Ingram Micro and
MicroAge. Failure to develop and maintain relationships with these and other
vendors that would allow it to source sufficient quantities of merchandise on
acceptable commercial terms could have a material adverse effect on the
Company's business, financial condition and results of operations.
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Online Commerce Security Risks; Credit Card Fraud. A significant barrier to
online commerce and communications is the secure transmission of confidential
information over public networks. The Company relies on encryption and
authentication technology licensed from third parties to provide security and
authentication necessary to effect secure transmission of confidential
information, such as customer credit card numbers. There can be no assurance
that advances in computer capabilities, new discoveries in the field of
cryptography, or other events or developments will not result in a compromise
or breach of the algorithms used by the Company to protect customer
transaction data. If any such compromise of the Company's security were to
occur, it could have a material adverse effect on the Company's reputation,
business, financial condition and results of operations. A party who is able
to circumvent the Company's security measures could misappropriate proprietary
information or cause interruptions in the Company's operations. The Company
may be required to expend significant capital and other resources to protect
against such security breaches or to alleviate problems caused by such
breaches.
Concerns over the security of transactions conducted on the Internet and the
privacy of users may also inhibit the growth of online services generally,
especially as a means of conducting commercial transactions. To the extent
that activities of the Company or third-party contractors involve the storage
and transmission of proprietary information, such as credit card numbers,
security breaches could damage the Company's reputation and expose the Company
to a risk of loss or litigation and possible liability. There can be no
assurance that the Company's security measures will prevent security breaches
or that failure to prevent such security breaches will not have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations. In addition, like other retailers who accept credit
card information over the telephone or Internet without a signature, the
Company has incurred losses as a result of orders placed with fraudulent
credit card information, despite the fact that the payment of such orders was
approved by the applicable financial institution. Under current credit card
practices, a retailer like Cyberian Outpost is liable for fraudulent credit
card transactions, where, as is the case with transactions processed by the
Company over the Internet, no cardholder signature is obtained. There can be
no assurance that the Company will not suffer significant losses as a result
of fraudulent use of credit card information in the future, which could have a
material adverse effect on the Company. See "Business--Technology and
Systems."
Risks Associated with Entry into New Business Areas. The Company may choose
to expand its operations by developing new Web sites, promoting new or
complementary products or sales formats, expanding the breadth and depth of
products and services offered or expanding its market presence through
relationships with third parties. In addition, the Company may pursue the
acquisition of new or complementary businesses, or technologies, although it
has no present understandings, commitments or agreements with respect to any
material acquisitions or investments. There can be no assurance that the
Company would be able to expand its efforts and operations in a cost-effective
or timely manner or that any such efforts would increase overall market
acceptance. Furthermore, any new business or Web site launched by the Company
that is not favorably received by consumers could damage the Company's
reputation or the Cyberian Outpost brand. Expansion of the Company's
operations in this manner would also require significant additional expenses
and development, operations and editorial resources and would strain the
Company's management, financial and operational resources. The lack of market
acceptance of such efforts could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
Trademarks and Proprietary Rights; Unlicensed Arrangements; Liability for
Online Content. The Company regards its service marks, trademarks, trade
secrets and similar intellectual property as instrumental to its success, and
relies on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
strategic partners and others to protect its proprietary rights. The Company
has pursued the registration of its trademarks and service marks in the United
States and internationally, and has applied for the registration of certain of
its trademarks and service marks. Effective trademark, service mark, copyright
and trade secret protection may not be available in every country in which the
Company's products and services are made available online.
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The Company has licensed in the past, and expects that it may license in the
future, certain of its proprietary rights, such as trademarks or copyrighted
material, to third parties. While the Company attempts to ensure that the
quality of its brand is maintained by such licensees, there can be no
assurance that such licensees will not take actions that might materially
adversely affect the value of the Company's proprietary rights or reputation,
which could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. There can be no
assurance that the steps taken by the Company to protect its proprietary
rights will be adequate or that third parties will not infringe or
misappropriate the Company's copyrights, trademarks and similar proprietary
rights. See "Business--Intellectual Property."
In addition, the Company believes that its success to date and its future
success will depend in part upon its ability to provide reviews and other
information about the computer products that it sells. As an online publisher,
the Company may face potential liability for copyright, trademark or patent
infringement, defamation or other claims based on the nature and content of
materials that the Company publishes or distributes. Defending such claims, or
liability arising out of such claims, could have a material adverse effect on
the Company. Moreover, because of the interconnectivity currently provided on
the Company's Web site, and because the Company expects to greatly expand such
interconnectivity in the future, the Company could be exposed to liability
with respect to content that it does not control. Insurance carried by the
Company may not be sufficient to offset liability arising from these types of
liabilities, and any liability in excess of such coverage could have a
material adverse effect on the Company.
Governmental Regulation and Legal Uncertainties. The Company believes that
it is not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally
and laws or regulations directly applicable to access to online commerce.
However, due to the increasing popularity and use of online services, it is
possible that a number of laws and regulations covering issues such as user
privacy, pricing, content, copyrights, distribution and characteristics and
quality of products and services may be enacted. Furthermore, the growth and
development of the market for online commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business online. The adoption of any additional laws or
regulations may decrease the growth of the Internet, which could, in turn,
decrease the demand for the Company's products and services and increase the
Company's cost of doing business, or otherwise have an adverse effect on the
Company's business, prospects, financial condition and results of operations.
Moreover, the applicability to online services of existing laws in various
jurisdictions governing issues such as intellectual property ownership, sales
and other taxes, libel and personal privacy is uncertain and may take years to
resolve. Any such new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to the
Company's business, or the application of existing laws and regulations to
online services could have a material adverse effect on the Company's
business, financial condition and results of operations.
Sales and Other Taxes. The Company does not currently collect sales or other
similar taxes in respect of shipments of goods into states other than
Connecticut and Ohio. However, one or more states may seek to impose sales tax
collection obligations on out-of-state companies such as the Company that
engage in online commerce. In addition, any new operation by the Company in
other states could subject shipments into such states to state sales taxes
under current or future laws. A successful assertion by one or more states or
any foreign country that the Company should collect sales or other taxes on
the sale of merchandise could have a material adverse effect on the Company's
business, financial condition and results of operations.
Year 2000 Compliance. The Company uses a significant number of computer
software programs and operating systems in its internal operations, including
applications used in order processing, inventory management, distribution,
financial business systems and various administrative functions. Although the
Company believes that its internal software applications contain source code
that is able to interpret appropriately the upcoming calendar year 2000,
failure by the Company to make any required modifications to make such
software "Year 2000" compliant could result in systems interruptions or
failures that could have a material adverse effect on the Company's business.
The Company does not anticipate that it will incur material expenses
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to make its computer software programs and operating systems "Year 2000"
compliant. However, there can be no assurance that unanticipated costs
necessary to update software, or potential systems interruptions, will not
exceed the Company's present expectations and have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, failure by key service providers to the Company, such as its
fulfillment house and the Company's Web hosting service provider, to make
their respective computer software programs and operating systems "Year 2000"
compliant could have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Year 2000."
Broad Discretion of Management as to Use of Proceeds. A substantial portion
of the net proceeds to be received by the Company in connection with this
Offering is not allocated for any specific purpose, but will be allocated to
expansion of sales and marketing activities, working capital and general
corporate purposes. A portion or all of the net proceeds of this Offering may
also be used for strategic acquisitions of businesses, products or
technologies complementary to those of the Company; however, the Company is
not currently a party to any commitments or agreements and is not currently
involved in any negotiations with respect to any material acquisitions.
Accordingly, management will have broad discretion with respect to the
expenditure of such proceeds. Purchasers of shares of Common Stock offered
hereby will be entrusting their funds to the Company's management, upon whose
judgment they must depend, with limited information concerning the specific
working capital requirements and general corporate purposes to which the funds
will ultimately be applied. See "Use of Proceeds."
Potential Adverse Effect of Anti-takeover Provisions. The Company's
Certificate of Incorporation (the "Certificate of Incorporation") authorizes
the Board of Directors to issue, without stockholder approval, 10,000,000
shares of Preferred Stock with voting, conversion and other rights and
preferences that could adversely affect the voting power or other rights of
the holders of Common Stock. The issuance of Preferred Stock or of rights to
purchase Preferred Stock could be used to discourage an unsolicited
acquisition proposal. In addition, the possible issuance of Preferred Stock
could discourage a proxy contest, make more difficult the acquisition of a
substantial block of the Company's Common Stock or limit the price that
investors might be willing to pay in the future for shares of the Company's
Common Stock. The Certificate of Incorporation also provides that: (i) the
affirmative vote of the holders of at least 70% of the voting power of all of
the then outstanding shares of the capital stock of the Company shall be
required to adopt, amend or repeal any provision of the By-laws of the
Company; (ii) following the closing of this Offering, stockholders of the
Company may not take any action by written consent; (iii) following the
closing of this Offering, the Board of Directors will be classified into three
classes with staggered terms of three years each; and (iv) members of the
Board of Directors may be removed only for cause and after reasonable notice
and an opportunity to be heard before the body proposing to remove such
director. The foregoing provisions of the Certificate of Incorporation could
have the effect of delaying, deterring or preventing a change in control of
the Company. Delaware law also contains provisions that may have the effect of
delaying, deterring or preventing a non-negotiated merger or other business
combination involving the Company. These provisions are intended to encourage
any person interested in acquiring the Company to negotiate with and obtain
the approval of its Board of Directors in connection with the transaction.
Certain of these provisions may, however, discourage a future acquisition of
the Company not approved by the Board of Directors in which stockholders might
receive an attractive value for their shares or that a substantial number or
even a majority of the Company's stockholders might believe to be in their
best interest. As a result, stockholders who desire to participate in such a
transaction may not have the opportunity to do so. See "Description of Capital
Stock--Delaware Law and Certain Charter and By-Law Provisions."
Shares Eligible for Future Sale; Possible Adverse Effect on Future Market
Price. Sales of Common Stock (including Common Stock issued upon the exercise
of outstanding options and warrants) in the public market after this Offering
could materially adversely affect the market price of the Common Stock. These
sales also might make it more difficult for the Company to sell equity
securities or equity-related securities in the future at a time and price that
the Company's management deems acceptable, or at all. Upon the completion of
this Offering, the Company will have shares of Common Stock outstanding,
assuming no exercise of options
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or warrants and assuming no exercise of the Underwriters' over-allotment
option. Of these outstanding shares of Common Stock, the shares sold in
this Offering will be freely tradeable, without restriction under the
Securities Act of 1933, as amended (the "Securities Act"), unless purchased by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining 6,005,704 shares of Common Stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 under the Securities Act and were issued and sold by the Company in
reliance on exemptions from the registration requirements of the Securities
Act. These shares may be resold in the public market only if registered or
pursuant to an exemption from registration, such as Rule 144 under the
Securities Act. All officers, directors and certain holders of Common Stock
beneficially owning, in the aggregate, shares of Common Stock and options
and warrants to purchase shares of Common Stock, have agreed, pursuant to
certain lock-up agreements, that they will not offer, sell, contract to sell,
grant any option to sell, pledge, hypothecate or otherwise dispose of;
directly or indirectly, any shares of Common Stock owned by them, or that
could be purchased by them through the exercise of options or warrants to
purchase Common Stock of the Company, for a period of 180 days after the date
of this Prospectus without the prior written consent of BT Alex. Brown
Incorporated. Upon expiration of the lock-up agreements, all shares of Common
Stock currently outstanding will be immediately eligible for resale, subject
to the requirements of Rule 144. Immediately following the completion of this
Offering, holders of 3,778,948 shares of Common Stock and warrants to purchase
785,968 shares of Common Stock will be entitled to certain registration
rights. However, pursuant to the lockup agreements, of these shares of
Common Stock and warrants to purchase shares of Common Stock may not be
sold for 180 days after the date of this Prospectus without the prior written
consent of BT Alex. Brown Incorporated. If such holders, by exercising their
demand rights, cause a large number of shares to be registered and sold on the
public market, such sales could have a material adverse effect on the market
price of the Company's Common Stock. The Company intends to file a
registration statement covering the 1,680,000 shares of Common Stock issued or
reserved for issuance under the Stock Plans and, upon filing, any shares
subsequently issued under such plans will be eligible for sale in the public
market, subject to compliance with Rule 144 in the case of affiliates of the
Company. The Company is unable to predict the effect that sales may have on
the then prevailing market price of the Common Stock. See "Management--Stock
Plans," "Description of Capital Stock" and "Shares Eligible for Future Sale."
No Public Market for the Common Stock; Price and Market Volatility. Prior to
this Offering, there has been no public market for the Common Stock, and there
can be no assurance that an active trading market will develop or be sustained
after this Offering or that the market price of the Common Stock will not
decline below the initial public offering price. The initial public offering
price will be determined by negotiations between the Company and the
Representatives of the Underwriters and may not be indicative of the market
price of the Common Stock in the future. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price.
Immediate and Substantial Dilution. Purchasers of shares of Common Stock in
this Offering will suffer an immediate and substantial dilution in the net
tangible book value of the Common Stock from the initial public offering
price. See "Dilution."
Absence of Dividends. No cash dividends have been paid on the Common Stock
to date and the Company does not anticipate paying cash dividends on the
Common Stock in the foreseeable future. See "Dividend Policy."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common Stock
offered hereby, assuming an initial public offering price of $ per share,
are estimated to be $ ($ if the Underwriters' over-allotment option is
exercised in full), after deducting the underwriting discounts and commissions
and estimated offering expenses payable by the Company. If the Underwriters'
over-allotment is exercised in full, the Company will not receive any proceeds
from the sale of of the shares of Common Stock subject to the over-
allotment that will be sold by the Company's principal stockholder. See
"Underwriting."
The principal purposes of this Offering are to obtain additional capital, to
create a public market for the Common Stock, to facilitate future access by
the Company to public equity markets and to provide increased visibility and
credibility in the market place. The Company expects to use the net proceeds
of this Offering for the payment of sales and marketing expenses, including
payments associated with strategic alliances, capital expenditures associated
with technology and systems upgrades, expansion of the Company's headquarters
location and general corporate purposes, including working capital. The
Company may, when the opportunity arises, use an unspecified portion of the
net proceeds to acquire or invest in complementary businesses, products and
technologies. From time to time, in the ordinary course of business, the
Company expects to evaluate potential acquisitions of such businesses,
products or technologies. However, the Company has no present understandings,
commitments or agreements with respect to any material acquisition. Pending
use of the net proceeds for the above purposes, the Company intends to invest
such funds in short-term, interest-bearing, investment-grade securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company intends to retain any earnings to fund future growth and
the operation of its business and, therefore, does not anticipate paying any
cash dividends in the foreseeable future. See "Risk Factors--Absence of
Dividends."
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
February 28, 1998 (i) on an actual basis, (ii) on a pro forma basis to give
effect to the Series B and C Transactions and (iii) on a pro forma basis as
adjusted to reflect the sale by the Company of shares of Common Stock
offered hereby, at an assumed initial public offering price of $ per share,
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company and the application of the estimated
net proceeds therefrom. The following table should be read in conjunction with
the Company's Consolidated Financial Statements, including the Notes thereto,
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FEBRUARY 28, 1998
-----------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
------- ------- -----------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C> <C>
Cash and cash equivalents........................ $ 7,325 $19,452 $
======= ======= ====
Notes payable and current portion of capital
lease obligations............................... $ 2,858 $ 108 $
======= ======= ====
Capital lease obligations, excluding current
portion......................................... $ 136 $ 136 $
------- ------- ----
Redeemable Series C Convertible Preferred Stock,
no par value; 875,000 shares issued and
outstanding actual; no shares issued and
outstanding pro forma and pro forma as
adjusted........................................ 5,991 -- --
------- ------- ----
Stockholders' equity (deficit)(1):
Preferred Stock, no par value, 5,000,000 shares
authorized, 682,738 Series A Convertible
shares and 163,043 Series B Convertible shares
issued and outstanding actual; $.01 par value,
10,000,000 shares authorized, no shares issued
and outstanding pro forma and pro forma as
adjusted...................................... 2,614 -- --
Common Stock, no par value, 10,000,000 shares
authorized, 2,226,762 shares issued and
outstanding actual, $.01 par value, 50,000,000
shares authorized, 6,005,704 shares issued and
outstanding pro forma; shares issued and
outstanding pro forma as adjusted............. 748 23,685
Additional paid-in capital....................... 1,769 2,313
Accumulated deficit.............................. (8,802) (8,802)
------- ------- ----
Total stockholders' equity (deficit)......... (3,671) 17,196
------- ------- ----
Total capitalization....................... $ 2,456 $17,332 $
======= ======= ====
</TABLE>
- --------
(1) Excludes 573,000 and 680,366 shares of Common Stock reserved for issuance
upon the exercise of stock options and warrants, respectively, outstanding
on February 28, 1998, at weighted average exercise prices of $4.48 and
$6.68 per share, respectively. Also excludes (i) 45,000 and 105,604 shares
of Common Stock issuable upon the exercise of stock options and warrants,
respectively, issued after February 28, 1998, at weighted average exercise
prices of $22.78 and $7.96 per share, respectively and (ii) 635,000 shares
of Common Stock issuable upon the exercise of stock options to be granted
to employees upon consummation of this Offering, at the initial public
offering price.
18
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of February 28,
1998, assuming the Series B and C Transactions had been completed as of such
date, was approximately $17.2 million or $2.86 per share of Common Stock. Pro
forma net tangible book value per share is determined by dividing the net
tangible book value of the Company (pro forma tangible assets less total
liabilities) by the number of shares of Common Stock outstanding. After giving
effect to (i) the sale of shares of Common Stock by the Company in this
Offering at an assumed initial public offering price of $ per share and
after deducting the underwriting discounts and commissions and estimated
offering expenses and (ii) the application of the estimated net proceeds
therefrom, the pro forma net tangible book value of the Company as of February
28, 1998 would have been approximately $ million, 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 pro forma net
tangible book value of $ per share to new investors. The following table
illustrates this dilution on a per share basis.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $
----
Pro forma net tangible book value per share before this
Offering...................................................... $2.86
Increase per share attributable to new investors...............
-----
Pro forma net tangible book value per share after this Offering..
----
Dilution per share to new investors (1).......................... $
====
</TABLE>
- --------
(1) If the Underwriters' over-allotment option is exercised in full, the pro
forma book value after this Offering would be approximately $ per
share, resulting in dilution to new investors in this Offering of $ per
share. See "Underwriting."
The following table sets forth on a pro forma basis as of February 28, 1998,
assuming the Series B and C Transactions had been completed as of such date,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing
stockholders and by new investors, based on an assumed initial public offering
price of $ per share and before deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 6,005,704 % $26,619,904 % $4.43
New investors...................
--------- --- ----------- ---
Total......................... 100% $ 100%
========= === =========== ===
</TABLE>
The foregoing tables assume no exercise of any outstanding stock options or
warrants to purchase Common Stock. To the extent such options and warrants are
exercised, there will be further dilution to the new investors. See
"Capitalization," "Management--Stock Plans" and "Description of Capital
Stock."
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of February 28,
1997 and 1998, and for the period from March 6, 1995 (date of inception)
through February 29, 1996 and for the years ended February 28, 1997 and 1998
were derived from the Consolidated Financial Statements of the Company which
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants, whose report appears elsewhere herein. Selected consolidated
financial data should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM MARCH
6, 1995 (DATE OF YEARS ENDED FEBRUARY 28,
INCEPTION) THROUGH -------------------------
FEBRUARY 29, 1996 1997 1998
------------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales........................ $1,852 $10,790 $22,681
Cost of sales.................... 1,689 9,535 20,525
------ ------- -------
Gross profit................... 163 1,255 2,156
Operating expenses:
Sales and marketing (1)........ 218 1,407 5,943
General and administrative..... 259 805 1,623
Technology and development..... 54 382 1,058
------ ------- -------
Total operating expenses..... 531 2,594 8,624
------ ------- -------
Operating loss................. (368) (1,339) (6,468)
Other income (expense), net (2).. (4) 1 (624)
------ ------- -------
Net loss....................... $ (372) $(1,338) $(7,092)
====== ======= =======
Basic and diluted net loss per
common share (3)................ $(0.21) $ (0.65) $ (3.21)
====== ======= =======
Weighted average basic and
diluted common shares
outstanding (3)................. 1,748 2,048 2,211
====== ======= =======
<CAPTION>
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1997 1998
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 119 $ 41 $ 7,325
Working capital (deficit)........ (182) (1,336) 824
Total assets..................... 525 755 10,940
Capital lease obligations,
excluding current portion....... -- 23 136
Redeemable convertible preferred
stock........................... -- -- 5,991
Total stockholders' deficit...... (33) (1,161) (3,671)
</TABLE>
- --------
(1) Sales and marketing expense for the year ended February 28, 1998 includes
a charge of $703,897 representing the fair value of Common Stock warrants
issued in connection with a marketing agreement. See Note 6(a) to
Consolidated Financial Statements.
(2) Other income (expense), net for the year ended February 28, 1998 includes
a charge of $567,563 representing the amortization of the original issue
discount in connection with a note payable. See Notes 3 and 6(a) to
Consolidated Financial Statements.
(3) See Note 1 to Consolidated Financial Statements for an explanation of the
determination of the number of common shares used in computing the amount
of basic and diluted net loss per common share.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements, including the Notes thereto, of the Company included
elsewhere in this Prospectus. This Prospectus contains forward-looking
statements. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties. Actual events or results may differ materially from those
discussed in the forward-looking statements as a result of various factors,
including the matters set forth in "Risk Factors."
OVERVIEW
Cyberian Outpost is a leading global Internet retailer of computer hardware,
software and peripheral products to the consumer and small office/home office
marketplace. With more than 115,000 SKUs, Cyberian Outpost offers an online
"superstore" at www.outpost.com that provides one-stop shopping for domestic
and international customers, 24 hours a day, seven days a week. The Company's
online store features a fun, easy to navigate interface, competitive pricing,
extensive product information and powerful search capabilities.
The Company has grown rapidly since its inception in 1995. Net sales have
increased from $1.9 million for the year ended February 29, 1996 ("fiscal
1996") to $22.7 million for the year ended February 28, 1998 ("fiscal 1998").
During the last four consecutive fiscal quarters, the Company's quarterly net
sales have increased from $3.9 million to $4.6 million, $6.1 million and $8.1
million, respectively. Of the more than 103,000 individual customers in over
140 countries worldwide who have purchased from Cyberian Outpost since
inception, more than 90,000 have become customers since March 1, 1997. In
addition, the Company has achieved high levels of average order size and
repeat orders. The Company has an average order size of approximately $250, a
number that the Company believes is significantly higher than many other
online retailers. Repeat customers accounted for approximately 48% of net
sales in fiscal 1998. The Company believes it is likely that the percentage of
net sales attributable to repeat customers will decline as the Company's
customer base increases over the next several years.
Cyberian Outpost believes that the key factor affecting its long-term
financial success is its ability to attract and retain customers in a cost
effective manner. Currently, the Company seeks to expand its customer base and
encourage repeat buying through multiple domestic and international marketing
programs. Such programs include: (i) strategic alliances with major Internet
content and portal sites, (ii) Web-based marketing and promotional campaigns,
(iii) linking programs with targeted Web sites and (iv) personalized direct
marketing programs designed to generate repeat sales from existing customers.
Cyberian Outpost recently accelerated its marketing campaign and entered into
strategic alliances with America Online, Lycos-Bertelsmann, StarMedia, c|net,
InfoSpace, Excite, WebCrawler, theglobe.com and MetaCrawler.
In fiscal 1998, revenues from international sources represented
approximately 36% of net sales. The Company expects that international sales
will continue to represent a significant portion of its overall revenue. The
Company's international sales are denominated in U.S. dollars and, therefore,
net sales are not affected by foreign currency translations. However, foreign
currency fluctuations may affect demand for the Company's products. In
addition, international sales are subject to diverse market factors and may
decrease in future periods depending on, among other factors, the economic
conditions of a given country or region.
Despite its growth in revenues, the Company continues to incur significant
net losses. Through fiscal 1998, the Company had an accumulated deficit of
$8.8 million. The Company believes that in order to continue its growth and
expansion, operating expenses will increase as a result of the financial
commitments required to form additional strategic alliances, further develop
multiple marketing channels and enhance its Web site features and
functionality. The Company expects to continue to incur increasing losses and
generate negative cash flow from operations for the near term. Since computer
retailers typically have low product gross margins, the Company's ability to
achieve profitability is dependent upon its ability to substantially increase
net sales. To the extent that the Company's marketing efforts do not result in
significantly higher net sales, the Company will be materially
21
<PAGE>
adversely affected. There can be no assurance that sufficient revenues will be
generated from the sale of the Company's products to enable the Company to
reach or maintain profitability on a quarterly or annual basis.
The Company expects to experience significant fluctuations in its future
operating results due to a variety of factors, many of which are outside the
Company's control. Factors that may affect the Company's operating results
include the frequency of new product releases, success of strategic alliances,
mix of product sales and seasonality of sales typically experienced by
retailers. Sales in the computer retail industry are significantly affected by
the release of new products. Infrequent or delayed new product releases, when
they occur, negatively impact the overall growth in computer retail sales. The
Company anticipates that a portion of its net sales growth will be the result
of sales to new customers added through its recently formed strategic
alliances and additional alliances it intends to form in the future. Due to
the relatively recent implementation of these relationships, the Company's
sales growth to date has not yet benefited from the impact of these
relationships. Gross profit margins for hardware, software and peripheral
products vary widely, with computer hardware generally having the lowest gross
profit margins. While the Company has some ability to affect its product mix
through effective upselling of high margin products, the Company's sales mix
will vary from period to period and its gross margins will fluctuate
accordingly.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statement of operations data as a percentage of net sales for the periods
indicated:
<TABLE>
<CAPTION>
PERIOD FROM MARCH YEARS ENDED
6, 1995 (DATE OF FEBRUARY 28,
INCEPTION) THROUGH ---------------
FEBRUARY 29, 1996 1997 1998
------------------ ------ ------
<S> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0%
Cost of sales.............................. 91.2 88.4 90.5
----- ------ ------
Gross profit............................. 8.8 11.6 9.5
Operating expenses:
Sales and marketing...................... 11.8 13.0 26.2
General and administrative............... 14.0 7.5 7.1
Technology and development............... 2.9 3.5 4.7
----- ------ ------
Total operating expenses............... 28.7 24.0 38.0
----- ------ ------
Operating loss........................... (19.9) (12.4) (28.5)
Other income (expense), net................ (0.2) -- (2.8)
----- ------ ------
Net loss................................. (20.1)% (12.4)% (31.3)%
===== ====== ======
</TABLE>
YEAR ENDED FEBRUARY 28, 1998 COMPARED TO THE YEAR ENDED FEBRUARY 28, 1997
Net Sales: Net sales are comprised of product sales, net of returns and
allowances, and advertising revenue. Product sales are comprised of computer
hardware, software and peripherals. Net sales increased by $11.9 million from
$10.8 million in fiscal 1997 to $22.7 million in fiscal 1998. This increase in
net sales was primarily a result of an increase in the Company's customer base
and in repeat purchases from existing customers of the Company. Although
international sales increased in absolute dollars in fiscal 1998 compared to
fiscal 1997, international sales decreased as a percentage of net sales from
approximately 47% in fiscal 1997 to approximately 36% in fiscal 1998. The
Company believes that this decrease was primarily a result of an increase in
domestic sales due to its focus on the development and implementation of
certain domestic marketing programs during fiscal 1998. During fiscal 1999,
the Company intends to use a portion of the proceeds of this Offering to
expand its international marketing program. There can be no assurance that the
Company's proposed investment in its international marketing program will
result in increased international sales.
22
<PAGE>
Cost of Sales: Cost of sales consists of the cost of the merchandise sold by
the Company. Cost of sales increased by $11.0 million from $9.5 million in
fiscal 1997 to $20.5 million in fiscal 1998. This increase was primarily a
result of an increase in product sales volume. The Company's gross profit
increased by $901,000, or 71.8% , from $1.3 million in fiscal 1997 to $2.2
million in fiscal 1998 as a result of the Company's growth in revenues. As a
percentage of net sales, the Company's gross profit margin decreased from
11.6% in fiscal 1997 to 9.5% in fiscal 1998. This decrease in gross profit
margin was primarily due to an increase in the proportion of sales of lower
margin hardware products and the implementation of more aggressive pricing
strategies in fiscal 1998.
Sales and Marketing: Sales and marketing expense consist primarily of fees
paid to strategic partners, advertising and promotion costs, marketing, sales
and customer service personnel and related expenditures, as well as direct
selling expenses. Sales and marketing expense increased by $4.5 million from
$1.4 million in fiscal 1997 to $5.9 million in fiscal 1998. As a percentage of
net sales, sales and marketing expense increased from 13.0% in fiscal 1997 to
26.2% in fiscal 1998. The increase was primarily a result of increased costs
associated with strategic alliances, increased advertising and promotional
costs incurred to build brand recognition and increases in sales and customer
service staffing to support the growth in sales. The Company intends to
increase the amount of its spending for sales and marketing in fiscal 1999,
both internationally and domestically. This increase will be principally
related to increased fees paid to existing and new strategic partners,
increased spending on marketing programs, hiring additional sales and
marketing personnel and increases in direct selling expense. There can be no
assurance that these increased expenditures will result in increased sales.
General and Administrative: General and administrative expense includes
administrative, finance and purchasing personnel and related costs, general
office and depreciation expenses, as well as professional fees. General and
administrative expense increased by $818,000 from $805,000 in fiscal 1997 to
$1.6 million in fiscal 1998. The dollar increase in general and administrative
expense was due to increases in both executive and administrative personnel
and office expenses associated with such personnel. As a percentage of net
sales, general and administrative expense decreased from 7.5% in fiscal 1997
to 7.1% in fiscal 1998. The Company anticipates that general and
administrative expense will increase in fiscal 1999 in absolute dollars, due
to growth in management personnel and administrative infrastructure, as well
as costs associated with its becoming a publicly-held company.
Technology and Development: Technology and development expense includes
systems personnel and related costs, software support, technology development
costs and Web site hosting and communications expenditures. Technology and
development expense increased by $676,000 from $382,000 in fiscal 1997 to $1.1
million in fiscal 1998. As a percentage of net sales, technology and
development expense increased from 3.5% in fiscal 1997 to 4.7% in fiscal 1998.
The increase in technology and development expense in absolute dollars and as
a percentage of net sales was primarily a result of increases in systems
personnel to maintain the Company's Web site and technology infrastructure, as
well as systems and software upgrades required to support the growth in
visitors to the Company's Web site. The Company anticipates that technology
and development expense will increase in fiscal 1999 in absolute dollars and
as a percentage of net sales, due to combined growth in staffing and systems
support.
Other Income (Expense), Net: Other income (expense), net consists of
interest expense attributable to a convertible debenture, a bridge loan,
short-term loans and leases offset by interest income earned by the Company on
overnight investments of its cash balances in money market accounts. Other
income (expense), net decreased from income of $630 in fiscal 1997 to an
expense of $624,000 in fiscal 1998. This change was primarily a result of an
increase in interest expense related to the amortization of the original issue
discount in connection with the bridge loan.
23
<PAGE>
Net Loss: As a result of the foregoing factors, the Company incurred a net
loss of $7.1 million in fiscal 1998 compared to a net loss of $1.3 million in
fiscal 1997.
YEAR ENDED FEBRUARY 28, 1997 COMPARED TO THE YEAR ENDED FEBRUARY 29, 1996
Net Sales: Net sales increased by $8.9 million from $1.9 million in fiscal
1996 to $10.8 million in fiscal 1997. This increase was primarily a result of
an increase in the Company's customer base and repeat purchases from existing
customers of the Company. At the end of fiscal 1997, the Company had
approximately 32,500 customer accounts as compared to 5,500 at the end of
fiscal 1996. International sales represented approximately 47% of net sales in
fiscal 1997 as compared to 62% in fiscal 1996. The Company believes that this
decrease was primarily the result of an increase in domestic sales due to its
focus on the development and implementation of certain domestic marketing
programs during fiscal 1997.
Cost of Sales: Cost of sales increased by $7.8 million from $1.7 million in
fiscal 1996 to $9.5 million in fiscal 1997. This increase was primarily a
result of an increase in product sales volumes. The Company's gross profit
increased by $1.1 million from $163,000 in fiscal 1996 to $1.3 million in
fiscal 1997 primarily as a result of the Company's growth in revenues. As a
percentage of net sales, the Company's gross profit margin increased from 8.8%
in fiscal 1996 to 11.6% in fiscal 1997. This increase was primarily due to
price increases implemented by the Company.
Sales and Marketing: Sales and marketing expense increased by $1.2 million
from $218,000 in fiscal 1996 to $1.4 million in fiscal 1997. As a percentage
of net sales, sales and marketing expense increased from 11.8% in fiscal 1996
to 13.0% in fiscal 1997. The increase in sales and marketing expense in
absolute dollars and as a percentage of net sales was primarily a result of
increased advertising and promotional costs incurred to build brand
recognition and increases in sales and customer service staffing to support
the growth in sales.
General and Administrative: General and administrative expense increased by
$546,000 from $259,000 in fiscal 1996 to $805,000 in fiscal 1997. This
increase was primarily a result of increases in personnel costs and office
expenses associated with such personnel, as well as increased legal and
accounting costs. As a percentage of net sales, general and administrative
expense decreased from 14.0% in fiscal 1996 to 7.5% in fiscal 1997. This
percentage decrease was due to the Company's ability to increase revenue
without a commensurate increase in corporate expenses.
Technology and Development: Technology and development expense increased by
$328,000 from $54,000 in fiscal 1996 to $382,000 in fiscal 1997. As a
percentage of net sales, technology and development expense increased from
2.9% in fiscal 1996 to 3.5% in fiscal 1997. The increase in technology and
development expense in absolute dollars and as a percentage of net sales was
primarily a result of additional personnel to enhance the Company's Web site
and technology infrastructure and systems and software upgrades required to
support the growth in visitors to the Company's Web site.
Other Income (Expense), Net: Other income (expense), net increased from an
expense of $4,000 in fiscal 1996 to income of $630 in fiscal 1997. This
increase was primarily a result of an increase in interest income from
overnight investing, partially offset by an increase in interest paid on
short-term loans and capital leases.
Net Loss: As a result of the foregoing factors, the Company incurred a net
loss of $1.3 million in fiscal 1997 compared to a net loss of $372,000 in
fiscal 1996.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statements of operations
data for the eight quarters ended February 28, 1998. The Company believes this
unaudited information has been prepared substantially on the same basis as the
annual audited financial statements and all necessary adjustments, consisting
of only normal recurring adjustments, have been included in the amounts stated
below to present fairly the unaudited financial
24
<PAGE>
statements of the Company. The operating results for any quarter are not
necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------
(IN THOUSANDS)
MAY 31, AUG. 31, NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30, FEB. 28,
1996 1996 1996 1997 1997 1997 1997 1998
------- -------- -------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $1,778 $2,362 $2,784 $3,866 $3,889 $4,622 $ 6,093 $ 8,077
Cost of sales........... 1,550 2,062 2,481 3,442 3,541 4,146 5,420 7,418
------ ------ ------ ------ ------ ------ ------- -------
Gross profit........... 228 300 303 424 348 476 673 659
Operating expenses:
Sales and marketing.... 281 340 392 394 468 760 1,145 3,570
General and
administrative........ 128 199 241 237 302 438 373 510
Technology and
development........... 32 48 177 125 294 122 226 416
------ ------ ------ ------ ------ ------ ------- -------
Total operating
expenses............ 441 587 810 756 1,064 1,320 1,744 4,496
------ ------ ------ ------ ------ ------ ------- -------
Operating loss......... (213) (287) (507) (332) (716) (844) (1,071) (3,837)
Other income (expense),
net.................... (1) 5 -- (3) (6) 6 (3) (621)
------ ------ ------ ------ ------ ------ ------- -------
Net loss............... $ (214) $ (282) $ (507) $ (335) $ (722) $ (838) $(1,074) $(4,458)
====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES FOR THREE MONTHS ENDED
----------------------------------------------------------------------------
MAY 31, AUG. 31, NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30, FEB. 28,
1996 1996 1996 1997 1997 1997 1997 1998
------- -------- -------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales........... 87.2 87.3 89.1 89.0 91.1 89.7 89.0 91.8
----- ----- ----- ----- ----- ----- ----- -----
Gross profit........... 12.8 12.7 10.9 11.0 8.9 10.3 11.0 8.2
Operating expenses:
Sales and marketing.... 15.8 14.4 14.1 10.2 12.0 16.4 18.8 44.2
General and
administrative........ 7.2 8.4 8.7 6.1 7.8 9.5 6.1 6.3
Technology and
development........... 1.8 2.0 6.4 3.2 7.5 2.6 3.7 5.2
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............ 24.8 24.8 29.2 19.5 27.3 28.5 28.6 55.7
----- ----- ----- ----- ----- ----- ----- -----
Operating loss......... (12.0) (12.1) (18.3) (8.5) (18.4) (18.2) (17.6) (47.5)
Other income (expense),
net.................... -- 0.2 -- (0.1) (0.2) 0.2 (0.1) (7.7)
----- ----- ----- ----- ----- ----- ----- -----
Net loss............... (12.0)% (11.9)% (18.3)% (8.6)% (18.6)% (18.0)% (17.7)% (55.2)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Due to the Company's operating strategy, the Company can operate with
limited working capital. Most of the Company's customers pay for their
purchases by credit card over the Web and as a result, the Company typically
receives payment for shipments within two to three business days of purchase.
In addition, the Company maintains only moderate levels of the most frequently
purchased products in its inventory at its contract warehouse in Ohio. The
remainder of the Company's "virtual" inventory is sourced from the Company's
suppliers for immediate delivery to customers and is typically paid for 15 to
30 days after it has been sold by the Company. Moreover, because the Company
generally keeps only the most frequently ordered inventory in stock, it
experiences rapid inventory turns. The Company achieved 30 inventory turns in
fiscal 1998. As a result of these factors, the Company's business is capital
efficient and does not experience the liquidity constraints faced by
traditional retailers who must maintain large inventories.
Since inception, Cyberian Outpost has financed its operations primarily
through private sales of Common Stock and Preferred Stock, which through
fiscal 1998 totaled $9.4 million and included $6.0 million in net proceeds
from the sale of Redeemable Series C Convertible Preferred Stock, and from
advances from related parties and certain other short term loans. In March
1998, the Company raised net proceeds of $13.6 million from the sale of
additional shares of Redeemable Series C Convertible Preferred Stock.
25
<PAGE>
The Company used $3.0 million and $129,000 in cash to fund operations in
fiscal 1998 and 1997, respectively. In fiscal 1996, the Company generated
$30,000 in cash from operations. In each of these periods, the Company's
principal operating cash requirements were to fund its net loss and increases
in accounts receivable and inventories, offset in part by increases in
accounts payable and accrued expenses.
The Company used $1.3 million, $95,000 and $175,000 in cash for investing
activities in fiscal 1998, 1997 and 1996, respectively. In each period, net
cash used for investing activities relates primarily to the purchase of
property, equipment and systems.
The Company generated $11.6 million, $146,000 and $264,000 in cash from
financing activities in fiscal 1998, 1997 and 1996, respectively. In fiscal
1998, financing activities included short-term working capital loans of $2.6
million, net proceeds of $6.0 million from the sale of Redeemable Series C
Convertible Preferred Stock, net proceeds of $2.2 million from the sale of
Series A Convertible Preferred Stock and Series B Convertible Preferred Stock
and net proceeds of $1.0 million from the sale of Common Stock warrants. In
fiscal 1997, financing activities consisted primarily of $200,000 in
borrowings. In fiscal 1996, financing activities consisted of net proceeds of
$229,000 from the sale of Common Stock and $35,000 in borrowings.
On December 1, 1997, the Company entered into an Interactive Marketing
Agreement with America Online that established Cyberian Outpost as the
exclusive third-party computer hardware and peripherals reseller in AOL's
Computer Superstore and provides that AOL will promote the Company as a non-
exclusive hardware and peripherals reseller in other key portions of the AOL
service and on AOL.COM. The Company is obligated to pay $5.0 million to AOL
during the 14-month term of this agreement. In addition, Cyberian Outpost is
required to share a small proportion of its AOL-derived revenue with AOL.
Pursuant to the agreement, the Company paid an aggregate $400,000 in the
fourth quarter of fiscal 1998 and $4.2 million in March 1998. The remaining
$400,000 is due during fiscal 1999. AOL is required to deliver a certain
minimum number of impressions to Cyberian Outpost during the term of the
agreement.
As of February 28, 1998, the Company had $7.3 million in cash and cash
equivalents. As of that date, the Company's material capital commitments
consisted of $4.6 million due to AOL, $244,000 in obligations outstanding
under capital leases, a $2.0 million bridge loan and $750,000 in convertible
debt. In March 1998, the Company paid AOL $4.2 million and fully repaid the
$2.0 million bridge loan. In April 1998, the holders of the $750,000
convertible debt converted the debt into Series B Convertible Preferred Stock.
After giving effect to such transactions, approximately $644,000 of the
material commitments is currently outstanding.
The Company believes that the net proceeds from this Offering, together with
its current cash and cash equivalents, will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for at
least the next 12 months. If cash generated from operations is insufficient to
satisfy the Company's liquidity requirements, the Company may seek to sell
additional equity or debt securities or obtain a credit facility. The sale of
additional equity or convertible debt securities could result in additional
dilution to the Company's stockholders. There can be no assurance that
financing will be available in amounts or on terms acceptable to the Company,
if at all. See "Risk Factors--Need for Additional Capital."
As of February 28, 1998, the Company had a net operating loss ("NOL")
carryforward of approximately $7.3 million, which begins to expire in February
2011. The utilization of the NOL carryforward will be limited pursuant to the
Tax Reform Act of 1986, due to cumulative changes in ownership in excess of
50%.
YEAR 2000
The Company uses a significant number of computer software programs and
operating systems in its internal operations, including applications used in
order processing, inventory management, distribution, financial business
systems and various administrative functions. Although the Company believes
that its internal software applications contain source code that is able to
interpret appropriately the upcoming calendar year 2000, failure by the
Company to make any required modifications to make such software "Year 2000"
compliant could result
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in systems interruptions or failures that could have a material adverse effect
on the Company's business. The Company does not anticipate that it will incur
material expenses to make its computer software programs and operating systems
"Year 2000" compliant. However, there can be no assurance that unanticipated
costs necessary to update software, or potential systems interruptions, will
not exceed the Company's present expectations and have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, failure by key service providers to the Company, such
as its contract warehouse and the Company's Web hosting service provider, to
make their respective computer software programs and operating systems "Year
2000" compliant could have a material adverse effect on the Company. See "Risk
Factors--Year 2000 Compliance."
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. This statement is effective for fiscal years beginning
after December 15, 1997 and requires reclassification of financial statements
for earlier periods provided for comparative purposes. The adoption of this
pronouncement is expected to have no impact on the Company's financial
position or results of operations.
FASB recently issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement establishes standards for
reporting operating segments of publicly traded business enterprises in annual
and interim financial statements and requires that those enterprises report
selected information about operating segments. This statement supersedes SFAS
No. 14, Financial Reporting for Segments of a Business, but retains the
requirements to report information about major customers. This statement also
amends SFAS No. 94, Consolidation of All Majority-Owned Subsidiaries. SFAS No.
131 is effective for financial statements for fiscal years beginning after
December 15, 1997 and requires that comparative information for earlier years
be restated. The adoption of this pronouncement is not expected to have a
material impact on the Company's existing disclosures.
FASB recently issued SFAS No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits. This statement standardizes disclosure
requirements for pensions and other postretirement benefits, and is effective
for fiscal years beginning after December 15, 1997. This statement does not
apply to the Company as the Company does not currently sponsor any pension or
postretirement plans.
The AICPA Accounting Standards Executive Committee recently issued Statement
of Position ("SOP") 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software, and
is effective for fiscal years beginning after December 15, 1998. The statement
also requires that costs related to the preliminary project stage and post
implementation/operations stage in an internal-use computer software
development project be expensed as incurred. The Company will comply with the
provisions of SOP 98-1 in fiscal 1999.
The AICPA Accounting Standards Executive Committee recently issued SOP 98-5,
Reporting on the Costs of Start-Up Activities. This statement requires that
costs incurred during start-up activities, including organization costs, be
expensed as incurred, and is effective for fiscal years beginning after
December 15, 1998. The Company will comply with the provisions of SOP 98-5 in
fiscal 1999.
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BUSINESS
Cyberian Outpost is a leading global Internet retailer of computer hardware,
software and peripheral products to the consumer and small office/home office
marketplace. With more than 115,000 SKUs, including 100,000 software SKUs
available to customers via electronic software download ("ESD"), Cyberian
Outpost offers an online "superstore" at www.outpost.com that provides one-
stop shopping for domestic and international customers, 24 hours a day, seven
days a week. The Company's online store features a fun, easy to navigate
interface, competitive pricing, extensive product information and powerful
search capabilities. The Cyberian Outpost Web site has quickly become one of
the most widely known and used e-commerce sites and has received recognition
from numerous publications, including The New York Times and Business Week.
Cyberian Outpost also was named "Best Site for Computer Equipment" by Money
Magazine in September 1997 and was cited as an "e-commerce trailblazer" by
Forbes ASAP in April 1998. To enhance Cyberian Outpost's brand recognition and
increase traffic to its online store, the Company has recently entered into
strategic marketing and distribution alliances with America Online, Lycos-
Bertelsmann, StarMedia, c|net, InfoSpace, Excite, WebCrawler, theglobe.com and
MetaCrawler.
The Company has grown rapidly since its inception in 1995. Net sales have
increased from $1.9 million for the year ended February 29, 1996 to $22.7
million for the year ended February 28, 1998. During the last four consecutive
fiscal quarters, the Company's quarterly net sales have increased from $3.9
million, to $4.6 million, $6.1 million and $8.1 million, respectively. Of the
more than 103,000 individual customers in over 140 countries worldwide who
have purchased from Cyberian Outpost since inception, more than 90,000 have
become customers since March 1, 1997. In addition, the Company has achieved
high levels of average order size and repeat orders. The Company has an
average order size of approximately $250, a number that the Company believes
is significantly higher than many other online retailers. Repeat customers
accounted for approximately 48% of net sales in fiscal 1998.
INDUSTRY OVERVIEW
Electronic Commerce
The Internet is an increasingly significant global medium for communication,
information and commerce. The Company believes that growth in Internet usage
and Web commerce has been fueled by a number of factors including: (i) a large
and growing installed base of PCs in the workplace and home, (ii) advances in
the performance and speed of PCs and modems, (iii) improvements in network
infrastructure, (iv) easier and cheaper access to the Internet and (v)
increased awareness of the Internet. International Data Corporation ("IDC"), a
market research firm, has estimated that there were 69 million Web users
worldwide at the end of 1997 and anticipates that number will grow to
approximately 320 million by the end of 2002. In addition, IDC estimates that
the total value of goods and services purchased over the Internet will grow
from $12 billion in 1997 to approximately $425 billion by the end of 2002.
The Company believes that its target market of consumers and small
office/home office businesses represents an attractive and rapidly growing
segment of the e-commerce industry. According to Jupiter, a market research
firm, domestic online consumer purchases of goods and services (excluding cars
and real estate) are expected to grow from an estimated $2.6 billion in 1997
to approximately $37.5 billion by 2002. Jupiter also estimates that the single
largest Web retail opportunity for the consumer and small office/home office
market is online sales of computer products (including hardware, software and
consumer electronics). By 2002, the online market for computer products is
estimated to reach approximately $10.5 billion in the United States alone,
which compares to an estimated domestic online market for travel, books and
music of $8.6 billion, $2.2 billion and $1.2 billion, respectively. IDC
estimates the worldwide consumer and small office/home office end market for
computer hardware alone (excluding peripherals) will grow from approximately
$50 billion in 1997 to approximately $80 billion in 2001.
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Traditional Computer Retailing
The traditional computer retail industry includes both store- and catalog-
based companies. Cyberian Outpost believes that these retailers face inherent
structural limitations that may not allow them to take full advantage of the
growing worldwide market for computer hardware and software. The computer
industry is characterized by a broad array of products, rapid product
obsolescence and continuous, new product introductions.
Store-based retailers have limited shelf space due to costly inventory and
real estate investment considerations that limit the number of SKUs they can
offer to their customers. The Company believes that large store-based
retailers typically carry only 4,000 SKUs. As a result, hardware and software
manufacturers compete for scarce retail shelf space and access to the large
distributors who supply the store-based retailers. Thus, manufacturers incur a
significant expense to gain this access and retailers face the risk of
carrying inventory that may quickly become obsolete. In addition, the store-
based retailers' merchandising process, which requires that the retailer
physically obtain, set up and display the product, limits the speed at which
these retailers can change their merchandise mix and offer new products.
Further, because store-based retailers must make significant investments in
inventory, real estate and personnel at each location, they are not quickly
able to expand into new geographic regions. Personnel costs also limit the
hours during which store-based retailers may operate, thereby limiting
customer convenience. Moreover, store-based retailers face challenges in
hiring, training and maintaining knowledgeable sales staff conversant and up
to date on the broad array of hardware and software products.
While catalog retailers provide customers with the convenience of shopping
from home or the office at flexible times, the number of SKUs they can feature
and the product information they can provide are limited due to catalog
mailing, printing and other related expenses. The Company believes that a
typical catalog retailer carries between 15,000 and 20,000 active SKUs, but
only features between 2,000 and 3,000 SKUs in any single catalog. Further, the
catalog shopping experience is, in general, neither interactive nor
personalized, yet requires extensive personnel support and manual intervention
on behalf of the retailer to take and process orders. The Company also
believes that many catalog retailers focus primarily on the corporate market.
The Company believes that the business model of the traditional computer
retail industry results in inefficiencies that are exacerbated by, among other
things, the broad array of products and the rapid change that characterize the
computer industry. The Company believes that Internet-based computer retailers
are well positioned to solve these inefficiencies.
THE CYBERIAN OUTPOST SOLUTION
The Company understands the key business challenges of the computer
retailing industry and uses the unique environment of the Internet to address
those challenges. The key operating advantages of the Cyberian Outpost online
store are:
Attractive economics of the "virtual" store. As an Internet-only merchant,
Cyberian Outpost enjoys structural economic advantages relative to traditional
retailers including: (i) low-cost and essentially unlimited "shelf space,"
(ii) flexible advertising and affordable merchandising opportunities, (iii)
lower personnel requirements, (iv) scaleable technology and systems that can
serve a fast-growing customer base and (v) the ability to serve a worldwide
customer base from a single, domestic location. The Company's investments in
its Web site, content, marketing and technology will be leveraged over a
growing global sales base resulting in substantial economies of scale that the
Company believes should enable it to achieve greater operating margins than
traditional computer retailers.
One-stop shop. Because Cyberian Outpost's "shelf space" is low-cost and
essentially unlimited, the Company offers a broad selection that would be
economically or physically impractical to stock in a store or to include in a
typical mail-order catalog. Cyberian Outpost currently offers more than
115,000 hardware, software and peripheral SKUs. Cyberian Outpost's product
selection includes computer hardware such as PC- and Mac-based desktops and
laptops, personal digital assistants (PDAs), printers, modems, memory and
accessories,
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packaged software for both home and office use, games and utilities. These
products are produced by a wide variety of manufacturers that include Apple
Computer, IBM, Toshiba, Hewlett Packard, 3Com, Connectix, Intel, Symantec,
Epson, Electronic Arts, Acer, Compaq and Broderbund.
Global customer base. With its global reach, the Company can deliver a broad
selection of products to customers in international, rural or other locations
that cannot support large-scale physical stores. Orders for in-stock items are
generally processed for next morning delivery throughout the U.S. and delivery
within 48-72 hours internationally. In addition, the translation of portions
of the Web site into nine foreign languages and the accessibility of the site
24 hours a day, seven days a week, enables the Company to offer the same
retail experience to customers around the world.
Value-added online content. In addition to offering the products themselves,
Cyberian Outpost's site delivers value-added content, including extensive
product descriptions. The Company's free e-mail newsletter, Cyberian Express,
delivers product information and updates to over 26,000 subscribers weekly. As
part of the Company's ongoing brand building strategy, Cyberian Outpost
intends to refine and enhance its "editorial voice" by supplementing external
content with its own commentary delivered in the Company's fun and irreverent
style.
Convenient 24 hour shopping. Purchasing items from Cyberian Outpost is more
convenient than shopping in a physical store or through a catalog. The
Cyberian Outpost Web site is open 24 hours a day, seven days a week and may be
reached from the buyer's home or office. The Company has found that its
customers access the site around the clock. Based on a sample of recent
orders, approximately 14% of orders were received from midnight to 6 a.m.
Eastern Time, 29% from 6 a.m. to 12 p.m. Eastern Time, 29% from 12 p.m. to 6
p.m. Eastern Time and 28% from 6 p.m. to midnight Eastern Time. The Company
believes that customers may buy more items because they have more hours to
shop, can act immediately on impulse purchases and can more easily locate
items that are hard to find in stores or catalogs.
Customer service. In addition to the product and order tracking information
that is available on Cyberian Outpost's Web site, the Company provides pre-
and post-sales support via both e-mail and toll-free telephone service.
Although over 85% of orders are placed directly on the Web, customers can also
contact the Company to obtain guidance for product selection, learn about
product compatibility and availability and, if they wish, place orders. Once
an order is made, customers can view order tracking information on the Web or
contact the Company's customer service department to obtain the status of
their order and, when necessary, resolve order and product questions. The
Company trains its sales and customer service representatives to offer
solutions and extend the level of service needed to satisfy the customer.
Low-cost, alternative distribution channel for manufacturers. Cyberian
Outpost offers manufacturers a direct, low-cost retail channel. In contrast to
store-based retailers that often charge for shelf space and catalog retailers
that often require up-front payments, all of Cyberian Outpost's products are
carried free of charge. In addition, the Company can offer manufacturers
special merchandising opportunities, such as bundling of products and advance
demand information on new product introductions, at very low or no cost. These
programs can be introduced with minimal lead time because of the flexibility
of the Internet as a marketing medium in publishing and disseminating new
information.
STRATEGY
In an effort to become the leading global Internet retailer of computer
hardware, software and peripheral products to the consumer and small
office/home office marketplace, the Company is pursuing a strategy consisting
of the following key elements:
Focus on consumer online retailing of computer products. The Company's
product selection is tailored to consumers, and features a wide variety of
games and gaming accessories, a full complement of education and entertainment
software titles for children, a large selection of desktop computers priced
under $1,000, and a broad array of other hardware, software and peripherals
designed for the consumer market. The Company's
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affiliate and linking programs are focused on consumer sites such as chat
groups and personal-interest Web sites. Additionally, the Company believes
that the design of the www.outpost.com store, with its cartoon graphics,
colorful environment and fun and irreverent edge, enhances its position as a
leading online consumer retail brand, making www.outpost.com the site of
choice for computer product buyers.
Build brand recognition through multiple marketing channels. To maximize
customer awareness, expand its customer base cost effectively and avoid
reliance on any one source of customers, the Company seeks to build brand
recognition through multiple marketing channels:
. Alliances with major Internet portal sites. Cyberian Outpost believes
that broad distribution alliances with portal sites build brand
recognition, increase market share and attract customers to the Company.
Accordingly, the Company recently has entered into marketing and
distribution alliances with America Online, Lycos-Bertelsmann, StarMedia,
c|net, InfoSpace, Excite, WebCrawler, theglobe.com and MetaCrawler. The
Company carefully evaluates each potential alliance and strives to ensure
that the fees associated with it are cost-effective in terms of the
potential customers to be acquired, potential revenue to be generated,
the level of exclusivity and brand exposure.
. Web-based and traditional advertising. The Company utilizes aggressive
online advertising to promote both its brand name and specific
merchandising opportunities on a wide variety of Web sites, including
major content and service providers, targeted computer-related sites and
niche, special-interest sites. The Company also intends to conduct a more
traditional media-based advertising campaign that will include
television, radio and print advertising.
. Linking and affiliate programs. To direct traffic to its Web site, the
Company has created over 20,000 inbound links that connect directly to
www.outpost.com from other sites on the Web. These links, most of which
are free to Cyberian Outpost, allow potential customers to simply click
on the link and become connected to the Company's Web site from search
engines, manufacturers' Web sites and community and affinity sites. In
addition, in order to increase exposure on the Internet and directly
generate sales, the Company has recently initiated an affiliates program
pursuant to which registered affiliates are paid a referral fee for any
sale generated via their link to www.outpost.com.
. Direct online marketing. The Company markets directly to its customers
through its in-house electronic newsletters, Cyberian Express, Gamer's
Express and Beta Report, and sends targeted merchandising e-mails to
discrete segments of its customer database based on purchasing history.
The Company intends to continue to use the unique resources of the
Internet as a low-cost means of personalized marketing.
Exploit international market opportunities. Cyberian Outpost believes that
the Web offers a unique opportunity for retailers to reach the international
market for computer hardware and software products, a market that the Company
believes to be approximately equal to the size of the domestic market for such
goods. An Internet retailer like Cyberian Outpost has key advantages
internationally because it is not encumbered with inefficient, international
distribution mechanisms that lead to higher prices and lack of product breadth
and depth. By translating portions of its Web site to nine foreign languages
and arranging rapid shipping to international destinations, the Company
attracted approximately 36% of its fiscal 1998 net sales from foreign buyers.
The Company believes that catalog and store-based retailers are typically
prohibited from shipping products internationally as a result of limitations
set forth in marketing and cooperative advertising agreements they sign with
product manufacturers.
Promote repeat purchases. The Company's strategy is to build customer
loyalty and thereby promote repeat buying by providing enhanced product
information to consumers, efficient site navigation and search capabilities,
personalized services and communications, and a broad range of immediately
available products. For example, the Company intends to customize its Web site
content for repeat customers based upon order history, platform of choice and
other criteria. The Company believes that these strategies will enable it to
maintain a significant level of repeat purchases, which accounted for
approximately 48% of net sales in fiscal 1998.
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Leverage technology to maximize business impact. The Company's technology
team leverages the unique efficiencies of the Internet to (i) personalize the
user experience, (ii) increase merchandising effectiveness and (iii) improve
operating efficiency. For example, Cyberian Outpost is developing systems to
personalize visitors' shopping experiences by re-merchandising the store in
real-time for individual shoppers. By targeting content and promotions such as
e-mails, newsletters and store advertising, www.outpost.com can deliver more
compelling promotional programs. The Company will also use such technology to
lower transaction costs and improve the customer experience through (i) the
automation of customer service functions such as automated e-mail responses
and online in-stock status, (ii) product management such as using automation
to update the product database and create upsells and links to product reviews
and (iii) communications with suppliers including electronic data interchange
("EDI") for purchasing and automated payment methods for accounting.
THE CYBERIAN OUTPOST RETAIL EXPERIENCE
The Company believes its attractive, easy-to-shop, online superstore offers
a competitive advantage. The user interface is simple, the look-and-feel is
playful and entertaining, and navigation is consistent throughout the site. As
with a physical retail store, customers can browse the departments of the
store, search for specific needs, see promoted products, obtain product
information, order products and ask for customer service. In contrast to a
physical retail store, however, the consumer can accomplish the shopping
experience in the comfort and convenience of his or her home or office. Set
forth below is a graphic illustration of the Company's homepage and the
Cyberian Outpost retail experience:
Text Boxes: BROWSING
EDITORIAL CONTENT
MERCHANDISING
CUSTOMER SERVICE
PRODUCT INFORMATION AND ORDERING
SEARCHING
INTERNATIONAL SITES
Browsing. The Company has categorized the products that it currently offers
into a simple set of departments and sub-departments. By clicking on the
department name, the consumer can quickly target products of interest. Some of
the departments, such as Software, PC and MAC, are permanent. Others, such as
digital cameras, reflect categories of hot selling products and change
opportunistically.
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Searching. A primary feature of the Cyberian Outpost Web site is its
interactive search engine. The Company provides a selection of search tools
that allows customers to find items based on pre-selected criteria such as
product type, platform, manufacturer or publisher. Customers can also use more
complex and precise search tools such as Boolean search queries.
Merchandising. The Company actively works with manufacturers to create
special bundles of products and to secure superior bargains for its customers.
These specials are featured prominently throughout the Web site and promote
"impulse purchasing." The promotions are displayed "in context," meaning, for
example, that promotions related to networking would be seen primarily in the
networking department.
Product Information and Ordering. For most products, detailed information is
available, including descriptions, system requirements, screen shots, product
packaging and product demonstrations. To purchase products, customers simply
click on a button to add products to their virtual shopping baskets. Customers
can add and subtract products from their shopping baskets as they browse,
prior to making a final purchase decision, just as in a physical store. To
execute orders, customers click on the "buy" button and are prompted to supply
shipping and credit card details online or by e-mail, facsimile or telephone.
Over 85% of the Company's orders are placed directly on the Web by customers.
Customers are then offered a variety of shipping options, although most
domestic customers choose overnight delivery due to the low rates the Company
has negotiated. Overseas customers receive delivery via DHL. Prior to
finalizing an order, customers are shown the actual shipping charges for their
order and, for domestic orders, can choose less expensive shipping methods.
The Company's system automatically confirms each order via e-mail and advises
customers about any backorders. International customers receive an additional
notification when their order is shipped.
Customer Service. The Customer Service area of the Web site contains
extensive information about shopping for, ordering and returning products.
Shipping charges, payment options, and other policies are explained for the
customer. Help buttons on every page of the site take customers to the
specific customer service topic they need. Customers can track the current
status of their orders, including getting the shipper tracking numbers.
Because the concept of Internet retail is new to many people, the Company
prominently displays its toll-free number throughout the site. A team of
customer service agents is available to answer customer questions about
products and the shopping process.
Editorial Content. One of the unique advantages of an Internet retail store
is the ability to interweave editorial content and product information. The
Company has a small team of writers that creates product information, reviews
and informational content for the site. Discussions are currently underway
with third party content providers for access to reviews of thousands of the
Company's products. The Company believes that fresh, entertaining content adds
to the customer experience, increases conversion rate (the number of visitors
to the site who make purchases) and differentiates the Company from other
online retailers.
International Sites. The Company has translated its Home Page and all
customer service and ordering information on its Web site into nine foreign
languages. These pages are accessed by selecting a national flag representing
the language of choice and a currency converter is available to provide
immediate local pricing information. The Company believes that international
markets will continue to represent a significant portion of the Company's
sales since many products offered by Cyberian Outpost are not otherwise
available in these markets. IDC projects that in 2001 approximately 60% of PCs
will be sold outside North America. The Company attracted approximately 36% of
its fiscal 1998 net sales from foreign buyers.
BEHIND THE SCENES
Tracking and Information Gathering. Once a customer places an order, the
process for tracking and fulfilling the order occurs with limited human
intervention. The Company provides its customers with e-mail verification of
order placement, backorders and shipping confirmation. Order tracking
information is available 24 hours a day for all customers. In addition,
Internet software technology allows the Company to gather much
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more detailed information about the purchase and the customer. For example,
the Company tracks the source of each order to identify which Web sites are
generating the most business for the Company. This information, combined with
customer profile information gathered throughout the ordering process, creates
a very powerful direct marketing database. The Company utilizes this database
to create repeat business.
Personalization and Targeting. The Company offers its customers a free,
weekly e-mail newsletter with news about new product releases, specials,
advance orders and industry events. The Company is currently developing and
implementing systems that will (i) customize the content of newsletters and
targeted e-mails based on order history, platform of choice and other buying
criteria and (ii) provide the Company with the browsing and buying history of
visitors to its site. The Company intends to use this data to personalize the
shopping experience, including re-merchandising the site for customers with
differing buying and shopping histories.
Distribution and Fulfillment The vast majority of product shipped by the
Company passes through its contract warehouse, located in Wilmington, Ohio,
which stores the Company's most popular inventory for immediate shipment to
customers. Since the warehouse is located at Airborne Express's hub and only
one hour from the Cincinnati-based hub of the Company's primary international
shipper, DHL, Cyberian Outpost is able to process orders late into the day.
Orders for in stock items placed by midnight Eastern Time are processed for
next morning delivery in the United States and delivery within 48 to 72 hours
overseas. Orders for released products not in the Company's warehouse are
usually available for shipment within 24 to 48 hours. The Company also takes
advance orders for not yet released products and ships them immediately upon
release from the manufacturer. Some orders are drop-shipped directly to
customers from the manufacturer.
Site Development and Enhancement. Cyberian Outpost strives to keep its site
one of the most innovative, creative and fun destinations on the Web through
the use of technology and the creative talent of its employees. Among other
technology objectives, the Company intends to provide increasingly valuable
personalized service programs and make the user interface even more intuitive,
engaging and fast. The Company has technology and systems plans in place to
support the Company's evolving merchandising and operational needs and to keep
the overall Cyberian Outpost shopping experience at the forefront of Web
retailing.
MARKETING AND PROMOTION
The Company's marketing strategy is to promote, advertise and increase its
brand visibility and acquire new customers through multiple channels,
including: (i) developing distribution alliances with major portal sites, (ii)
advertising on leading Web sites and other media worldwide, (iii) expanding
the Company's affiliates network and linking programs and (iv) direct
marketing to existing and potential customers. The Company believes that the
use of multiple marketing channels reduces reliance on any one source of
customers, lowers customer acquisition costs and maximizes brand awareness.
Strategic Alliances. Forming strategic alliances with Internet service and
content providers can be a source of significant new Web traffic and
customers. The Company has formed several marketing alliances that generally
require the Company to pay either up-front or periodic fees and payments based
upon a percentage of the net revenue generated as a result of the alliance.
The agreements are typically entered into for an initial term of one year with
the right to renew at specified times on certain conditions, or for additional
fees and/or increased revenue sharing. The Company believes that the
agreements provide several key benefits to the Company including (i) enhancing
Cyberian Outpost's brand awareness and extending market reach, (ii) building
the Company's customer base and (iii) generating sales. Typically, these
agreements guarantee the Company a certain number of impressions per year. The
Company has the following strategic alliances in place:
. AMERICA ONLINE. In December 1997, the Company finalized an agreement with
America Online to serve as the exclusive third-party computer hardware
and peripherals retailer in America Online's Computer Superstore. In
addition, the Company will be promoted on a non-exclusive basis as a
hardware, software and peripherals retailer in other key areas of the
America Online service including
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the Buyer's Guide and Shopping Channel. The Company will also have a
significant presence on www.aol.com, AOL's primary Web site. This
agreement is renewable at the option of either the Company or AOL upon
satisfaction of certain conditions.
. LYCOS-BERTELSMANN. In March 1998, Cyberian Outpost signed an agreement
with Lycos-Bertelsmann, a leading European operator of Web sites. This
agreement provides that the Company is the premier computer retailer in
the "Shopping" area, and the most prominent computer store in the
"Shopping WebGuides." The Company is also the exclusive online computer
hardware and software retailer in all other areas.
. STARMEDIA. In May 1998, the Company signed a letter of intent with
StarMedia, a proprietary online service for Latin America. This letter of
intent provides that the Company is to be the exclusive reseller of
computer products in the service.
. C|NET. In January 1998, the Company entered into a distribution agreement
with c|net, an operator of Web sites that are estimated to have had over
nine million visitors in March 1998 alone. The Company is prominently
featured throughout the c|net sites, and is one of only three computer
retailers featured on any c|net site.
. INFOSPACE. In January 1998, the Company entered into an agreement to
become the exclusive computer retailer on InfoSpace, a Web directory site
with approximately 6.5 million visitors per month.
. EXCITE AND WEBCRAWLER. In January 1998, the Company entered into an
agreement giving it premier placement on the Excite and WebCrawler
shopping channel main pages, as well as targeted promotions on those Web
sites.
. THEGLOBE.COM. In April 1998, the Company signed a letter of intent with
theglobe.com, a leading usenet (bulletin board) posting site with
approximately 1.3 million members. The letter of intent provides that the
Company is to be the exclusive retailer of computer products in
theglobe.com's Marketplace.
. METACRAWLER. In January 1998, Cyberian Outpost entered into an agreement
to become the exclusive computer products retailer on go2net's
MetaCrawler home page.
Online and Traditional Advertising. The Company drives Web traffic directly
to its site by advertising on other Web sites worldwide such as The Microsoft
Plaza, HotBot, ComputerESP, PC Guide, MacCentral, TidBits/NetBits, Filez,
Angelfire, Bargain America and FamilyPC. The Company uses ad-server
technology, which allows it to change its advertising on-the-fly by delivering
program code directly to the ad site which the Company then changes at will
from its own site. To date, nearly all advertising has been developed in-
house. Advertising sites are chosen based on the cost relative to their
ability to generate traffic for Cyberian Outpost and the likely audience. The
Company also participates in numerous in-house and manufacturer sponsored
promotions. These promotions are all Web-based and are geared to time of year,
specific manufacturers, product categories and buyer segments. Cyberian
Outpost believes that traditional advertising including television, radio and
print will become a component of its marketing mix in the future. These
traditional advertising venues can build brand awareness and promote the
benefits of e-commerce.
Linking and Affiliate Programs. To direct traffic to its Web site, Cyberian
Outpost has aggressively pursued a grass roots marketing program, the
cornerstone of which is the Company's linking program, to create inbound links
to its Web site from other sites on the Web. These links allow potential
customers to simply click on the link and be connected to the Company's Web
site from other search engines, manufacturers' Web sites, community and
affinity sites and home pages. According to The Visibility Index produced by
wordofnet (www.wordofnet.com), the Company has over 20,000 such inbound links
to its Web site. In addition, the Company has recently created the Outpost
Affiliate Network, a marketing tool that increases exposure on the Internet
and directly generates sales. Registered affiliates are paid a referral fee,
in most cases 3% of the net invoice value for any sale generated via the
affiliate's link to the Company's Web site. Cyberian Outpost currently has 300
registered affiliates with over 500 unique domains displaying the Company's
logos and
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banners, of which nearly 50% are either computer or shopping related sites. In
addition to these paid affiliates, manufacturers and other affinity sites link
directly to the Company's home page.
Direct Marketing. The Company's in-house newsletters, Cyberian Express,
Gamer's Express and Beta Report, allow it to communicate on a regular basis
with its customers who have requested to be updated on new arrivals and other
product news. To satisfy the wide breadth of interests of the Cyberian Express
recipients, featured and special products are presented in both PC and Mac
formats and in a wide variety of product categories. The Gamer's Express is
more narrowly focused on game-playing enthusiasts in both the PC and Mac
formats. This proactive marketing approach allows the Company to alert
existing customers to new buying opportunities. Cyberian Express is also
translated into Kanji and sent to more than 20,000 subscribers in Japan.
WAREHOUSING AND FULFILLMENT
The Company obtains products from a network of distributors and software
publishers. It carries a moderate level of inventory and relies to a large
extent on rapid fulfillment from major distributors and wholesalers that carry
a broad selection of titles. The Company purchases a substantial portion of
its products from large distributors such as Ingram Micro and MicroAge who
have inventory at distribution centers around the country.
In July 1997, the Company moved its inventory, warehousing and fulfillment
operations to a 120,000 square-foot facility located in Wilmington, Ohio,
managed by a third-party fulfillment company. This warehouse, which is located
at the Airborne Express hub, can accept orders until midnight Eastern Time for
next morning delivery in the United States and two day international delivery
(via the DHL hub in Cincinnati, one hour away) for products that are in stock.
As a result of this arrangement, the Company added seven hours to its shipping
day, can deliver Friday orders on Saturday and simultaneously lowered its
expected warehousing and shipping costs.
The Wilmington warehouse is connected to the Company's information systems
via a dedicated 56K frame relay connection provided by AT&T. A backup circuit
is maintained by Sprint. This gives the Company real-time data on inventory
receiving, shipping, inventory quantities and inventory location. In addition,
the Company offers a real-time order tracking system for its customers on the
Web. The moment a package is shipped and assigned an Airborne, UPS or DHL
airbill tracking number, the customer's order information is updated. Returns
processing is also handled using this system, allowing returned product to be
promptly returned to the manufacturer for credit.
This high level of automation and the Company's ability to maintain moderate
levels of inventory helps the Company maintain rapid inventory turns. In
fiscal 1998, the Company achieved 30 inventory turns. The Company has
negotiated special shipping terms with its major distributor suppliers with no
freight charged on UPS Ground or FedEx second day delivery. Thus, most
purchase orders placed with its major suppliers for in-stock items are
received within 48 hours of order. To help maintain its ability to turn
inventory quickly, the Company is now in discussions with two of its top
vendors to establish EDI connections to the vendors' inventory information.
Such connections will (i) help to automate the ordering process between the
Company and its vendors and (ii) allow the Company to provide real-time,
online in-stock status information to customers that details product
availability not only in the Company's warehouse, but also at these vendor
locations.
TECHNOLOGY AND SYSTEMS
The Company has implemented a broad array of site management, search,
customer support, transaction-processing and fulfillment systems using a
combination of proprietary technologies and commercially available, licensed
technologies.
The Company's Web front-end is built on industry standard technologies,
including Sun UltraSparc servers, the Solaris operating system, Netscape Web
Servers and Oracle databases. The business logic of the site is
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contained in a variety of proprietary programs. A portion of these are written
in PERL, a well known and widely used scripting language. These programs
handle user interface, ordering and customer communications. Other programs,
which handle searching and product description, are implemented with Allaire's
Cold Fusion product, a widely used Web application toolkit.
These systems run on over 20 redundant Sun Sparc and HP Vectra servers. The
Company's system includes redundant hardware on mission critical components
and the Company believes it can survive the failure of several entire servers
with little or no downtime. Capacity can be quickly and easily expanded
without additional development. The Company's policy is to run key systems at
no more than 60% of capacity to support rapid growth.
Back-end transaction processing is primarily handled by Smith-Gardner and
Associates MACS II system. MACS II is a mature, widely used application which
(i) accepts and validates orders, (ii) organizes and manages orders with
suppliers, (iii) receives product and assigns it to customer orders, (iv)
manages shipments and (v) integrates inventory management, purchasing and
accounting. The system handles multiple shipment methods, credit card
transaction processing and automated customer communications and allows the
customer to choose whether to receive single or multiple shipments based on
availability. The MACS II system runs on an HP/3000 running MPE/IX and is
highly scaleable.
The Company subcontracts the hosting of its Web servers to an Internet data
center specialist (the "Data Center") with an extensive national network
backbone. The Data Center provides redundant Internet connections to multiple
Internet access points, a secure physical environment, climate control and
redundant power. In addition, the Data Center provides the Company with 24
hour a day, seven days a week system monitoring and escalation. It currently
hosts the Company's Web operations in its New Jersey data center and has more
than adequate available floor space to support the Company's growth in this
facility. Additionally, the Company will be able to support a distributed,
redundant site by placing some of its servers in the Data Center's other
locations around the world. The Data Center currently provides the Company a
dedicated 5 Megabits per second ("MBPS") connection to the Internet, which can
be upgraded to 10 MBPS or beyond quickly and easily. In the near future, the
Company intends to implement a systems plan that may include replacing or
supplementing existing systems with newer technologies. This systems plan will
provide closer integration between front-end and back-end processing, the
ability to add new system features and functionality and improved scaling and
redundancy.
COMPETITION
The online commerce market is new, rapidly evolving and intensely
competitive. Current and new competitors can launch new sites at a relatively
low cost. In addition, the computer products retail industry is intensely
competitive. The Company currently or potentially competes with a variety of
other companies. These competitors include (i) various traditional computer
retailers including CompUSA and MicroCenter, (ii) various mail-order retailers
including CDW, MicroWarehouse, Insight, PC Connection and Creative Computers,
(iii) various Internet-focused computer retailers including Egghead.com,
software.net Corporation and NECX Direct, (iv) various manufacturers that sell
directly over the Internet including Dell, Gateway, Apple and many software
companies, (v) a number of online service providers including America Online
and the Microsoft Network that offer computer products directly or in
partnership with other retailers, (vi) some non-computer retailers such as
Wal-Mart that sell a limited selection of computer products in their stores
and (vii) computer products distributors which may develop direct channels to
the consumer market. Increased competition from these and other sources could
require the Company to respond to competitive pressures by establishing
pricing, marketing and other programs or seeking out additional strategic
alliances or acquisitions, any of which could have a material adverse effect
on the business, prospects, financial condition and results of operations of
the Company.
The Company believes that the principal competitive factors in its market
are brand recognition, selection, price, variety of value-added services, ease
of use, site content, fulfillment, reliability, quality of search tools,
customer service and technical expertise. Many of the Company's current and
potential competitors have longer
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operating histories, larger customer bases, greater brand recognition, and
significantly greater financial, marketing and other resources than the
Company. In addition, online retailers may be acquired by, receive investments
from or enter into other commercial relationships with larger, well-
established and well-financed companies as use of the Internet and other
online services increases. The Company is aware that certain of its
competitors have and may continue to adopt aggressive pricing or inventory
availability policies and devote substantially more resources to Web site and
systems development than the Company. Increased competition may result in
reduced operating margins, loss of market share and a diminished brand
franchise, any of which would have a material adverse effect on the Company.
Moreover, companies that control access to transactions through network access
or Web browsers currently promote, and will likely continue to promote
competitors of the Company. There can be no assurance that the Company will be
able to respond effectively to increasing competitive pressures or to compete
successfully with current and future competitors. See "Risk Factors--
Competition."
INTELLECTUAL PROPERTY
Cyberian Outpost has been granted a registered service mark for the name
"Cyberian Outpost", registration date July 2, 1996. The Company claims a
common law trademark for its newsletter name "Cyberian Express." The Company
also has rights to numerous Internet domain names including outpost.com,
cybout.com and cyberianoutpost.com.
EMPLOYEES
The Company believes its success depends to a significant extent on its
ability to attract, motivate and retain highly skilled management and
employees. To this end, the Company focuses on incentive programs such as
employee stock options, competitive compensation and benefits for its
employees and fosters a corporate culture which is challenging, rewarding and
fun. As of May 1, 1998, the Company had 78 full-time and five part-time
employees. The Company also employs a limited number of independent
contractors and temporary employees on a periodic basis. None of the Company's
employees is represented by a labor union and the Company considers its labor
relations to be good.
FACILITIES
The Company leases 7,425 square feet of office space in Kent, Connecticut
pursuant to leases expiring in November 1998 and November 1999. These
facilities currently house the Company's executive offices. In addition, in
May 1998, the Company entered into a seven-year lease for an additional 18,000
square feet of office space in a building which is being constructed adjacent
to its present facilities.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to the Company's
knowledge, threatened against the Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, their ages as of June
1, 1998, and their positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Darryl Peck...................... 39 President, Chief Executive Officer and
Director
Katherine N. Vick ............... 46 Executive Vice President, Chief Financial
Officer and Director
Michael R. Starkenburg........... 26 Chief Technology Officer
Larry Berk....................... 44 Vice President and General Merchandise
Manager
Philip J. Rello.................. 37 Vice President of Sales
Charles H. Jackson, IV (2)....... 49 Director
Michael Murray (1)(2)............ 35 Director
William C. Mulligan (2).......... 44 Director
David Yarnell (1)................ 42 Director
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Peck founded the Company in March 1995 and has been President and a
Director since that time. He has served as Chief Executive Officer since April
1998. In 1989, he formed Inline Software, a publisher of game and utility
software titles primarily for the Macintosh platform, and served as its
President until the company was sold to Focus Enhancements in May 1994. From
1989 to 1990, Mr. Peck was President of the New York Mac User's group, which
at the time was the third largest Mac user group in the world.
Ms. Vick has served as Vice President and Chief Financial Officer of the
Company since June 1997 and as a Director since May 1997. She was named
Executive Vice President in May 1998. From January 1997 until June 1997, she
served as a consultant to the Company. From 1986 to June 1997, Ms. Vick was
President of her own strategic and financial planning consulting firm,
Katherine Vick, Ltd. From 1978 to 1986, she was a Principal with Arthur Young
(now Ernst & Young) where she helped develop and lead the Entrepreneurial
Services Consulting Group in New York City.
Mr. Starkenburg has served as Chief Technology Officer of the Company since
July 1997. From December 1996 until July 1997, he led the Web development and
operations team of Digital City, Inc., a content based Internet company. From
August 1995 to December 1996, Mr. Starkenburg worked for America Online, Inc.,
an Internet service provider, where he was responsible for the development and
operations of several large Internet sites. From November 1991 until joining
America Online, he was an Internet and networking consultant to a variety of
clients, including the International Monetary Fund, the National Academy of
Sciences, and the Information Technology Association of America.
Mr. Berk has served as Vice President and General Merchandise Manager for
Cyberian Outpost since May 1998. From October 1996 until joining the Company,
he was Worldwide Manager of Electronic Commerce, Marketing and Merchandising
for IBM. From May 1995 until October 1996, Mr. Berk was President of
Mediaphiles, Inc., a catalog retailer of CD-ROM computer software, and from
January 1993 to May 1995 he served as Vice President and General Merchandise
Manager of Staples, Inc., an office products retailer.
Mr. Rello has served as Vice President of Sales of the Company since July
1997. From April 1990 until July 1997, he worked at Micro Warehouse, Inc., a
retailer of computer software and peripherals, where he last served as
Director of Education Sales.
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Mr. Jackson has served as a Director of the Company since August 1996. He is
a computer industry entrepreneur and invests in start-up companies at their
earliest stages. In 1993, he co-founded FutureWave Software which was acquired
by MacroMedia in 1996. In 1984, Mr. Jackson founded Silicon Beach Software, a
developer and publisher of Macintosh consumer titles which was sold to Aldus
Corporation in 1990.
Mr. Murray has served as a Director of the Company since May 1997. Since
July 1996, he has been the Managing Director of the Online Venture Fund for
Broderbund Software ("Broderbund"), a software development company, and since
September 1997, he has been the General Manager of the Online Business Unit
for Broderbund. In addition to managing the business unit, Mr. Murray leads
Broderbund's Internet strategy and implementation, and manages an external
Internet incubator facility for Internet startups.
Mr. Mulligan has served as a Director of the Company since February 1998. He
has been a Managing Director of Primus Venture Partners since June 1987. From
June 1985 until June 1987, he was with the Cleveland office of McKinsey &
Company, Inc. Mr. Mulligan also serves on the Board of Directors of Universal
Electronics, Inc., a publicly held company.
Mr. Yarnell has served as a Director of the Company since February 1998. He
has been a General Partner of Brand Equity Ventures since March 1997 and a
Vice President of Consumer Venture Partners since July 1993. From June 1991 to
July 1993 he served as President of Mexx USA, Inc., a contemporary apparel
company.
The Board of Directors of the Company will be divided into three classes as
nearly equal in number as possible upon consummation of this Offering. Each
year the stockholders will elect the members of one of the three classes to a
three-year term of office. Messrs. Mulligan and Yarnell will serve in the
class whose term expires in 1999; Ms. Vick and Mr. Jackson will serve in the
class whose term expires in 2000; and Messrs. Peck and Murray will serve in
the class whose term expires in 2001.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has a Compensation Committee, which makes
recommendations concerning salaries and incentive compensation for employees
of and consultants to the Company, establishes and approves salaries and
incentive compensation for executive officers and administers the Company's
Stock Plans, and an Audit Committee, which reviews the results and scope of
audits and other services provided by the Company's independent public
accountants. See "--Stock Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Jackson, Mulligan and Murray, all non-employee directors, constitute
the Company's Compensation Committee. No executive officer of the Company will
serve as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company do not receive an annual
retainer or any fees for attending regular meetings of the Board of Directors.
Directors are reimbursed for reasonable out-of-pocket expenses incurred in
attending such meetings. Non-employee directors are, however, eligible for
participation in the Company's Stock Plans and the Company may, in the future,
grant non-qualified stock options to non-employee Directors as an incentive to
join or remain on the Board of Directors. See "--Stock Plans."
KEY PERSON LIFE INSURANCE
The Company presently maintains key person life insurance in the amount of
$2.0 million on Darryl Peck, the Company's President and Chief Executive
Officer.
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EXECUTIVE COMPENSATION
Summary Compensation. The following table presents certain information
concerning compensation paid or accrued for services rendered to the Company
in all capacities during the fiscal year ended February 28, 1998, for the
Company's Chief Executive Officer and the other most highly compensated
executive officers of the Company earning greater than $100,000 in the fiscal
year ended February 28, 1998 (the "Named Executive Officer").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
- --------------------------- ---------- ---------
<S> <C> <C>
Darryl Peck............................................... $ 130,539 $ 11,000
President and Chief Executive Officer
</TABLE>
Option Grants. There were no options granted by the Company during the
fiscal year ended February 28, 1998 to the Named Executive Officer.
Option Exercises and Year-End Option Values. The Named Executive Officer did
not exercise any options during the fiscal year ended February 28, 1998 and
did not hold any stock options at February 28, 1998.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements (collectively, the
"Employment Agreements") with Mr. Peck and Ms. Vick. The Employment Agreements
provide for an initial term of two years and automatically renew for
successive two year terms unless notice of non-renewal is given by either the
Company or the executive. Pursuant to the Employment Agreements, Mr. Peck and
Ms. Vick initially receive annual base salaries of $175,000 and $150,000,
respectively. In the event of a termination by the Company without cause, a
termination by the executive as a result of a constructive termination or the
Company's non-renewal of the agreement at the end of a two-year term
(collectively, a "Company Termination"), the executive will receive a lump-sum
payment equal to two year's base salary in the case of Mr. Peck and one year's
base salary in the case of Ms. Vick. The Employment Agreements provide for
option grants to Mr. Peck and Ms. Vick covering 400,000 shares and 100,000
shares, respectively. The options will be granted at the initial public
offering price and will become exercisable in five equal annual installments
beginning on the first anniversary of the grant date. In the event of a
Company Termination following a change of control of the Company, the
executive will receive a lump sum payment equal to three year's base salary,
the options granted pursuant to the Employment Agreements will become fully
exercisable and the executive will be entitled to the continuation of certain
benefits. The Employment Agreements provide, however, that the amount of
severance payment in the event of a change of control will be reduced to the
extent necessary to avoid any excise tax on "parachute payments" under Section
4999 of the Internal Revenue Code of 1986, as amended (the "Code"). The
Employment Agreements also contain a one year post employment non-compete
provision on the part of each executive.
STOCK PLANS
1998 Employee, Director and Consultant Stock Plan
The Company will adopt the 1998 Employee, Director and Consultant Stock Plan
(the "Stock Plan") in June 1998. The Stock Plan authorizes the grant of
incentive stock options within the meaning of Section 422 of the Code,
nonqualified stock options and stock grants ("stock awards"). As of the
consummation of this Offering, a total of 840,000 shares of Common Stock will
be reserved for issuance under the Stock Plan, and no shares will have been
issued pursuant to stock awards granted under the Stock Plan, 635,000 shares
will be subject to outstanding options and 205,000 shares will be available
for future grant.
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The Stock Plan is administered by the Compensation Committee, which
determines the terms of stock awards granted, including: (i) the exercise or
purchase price and the number of shares subject to each stock award; (ii) the
schedule upon which options become exercisable; (iii) the termination or
cancellation provisions applicable to stock awards; and (iv) the conditions
relating to the right of the Company to reacquire shares subject to stock
awards. The maximum term of options granted under the Stock Plan is ten years.
In the event of an acquisition of the Company, the Compensation Committee
will provide that outstanding options under the Stock Plan be: (i) assumed by
the successor or acquiring entity; (ii) exercised within a specified number of
days, at the end of which period the options will terminate; or (iii)
terminated in exchange for a cash payment equal to the difference between the
option exercise price and the fair market value of the Common Stock at the
time of the acquisition. In the event of an acquisition, the Compensation
Committee may also provide for the full vesting of outstanding stock awards.
1997 and 1998 Incentive Stock Plans
The Company adopted the 1997 Incentive Stock Plan and the 1998 Incentive
Stock Plan (the "Incentive Stock Plans") on July 8, 1997 and January 7, 1998,
respectively. The Incentive Stock Plans authorize the grant of incentive stock
options within the meaning of Section 422 of the Code and nonqualified stock
options. As of June 1, 1998, an aggregate of 840,000 shares of Common Stock
has been reserved for issuance under the Incentive Stock Plans. As of June 1,
1998, no shares had been issued upon the exercise of stock options granted
under the Incentive Stock Plans, 608,000 shares were subject to outstanding
options and 232,000 shares were available for future grant.
The Incentive Stock Plans are administered by the Compensation Committee
which determines the terms of stock options granted, subject to the provisions
of the Incentive Stock Plans, including: (i) the exercise price and the number
of shares subject to each option; (ii) the schedule upon which options become
exercisable; and (iii) the termination or cancellation provisions applicable
to stock options. The maximum term of options granted under the Incentive
Stock Plans is ten years.
In the event of the acquisition of the Company, pursuant to a merger, sale
of assets or otherwise, unless otherwise provided by the Board of Directors,
outstanding options under the Incentive Stock Plans will terminate. If the
acquiring entity does not provide for the grant to optionees of substitute
options on an equitable basis, the Board of Directors may provide for the full
vesting of outstanding options which may then be exercised prior to the
acquisition.
The Stock Plan and the Incentive Stock Plans are collectively referred to
herein as the "Stock Plans."
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
The Delaware General Corporation Law (the "DGCL") authorizes corporations to
limit or eliminate the personal liability of directors to corporations and
their stockholders for monetary damages for breach of directors' fiduciary
duty of care. The Company's Certificate of Incorporation limits the liability
of directors of the Company to the Company or its stockholders to the fullest
extent permitted by Delaware law. See "Description of Capital Stock--Delaware
Law and Certain Charter and Bylaw Provisions."
The Company's Certificate of Incorporation provides mandatory
indemnification rights to any officer or director of the Company who, by
reason of the fact that he or she is an officer or director of the Company, is
involved in a legal proceeding of any nature. Such indemnification rights
include reimbursement for expenses incurred by such officer or director in
advance of the final disposition of such proceeding in accordance with the
applicable provisions of the DGCL.
There is no pending litigation or proceeding involving a director, officer,
employee or agent of the Company in which indemnification by the Company will
be required or permitted. The Company is not aware of any threatened
litigation or proceeding that may result in a claim for such indemnification.
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CERTAIN TRANSACTIONS
PREFERRED STOCK OFFERINGS
In May 1997 and July 1997, the Company raised aggregate gross proceeds of
approximately $2.3 million by completing a private placement of 682,737 shares
of Series A Convertible Preferred Stock with 22 investors at a price of $3.40
per share. 117,646 shares of the Series A Convertible Preferred Stock were
issued to The Jackson Living Trust, a trust for the benefit of Charles H.
Jackson, IV and his wife, in exchange for approximately $400,000 in debt
obligations payable to Mr. Jackson by the Company. Mr. Jackson is a Director
of the Company and co-trustee of the Jackson Living Trust. Connecticut
Innovations, Incorporated ("CII"), a five-percent beneficial stockholder of
the Company, purchased 183,823 shares of the Series A Convertible Preferred
Stock.
In October 1997, the Company raised gross proceeds of $750,000 by completing
a private placement of 163,043 shares of Series B Convertible Preferred Stock
with two investors at a price of $4.60 per share. Winfield Capital Corp., a
five-percent beneficial stockholder of the Company, purchased 155,443 shares
of the Series B Convertible Preferred Stock. In addition, in connection with
the Series B Convertible Preferred Stock financing, Winfield Capital Corp.
purchased a $750,000 convertible debenture from the Company that was
convertible into shares of Series B Convertible Preferred Stock at a
conversion price of $4.60 per share. This debenture was converted into 163,043
shares of Series B Convertible Preferred Stock in April 1998.
In February 1998 and March 1998, the Company raised aggregate gross proceeds
of approximately $22.0 million by completing a private placement of 2,770,125
shares of Redeemable Series C Convertible Preferred Stock with 58 investors at
a price of $7.96 per share. Primus Capital Fund IV Limited Partnership
("Primus"), a five-percent beneficial stockholder of the Company, purchased
500,000 shares of the Redeemable Series C Convertible Preferred Stock. William
C. Mulligan, a Director of the Company, is a Managing Director of Primus.
Brand Equity Ventures I, L.P. ("Brand"), a five-percent beneficial stockholder
of the Company, purchased 375,000 shares of the Redeemable Series C
Convertible Preferred Stock. David Yarnell, a Director of the Company, is a
General Partner of Brand. CII, a five-percent beneficial stockholder of the
Company, purchased 125,000 shares of the Redeemable Series C Convertible
Preferred Stock. Winfield Capital Corp., a five-percent beneficial stockholder
of the Company, purchased 125,000 shares of the Redeemable Series C
Convertible Preferred Stock.
SHORT-TERM LOANS AND OTHER RELATED PARTY TRANSACTIONS
In November 1995, Charles H. Jackson, IV, purchased 200,000 shares of Common
Stock for an aggregate purchase price of $200,000. In addition, in November
1996, December 1996 and May 1997, Mr. Jackson loaned the Company $50,000,
$100,000 and $250,000, respectively. All of such loans were converted into an
aggregate of 117,646 shares of Series A Convertible Preferred Stock in May
1997.
In March 1997, Stanley Peck, father of Darryl Peck, loaned the Company
$100,000 at an annual interest rate of 9%. The loan, plus accrued interest,
was repaid in full in May 1997.
In January 1998, Winfield Capital Corp., a five-percent beneficial
stockholder of the Company, loaned the Company $2.0 million at an interest
rate of 12.5%. The loan, plus accrued interest, was repaid in full in March
1998. In connection with this loan, Winfield Capital Corp. was issued a
warrant to purchase 125,000 shares of the Company's Common Stock at $7.96 per
share.
43
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of Common Stock as of June 1, 1998, and as
adjusted to reflect the sale of shares offered hereby, by (i) each director of
the Company, (ii) each executive officer named in the Summary Compensation
Table, (iii) all directors and executive officers of the Company as a group
and (iv) each person known to the Company to be the beneficial owner of more
than 5% of its outstanding shares of Common Stock. Except as otherwise
indicated, the persons or entities listed below have sole voting and
investment power with respect to all shares of Common Stock owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
---------------------------------
PERCENTAGE OWNED(2)
-----------------------
BEFORE
NUMBER OFFERING AFTER OFFERING
--------- -------- --------------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Darryl Peck(3)........................................................... 1,477,680 24.1% %
Katherine N. Vick (4).................................................... 24,163 * *
Charles M. Jackson, IV (5)............................................... 282,401 4.7% %
Michael Murray(6)........................................................ 147,059 2.4% *
William C. Mulligan (7).................................................. 500,000 8.3% %
David Yarnell (8)........................................................ 375,000 6.2% %
All current directors and executive officers as a group (9 persons) (9).. 2,788,803 46.2% %
FIVE PERCENT STOCKHOLDERS
Winfield Capital Corp. (10).............................................. 568,486 9.3% %
237 Mamaroneck Avenue
White Plains, New York 10605
Primus Capital Fund IV Limited Partnership............................... 500,000 8.3% %
c/o Primus Venture Partners, Inc.
5900 Landerbrook Drive, Suite 200
Cleveland, Ohio 44124
Brand Equity Ventures I, L.P............................................. 375,000 6.2% %
Three Pickwick Plaza
Greenwich, Connecticut 06830
T. Rowe Price Threshold Fund III, L.P.................................... 375,000 6.2% %
100 East Pratt Street
Baltimore, Maryland 21202
Connecticut Innovations, Incorporated.................................... 308,823 5.1% %
999 West Street
Rocky Hill, Connecticut 06067
</TABLE>
- --------
* Less than 1%
(1) Shares of Common Stock that an individual or group has the right to
acquire within 60 days of June 1, 1998, pursuant to the exercise of
options or warrants are deemed to be outstanding for the purposes of
computing the percentage ownership of such individual or group, but are
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person shown in the table.
(2) Percentage of ownership is based on 6,005,704 shares of Common Stock
outstanding on June 1, 1998 and shares of Common Stock outstanding
after the completion of this Offering and assumes the Preferred Stock
Conversion.
(3) Does not include an additional 400,000 shares subject to options which are
not currently exercisable. If the Underwriters exercise the over-allotment
option to purchase up to shares from Mr. Peck in full, Mr. Peck will
beneficially own shares of Common Stock, or % of the outstanding
Common Stock, after this Offering.
44
<PAGE>
(4) Includes 20,000 shares of Common Stock underlying options which are
exercisable as of the date of this Prospectus or within 60 days of such
date. Does not include an additional 257,000 shares subject to options
which are not currently exercisable.
(5) Consists of 282,401 shares of Common Stock owned by a trust for the
benefit of Mr. Jackson and his wife. Mr. Jackson and his wife are co-
trustees of the trust.
(6) Consists of 147,059 shares of Common Stock owned by Broderbund. Mr. Murray
is the General Manager of Broderbund. Mr. Murray expressly disclaims
beneficial ownership of such shares.
(7) Consists of 500,000 shares of Common Stock owned by Primus. Mr. Mulligan
is a Managing Director of Primus. Mr. Mulligan expressly disclaims
beneficial ownership of such shares.
(8) Consists of 375,000 shares of Common Stock owned by Brand Equity Ventures
I, L.P. ("Brand"). Mr. Yarnell is a General Partner of Brand. Mr. Yarnell
expressly disclaims ownership of such shares.
(9) Includes 7,500 shares of Common Stock subject to currently exercisable
options held by Michael R. Starkenburg, 5,000 shares of Common Stock
subject to currently exercisable options held by Larry Berk, and no shares
of Common Stock subject to currently exercisable options held by Philip J.
Rello. See also footnotes 3 through 8 above.
(10) Includes 125,000 shares of Common Stock subject to a currently
exercisable warrant.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the consummation of this Offering, the Company's authorized capital
stock will consist of 50,000,000 shares of Common Stock, par value $.01 per
share ("Common Stock"), and 10,000,000 shares of Preferred Stock, par value
$.01 per share ("Preferred Stock"). Upon completion of this Offering, there
will be shares of Common Stock and no shares of Preferred Stock
outstanding. As of June 1, 1998, there were 6,005,704 shares of Common Stock
outstanding, held of record by stockholders. In addition, as of June 1, 1998
there were outstanding options to purchase 608,000 shares of Common Stock and
warrants to purchase 785,968 shares of Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to the
rights and preferences of the holders of any outstanding Preferred Stock, the
holders of Common Stock are entitled to receive ratably such dividends as are
declared by the Board of Directors out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of the Company, holders
of Common Stock have the right to a ratable portion of assets remaining after
the payment of all debts and other liabilities of the Company, subject to the
liquidation preferences of the holders of any outstanding Preferred Stock.
Holders of Common Stock have neither preemptive rights nor rights to convert
their Common Stock into any other securities and are not subject to future
calls or assessments by the Company. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and the shares offered hereby upon issuance and sale will be, fully
paid and non-assessable. The rights, preferences and privileges of the holders
of Common Stock are subject to, and may be adversely affected by, the rights
of the holders of shares of Preferred Stock that the Company may designate and
issue in the future.
PREFERRED STOCK
Upon the closing of this Offering, all of the outstanding shares of the
Company's Series A Convertible Preferred Stock, Series B Convertible Preferred
Stock and Redeemable Series C Convertible Preferred Stock will be
automatically converted on a one-for-one basis into an aggregate of 3,778,948
shares of Common Stock.
The Board of Directors is authorized, subject to certain limitations
prescribed by Delaware law, without further action by the stockholders, to
issue shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms, the number of shares constituting any series
and the designation of such series. The Company believes that the Board of
Directors' power to set the terms of, and the Company's ability to issue,
Preferred Stock will provide flexibility in connection with possible financing
transactions in the future. The issuance of Preferred Stock, however, could
adversely affect the voting power of holders of Common Stock and decrease the
amount of any liquidation distribution to such holders. The presence of
outstanding Preferred Stock could also have the effect of delaying, deterring
or preventing a change in control of the Company. The Company has no present
plans to issue any shares of Preferred Stock.
WARRANTS
As of June 1, 1998, there were outstanding warrants to purchase 785,968
shares of Common Stock held by six investors. Such warrants have expiration
dates ranging from 2001 to 2007 and have exercise prices that range from
$.0124 per share to $8.00 per share with a weighted average exercise price of
$6.86 per share. The number of shares for which the warrants are exercisable
is subject to adjustment for stock splits, combinations or dividends and
reclassifications, exchanges or substitutions. Upon the closing of this
Offering, contingent warrants to purchase an additional 415,518 shares of
Common Stock will terminate.
REGISTRATION RIGHTS
Following this Offering, the holders of 3,778,948 shares of Common Stock and
of warrants to purchase a total of 567,865 shares of Common Stock will have
certain rights to cause the Company to register those shares
46
<PAGE>
under the Securities Act beginning between three and six months after the
closing date of this Offering. These holders formerly held the Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock and
Redeemable Series C Convertible Preferred Stock that will be automatically
converted into Common Stock in the Preferred Stock Conversion. The Company may
be required to effect up to two registrations requested by each of these
groups of equity holders. In addition, 90 days following this Offering, the
foregoing holders will have certain rights to cause the Company to register
the aforementioned shares on Forms S-2 and S-3 under the Securities Act,
provided that the Company is eligible to use such Forms. There is no limit to
the number of registrations on Form S-3 that the Company may be required to
effect, except that the Company will in no event be obligated to effect more
than two such registrations in any calendar year. Stockholders with
registration rights who are not part of an initial registration demand are
entitled to notice of such registration and are entitled to include their
shares of Common Stock therein. These registration rights are subject to
certain conditions and limitations, including the right, under certain
circumstances, of underwriters to limit the number of shares included in any
such registration.
In addition, if the Company proposes to register any of its equity
securities under the Securities Act, whether or not for sale for its own
account, other than in connection with a Company employee benefit plan or
certain business combinations involving the Company, the foregoing holders of
3,778,948 shares of Common Stock and Warrants to purchase 567,865 shares of
Common Stock, along with the holders of warrants to purchase 218,103 shares of
Common Stock, are entitled to notice of such registration and are entitled to
include their Common Stock therein. These rights are subject to certain
conditions and limitations, including the right of the underwriters of an
offering to limit the number of shares included in any such registration under
certain circumstances.
All expenses incurred in connection with such registrations (other than
underwriters' discounts and commissions and stock transfer fees or expenses)
and the fees and expenses of a single counsel to the selling stockholders will
be borne by the Company.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Upon the consummation of this Offering, the Company will be subject to the
anti-takeover provisions of Section 203 of the DGCL, an anti-takeover law. In
general, Section 203 prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is, or the
transaction in which the person became an interested stockholder was, approved
in a prescribed manner or another prescribed exception applies. For purposes
of Section 203, a "business combination" is defined broadly to include a
merger, asset sale or other transaction resulting in a financial benefit to
the interested stockholder, and, subject to certain exceptions, an interested
stockholder is a person who, together with his or her affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
The Board of Directors of the Company will be divided into three classes as
nearly equal in number as possible upon consummation of this Offering. Each
year the stockholders will elect the members of one of the three classes to a
three-year term of office. Messrs. Mulligan and Yarnell will serve in the
class whose term expires in 1999; Ms. Vick and Mr. Jackson will serve in the
class whose term expires in 2000; and Messrs. Peck and Murray will serve in
the class whose term expires in 2001. All directors elected to the Company's
classified Board of Directors will serve until the election and qualification
of their respective successors or their earlier resignation or removal. The
Board of Directors is authorized to create new directorships and to fill such
positions so created and is permitted to specify the class to which any such
new position is assigned. The person filling such position would serve for the
term applicable to that class. The Board of Directors (or its remaining
members, even if less than a quorum) is also empowered to fill vacancies on
the Board of Directors occurring for any reason for the remainder of the term
of the class of Directors in which the vacancy occurred. Members of the Board
of Directors may only be removed for cause. These provisions are likely to
increase the time required for stockholders to change the composition of the
Board of Directors. For example, in general, at least two annual meetings will
be necessary for stockholders to effect a change in a majority of the members
of the Board of Directors.
47
<PAGE>
The Company's Bylaws provide that, for nominations to the Board of Directors
or for other business to be properly brought by a stockholder before a meeting
of stockholders, the stockholder must first have given timely notice thereof
in writing to the Secretary of the Company. To be timely, a stockholder's
notice generally must be delivered not less than 60 days nor more than 90 days
prior to the annual meeting. If the meeting is not an annual meeting, the
notice must generally be delivered not more than 90 days prior to the special
meeting and not later than the later of 60 days prior to the special meeting
or ten days following the day on which public announcement of the meeting is
first made by the Company. Only such business shall be conducted at a special
meeting of stockholders as is brought before the meeting pursuant to the
Company's notice of meeting. The notice by a stockholder must contain, among
other things, certain information about the stockholder delivering the notice
and, as applicable, background information about the nominee or a description
of the proposed business to be brought before the meeting.
The Company's Certificate of Incorporation also requires that any action
required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of stockholders and may
not be effected by a consent in writing. Special meetings may be called only
by the Board of Directors of the Company pursuant to a resolution adopted by a
majority of the total number of directors authorized.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless the corporation's certificate
of incorporation or bylaws, as the case may be, requires a greater percentage.
The Certificate of Incorporation requires the affirmative vote of the holders
of at least 70% of the outstanding voting stock of the Company to amend or
repeal any of the provisions discussed in this section entitled "Delaware Law
and Certain Charter and Bylaw Provisions" or to reduce the number of
authorized shares of Common Stock or Preferred Stock. Such 70% vote is also
required for any amendment to, or repeal of, the Company's Bylaws by the
stockholders. Such 70% stockholder vote would be in addition to any separate
class vote that might in the future be required pursuant to the terms of any
preferred stock that might then be outstanding. The Bylaws may also be amended
or repealed by a simple majority vote of the Board of Directors.
The provisions of the Certificate of Incorporation and Bylaws discussed
above could make more difficult or discourage a proxy contest or other change
in the Company's management or the acquisition or attempted acquisition of
control by a holder of a substantial amount of the Company's voting stock. It
is possible that such provisions could make it more difficult to accomplish,
or could deter, transactions that stockholders may otherwise consider to be in
their best interests or those of the Company.
As permitted by the DGCL, the Certificate of Incorporation provides that
Directors of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of their fiduciary duties as
Directors, except for liability (i) for any breach of their duty of loyalty to
the Company and its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
for unlawful payments of dividends or unlawful stock repurchases or
redemptions, as provided in Section 174 or successor provisions of the DGCL or
(iv) for any transaction from which the Director derives an improper personal
benefit.
The Certificate of Incorporation and Bylaws provide that the Company shall
indemnify its Directors and officers to the fullest extent permitted by
Delaware law (except, in some circumstances, with respect to suits initiated
by the Director or officer) and advance expenses to such Directors or officers
to defend any action for which rights of indemnification are provided. In
addition, the Certificate of Incorporation and Bylaws also permit the Company
to grant such rights to its employees and agents. The Bylaws also provide that
the Company may enter into indemnification agreements with its Directors and
officers and purchase insurance on behalf of any person whom it is required or
permitted to indemnify. The Company believes that these provisions will assist
the Company in attracting and retaining qualified individuals to serve as
Directors, officers and employees.
48
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission (the
"Commission"), such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is . The transfer
agent's telephone number is .
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for the Common Stock of the
Company. The Company can make no prediction as to the effect, if any, that
sales of shares or the availability of shares for sale will have on the market
price of Common Stock prevailing from time to time. Nevertheless, sales of
significant amounts of the Common Stock in the public market, or the
perception that such sales may occur, could adversely affect prevailing market
prices. See "Risk Factors--Shares Eligible for Future Sale."
Upon completion of this Offering, the Company expects to have shares of
Common Stock outstanding (excluding 608,000 and 785,968 shares reserved for
issuance upon the exercise of outstanding stock options and warrants,
respectively) ( shares of Common Stock outstanding if the Underwriters'
over-allotment option is exercised in full). Of these shares, the shares
offered hereby will be freely tradable without restrictions or further
registration under the Securities Act, except for any shares purchased by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act ("Rule 144"), which shares will be subject to the resale
limitations imposed by Rule 144, as described below.
All of the remaining 6,005,704 shares of Common Stock outstanding will be
"restricted securities" within the meaning of Rule 144 and may not be resold
in the absence of registration under the Securities Act, or pursuant to
exemptions from such registration including, among others, the exemption
provided by Rule 144. Of the restricted securities, 319,364 shares are
eligible for sale in the public market immediately after this Offering
pursuant to Rule 144(k) under the Securities Act ("Rule 144k"). A total of
2,547,810 additional restricted securities will be eligible for sale in the
public market in accordance with Rule 144 beginning 90 days after the date of
this Prospectus. Taking into consideration the effect of the lock-up
agreements described below and the provisions of Rules 144 and 144(k),
restricted shares will be eligible for sale in the public market immediately
after this Offering, restricted shares (excluding 608,000 and 785,968
shares issuable upon the exercise of outstanding stock options and warrants,
respectively) will be eligible for sale beginning 90 days after the date of
this Prospectus, and the remaining restricted shares will be eligible for sale
upon the expiration of the lock-up agreements 180 days after the date of this
Prospectus, subject to the provisions of Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are required to
be aggregated) whose restricted securities have been outstanding for at least
one year, including a person who may be deemed an "affiliate" of the Company,
may only sell a number of shares within any three-month period which does not
exceed the greater of (i) one percent of the then outstanding shares of the
Company's Common Stock (approximately shares after this Offering) or (ii)
the average weekly trading volume in the Company's Common Stock in the four
calendar weeks immediately preceding such sale. Sales under Rule 144 are also
subject to certain requirements as to the manner of sale, notice and the
availability of current public information about the Company. A person who is
not an affiliate of the issuer, has not been an affiliate within three months
prior to the sale and has owned the restricted securities for at least two
years is entitled to sell such shares under Rule 144(k) without regard to any
of the limitations described above.
Beginning 90 days after the date of this Prospectus, certain shares issued
or issuable upon the exercise of options granted by the Company prior to the
date of this Prospectus will also be eligible for sale in the public market
pursuant to Rule 701 under the Securities Act ("Rule 701"). In general, Rule
701 permits resales of shares issued pursuant to certain compensatory benefit
plans and contracts, commencing 90 days after the issuer becomes subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended,
in reliance upon Rule 144, but without compliance with certain restrictions of
Rule 144, including the holding period requirements. As of June 1, 1998, the
Company has granted options covering 608,000 shares of Common Stock, none of
which have been exercised and which become exercisable at various times in the
future. Any shares of Common Stock issued upon the exercise of these options
will be eligible for sale pursuant to Rule 701.
50
<PAGE>
The executive officers and Directors and certain other existing stockholders
of the Company, who beneficially own in the aggregate shares of Common
Stock and options and warrants to purchase shares of Common Stock, have
agreed that they will not, without the prior written consent of BT Alex. Brown
Incorporated, (i) 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, lend 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 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 such 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, for a period of 180 days after the date of this Prospectus.
Upon completion of this Offering, the holders of 3,778,948 shares of Common
Stock and warrants to purchase 567,865 shares of Common Stock are entitled to
certain rights with respect to the registration of such shares under the
Securities Act. Registration of such shares under the Securities Act would
result in such shares becoming freely tradeable without restriction under the
Securities Act (except for shares purchased by affiliates of the Company)
immediately upon the effectiveness of such registration. Certain of these
existing stockholders who beneficially own in the aggregate shares of
Common Stock and warrants to purchase shares of Common Stock have agreed
that, without the prior written consent of BT Alex. Brown Incorporated, they
will not, for a period of 180 days after the date of the Prospectus, make any
demand for, or exercise any right with respect to, the registration of any
shares of Common Stock or any security exercisable for Common Stock. See
"Underwriting."
51
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement between
the Company and the Underwriters (the "Underwriting Agreement"), the
Underwriters named below, through their representatives, BT Alex. Brown
Incorporated, NationsBanc Montgomery Securities LLC and Dain Rauscher Wessels,
a division of Dain Rauscher Incorporated ("Dain Rauscher Wessels")
(collectively, the "Representatives"), have severally agreed to purchase from
the Company the number of shares of Common Stock set forth opposite the name
of such Underwriter below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
BT Alex. Brown Incorporated.......................................
NationsBanc Montgomery Securities LLC.............................
Dain Rauscher Wessels.............................................
----
Total...........................................................
====
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of Common Stock offered hereby if any of such
shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the shares of Common Stock to the public at the
offering price set forth on the cover page of this Prospectus and through the
Representatives to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may re-
allow, a concession not in excess of $ per share to certain other dealers.
After commencement of this Offering, the offering price and other selling
terms may be changed by the Representatives.
The Company and Darryl Peck, the Company's President and Chief Executive
Officer, have granted the Underwriters an option, exercisable by the
Representatives not later than 30 days after the date of this Prospectus, to
purchase up to and additional shares of Common Stock, respectively, at
the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus. To the extent that
the Underwriters exercise such option, each of the Underwriters will have a
firm commitment to purchase approximately the percentage thereof that the
number of shares of Common Stock to be purchased by it in the above table
bears to , and the Company and Mr. Peck will be obligated, pursuant to the
option, to sell such shares to the Underwriters. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
the Common Stock offered hereby. If purchased, the Underwriters will offer
such additional shares on the same terms as those on which the shares are
being offered.
The Underwriting Agreement contains covenants of indemnity and contribution
between the Underwriters and the Company regarding certain liabilities,
including liabilities under the Securities Act.
To facilitate this Offering of the Common Stock, the Underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price
of the Common Stock. Specifically, the Underwriters may over-allot shares of
the Common Stock in connection with this Offering, thereby creating a short
position in the Underwriters' syndicate account. Additionally, to cover such
over-allotments or to stabilize the market price of the Common Stock, the
Underwriters may bid for, and purchase, shares of the Common Stock in the open
market. Any of these activities may maintain the market price of the Common
Stock at a level above that which might otherwise prevail in the open market.
The Underwriters are not required to engage in these activities, and, if
commenced, any such activities may be discontinued at any time. The
Representatives, on behalf of the Underwriters, also may reclaim selling
concessions allowed to an Underwriter or dealer, if the syndicate repurchases
shares distributed by that Underwriters or dealer.
The Company has agreed that it will not sell or offer any shares of Common
Stock or options, rights or warrants to acquire any Common Stock for a period
of 180 days after the date of this Prospectus without the
52
<PAGE>
prior written consent of BT Alex. Brown Incorporated, except for shares
issued: (i) in connection with acquisitions, provided that the recipients
agree not to sell or dispose of such shares during such 180-day period; (ii)
pursuant to the exercise of options granted under the Company's Stock Plans
and (iii) upon the Preferred Stock Conversion. Further, the Company's
directors, officers, and certain other stockholders, who beneficially own
shares in the aggregate, have agreed not to directly or indirectly sell or
offer for sale or otherwise dispose of any Common Stock for a period of 180
days after the date of this Prospectus, except for certain permitted transfers
or with the prior written consent of BT Alex. Brown Incorporated.
Pursuant to an engagement letter signed by the Company in November 1997, BT
Alex. Brown Incorporated acted as the placement agent for the Redeemable
Series C Convertible Preferred Stock financing and in connection with such
service received warrants to purchase 158,103 shares of Common Stock at an
exercise price of $8.00 per share. In addition, certain persons related to BT
Alex. Brown Incorporated purchased shares of Redeemable Series C Convertible
Preferred Stock, together with contingent warrants to purchase Common Stock,
in connection with such financing.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock
will be determined by negotiations between the Company and the
Representatives. Among the factors to be considered in such negotiations are
prevailing market conditions, the results of operations of the Company in
recent periods, the market capitalization and stages of development of other
companies which the Company and the Representatives believe to be comparable
to the Company, estimates of the business potential of the Company, the
present state of the Company's development and other factors deemed relevant
by the Company and the Representatives.
LEGAL MATTERS
The validity of issuance of the Common Stock offered hereby will be passed
upon for the Company by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
Boston, Massachusetts. Certain legal matters will be passed upon for the
Underwriters by Reboul, MacMurray, Hewitt, Maynard & Kristol, New York, New
York.
EXPERTS
The Consolidated Financial Statements of Cyberian Outpost, Inc. and
Subsidiary as of February 28, 1997 and 1998 and for the period from March 6,
1995 (date of inception) through February 29, 1996, and for the years ended
February 28, 1997 and 1998, have been included in this Prospectus and
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, which report is included elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, with respect to the Common Stock offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus,
which is part of the Registration Statement, omits certain information,
exhibits, schedules and undertakings set forth in the Registration Statement.
For further information pertaining to the Company and the Common Stock,
reference is made to such Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents
or provisions of any documents referred to herein are not necessarily
complete, and in each instance where a copy of the document has been filed as
an exhibit to the Registration Statement, reference is made to the exhibit so
filed. The Registration
53
<PAGE>
Statement may be inspected without charge at the office of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the Registration
Statement may be obtained from the Commission at prescribed rates from the
Public Reference Section of the Commission at such address, and at the
Commission's regional offices located at 7 World Trade Center, 13th Floor, New
York, New York 10048, and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. In addition, registration statements and
certain other filings made with the Commission through its Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") system are publicly available
through the Commission's site on the Internet's World Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants,
and will make available quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information and such other periodic
reports as the Company may determine to be appropriate or as may be required
by law.
54
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of February 28, 1997 and 1998.............. F-3
Consolidated Statements of Operations for the period from March 6, 1995
(date of inception) through February 29, 1996, and for the years ended
February 28, 1997 and 1998............................................... F-4
Consolidated Statements of Redeemable Preferred Stock and Stockholders'
Deficit for the period from March 6, 1995 (date of inception) through
February 29, 1996, and for the years ended February 28, 1997 and 1998.... F-5
Consolidated Statements of Cash Flows for the period from March 6, 1995
(date of inception) through February 29, 1996, and for the years ended
February 28, 1997 and 1998............................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cyberian Outpost, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Cyberian
Outpost, Inc. and subsidiary as of February 28, 1997 and 1998, and the related
consolidated statements of operations, redeemable preferred stock and
stockholders' deficit, and cash flows for the period from March 6, 1995 (date
of inception) through February 29, 1996, and for the years ended February 28,
1997 and 1998. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cyberian
Outpost, Inc. and subsidiary as of February 28, 1997 and 1998, and the results
of their operations and their cash flows for the period from March 6, 1995
(date of inception) through February 29, 1996, and for the years ended
February 28, 1997 and 1998, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Providence, Rhode Island
April 24, 1998
F-2
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
February 28, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 40,970 $ 7,325,317
Accounts receivable, less allowance for
doubtful accounts of $4,000 in 1997 and
$47,000 in 1998............................... 197,779 474,340
Inventories.................................... 313,932 1,410,545
Prepaid expenses and other current assets...... 3,175 98,079
----------- -----------
Total current assets......................... 555,856 9,308,281
----------- -----------
Property and equipment, net (note 2)......... 198,729 1,611,463
Other assets..................................... -- 19,776
----------- -----------
Total assets................................. $ 754,585 $10,939,520
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable (note 3)......................... $ 200,000 $ 2,750,000
Current portion of capital lease obligations
(note 7(b))................................... 10,836 107,983
Accounts payable............................... 1,544,701 3,420,590
Accrued expenses (notes 2 and 7(a))............ 136,675 2,205,771
----------- -----------
Total current liabilities.................... 1,892,212 8,484,344
----------- -----------
Capital lease obligations, excluding current
portion (note 7(b))............................. 22,938 135,517
----------- -----------
Total liabilities............................ 1,915,150 8,619,861
----------- -----------
Commitments (note 7)
Redeemable Series C convertible preferred stock,
no par value, 875,000 shares issued and
outstanding at February 28, 1998 (liquidation
value of $7,000,000) (note 5)................... -- 5,990,758
Stockholders' deficit (notes 4 and 6):
Preferred stock, no par value, 5,000,000 shares
authorized, 682,738 Series A Convertible shares
and 163,043 Series B Convertible shares issued
and outstanding at February 28, 1998............ -- 2,613,776
Common stock, no par value, 10,000,000 shares
authorized, 2,150,549 and 2,226,762 shares
issued and outstanding in 1997 and 1998......... 489,279 748,401
Additional paid-in capital....................... 60,000 1,768,397
Accumulated deficit.............................. (1,709,844) (8,801,673)
----------- -----------
Total stockholders' deficit.................. (1,160,565) (3,671,099)
----------- -----------
Total liabilities and stockholders' deficit.. $ 754,585 $10,939,520
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the period from March 6, 1995 (date of inception) through
February 29, 1996 and for the years ended February 28, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net sales.............................. $ 1,851,793 $10,790,054 $22,681,043
Cost of sales.......................... 1,688,455 9,535,116 20,525,034
----------- ----------- -----------
Gross profit......................... 163,338 1,254,938 2,156,009
Operating expenses:
Sales and marketing (note 7(a))...... 217,675 1,407,218 5,942,565
General and administrative........... 258,853 804,711 1,623,113
Technology and development........... 54,402 381,960 1,057,893
----------- ----------- -----------
Total operating expenses........... 530,930 2,593,889 8,623,571
----------- ----------- -----------
Operating loss....................... (367,592) (1,338,951) (6,467,562)
----------- ----------- -----------
Other income (expense):
Interest expense (note 3)............ (1,535) (4,126) (657,743)
Other, net........................... (2,396) 4,756 33,476
----------- ----------- -----------
Other income (expense), net........ (3,931) 630 (624,267)
----------- ----------- -----------
Net loss............................. $ (371,523) $(1,338,321) $(7,091,829)
=========== =========== ===========
Basic and diluted net loss per common
share................................. $ (0.21) $ (0.65) $ (3.21)
=========== =========== ===========
Weighted average basic and diluted
common shares outstanding............. 1,747,922 2,048,258 2,211,094
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
For the period from March 6, 1995 (date of inception) through
February 29, 1996 and for the years ended February 28, 1997 and 1998
<TABLE>
<CAPTION>
STOCKHOLDERS' DEFICIT
------------------------------------------------------------------------------
REDEEMABLE
PREFERRED
STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
------------------ ------------------ ------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIT
------- ---------- ------- ---------- --------- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 6,
1995 (inception).... -- -- -- -- -- -- -- -- --
Issuance of common
stock............... -- -- -- -- 1,810,000 $ 228,730 -- -- $ 228,730
Issuance of common
stock awards to
employees........... -- -- -- -- 70,000 50,000 -- -- 50,000
Issuance of common
stock for services
rendered............ -- -- -- -- 120,000 60,000 -- -- 60,000
Net loss............. -- -- -- -- -- -- -- $ (371,523) (371,523)
------- ---------- ------- ---------- --------- --------- ----------- ------------ ------------
Balance, February 29,
1996................ -- -- -- -- 2,000,000 338,730 -- (371,523) (32,793)
Value of warrants
issued for services
rendered............ -- -- -- -- -- -- $ 60,000 -- 60,000
Issuance of common
stock awards to
employees........... -- -- -- -- 139,527 139,527 -- -- 139,527
Issuance of common
stock for services
rendered............ -- -- -- -- 11,022 11,022 -- -- 11,022
Net loss............. -- -- -- -- -- -- -- (1,338,321) (1,338,321)
------- ---------- ------- ---------- --------- --------- ----------- ------------ ------------
Balance, February 28,
1997................ -- -- -- -- 2,150,549 489,279 60,000 (1,709,844) (1,160,565)
Issuance of common
stock awards to
employees........... -- -- -- -- 72,050 244,968 -- -- 244,968
Issuance of common
stock for services
rendered............ -- -- -- -- 4,163 14,154 -- -- 14,154
Sales of Series A
Convertible
Preferred stock, net
of expenses and
value of warrants
issued.............. -- -- 682,738 $1,948,736 -- -- -- -- 1,948,736
Value of warrants
issued in connection
with Series A
Convertible
Preferred Stock..... -- -- -- -- -- -- 166,275 -- 166,275
Sales of Series B
Convertible
Preferred Stock, net
of expenses......... -- -- 163,043 665,040 -- -- -- -- 665,040
Value of warrants
issued in connection
with marketing
agreement (note 6).. -- -- -- -- -- -- 703,897 -- 703,897
Value of warrants
issued in connection
with bridge
financing (note 6).. -- -- -- -- -- -- 567,563 -- 567,563
Sales of Series C
Redeemable
Convertible
Preferred Stock, net
of expenses and
value of warrants
issued.............. 875,000 $5,990,758 -- -- -- -- -- -- --
Warrants issued in
connection with
Series C Redeemable
Convertible
Preferred Stock..... -- -- -- -- -- -- 235,662 -- 235,662
Contingent stock
purchase warrants
issued in connection
with Series C
Redeemable
Convertible
Preferred Stock..... -- -- -- -- -- -- 35,000 -- 35,000
Net loss............. -- -- -- -- -- -- -- (7,091,829) (7,091,829)
------- ---------- ------- ---------- --------- --------- ----------- ------------ ------------
Balance, February 28,
1998................ 875,000 $5,990,758 845,781 $2,613,776 2,226,762 $ 748,401 $ 1,768,397 $ (8,801,673) $ (3,671,099)
======= ========== ======= ========== ========= ========= =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period from March 6, 1995 (date of inception)
through February 29, 1996 and for the years ended
February 28, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................. $(371,523) $(1,338,321) $(7,091,829)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Depreciation and amortization............ 26,528 94,795 145,233
Amortization of original issue discount
on bridge financing..................... -- -- 567,563
Issuance of common stock for services
rendered................................ 60,000 11,022 14,154
Issuance of common stock awards to
employees............................... 50,000 139,527 244,968
Issuance of common stock warrants........ -- 60,000 703,897
Provision for doubtful accounts and
credit card chargebacks................. 26,000 53,000 282,000
Loss on disposal of property and
equipment............................... 2,396 -- 1,510
(Increase) decrease in operating assets:
Accounts receivable..................... (50,288) (226,491) (558,561)
Inventories............................. (230,656) (83,276) (1,096,613)
Prepaid expenses and other assets....... (4,675) 1,500 (114,680)
Increase in operating liabilities:
Accounts payable........................ 437,335 1,107,366 1,875,889
Accrued expenses........................ 85,053 51,622 2,069,096
--------- ----------- -----------
Net cash provided (used) by operating
activities............................ 30,170 (129,256) (2,957,373)
--------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment...... (174,910) (94,904) (1,321,792)
Proceeds from the sale of property and
equipment............................... -- -- 500
--------- ----------- -----------
Net cash used by investing activities.. (174,910) (94,904) (1,321,292)
--------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings of notes
payable................................. 35,000 200,000 2,632,437
Repayment of notes payable............... -- (35,000) (150,000)
Repayment of capital lease obligations... -- (18,860) (28,459)
Proceeds from issuance of preferred
stock................................... -- -- 2,113,776
Proceeds from issuance of redeemable
preferred stock......................... -- -- 5,990,758
Proceeds from issuance of common stock
warrants................................ -- -- 1,004,500
Proceeds from issuance of common stock... 228,730 -- --
--------- ----------- -----------
Net cash provided by financing
activities............................ 263,730 146,140 11,563,012
--------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents.............................. 118,990 (78,020) 7,284,347
Cash and cash equivalents at beginning of
period................................... -- 118,990 40,970
--------- ----------- -----------
Cash and cash equivalents at end of
period................................... $ 118,990 $ 40,970 $ 7,325,317
========= =========== ===========
</TABLE>
During the year ended February 28, 1998, the Company issued shares of Series
A Convertible Preferred Stock with an aggregate market value of $500,000 to
several investors as full repayment on notes payable with a balance of
$500,000. During the years ended February 28, 1997 and 1998, the Company
acquired office equipment, furniture and fixtures by incurring capital lease
obligations of $52,634 and $238,185, respectively.
During the period ended February 29, 1996 and during the years ended
February 28, 1997 and 1998, the Company paid cash for interest of $1,590,
$1,665 and $87,522, and for income taxes of $0, $250 and $500, respectively.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 6, 1995 (DATE OF INCEPTION)
THROUGH FEBRUARY 29, 1996 AND FOR THE YEARS ENDED FEBRUARY 28, 1997 AND 1998
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Cyberian Outpost, Inc. ("Cyberian") was incorporated in the state of
Connecticut on March 6, 1995. Cyberian and its Subsidiary (the "Company") is a
leading, global, online retailer of computer hardware and software products.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Cyberian
Outpost, Inc. and its wholly-owned subsidiary. All intercompany accounts and
transactions are eliminated in consolidation.
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent gains and losses at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(d) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all investment instruments with original maturities of three months
or less to be cash equivalents. Cash equivalents at February 28, 1998 included
investments in overnight repurchase agreements and money market funds.
(e) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average cost method.
(f) Property and Equipment
Property and equipment are stated at cost. Equipment under capital lease
obligations is stated at the lesser of the present value of minimum rental and
other lease payments or fair value at the time of acquisition. Depreciation
and amortization are provided using the straight-line method over the
estimated useful lives of the assets, or over the term of the lease if
shorter.
Estimated useful lives for financial reporting purposes are as follows:
<TABLE>
<S> <C>
Computers........................................................... 3 years
Purchased software.................................................. 2 years
Office equipment.................................................... 3 years
Furniture and fixtures.............................................. 7 years
Leasehold improvements.............................................. 2 years
</TABLE>
F-7
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(g) Revenue Recognition
Net sales, which consist primarily of computer hardware and third-party
prepackaged software sold via the Internet, are recognized when the products
are shipped to customers. The Company records a reserve for estimated sales
returns at the time of shipment based on historical return rates.
The Company derived 62%, 47% and 36% of revenues in fiscal 1996, 1997 and
1998, respectively, from customers outside the United States. All sales are
settled in U.S. dollars.
(h) Sales and Marketing
Sales and marketing includes advertising costs, which are charged to expense
as incurred. Advertising costs were $75,960 for the period ended February 29,
1996, and $342,669 and $2,998,047 for the years ended February 28, 1997 and
1998, respectively.
(i) Technology and Development
Technology expenses consist primarily of payroll and related expenses of
development, editorial, and network operations personnel, and for systems and
telecommunications infrastructure costs.
(j) Income Taxes
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
operations in the period that includes the enactment date.
(k) Stock-based Compensation
On March 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-
Based Compensation, which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings
disclosures for employee stock option grants made in fiscal 1996 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123.
(l) Net Loss Per Common Share
The Company has presented net loss per share pursuant to Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings per Share, and the
Securities and Exchange Commission Staff Accounting Bulletin No. 98.
Basic loss per share was computed by dividing net loss applicable to common
shareholders by the weighted average number of shares of Common Stock
outstanding for each period presented. Diluted loss per share has not been
presented separately, as the outstanding stock options, warrants and
contingent stock purchase warrants are anti-dilutive for each of the periods
presented.
F-8
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(m) Recapitalization
In May 1997, the Company effected a 100-for-1 stock split in the form of a
stock dividend and amended its Articles of Incorporation to increase the
number of authorized shares to 13,000,000, of which 10,000,000 shares were
designated as Common Stock and 3,000,000 shares were designated as Preferred
Stock, both without nominal or par value. In February 1998, the Company
amended its Articles of Incorporation to increase the number of authorized
shares to 15,000,000, of which 10,000,000 shares were designated as Common
Stock and 5,000,000 shares were designated as Preferred Stock, both without
nominal or par value. All references in the consolidated financial statements
to the number of shares and to per share amounts have been retroactively
restated to reflect these changes.
(2) FINANCIAL STATEMENT DETAILS
Property and equipment consists of the following at February 28, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Computers.............................................. $ 125,660 $ 410,790
Purchased software..................................... 78,146 1,155,430
Office equipment....................................... 79,666 116,502
Furniture and fixtures................................. 22,313 127,700
Leasehold improvements................................. 13,345 54,141
--------- ----------
319,130 1,864,563
Less accumulated depreciation and amortization......... 120,401 253,100
--------- ----------
$ 198,729 $1,611,463
========= ==========
</TABLE>
Accrued expenses consists of the following at February 28, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Accrued advertising..................................... $ -- $ 908,813
Accrued preferred stock issuance costs.................. -- 604,617
Accrued payroll and related taxes....................... 77,166 194,402
Other................................................... 59,509 497,939
-------- ----------
$136,675 $2,205,771
======== ==========
</TABLE>
(3) NOTES PAYABLE
Notes payable at February 28, 1998 consists of a $750,000 convertible
debenture ("Debenture") and a $2,000,000 short-term note ("Note") due to an
investor. The Debenture was issued on October 31, 1997, accrued interest at
12.5% per annum, was scheduled to mature on October 31, 1998, and was
convertible into shares of Series B Convertible Preferred Stock at a
conversion price of $4.60 per share. Subsequent to February 28, 1998, the
investor converted the Debenture into 163,043.47 shares of Series B
Convertible Preferred Stock.
The Note was issued on January 13, 1998, together with warrants for the
purchase of 125,000 shares of Common Stock at $7.96 per share, exercisable at
any time through February 27, 2003 (See Note 6). The Note accrues interest at
12.5% per annum, and was due upon the earlier of the 270-day anniversary of
the Note or the date on which the Company closed an equity financing resulting
in gross proceeds of at least $6,000,000. Of the total $2,000,000 proceeds
from the Note, $567,563 was allocated to the warrants based on their estimated
fair value at the date of grant. The Note was considered bridge financing in
anticipation of the Company's sale of Redeemable Series C Convertible
Preferred Stock. On February 27, 1998, the Company closed on the first tranche
of Redeemable Series C Convertible Preferred Stock and received gross proceeds
of $7,000,000, at which time the Note matured. Therefore, the Company
amortized the original issue discount on the Note over the Note's expected
term of 45 days with charges to interest expense. The Note was repaid on March
10, 1998.
F-9
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During the year ended February 28, 1998, the Company borrowed $100,000 from
the father of the Company's President at a market interest rate. The borrowing
was repaid in full in May 1997. In addition, the Company borrowed $250,000
from a stockholder and an aggregate of $100,000 from three principals of the
placement agent for the Series A Convertible Preferred Stock offering. These
borrowings were exchanged for 147,058.82 shares of Series A Convertible
Preferred Stock in May 1997.
Notes payable at February 28, 1997 consisted of a $50,000 demand note, with
interest at 7% per annum, issued to the Company's President, and $150,000 of
demand notes, with interest at 7% per annum, issued to a stockholder of the
Company. The note payable to the President was repaid in full in May 1997, and
the notes due to the stockholder were exchanged by the stockholder for
44,117.65 shares of Series A Convertible Preferred Stock.
(4) PREFERRED STOCK
At February 28, 1998, Preferred Stock consisted of 5,000,000 shares
authorized and designated as 700,000 shares of Series A Convertible Preferred
Stock, 500,000 shares of Series B Convertible Preferred Stock, 3,000,000
shares of Redeemable Series C Convertible Preferred Stock, and 800,000 shares
undesignated.
In May and July 1997, the Company issued an aggregate of 638,620 shares of
Series A Convertible Preferred Stock at $3.40 per share and received net
proceeds of $1,948,736. The Company also issued 44,117.65 shares of Series A
Convertible Preferred Stock at $3.40 per share in repayment of certain notes.
The Series A Convertible Preferred Stock is convertible into Common Stock on a
one-to-one basis and has a liquidation preference of $3.40 per share.
In October 1997, the Company issued 163,043 shares of Series B Convertible
Preferred Stock at $4.60 per share and received net proceeds of $665,040. The
Series B Convertible Preferred Stock is convertible into Common Stock on a
one-to-one basis and has a liquidation preference of $4.60 per share.
(5) REDEEMABLE PREFERRED STOCK
In February 1998, the Company issued 875,000 shares of Redeemable Series C
Convertible Preferred Stock at $7.96 per share and received net proceeds of
$5,990,758. The Redeemable Series C Convertible Preferred Stock is convertible
into Common Stock on a one-to-one basis and has an aggregate liquidation
preference of $7,000,000 or $8.00 per share. The Redeemable Series C
Convertible Preferred Stock is redeemable at the election of a majority of the
holders thereof at any time after July 28, 2002. Such election would cause the
Company to redeem one-third of the then outstanding shares in each of the
three years succeeding the election at a price which is the greater of the
original purchase price plus all unpaid and accrued dividends or fair market
value, determined by the public stock price or by a third-party appraisal if
the stock is traded privately. The Redeemable Series C Convertible Preferred
Stock also earns dividends at the rate of 7% per annum, payable upon
liquidation of the Company, redemption of the Redeemable Series C Convertible
Preferred Stock, or conversion of the Preferred Stock into Common Stock,
provided that the cumulative dividends shall not be payable if the conversion
of shares into Common Stock occurs prior to the third anniversary of the
original issuance of the shares. The Redeemable Series C Convertible Preferred
Stock will be accreted to its redemption value.
(6) COMMON STOCK
(a) Common Stock Warrants
In July 1996, the Company issued a warrant to purchase 60,000 shares of
Common Stock at an exercise price of $.0124 per share to a placement agent.
The warrants expire in July 2001. Using the Black-Scholes model, the warrants
were valued at $60,000. This amount was recorded as expense when incurred
since the placement agent was not successful in raising equity financing for
the Company.
F-10
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In May and July 1997, the Company issued warrants to purchase an aggregate
of 87,159.71 shares of Common Stock at an exercise price of $3.40 per share in
connection with the Series A Convertible Preferred Stock financing. The
warrants expire in May 2002. Using the Black-Scholes model, the warrants were
valued at $166,275. This amount was recorded as a reduction to the net
proceeds of the Series A Convertible Preferred Stock financing.
In December 1997, the Company issued warrants to purchase 355,707 shares of
Common Stock at an exercise price of $7.96 per share in connection with a
marketing agreement (see Note 7(a)). The warrants expire in December 2007. Of
the total shares available for purchase under the warrants, one-third, or
118,569 shares, vested immediately, while the other two-thirds, or 237,138
shares, vest only if certain milestones set forth in the agreement are met.
Using the Black-Scholes model, the Company calculated the fair value of the
warrants for those shares that vested immediately at $703,897. This amount was
recorded as a charge to marketing expense.
In January 1998, the Company issued warrants to purchase 125,000 shares of
Common Stock at an exercise price of $8.00 per share in connection with the
Note (see Note 3). The warrants expire in February 2003. Using the Black-
Scholes model, the warrants were valued at $567,563. This amount was recorded
as a reduction to the carrying value of the Note.
In February 1998, the Company issued warrants to purchase 52,500 shares of
Common Stock at an exercise price of $8.00 per share to an investment banker
in connection with the Redeemable Series C Convertible Preferred Stock
financing. The warrants expire in February 2003. Using the Black-Scholes
model, the warrants were valued at $235,662. This amount was recorded as a
reduction in the carrying value of the Redeemable Series C Convertible
Preferred Stock and will be amortized and included in the accretion to the
redemption value of the Redeemable Series C Convertible Preferred Stock
recorded in each period.
In connection with the Redeemable Series C Convertible Preferred Stock
financing, the Company issued contingent stock purchase warrants to the
holders of the Redeemable Series C Convertible Preferred Stock for the
purchase of 131,250 shares of Common Stock at an exercise price of $10.00 per
share. The contingent warrants shall only be exercisable upon the earlier of
(i) the completion by the Company of an initial public offering at a price per
share of less than (x) 200% of the then applicable conversion price if the
initial public offering occurs within 12 months of the closing of the
Redeemable Series C Convertible Preferred Stock financing , or (y) 250% of the
then applicable conversion price if the initial public offering occurs after
12 months from the closing of such financing but within 24 months of the
closing, or (ii) the second anniversary of the closing if the Company has not
completed an initial public offering. The contingent stock purchase warrants
will expire immediately upon the completion by the Company of an initial
public offering; otherwise, the contingent warrants will expire on the fifth
anniversary of the closing of the Redeemable Series C Convertible Preferred
Stock financing. The contingent stock purchase warrants were valued at
$35,000, and recorded as a reduction to the net proceeds of the Redeemable
Series C Convertible Preferred Stock financing.
F-11
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(b) Common Stock Options
The Company has two stock option plans, which are described below. Statement
of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, requires companies to either (a) record an expense related to
its stock option plans based on the estimated fair value of stock options as
of the date of the grant or (b) disclose pro forma net income (loss) and
earnings (loss) per share data as if the Company had recorded an expense,
beginning with options granted in 1995. The Company has elected to apply APB
Opinion 25 and related Interpretations in accounting for these plans and to
comply with the SFAS No. 123 disclosure requirements. No compensation cost has
been recognized for its stock option plans in the accompanying consolidated
financial statements. Had compensation cost for such plans been determined
based on the fair value at the grant dates for awards under these plans
consistent with the method of SFAS No. 123, the Company's net loss would have
been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998
----
<S> <C> <C>
Net loss As reported $(7,091,829)
Pro forma $(7,125,479)
Basic loss per share As reported $ (3.21)
Pro forma $ (3.22)
Diluted loss per share As reported $ (3.21)
Pro forma $ (3.22)
</TABLE>
The weighted average fair value of options granted during 1998 was $1.77.
The Company estimates the fair value of each option as of the date of grant
using the Black-Scholes pricing model with the following weighted average
assumptions:
<TABLE>
<S> <C>
Expected volatility.................................................. 0%
Dividend yield....................................................... 0%
Risk-free interest rate.............................................. 6.3%
Expected life........................................................ 8 years
</TABLE>
During the year ended February 28, 1998, the Company's stockholders approved
the 1997 Stock Option Plan and the 1998 Stock Option Plan (collectively the
"Plans"). The 1997 and 1998 Stock Option Plans authorized the grant of options
for up to 300,000 shares and for 540,000 shares, respectively, of Common
Stock. Options granted under the Plans are either (a) options intended to
constitute incentive stock options ("ISOs") under the Internal Revenue Code of
1986 (the "Code") or (b) non-qualified options. Incentive stock options may be
granted under the Plans to employees of the Company. Non-qualified options may
be granted to consultants, directors and officers (whether or not they are
employees), or employees of the Company.
Options granted under the Plans vest 20% per year over a five-year period,
and are exercisable for a period not to exceed 10 years from the date of
grant.
F-12
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of the Company's stock option plans as of February
28, 1998 and changes during the year then ended is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Outstanding at beginning of year............................ -- --
Granted..................................................... 573,000 $4.48
Exercised................................................... -- --
Terminated.................................................. -- --
-------
Outstanding at end of year.................................. 573,000 $4.48
=======
Exercisable at end of year.................................. 25,000 $3.40
=======
Shares reserved at end of year.............................. 267,000
=======
</TABLE>
The following table summarizes information about stock options outstanding
at February 28, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3.40 to $4.60....... 521,500 9.8 $4.13 25,000 $3.40
$8.00................ 51,500 10.0 $8.00 -- --
------- ------
$3.40 to $8.00....... 573,000 9.8 $4.48 25,000 $3.40
======= ======
</TABLE>
(c) Common Stock
During the period ended February 29, 1996, and during the years ended
February 28, 1997 and 1998, the Company issued 190,000, 150,549, and 76,213
shares of Common Stock to employees and consultants in exchange for services.
The Company has recorded expense of $110,000, $150,549, and $259,122 in the
corresponding periods related to these stock issuances.
(7) COMMITMENTS
(a) Marketing Agreement
The Company entered into a marketing agreement with an internet service and
content provider on December 1, 1997. All advertising revenues generated under
the agreement are shared equally by the Company and the Internet content
provider.
In consideration of the marketing, promotion, and advertising provided under
the agreement, the Company agreed to pay a total of $5,000,000 for the
fourteen month period ended January 31, 1999. The Company is amortizing the
costs of the agreement over the term of the contract on a straight-line basis
with periodic charges to marketing expense. The total expense for the year
ended February 28, 1998 was $1,071,429. An accrual of $671,429 is included in
accrued expenses at February 28, 1998 in the accompanying consolidated balance
sheet.
(b) Operating Leases
The Company is obligated under several operating leases for space rented at
its corporate headquarters and vehicle and office equipment leases that expire
at various dates during the next three years. The building lease
F-13
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
is on a month-to-month basis and requires the Company to pay certain costs
such as maintenance and insurance. Rental payments for the vehicle lease
include minimum rentals plus contingent rentals based on mileage. Rental
expense for operating leases was $16,331, $65,370 and $101,431 in fiscal 1996,
1997, and 1998, respectively.
Future minimum lease payments under noncancelable operating leases with
initial terms in excess of one year are as follows at February 28, 1998:
<TABLE>
<CAPTION>
YEAR ENDING
-----------
<S> <C>
February 28, 1999................................................... $ 85,719
February 29, 2000................................................... 48,519
February 28, 2001................................................... 2,179
--------
$136,417
========
</TABLE>
(c) Capital Leases
The Company has capital lease arrangements for certain computers, furniture
and fixtures, and telephone equipment. The assets have an aggregate
capitalized cost of $290,819 and related accumulated amortization of $30,037
as of February 28, 1998. Future minimum lease payments under capital lease
obligations are as follows at February 28, 1998:
<TABLE>
<CAPTION>
YEAR ENDING
-----------
<S> <C>
February 28, 1999.................................................. $132,732
February 29, 2000.................................................. 122,002
February 28, 2001.................................................. 23,788
--------
278,552
Less amount representing interest.................................. 35,022
--------
Present value of future minimum lease payments..................... 243,500
Less current portion............................................... 107,983
--------
Long-term portion.................................................. $135,517
========
</TABLE>
(8) INCOME TAXES
The Company incurred minimum state taxes of $250, $500, and $7,750 in fiscal
1996, 1997 and 1998, respectively, which were included in general and
administrative expenses.
As of February 28, 1997 and 1998, the Company has available for federal and
state income tax purposes approximately $1,300,000 and $7,300,000,
respectively, of net operating loss carryforwards. These carryforwards expire
through fiscal 2013 for federal purposes and through fiscal 2003 for state
purposes.
F-14
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income tax expense (benefit) results from changes in the temporary
differences in the book and tax bases of certain assets and liabilities. The
components of deferred taxes as of February 28, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
------- ----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts................................... $ 1,500 $ 19,100
Inventories, principally due to reserves............. 10,700 20,300
Federal net operating loss carryforwards............. 450,500 2,494,100
State net operating loss carryforwards............... 87,400 483,600
Property and equipment, principally due to
differences in depreciation......................... -- 2,900
Other assets......................................... 4,700 3,200
Other accrued liabilities............................ 6,700 24,600
Stock-based compensation............................. 154,500 545,500
------- ----------
Gross deferred tax assets.......................... 716,000 3,593,300
Less valuation allowance against deferred tax
assets.............................................. 715,800 3,593,300
------- ----------
200 --
------- ----------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation......................... (200) --
------- ----------
Total deferred tax liabilities..................... (200) --
------- ----------
Net deferred tax asset............................. $ -- $ --
======= ==========
</TABLE>
The Company has deferred tax assets for future deductible amounts, and net
operating loss carryforwards which are attributable to losses generated during
the Company's first three years of operations. In assessing the realizability
of the deferred tax assets, the Company considers whether it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. The valuation allowance at February 28, 1997 and 1998 was $715,800
and $3,593,300, respectively.
During the year end February 28, 1998, the Company experienced an ownership
change, as defined by Section 382 of the Internal Revenue Code, due to
additional sales of preferred stock. The Company has not yet assessed the
Section 382 implications of the additional stock issuances, but the change in
control will limit the utilization of the net operating loss carryforwards.
(9) SUBSEQUENT EVENTS
During March 1998, the Company issued an additional 1,895,125 shares of
Redeemable Series C Convertible Preferred Stock at $7.96 per share and
received net proceeds of $14,126,349. In connection with the issuance of these
additional shares of Redeemable Series C Convertible Preferred Stock, the
Company issued contingent stock purchase warrants to the Redeemable Series C
Convertible Preferred Stock investors for the purchase of 284,269 shares of
Common Stock at an exercise price of $10.00 per share. The contingent stock
purchase warrants are exercisable under the same provisions as the contingent
stock purchase warrants discussed in Note 6(a).
Also during March 1998 and in connection with the sale of the Redeemable
Series C Convertible Preferred Stock, the Company issued to an investment
banker warrants to purchase 105,604 shares of Common Stock at an exercise
price of $8.00 per share. The warrants expire in March 2003. Using the Black-
Scholes model, the
F-15
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
warrants were valued at $474,035. This amount was recorded as a reduction to
the carrying value of the Redeemable Series C Convertible Preferred Stock and
will be amortized and included in the accretion to the redemption value of the
Redeemable Series C Convertible Preferred Stock recorded in each period.
During May 1998, the Company entered into a seven-year lease for office
space in a building which is being constructed adjacent to its present
facilities. Lease payments will begin once a certificate of occupancy is
obtained. Future annual minimum rental payments range from $198,000 to
$216,000 for the first five years of the lease term.
During May 1998, the Company granted 45,000 options under the 1998 Stock
Option Plan with a weighted average exercise price of $22.78 per share. Of the
total options granted, 10,000 were granted at an exercise price of $15.00 per
share and 35,000 were granted at an exercise price of $25.00 per share.
F-16
<PAGE>
[Graphic depiction of OUTPOST.COM Order Confirmation Page]
IMMEDIATE ORDER CONFIRMATIONS
Cyberian Outpost gives all buyers a personal confirmation number and lets them
know that their orders were received and processed via e-mail confirmations.
[Graphic depiction of OUTPOST.COM Order Tracking Page]
SPEEDY DELIVERY
All in-stock orders received by midnight eastern time are shipped the same
night. U.S. customers generally receive orders the following morning.
International deliveries take a little longer--usually 48-72 hours.
THE COOL PLACE TO SHOP FOR COMPUTER STUFF!
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS NOT CONTAINED HEREIN MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDER-
WRITERS OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY, TO
ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 28
Management............................................................... 39
Certain Transactions..................................................... 43
Principal Stockholders................................................... 44
Description of Capital Stock............................................. 46
Shares Eligible for Future Sale.......................................... 50
Underwriting............................................................. 52
Legal Matters............................................................ 53
Experts.................................................................. 53
Additional Information................................................... 53
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
LOGO
COMMON STOCK
---------------
PROSPECTUS
---------------
BT ALEX. BROWN
NATIONSBANC MONTGOMERY SECURITIES LLC
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the Registrant's expenses in connection with
the issuance and distribution of the securities being registered. Except for
the SEC Registration Fee and the National Association of Securities Dealers,
Inc. ("NASD") Filing Fee, the amounts listed below are estimates:
<TABLE>
<S> <C>
SEC Registration Fee.................................................... $
NASD Filing Fee.........................................................
Nasdaq Listing Fees.....................................................
Legal Fees and Expenses.................................................
Blue Sky Fees and Expenses..............................................
Accounting Fees and Expenses............................................
Printing and Engraving..................................................
Transfer Agent and Register Fees and Expenses...........................
Miscellaneous...........................................................
---
TOTAL................................................................. $
===
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation (the "Certificate of
Incorporation") provides that the Company shall indemnify to the fullest
extent authorized by the Delaware General Corporation Law ("DGCL"), each
person who is involved in any litigation or other proceeding because such
person is or was a Director or officer of the Company or is or was serving as
an officer or director of another entity at the request of the Company,
against all expense, loss or liability reasonably incurred or suffered in
connection therewith. The Certificate of Incorporation provides that the right
to indemnification includes the right to be paid expenses incurred in
defending any proceeding in advance of its final disposition, provided,
however, that such advance payment will only be made upon delivery to the
Company of an undertaking, by or on behalf of the Director or officer, to
repay all amounts so advanced if it is ultimately determined that such
Director is not entitled to indemnification. If the Company does not pay a
proper claim for indemnification in full within 60 days after a written claim
for such indemnification is received by the Company, the Certificate and the
Company's Bylaws authorize the claimant to bring an action against the Company
and prescribe what constitutes a defense to such action.
Section 145 of the DGCL permits a corporation to indemnify any director or
officer of the corporation against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding brought by reason
of the fact that such person is or was a director or officer of the
corporation, if such person acted in good faith and in a manner that he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, if he had
no reason to believe his conduct was unlawful. In a derivative action, (i.e.,
one brought by or on behalf of the corporation), indemnification may be
provided only for expenses actually and reasonably incurred by any director or
officer in connection with the defense or settlement of such an action or suit
if such person acted in good faith and in a manner that he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation,
except that no indemnification shall be provided if such person shall have
been adjudged to be liable to the corporation, unless and only to the extent
that the court in which the action or suit was brought shall determine that
the defendant is fairly and reasonably entitled to indemnity for such expenses
despite such adjudication of liability.
Pursuant to Section 102(b)(7) of the DGCL, Article of the Certificate of
Incorporation eliminates the liability of a Director or the Company or its
stockholders for monetary damages for such a breach of fiduciary duty as a
Director, except for liabilities arising (i) from any breach of the Director's
duty of loyalty to the Company or its stockholders, (ii) from acts or
omissions not in good faith or which involve intentional
II-1
<PAGE>
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) from any transaction from which the director derived an improper
personal benefit.
The Company intends to obtain insurance policies insuring the directors and
officers of the Company against certain liabilities that they may incur in
their capacity as directors and officers. Under such policies, the insurers,
on behalf of the Company, may also pay amounts for which the Company has
granted indemnification to the directors or officers.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of
the Company, its directors and officers who sign the Registration Statement
and persons who control the Company, under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, the
Company has sold the following securities that were not registered under the
Securities Act (without giving effect to the for stock split to be
effected prior to the consummation of this Offering):
(a) Issuances of Capital Stock and Warrants
In November 1995, the Company issued and sold 200,000 shares of its Common
Stock for an aggregate purchase price of $200,000 to a single investor in a
private placement.
In May 1997, the Company issued an aggregate of 147,059 shares of Series A
Convertible Preferred Stock to five investors in exchange for $500,000 in
outstanding debt obligations of the Company.
In May and July 1997, the Company issued and sold an aggregate of 682,737
shares of its Series A Convertible Preferred Stock at a price per share of
$3.40 to 22 investors in a private placement.
During the period ended February 29, 1996, and during the years ended
February 28, 1997 and 1998, the Company issued 190,000, 150,549, and 76,213
shares of Common Stock to employees and consultants in exchange for services.
In October 1997, the Company issued and sold an aggregate of 163,043 shares
of its Series B Convertible Preferred Stock at a price per share of $4.60 to
two investors in a private placement.
In February and March 1998, the Company issued and sold an aggregate of
2,770,125 shares of its Redeemable Series C Convertible Preferred Stock at a
price per share of $7.96 to 58 investors in a private placement.
In March 1998, the Company issued 163,043 shares of Series B Convertible
Preferred Stock to Winfield Capital Corp. upon the conversion of a $750,000
convertible debenture.
In July 1996, the Company issued a warrant to purchase 60,000 shares of
Common Stock at an exercise price of $.0124 per share to a placement agent.
In May and July 1997, the Company issued warrants to purchase an aggregate
of 87,158 shares of Common Stock at an exercise price of $3.40 per share to a
placement agent in connection with the Series A Convertible Preferred Stock
financing.
In December 1997, the Company issued warrants to purchase 355,707 shares of
Common Stock at an exercise price of $7.96 per share in connection with a
marketing agreement.
In January 1998, the Company issued warrants to purchase 125,000 shares of
Common Stock at an exercise price of $7.96 per share in connection with a note
payable.
II-2
<PAGE>
In February and March 1998, the Company issued warrants to purchase an
aggregate of 158,103 shares of Common Stock at an exercise price of $8.00 per
share to an investment banker in connection with the Redeemable Series C
Convertible Preferred Stock financing.
In connection with the Redeemable Series C Convertible Preferred Stock
financing, in February and March 1998, the Company issued contingent stock
purchase warrants to the holders of the Redeemable Series C Convertible
Preferred Stock for the purchase of an aggregate of 415,518 shares of Common
Stock at an exercise price of $10.00 per share.
(b) Certain Grants and Exercises of Stock Options
Pursuant to the 1997 Inventive Stock Plan and the 1998 Incentive Stock Plan
(collectively, the "Stock Plans"), the Company had as of June 1, 1998 issued
options to purchase an aggregate of 608,000 shares of Common Stock, of which
options to purchase an aggregate of 32,500 shares of Common Stock are
exercisable, at a weighted average exercise price of $5.85 per share. As of
June 1, 1998, no options pursuant to the foregoing have been exercised.
The sale and issuance of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701
promulgated under Section 3(b) of the Securities Act, as transactions by an
issuer not involving a public offering or transactions pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under such Rule 701. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and instruments
issued in such transactions. All recipients had adequate access, through their
relationships with the Company, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*1.1 --Form of Underwriting Agreement.
*3.1 --Form of Plan and Agreement of Merger.
3.2 --Amended and Restated Certificate of Incorporation of the Registrant.
*3.3 --Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.4 --Amended and Restated By Laws of the Registrant.
*3.5 --Form of Amended and Restated By Laws of the Registrant.
*4.1 --Form of Common Stock Certificate.
*5.1 --Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. with
respect to the legality of securities being registered.
10.1 --Lease, dated December 2, 1997, between Barton Kent LLC and the
Registrant.
10.2 --Lease, dated December 2, 1997, between Barton Kent LLC and the
Registrant.
10.3 --Lease, dated February 16, 1998, between Barton Kent LLC and the
Registrant.
10.4 --Lease, dated May 4, 1998, between Barton Kent LLC and the
Registrant.
10.5 --1997 Incentive Stock Plan.
10.6 --1998 Incentive Stock Plan.
*10.7 --1998 Employee, Director and Consultant Stock Plan.
*10.8 --Employment Agreement, dated June , 1998, between the Registrant and
Darryl Peck.
*10.9 --Employment Agreement, dated June , 1998, between the Registrant and
Katherine N. Vick.
+10.10 --Interactive Marketing Agreement, dated December 1, 1997, by and
between America Online, Inc. and the Registrant.
+10.11 --Agreement, dated April 7, 1998, by and between Lycos-Bertelsmann
GmbH and the Registrant.
11.1 --Computation of Loss Per Share.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
21.1 --Subsidiaries of the Company.
23.1 --Consent of KPMG Peat Marwick LLP.
*23.2 --Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (see
Exhibit 5.1).
24.1 --Power of Attorney (see page II-5).
</TABLE>
- --------
* To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
(b) Financial Statement Schedules
All schedules are omitted because they are not required, are not applicable
or the information is included in the Consolidated Financial Statements or
Notes thereto.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described under "Item 14-
Indemnification of Directors and Officers" above, 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 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, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, 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
of 1933, 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.
(c) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, in Kent, Connecticut, on June 2, 1998.
CYBERIAN OUTPOST, INC.
/s/ Darryl Peck
By: _________________________________
DARRYL PECK,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY AND SIGNATURES
We the undersigned officers and directors of Cyberian Outpost, Inc., hereby
severally constitute and appoint Darryl Peck and Katherine N. Vick, and each
of them singly (with full power to each of them to act alone), our true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution in each of them for him and in his name, place and stead, and
in any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement (or any other
Registration Statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933), and to file
the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as full 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 their or his substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities held on the dates indicated.
<TABLE>
<S> <C>
SIGNATURE TITLE
DATE
/s/ Darryl Peck President, Chief June 2, 1998
- ------------------------------------- Executive Officer
DARRYL PECK and Director
(Principal
executive officer)
/s/ Katherine N. Vick Executive Vice June 2, 1998
- ------------------------------------- President and
KATHERINE N. VICK Director (Principal
financial and
accounting officer)
/s/ Charles Jackson Director June 2, 1998
- -------------------------------------
CHARLES JACKSON
/s/ Michael Murray Director June 2, 1998
- -------------------------------------
MICHAEL MURRAY
/s/ William C. Mulligan Director June 2, 1998
- -------------------------------------
WILLIAM C. MULLIGAN
/s/ David Yarnell Director June 2, 1998
- -------------------------------------
DAVID YARNELL
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
*1.1 --Form of Underwriting Agreement.
*3.1 --Form of Plan and Agreement of Merger.
3.2 --Amended and Restated Certificate of Incorporation of the
Registrant.
*3.3 --Form of Amended and Restated Certificate of Incorporation of
the Registrant.
3.4 --Amended and Restated By Laws of the Registrant.
*3.5 --Form of Amended and Restated By Laws of the Registrant.
*4.1 --Form of Common Stock Certificate.
*5.1 --Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. with respect to the legality of securities being
registered.
10.1 --Lease, dated December 2, 1997, between Barton Kent LLC and
the Registrant.
10.2 --Lease, dated December 2, 1997, between Barton Kent LLC and
the Registrant.
10.3 --Lease, dated February 16, 1998, between Barton Kent LLC and
the Registrant.
10.4 --Lease, dated May 4, 1998, between Barton Kent LLC and the
Registrant.
10.5 --1997 Incentive Stock Plan.
10.6 --1998 Incentive Stock Plan.
*10.7 --1998 Employee, Director and Consultant Stock Plan.
*10.8 --Employment Agreement, dated June , 1998, between the
Registrant and Darryl Peck.
*10.9 --Employment Agreement, dated June , 1998, between the
Registrant and Katherine N. Vick.
+10.10 --Interactive Marketing Agreement, dated December 1, 1997, by
and between America Online, Inc. and the Registrant.
+10.11 --Agreement, dated April 7, 1998, by and between Lycos-
Bertelsmann GmbH and the Registrant.
11.1 --Computation of Loss Per Share.
21.1 --Subsidiaries of the Company.
23.1 --Consent of KPMG Peat Marwick LLP.
*23.2 --Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. (see Exhibit 5.1).
24.1 --Power of Attorney (see page II-5).
</TABLE>
- --------
* To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
-------------------------------------------------
OF
CYBERIAN OUTPOST, INC.
_______
The undersigned, for the purpose of restating the Amended and Restated
Certificate of Incorporation of Cyberian Outpost, Inc. (which was filed with the
Connecticut Secretary of the State on October 30, 1997), under the provisions of
the Connecticut Business Corporation Act, does hereby certify that:
FIRST: The name of the corporation is Cyberian Outpost, Inc.
-----
SECOND: The nature of the business to be transacted, or the purposes to be
------
promoted or carried out by the corporation, which shall be in addition to the
authority of the corporation to engage in any lawful act or activity for which
corporations may be formed under the Connecticut Business Corporation Act, are
as follows:
To carry on a general mercantile, industrial, investing, and trading
business in all its branches; to devise, invent, manufacture, fabricate,
assemble, install, service, maintain, alter, buy, sell, import, export, license
as licensor or licensee, lease as lessor or lessee, distribute, job, enter into,
negotiate, execute, acquire, and assign contracts in respect of, acquire,
receive, grant, and assign licensing arrangements, options, franchises, and
other rights in respect of, and generally deal in and with, at wholesale and
retail, as principal, and as sales, business, special, or general agent,
representative, broker, factor, merchant, distributor, jobber, advisor, and in
any other lawful capacity, goods, wares, merchandise, commodities, and
unimproved, improved, finished, processed, and other real, personal, and mixed
property of any and all kinds, together with the components, resultants, and by-
products thereof; to acquire by purchase or otherwise own, hold, lease,
mortgage, sell, or otherwise dispose of, erect, construct, make, alter, enlarge,
improve, and to aid or subscribe toward the construction, acquisition or
improvement or any factories, shops, storehouse, buildings, and commercial and
retail establishments of every character, including all equipment, fixtures,
machinery, implements, and supplies necessary, or incidental to, or connected
with, any of the purposes or business of the corporation; and generally to
perform any and all acts connected therewith or arising therefrom or incidental
thereto, and all acts proper or necessary for the purpose of the business.
To manufacture, develop, sell, and distribute computer software, computer
hardware, and related products and services.
To apply for, register, obtain, purchase, lease, take licenses in respect
of or otherwise acquire, and to hold, own, use, operate, develop, enjoy, turn to
account, grant licenses and
<PAGE>
immunities in respect of, manufacture under and to introduce, sell, assign,
mortgage, pledge, or otherwise dispose of, and, in any manner deal with and
contract with reference to:
<PAGE>
(a) inventions, devices, formulae, processes, and any improvements and
modifications thereof;
(b) letters patent, patent rights, patented processes, copyrights,
designs, and similar rights, trade-marks, trade symbols and other indications of
origin and ownership granted by or recognized under the laws of the United
States of America or of any state or subdivision thereof, or of any foreign
country or subdivision thereof, and all rights connected therewith or
appertaining thereunto;
(c) franchises, licenses, grants, and concessions.
To have and to exercise all powers granted by law and by the Connecticut
Business Corporation Act and all legal powers necessary or convenient to effect
any or all of the purposes stated in this Certificate of Incorporation or to
transact the stated business of the Corporation.
THIRD: The authorized number of shares of the corporation is 15,000,000,
-----
of which:
1. 10,000,000 shares are designated as shares of common stock, without
nominal or par value.
2. 5,000,000 shares are designated as shares of preferred stock,
without nominal or par value. There is hereby established a series of preferred
stock designated "Series A Convertible Preferred Stock", consisting of 700,000
shares of preferred stock, without nominal or par value, and having the relative
rights, designations, preferences, qualifications, privileges, limitations, and
restrictions applicable thereto as set forth on Exhibit A attached hereto and
---------
made a part hereof. There is hereby established a series of preferred stock
designated "Series B Convertible Preferred Stock", consisting of 500,000 shares
of preferred stock, without nominal or par value, and having the relative
rights, designations, preferences, qualifications, privileges, limitations, and
restrictions applicable thereto as set forth on Exhibit B attached hereto and
---------
made a part hereof. There is hereby established a series of preferred stock
designated "Series C Convertible Preferred Stock", consisting of 3,000,000
shares of preferred stock, without nominal or par value, and having the relative
rights, designations, preferences, qualifications, privileges, limitations, and
restrictions applicable thereto as set forth on Exhibit C attached hereto and
---------
made a part hereof.
3. The remaining 800,000 authorized shares of preferred stock are
hereby deemed to be shares of an undesignated series of preferred stock until
designated by the Board of Directors of Cyberian Outpost, Inc. as being part of
a series previously established or a new series then being established by the
Board of Directors of Cyberian Outpost, Inc. The Board of Directors of Cyberian
Outpost, Inc. is hereby authorized to establish one or more additional series of
preferred stock, and to the extent now or hereafter permitted by the Connecticut
Business Corporation Act the Board of Directors of Cyberian Outpost, Inc. is
authorized to fix and determine the preferences, voting powers, qualifications
and special or relative rights or
<PAGE>
privileges of each such series including, but not limited to:
(a) the number of shares to constitute such series and the
distinguishing designation thereof;
(b) the dividend rate on the shares of such series and the
preferences, if any, and the special and relative rights of such shares of such
series as to dividends;
(c) whether or not the shares of such series shall be redeemable, and,
if redeemable, the price, terms, and manner of redemption;
(d) the preferences, if any, and the special and relative rights of
the shares of such series upon liquidation of the corporation;
(e) whether or not the shares of such series shall be subject to the
operation of a sinking or purchase fund and, if so, the terms and provisions of
such fund;
(f) whether or not the shares of such series shall be convertible into
shares of any other class or of any other series of the same or any other class
of stock of the corporation and, if so, the conversion price or ratio and other
conversion rights;
(g) the conditions under which the shares of such series shall have
separate voting rights or no voting rights; and
(h) such other designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or restrictions
of such series to the full extent now or hereafter permitted by the laws of the
State of Connecticut.
Notwithstanding the fixing of the number of shares constituting a
particular series, the Board of Directors of Cyberian Outpost, Inc. may at any
time authorize the issuance of additional shares of the same series.
FOURTH: Except as may be otherwise set forth in this Certificate of
------
Incorporation, no holder of any of the shares of the corporation shall be
entitled as of right to purchase or subscribe for any unissued shares of any
class or any additional shares of any class to be issued by reason of any
increase of the authorized shares of the corporation, or bonds, certificates of
indebtedness, debentures, or other securities convertible into shares of the
corporation or carrying any right to purchase shares of any class, but any such
unissued shares or such additional authorized issue of any shares or of other
securities convertible into shares, or carrying any right to purchase shares,
may be issued and disposed of pursuant to resolution of the Board of Directors
to such persons, firms, corporations, or associations and upon such terms as may
be deemed advisable by the Board of Directors in the exercise of its discretion.
FIFTH: The minimum amount of stated capital with which the corporation
-----
shall
<PAGE>
commence business is one thousand dollars.
SIXTH: For the regulation and management of the affairs of the corporation,
-----
it is further provided:
1. Whenever any provision of the Connecticut Business Corporation Act
shall otherwise require for the approval of any specified corporate action the
authorization of at least two-thirds of the voting power of shareholders
entitled to vote, any such corporate action shall be approved by the
authorization of at least a majority of the voting power of the shareholders
entitled to vote; and whenever the corporation shall have one or more classes or
series of shares which are denied voting power under the Certificate of
Incorporation but the authorization of at least two-thirds of the voting power
of said class or series is otherwise required for the approval of any specified
corporate action under the Connecticut Business Corporation Act, any such
corporate action shall be approved by said class or series by the authorization
of at least a majority of the voting power of each such class and of each such
series.
2. To the extent permitted by the Connecticut Business Corporation Act,
and in conformity with the provisions thereof, any corporate action permitted to
be taken at a meeting of shareholders entitled to vote may be taken without a
meeting by a consent in writing signed by the holders of at least a majority of
the voting power of each class entitled to vote.
3. Whenever the corporation shall be engaged in the business of exploiting
natural resources, dividends may be declared and paid in cash or property and
charged against depletion reserves.
4. To the extent permitted by the Connecticut Business Corporation Act,
and in conformity with the provisions thereof, distributions in cash or property
may be made out of capital surplus available therefor without the authorization
of the shareholders of any class of the corporation, except as otherwise
provided herein.
5. To the extent permitted by the Connecticut Business Corporation Act,
and in conformity with the provisions thereof, acquisitions of its own shares
out of unreserved and unrestricted capital surplus may be made by the
corporation without the authorization of the shareholders of any class of the
corporation, except as otherwise provided herein.
6. One or more or all of the directors of the corporation may be removed
for cause or without cause by the shareholders entitled to vote for their
election. The Board of Directors shall have power to remove any director for
cause and to suspend any director pending a final determination that cause
exists, except as otherwise provided herein.
7. The personal liability of the directors of the corporation is limited
to the fullest extent permitted by the provisions of the Connecticut Business
Corporation Act, as the same may be amended and supplemented.
<PAGE>
8. The Corporation shall, to the fullest extent permitted by Section 33-
776(4) of the Connecticut Business Corporation Act, as the same may be amended
and supplemented, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities, or other matters referred to in or covered by said section.
I, the undersigned, do hereby declare under the penalties of false
statement that the statements contained in the foregoing document are true and
do hereby sign this document at Kent, Connecticut, on February 27, 1998.
/s/ Darryl Peck
_______________________________
Darryl Peck, President
<PAGE>
EXHIBIT A
TERMS OF SERIES A CONVERTIBLE PREFERRED STOCK
OF
CYBERIAN OUTPOST, INC.
Designation of Series A Convertible Preferred Stock. There is hereby
----------------------------------------------------
established a series of Preferred Stock designated "Series A Convertible
Preferred Stock" (the "Series A Preferred"), consisting of 700,000 shares,
------------------
without nominal or par value, and having the relative rights, designations,
preferences, qualifications, privileges, limitations, and restrictions
applicable thereto as follows:
1. Dividend Provisions. Except as may be otherwise approved in writing by
-------------------
the holders of a majority of the outstanding shares of Series A Preferred:
(a) The holders of the shares of Series A Preferred shall be entitled
to receive dividends, out of any assets legally available therefor, in an amount
per share of Series A Preferred which is equal to the product of (i) the number
of shares of common stock, no par value ("Common Stock") of Cyberian Outpost,
------------
Inc. (the "Corporation") into which one share of Series A Preferred is
-----------
convertible at the time of declaration of such dividend, multiplied by (ii) the
aggregate amount per share of Common Stock of all cash dividends and the
aggregate amount per share (payable, at the option of the holder, in kind or in
cash, based upon the fair market value at the time the non-cash dividend or
other distribution is declared or paid as determined in good faith by the Board
of Directors of the Corporation) of all non-cash dividends or other
distributions on the Common Stock, when, as and if a dividend is declared on the
shares of Common Stock. Such dividends shall accumulate and be declared and
paid contemporaneously with the declaration and payment of the related dividend
on the Common Stock, so that the Series A Preferred participates equally with
the Common Stock in such dividend or distribution with respect to the number of
shares of Common Stock into which the Series A Preferred is then convertible
pursuant to Section 3 hereof.
<PAGE>
(b) So long as any Series A Preferred shall remain outstanding, no
deposit, payment, dividend or other distribution shall be paid or made on any
other class of stock of the Corporation and no shares of any other class of
stock of the Corporation shall be purchased or otherwise acquired by the
Corporation or any subsidiary of the Corporation other than, (i) except as may
be otherwise provided in the Certificate of Incorporation, including in any
class or series designation concerning any capital stock of the Corporation (as
such may be amended from time to time), or (ii) upon exercise of the
Corporation's rights or a stockholder's rights under any restricted stock
purchase agreement (or any similar agreement pursuant to which the Corporation
is obligated to redeem its stock) in effect as of the Original Issuance Date (as
defined below in Section 3(k)) or otherwise pursuant to incentive stock plans of
the Corporation in effect as of the Original Issuance Date, or as may be
approved from time to time by the Corporation and the holders of the Series A
Preferred in accordance with Section 6(c) hereof, or (iii) upon the exercise of
a stockholder's put rights in effect as of the Original Issuance Date, or as may
be approved from time to time by the Corporation and the holders of the Series A
Preferred in accordance with Section 6(c) hereof, or (iv) by exchange therefor
of shares of the stock of the Corporation.
Subject to the above limitations and to the provisions of Section 6,
dividends may be paid on any class of stock of the Corporation out of any funds
legally available for such purpose when and as declared by the Board of
Directors.
2. Liquidation Preference. Except as may be otherwise approved in writing
----------------------
by the holders of a majority of the outstanding shares of Series A Preferred:
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of shares of Series A
Preferred shall be entitled to receive out of the assets of the Corporation
available for distribution to shareholders, (i) before any distribution or
payment shall be made in respect of the holders of shares of Common Stock but
pari passu with holders of Series B Convertible Preferred Stock of the
Corporation (the "Series B Preferred") and Series C Convertible Preferred Stock
------------------
of the Corporation (the "Series C Preferred"), a liquidation distribution in an
------------------
amount equal to the Original Issuance Price (as defined below in Section 3(k))
per share, plus an amount equal to all declared dividends thereon to the date
fixed for such distribution or payment, and then (ii) to share with the holders
of shares of Common Stock, Series B Preferred and Series C Preferred as if the
shares of Series A Preferred, Series B Preferred and Series C Preferred were
then converted into shares of Common Stock. If, upon any such liquidation,
dissolution or winding up of the affairs of the Corporation, the assets of the
Corporation available for distribution to shareholders shall be insufficient to
permit the payment in full to the holders of Series A Preferred, Series B
Preferred and Series C Preferred of the amounts to which they are each entitled
in preference to holders of shares of Common Stock, then all of such available
assets shall be distributed to the holders of shares of Series A Preferred,
Series B Preferred and Series C Preferred ratably in proportion to the
liquidation payment otherwise due pursuant to clause (i) above to each such
holder.
<PAGE>
(b) A consolidation or merger of the Corporation with or into any
other corporation or corporations, or the consolidation or merger of any other
corporation or corporations into the Corporation, or the sale or transfer by the
Corporation of all or substantially all of its assets or the effectuation by the
Corporation or any holders of its capital stock of a transaction or series of
related transactions in which more than fifty percent (50%) of the voting power
of the Corporation is sold, transferred or otherwise disposed of, shall be
deemed to be a liquidation, dissolution or winding up within the meaning of this
Section 2.
3. Conversion. The holders of the shares of Series A Preferred shall have
----------
conversion rights as follows:
(a) Optional Conversion. The holder of any shares of Series A
-------------------
Preferred shall have the right, at such holder's option, at any time or from
time to time by the giving of written notice thereof to the Corporation (the
"Conversion Date") to convert all or any of such shares of Series A Preferred
- ----------------
into such number of fully paid and nonassessable shares of Common Stock as
obtained by multiplying the Original Issuance Price by the number of shares of
Series A Preferred being converted, and dividing the product thereof by the
Series A Conversion Price (as hereinafter defined) (as last adjusted and then in
effect) for the shares of Series A Preferred then being converted. The
conversion price per share (the "Series A Conversion Price") at which shares of
-------------------------
Common Stock shall be issuable shall be Three Dollars and Forty Cents ($3.40)
per share; provided, however, that the Series A Conversion Price shall be
--------
subject to adjustment as set forth in Section 3(e) hereof. The holder of any
shares of Series A Preferred converted into shares of Common Stock pursuant to
this Section 3(a) shall be entitled to payment of all declared but unpaid
dividends, if any, payable with respect to such shares being converted up to and
including the Conversion Date.
(b) Mandatory Conversion. Upon the consummation of a public offering
--------------------
of shares of Common Stock of the Corporation registered pursuant to the
Securities Act of 1933, as amended, in which the gross proceeds to the
Corporation exceed Ten Million Dollars ($10,000,000) as the result of which
shares of Common Stock are traded on either the New York Stock Exchange, the
American Stock Exchange or the NASDAQ National Market System (an "Event of
--------
Conversion"), all shares of Series A Preferred then outstanding shall, by virtue
- ----------
of and simultaneously with the occurrence of the Event of Conversion and without
any action on the part of the holder thereof, be deemed automatically converted
into such whole number of fully paid and nonassessable shares of Common Stock as
obtained by multiplying the Original Issuance Price by the number of shares of
Series A Preferred being converted, and dividing the product thereof by the
Series A Conversion Price (as last adjusted and then in effect) for the shares
of Series A Preferred being converted (such Series A Conversion Price being
subject to adjustment as set forth in Section 3(e) hereof). The holder of any
shares of Series A Preferred converted into shares of Common Stock pursuant to
this Section 3(b) shall be entitled to payment of all declared but unpaid
dividends, if any, payable with respect to such shares of Series A Preferred up
to and including the Conversion Date.
<PAGE>
(c) Procedure for Conversion. Upon conversion of the shares of Series
------------------------
A Preferred pursuant to Section 3(a) hereof, the holder of any shares of Series
A Preferred shall deliver to the Corporation during regular business hours, at
the office of any transfer agent of the Corporation for the Series A Preferred,
or at such other place as may be designated by the Corporation, the certificate
or certificates for the shares to be converted, duly endorsed or assigned in
blank or to the Corporation (if required by it), accompanied by written notice
stating the name or names (with address) in which the certificate or
certificates for the shares of Common Stock are to be issued. As promptly as
practicable thereafter, the Corporation shall issue and deliver to or upon the
written order of such holder, to the place designated by such holder, a
certificate or certificates for the number of full shares of Common Stock to
which such holder is entitled, a check or cash in respect of any fractional
interest in a share of Common Stock as provided in Section 3(d) hereof and a
check or cash in payment of all declared but unpaid dividends, if any (to the
extent permissible under law), payable with respect to the shares of Series A
Preferred so converted up to and including the Conversion Date. The person in
whose names the certificate or certificates for Common Stock are to be issued
shall be deemed to have become a shareholder of record on the applicable
Conversion Date unless the transfer books of the Corporation are closed on that
date, in which event he shall be deemed to have become a shareholder of record
on the next succeeding date on which the transfer books are open, but the Series
A Conversion Price for the Series A Preferred shall be that in effect on the
Conversion Date.
(d) Additional Conversion Provisions. The following additional terms
--------------------------------
shall apply upon any conversion of the Series A Preferred:
(i) No fractional shares of Common Stock or scrip shall be
issued upon conversion of shares of Series A Preferred. If more than one share
of Series A Preferred shall be surrendered for conversion at any one time by the
same holder, the number of full shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of
Series A Preferred so surrendered. In lieu of any fractional shares of Common
Stock which would otherwise be issuable upon conversion of any shares of Series
A Preferred the Corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to the then Current Market Price (as
defined below) of a share of Common Stock as of the date of conversion,
multiplied by such fractional interest. Fractional interests shall not be
entitled to dividends, and the holders of fractional interests shall not be
entitled to any rights as shareholders of the Corporation in respect of such
fractional interest.
(ii) For the purpose of any computation pursuant to this Section
3(d), the Current Market Price at any date of one share of Common Stock shall be
deemed to be the closing price as of the day before the day in question. If the
Common Stock is not traded in such manner that the closing price is readily
available, the Current Market Price shall be determined in good faith by the
Directors of the Corporation.
<PAGE>
(e) Adjustments to Series A Conversion Price. The Series A Conversion
----------------------------------------
Price for the Series A Preferred shall be subject to adjustment from time to
time as follows:
(i) Stock Dividends, Split-Ups, Etc. If, at any time after the
-------------------------------
Original Issuance Date, the number of shares of Common Stock outstanding is
increased by a stock dividend payable in shares of Common Stock or by a
subdivision or split-up of shares of Common Stock, then, following the record
date fixed for the determination of holders of Common Stock entitled to receive
such stock dividend, subdivision or split-up, the Series A Conversion Price of
the Series A Preferred shall be appropriately decreased so that the number of
shares of Common Stock issuable on conversion of each share of Series A
Preferred shall be increased in proportion to such increase in outstanding
shares.
(ii) Combinations. If, at any time after the Original Issuance
------------
Date, the number of shares of Common Stock outstanding is decreased by a
combination of the outstanding shares of Common Stock, then, following the
record date for such combination, the Series A Conversion Price shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion of each share of Series A Preferred shall be decreased in proportion
to such decrease in outstanding shares.
(iii) Reorganizations, Reclassifications, Etc. In case, at any
---------------------------------------
time after the Original Issuance Date, of any Capital Events (as defined below
in Section 3(k)) each share of Series A Preferred shall after such Capital Event
be (unless, in the case of a consolidation, merger, sale or other disposition,
payment shall have been made to the holders of all shares of Series A Preferred
of the full amount to which they respectively shall have been entitled pursuant
to Section 2 hereof) convertible into the kind and number of shares of stock or
other securities or property of the Corporation or of the corporation resulting
from such consolidation or surviving such merger or to which such properties and
asset shall have been sold or otherwise disposed to which the holder of the
number of shares of Common Stock deliverable (immediately prior to the time of
such Capital Event) upon conversion of such shares would have been entitled upon
such Capital Event. The provisions of this Section 3(e)(iii) shall similarly
apply to successive Capital Events.
(iv) Dilutive Issuances.
------------------
(1) If the Corporation shall at any time or from time to
time after the Original Issuance Date issue any shares of Common Stock other
than Excluded Stock (as defined below in Section 3(k)) without consideration or
for a consideration per share less than the Series A Conversion Price then in
effect (such issuance being referred to in this clause (iv) as a "Dilutive
--------
Issuance"), the Series A Conversion Price in effect immediately prior to such
- --------
Dilutive Issuance shall be reduced with effect from the first to occur of (A)
the record date for the issuance of the securities or (B) the date of original
issuance (as the case may be the "Issue Date"), so that it shall equal the price
----------
determined by multiplying the Series A Conversion Price by a fraction (i) the
numerator of which shall be (X) the number of shares of Common Stock outstanding
at the close of business on the day next preceding the Issue Date, plus (Y) the
<PAGE>
number of shares of Common Stock which the aggregate consideration received by
the Corporation for the Dilutive Issuance would purchase at the Series A
Conversion Price, and (ii) the denominator of which shall be the number of
shares of Common Stock outstanding at the close of business on the Issue Date
after giving effect to such Dilutive Issuance.
(2) For the purposes of any adjustment of the Series A
Conversion Price pursuant to this clause (iv), the following provisions shall
apply:
(A) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid therefor after
deducting therefrom any discounts or commissions allowed or paid by the
Corporation for any underwriting or otherwise in connection with the issuance
and sale thereof.
(B) In the case of the issuance of 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 market value thereof to the Corporation as
determined in good faith by the Board of Directors, irrespective of any
accounting treatment.
(C) In the case of the issuance of (i) options to purchase
or rights to subscribe for Common Stock, (ii) securities by their terms
convertible into or exchangeable for Common Stock, or (iii) options to purchase
or rights to subscribe for such convertible or exchangeable securities:
(I) the shares of Common Stock deliverable upon
exercise of such options to purchase or rights to subscribe for Common Stock
shall be deemed to have been issued at the time such options or rights were
issued and for a consideration equal to the consideration (determined in the
manner provided in subclauses (A) and (B), above), if any, received by the
Corporation upon the issuance of such options or rights plus the minimum
purchase price provided in such options or rights for the Common Stock covered
thereby;
(II) the shares of Common Stock deliverable upon
conversion of or in exchange 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 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 additional consideration, if any, to be
received by the Corporation 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 subclauses (A) and (B), above);
(III) on any change in the number of shares or exercise
price of Common Stock deliverable upon exercise of any such options or rights or
upon
<PAGE>
conversion of or in exchange for such convertible or exchangeable securities,
other than a change resulting from the antidilution provisions thereof, the
Series A Conversion Price shall forthwith be readjusted to such Series A
Conversion Price as would have obtained had the adjustment made upon the
issuance of such options, rights or securities not converted prior to such
change or options or rights related to such securities not converted prior to
such change been made upon the basis of such change; and
(IV) on 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 Series A Conversion Price shall forthwith be readjusted to such Series A
Conversion Price as would have obtained had such options, rights, securities or
options or rights related to such securities not been issued.
(v) All calculations under this paragraph (e) shall be made to
the nearest one-tenth (1/10) of a share or to the nearest one tenth (1/10) of a
cent, as the case may be.
(vi) In any case in which the provisions of this Section 3(e)
shall require that an adjustment shall become effective immediately after a
record date for an event the Corporation may defer until the occurrence of such
event (1) issuing to the holder of any share of Series A Preferred converted
after such record date and before the occurrence of such event the additional
shares of capital stock issuable upon such conversion by reason of the
adjustment required by such event over and above the shares of capital stock
issuable upon such conversion before giving effect to such adjustment and (2)
paying to such holder any amount in cash in lieu of a fractional share of
capital stock pursuant to Section 3(d) hereof; provided, however, that the
-------- -------
Corporation shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares, and
such cash, immediately upon the occurrence of the event requiring such
adjustment.
(vii) The Corporation will not voluntarily, by amendment of its
Certificate of Incorporation, as amended, or through any reorganization,
transfer of assets, merger, dissolution, issuance or sale or 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 the Corporation, but
will at all times in good faith assist in the carrying out of all of the
provisions of this Section 3 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 against impairment.
(f) Whenever the Series A Conversion Price of the Series A Preferred
shall be adjusted as provided in Section 3(e), the Corporation shall forthwith
file, at the office of the transfer agent for the Series A Preferred or at such
other place as may be designated by the Corporation, a statement showing in
detail the facts requiring such adjustment and the Series A Conversion Price of
the Series A Preferred that shall be in effect after such adjustment. The
Corporation shall also cause a copy of such statement to be sent by mail, first-
class certified mail,
<PAGE>
return receipt requested, postage prepaid, to each holder of shares of any
series of preferred stock in respect of which an adjustment to the Series A
Conversion Price was required to be made at his address appearing on the
Corporation's records. Where appropriate, such copy may be given in advance and
may be included as part of a notice required to be mailed under the provisions
of Section 4(g) hereof.
(g) If the Corporation shall propose to take any action of the types
described in clauses (i), (ii), (iii) or (iv) of Section 3(e), the Corporation
shall give notice to each holder of shares of Series A Preferred in the manner
set forth in Section 3(f) hereof, which notice shall specify the record date, if
any, with respect to any such action and the date on which such action is to
take place. Such notice shall also set forth such facts with respect thereto as
shall be reasonably necessary to indicate the effect of such action (to the
extent such effect may be known at the date of such notice) on the Series A
Conversion Price and the number, kind or series of shares or other securities or
property which shall be deliverable or purchasable upon the occurrence of such
action or deliverable upon conversion of shares of each such series of Series A
Preferred. In the case of any action which would require the fixing of a record
date, such notice shall be given at least twenty (20) days prior to the date so
fixed, and in case of all other actions, such notice shall be given at least
thirty (30) days prior to the taking of such proposed action. Failure to give
such notice, or any defect therein, shall not affect the legality or validity of
any such action.
(h) The Corporation shall pay all documentary, stamp or other
transaction taxes attributable to the issuance or delivery of shares of capital
stock of the Corporation upon conversion of shares of Series A Preferred;
provided, however, that the Corporation shall not be required to pay any taxes
- -----------------
which may be payable in respect of any transfer involved in the issuance of
delivery of any certificate for such shares in a name other than that of the
holder of the shares of Series A Preferred in respect of which such shares are
being issued.
(i) The Corporation shall reserve and at all times from and after such
date keep reserved, free from preemptive rights, out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Series A Preferred and shall take all action as may
be necessary to enable the Corporation lawfully to issue such Common Stock upon
the conversion of shares of Series A Preferred.
(j) All shares of Common Stock which may be issued in connection with
the conversion provisions set forth herein will, upon issuance by the
Corporation, be validly issued, fully paid and nonassessable with no personal
liability attaching to the ownership thereof and free from all taxes, liens or
charges with respect thereto.
(k) Definitions. As used herein, the following terms have the
-----------
following meanings:
(i) "Capital Events" means any capital reorganization,
--------------
recapitalization,
<PAGE>
or any reclassification of the stock of the Corporation (other than a change in
par value, or from par value to no par value, or from no par value to par value,
or as a result of a stock dividend or subdivision, split-up or combination of
shares), or the consolidation or merger of the Corporation with or into another
person (other than a consolidation or merger in which the Corporation is the
continuing corporation and which does not result in any change in the Common
Stock), or the sale or other disposition of all or substantially all of the
properties and assets of the Corporation to any person or third party.
(ii) "Excluded Stock" means shares of Common Stock issued by the
--------------
Corporation: (A) as a stock dividend payable in shares of Common Stock or upon
any subdivision or split-up of the outstanding shares of Common Stock, (B) upon
conversion of the shares of Series A Preferred, Series B Preferred or Series C
Preferred at any time outstanding, (C) to officers, employees or directors of,
or consultants to, the Corporation (whether as an issuance of Common Stock,
options to purchase or rights to subscribe for such Common Stock, or options to
purchase or rights to subscribe for such convertible or exchangeable
securities), in each case approved by the Board of Directors of the
Corporation; provided, however, that the maximum number of shares of Common
-----------------
Stock issued or issuable to officers, employees or directors of, or consultants
to, the Corporation to which this clause (C) shall apply shall not exceed the
number of shares issuable under the incentive stock option plans of the
Corporation presently in effect or as may be approved from time to time by the
Corporation and the holders of the Series A Preferred in accordance with Section
6(c)(ix) hereof (including any Common Stock issued pursuant to the exercise of
any such options), and (D) pursuant to any options (other than those described
in (C), above), warrants or other rights outstanding on the Original Issuance
Date.
(iii) "Original Issuance Date" means the date of original issuance
----------------------
by the Corporation of the first share of Series A Preferred.
(iv) "Original Issuance Price" means Three Dollars and Forty
-----------------------
Cents ($3.40), the price of the first share of Series A Preferred issued by the
Corporation.
(v) "Person" means any corporation, general or limited partner-
------
ship, limited liability partnership, limited liability company, joint venture,
estate, trust, association, organization, labor union, or other entity.
(vi) "Subsidiary" means with respect to any Person (the "Owner"),
----------
any corporation or other Person of which securities or other interests having
the power to elect a majority of that corporation's or other Person's board of
directors or similar governing body, or otherwise having the power to direct the
business and policies of that corporation or other Person (other than securities
or other interests having such power only upon the happening of a contingency
that has not occurred), are held by the Owner or one or more of its
Subsidiaries; when used without reference to a particular Person, "Subsidiary"
means a Subsidiary of the Corporation.
<PAGE>
4. Status of Converted Stock. If any shares of Series A Preferred shall
-------------------------
be converted pursuant to Section 3 hereof, the shares so converted shall be
canceled and shall not be reissuable by the Corporation.
5. Redemption. Shares of Series A Preferred are not redeemable.
----------
6. Voting Rights.
-------------
(a) General. Except as otherwise provided below, on all matters
-------
submitted to a vote of the holders of shares of Common Stock, the holder of each
share of Series A Preferred shall have the right to one vote for each Common
Share into which such Series A Preferred could then be converted (with any
fractional share determined on an aggregate conversion basis being rounded to
the nearest whole share), 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 such shares of Common Stock, and shall be entitled, notwithstanding
any provision hereof, to notice of any shareholders' meeting in accordance with
the by-laws of the Corporation and shall be entitled to vote, together with
holders of shares of Common Stock with respect to any question upon which
holders of shares of Common Stock have the right to vote.
(b) Election of Directors. Except as may be otherwise approved by
---------------------
vote or by the written consent of the holders of a majority of the shares of
Series A Preferred then outstanding, the Board of Directors shall consist of up
to 7 members. The holders of the Series A Preferred, voting as a separate class,
shall have the right to elect one (1) director. Except as may otherwise be
provided by law or in the Certificate of Incorporation of the Corporation
(including the Certificate of Designation for the Series C Preferred), the
holders of the Common Stock shall have the right to elect the remaining members
of the Board of Directors and the Series A Preferred shall not be entitled to
vote in the election of the remaining members of the Board of Directors. Each
director shall be elected at the annual meeting of shareholders and shall serve
until his successor is elected and qualified or until his earlier resignation or
removal. Any director who shall have been elected by the holders of Series A
Preferred may be removed during his term of office, either for or without cause,
by and only by, the affirmative vote of the holders of a majority of the shares
of Series A Preferred then outstanding, given at a special meeting of such
shareholders duly called for that purpose, and any vacancy thereby created may
be filled by the holders of the Series A Preferred represented at that meeting.
(c) Protective Provisions. So long as twenty-five percent (25%) or
---------------------
more of the shares of Series A Preferred are outstanding, the Corporation shall
not, and shall not attempt to, without first obtaining the approval (by vote or
written consent) of the holders of at least a majority of the then outstanding
shares of Series A Preferred, voting as a separate class:
(i) authorize any additional shares of Series A Preferred, or
authorize and issue any shares of, (a) any class or series of equity security
having superior rights to the
<PAGE>
Series A Preferred as to dividends (except for the Series C Preferred),
redemptions, or as to payment upon liquidation, dissolution or a winding up of
the Corporation, or otherwise, or (b) any notes or debt securities convertible
into or exchangeable for any equity securities or containing profit
participation features;
(ii) redeem or repurchase outstanding Common Stock in excess of
an aggregate of 75,000 shares, provided that the Corporation may redeem shares
of Common Stock from persons having been granted and exercised stock options
pursuant to the Corporation's incentive stock plans as in effect as of the
Original Issuance Date, or as may be approved from time to time by the
Corporation and by the holders of the Series A Preferred pursuant to Section
6(c)(ix) below;
(iii) enter into any agreement that would restrict the
Corporation's ability to perform its obligations under any agreement to which
the Corporation is a party concerning the Corporation's original issuance of any
shares of the Series A Preferred (including the Certificate of Incorporation and
this Certificate of Designation);
(iv) amend the Certificate of Incorporation (including any
existing or new Certificate of Designation) or By-Laws of the Corporation in any
manner that adversely affects the powers, rights, privileges or restrictions or
relative preferences of the Series A Preferred or the holders thereof as a
class, or increase the powers, preferences, rights, privileges or restrictions
of any other class or series of preferred stock unless the Series A Preferred is
treated in the same manner;
(v) sell, transfer, convey or lease greater than twenty-five
percent (25%) of the assets of the Corporation in one or more of a series of
related transactions, except for the sale of inventory in the ordinary course of
the Corporation's business;
(vi) issue additional equity securities of any class or series
to the employees, officers or directors of the Corporation, except for such
equity securities as may be issuable upon the exercise of options or warrants
outstanding as of the Original Issuance Date (or as may be approved from time to
time by the Corporation and the holders of the Series A Preferred in accordance
with this Section 6(c)(vi)); provided that any such equity securities, including
any options or warrants for equity securities of the Corporation, shall be
granted at no less than the fair market value for such equity securities, as
determined in good faith by a majority of the independent directors residing on
the Board of Directors of the Corporation;
(vii) issue any equity securities of any class or series for a
price less than fair market value, as determined in good faith by the Board of
Directors of the Corporation, except as may be required pursuant to contractual
commitments of the Corporation existing as of the Original Issuance Date;
(viii) enter into any transaction or series of transactions or
any agreement
<PAGE>
or other arrangement, including, without limitation, any loan, with or to any
officer or director (or any family member or person affiliated with any officer
or director) or other affiliate (excluding any Subsidiary of the Corporation) of
the Corporation in excess of $100,000, individually, or $250,000, in the
aggregate, during any calendar year, except as may be required pursuant to
contractual commitments of the Corporation existing as of February 27, 1998
(except that such limitations shall not be applicable to any employment or other
compensatory arrangements on reasonable arms' length terms (including, without
limitation, the granting of stock options under any stock option plan in effect
as of the Original Issuance Date, or as may be approved from time to time by the
Corporation and the holders of the Series A Preferred in accordance with Section
6(c)(ix) below), as may be approved by the Board of Directors of the
Corporation);
(ix) adopt any stock option plans or increase the number of
shares available or reserved for issuance under any stock option plan or related
plan in effect as of the Original Issuance Date, or as may be approved from time
to time by the Corporation and by the holders of the Series A Preferred pursuant
to Section 6(c)(ix);
(x) engage in any transaction which would impair or reduce the
rights of the holders of shares of the Series A Preferred as a class (except
that the Corporation may effect a reverse-split of its Common Stock without the
consent of the holders of shares of the Series A Preferred);
(xi) merge or consolidate with any Person or permit any
Subsidiary to merge or consolidate with any Person (other than a Subsidiary that
is wholly-owned by the Corporation, directly or indirectly);
(xii) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including, without limitation, any
reorganization into a limited liability company, a partnership or any other non-
corporate entity which is treated as a partnership for federal income tax
purposes); or
(xiii) issue any dividends on any class or series of capital stock
of the Corporation (other than the Series A Preferred and the Series C Preferred
(as provided in the Certificate of Designation therefor)).
7. Preemptive Rights. Shares of Series A Preferred have no preemptive
-----------------
rights.
<PAGE>
EXHIBIT B
TERMS OF SERIES B CONVERTIBLE PREFERRED STOCK
OF
CYBERIAN OUTPOST, INC.
Designation of Series B Convertible Preferred Stock. There is hereby
---------------------------------------------------
established a series of Preferred Stock designated "Series B Convertible
Preferred Stock" (the "Series B Preferred"), consisting of 500,000 shares,
------------------
without nominal or par value, and having the relative rights, designations,
preferences, qualifications, privileges, limitations and restrictions applicable
thereto as follows:
1. Dividend Provisions. Except as may be otherwise approved in writing by
-------------------
the holders of a majority of the outstanding shares of Series B Preferred:
(a) The holders of the shares of Series B Preferred shall be entitled
to receive dividends, out of any assets legally available therefor, in an amount
per share of Series B Preferred which is equal to the product of (i) the number
of shares of common stock, no par value ("Common Stock") of Cyberian Outpost,
------------
Inc. (the "Corporation") into which one share of Series B Preferred is
-----------
convertible at the time of declaration of such dividend, multiplied by (ii) the
aggregate amount per share of Common Stock of all cash dividends and the
aggregate amount per share (payable, at the option of the holder, in kind or in
cash, based upon the fair market value at the time the non-cash dividend or
other distribution is declared or paid as determined in good faith by the Board
of Directors of the Corporation) of all non-cash dividends or other
distributions on the Common Stock, when, as and if a dividend is declared on the
shares of Common Stock. Such dividends shall accumulate and be declared and
paid contemporaneously with the declaration and payment of the related dividend
on the Common Stock, so that the Series B Preferred participates equally with
the Common Stock in such dividend or distribution with respect to the number of
shares of Common Stock into which the Series B Preferred is then convertible
pursuant to Section 3 hereof.
(b) So long as any Series B Preferred shall remain outstanding, no
deposit, payment, dividend or other distribution shall be paid or made on any
other class of stock of the Corporation and no shares of any other class of
stock of the Corporation shall be purchased or otherwise acquired by the
Corporation or any subsidiary of the Corporation other than, (i) except as may
be otherwise provided in the Certificate of Incorporation, including in any
class or series designation concerning any capital stock of the Corporation (as
such may be amended from time to time), or (ii) upon exercise of the
Corporation's rights or a stockholder's rights under any restricted stock
purchase agreement (or any similar agreement pursuant to which the Corporation
is obligated to redeem its stock) in effect as of the Original Issuance Date (as
defined below in Section 3(k)) or otherwise pursuant to incentive stock plans of
the Corporation in effect as of the Original Issuance Date, or as may be
approved from time to time by the Corporation and the holders of the Series B
Preferred in accordance with Section 6(b) hereof, or (iii) upon the
<PAGE>
exercise of a stockholder's put rights in effect as of the Original Issuance
Date, or as may be approved from time to time by the Corporation and the holders
of the Series B Preferred in accordance with Section 6(b) hereof, or (iv) by
exchange therefor of shares of the stock of the Corporation.
<PAGE>
Subject to the above limitations and to the provisions of Section 6,
dividends may be paid on any class of stock of the Corporation out of any funds
legally available for such purpose when and as declared by the Board of
Directors.
2. Liquidation Preference. Except as may be otherwise approved in writing
----------------------
by the holders of a majority of the outstanding shares of Series B Preferred:
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of shares of Series B
Preferred shall be entitled to receive out of the assets of the Corporation
available for distribution to shareholders, (i) before any distribution or
payment shall be made in respect of the holders of shares of Common Stock but
pari passu with holders of Series A Convertible Preferred Stock of the
Corporation (the "Series A Preferred") and Series C Convertible Preferred Stock
------------------
of the Corporation (the "Series C Preferred"), a liquidation distribution in an
------------------
amount equal to the Original Issuance Price (as defined below in Section 3(k))
per share, plus an amount equal to all declared dividends thereon to the date
fixed for such distribution or payment, and then (ii) to share with the holders
of shares of Common Stock, Series A Preferred and Series C Preferred as if the
shares of Series A Preferred, Series B Preferred and Series C Preferred were
then converted into shares of Common Stock. If, upon any such liquidation,
dissolution or winding up of the affairs of the Corporation, the assets of the
Corporation available for distribution to shareholders shall be insufficient to
permit the payment in full to the holders of Series A Preferred, Series B
Preferred and Series C Preferred of the amounts to which they are each entitled
in preference to holders of shares of Common Stock, then all of such available
assets shall be distributed to the holders of shares of Series A Preferred,
Series B Preferred and Series C Preferred ratably in proportion to the
liquidation payment otherwise due pursuant to clause (i) above to each such
holder.
(b) A consolidation or merger of the Corporation with or into any
other corporation or corporations, or the consolidation or merger of any other
corporation or corporations into the Corporation, or the sale or transfer by the
Corporation of all or substantially all of its assets or the effectuation by the
Corporation or any holders of its capital stock of a transaction or series of
related transactions in which more than fifty percent (50%) of the voting power
of the Corporation is sold, transferred or otherwise disposed of, shall be
deemed to be a liquidation, dissolution or winding up within the meaning of this
Section 2.
3. Conversion. The holders of the shares of Series B Preferred shall have
----------
conversion rights as follows:
(a) Optional Conversion. The holder of any shares of Series B
-------------------
Preferred shall have the right, at such holder's option, at any time or from
time to time by the giving of written notice thereof to the Corporation (the
"Conversion Date") to convert all or any of such shares of Series B Preferred
- ----------------
into such number of fully paid and nonassessable shares of Common Stock as
obtained by multiplying the Original Issuance Price by the number of shares of
Series B
<PAGE>
Preferred being converted, and dividing the product thereof by the Series B
Conversion Price (as hereinafter defined) (as last adjusted and then in effect)
for the shares of Series B Preferred then being converted. The conversion price
per share (the "Series B Conversion Price") at which shares of Common Stock
-------------------------
shall be issuable shall be Four Dollars and Sixty Cents ($4.60) per share;
provided, however, that the Series B Conversion Price shall be subject to
- -----------------
adjustment as set forth in Section 3(e) hereof. The holder of any shares of
Series B Preferred converted into shares of Common Stock pursuant to this
Section 3(a) shall be entitled to payment of all declared but unpaid dividends,
if any, payable with respect to such shares being converted up to and including
the Conversion Date.
(b) Mandatory Conversion. Upon the consummation of a public offering
--------------------
of shares of Common Stock of the Corporation registered pursuant to the
Securities Act of 1933, as amended, in which the gross proceeds to the
Corporation exceed Ten Million Dollars ($10,000,000) as the result of which
shares of Common Stock are traded on either the New York Stock Exchange, the
American Stock Exchange or the NASDAQ National Market System (an "Event of
--------
Conversion"), all shares of Series B Preferred then outstanding shall, by virtue
- ----------
of and simultaneously with the occurrence of the Event of Conversion and without
any action on the part of the holder thereof, be deemed automatically converted
into such whole number of fully paid and nonassessable shares of Common Stock as
obtained by multiplying the Original Issuance Price by the number of shares of
Series B Preferred being converted, and dividing the product thereof by the
Series B Conversion Price (as last adjusted and then in effect) for the shares
of Series B Preferred being converted (such Series B Conversion Price being
subject to adjustment as set forth in Section 3(e) hereof). The holder of any
shares of Series B Preferred converted into shares of Common Stock pursuant to
this Section 3(b) shall be entitled to payment of all declared but unpaid
dividends, if any, payable with respect to such shares of Series B Preferred up
to and including the Conversion Date.
(c) Procedure for Conversion. Upon conversion of the shares of Series
------------------------
B Preferred pursuant to Section 3(a) hereof, the holder of any shares of Series
B Preferred shall deliver to the Corporation during regular business hours, at
the office of any transfer agent of the Corporation for the Series B Preferred,
or at such other place as may be designated by the Corporation, the certificate
or certificates for the shares to be converted, duly endorsed or assigned in
blank or to the Corporation (if required by it), accompanied by written notice
stating the name or names (with address) in which the certificate or
certificates for the shares of Common Stock are to be issued. As promptly as
practicable thereafter, the Corporation shall issue and deliver to or upon the
written order of such holder, to the place designated by such holder, a
certificate or certificates for the number of full shares of Common Stock to
which such holder is entitled, a check or cash in respect of any fractional
interest in a share of Common Stock as provided in Section 3(d) hereof and a
check or cash in payment of all declared but unpaid dividends, if any (to the
extent permissible under law), payable with respect to the shares of Series B
Preferred so converted up to and including the Conversion Date. The person in
whose names the certificate or certificates for Common Stock are to be issued
shall be deemed to have become a shareholder of record on the applicable
Conversion Date unless the transfer books
<PAGE>
of the Corporation are closed on that date, in which event he shall be deemed to
have become a shareholder of record on the next succeeding date on which the
transfer books are open, but the Series B Conversion Price for the Series B
Preferred shall be that in effect on the Conversion Date.
(d) Additional Conversion Provisions. The following additional terms
--------------------------------
shall apply upon any conversion of the Series B Preferred:
(i) No fractional shares of Common Stock or scrip shall be
issued upon conversion of shares of Series B Preferred. If more than one share
of Series B Preferred shall be surrendered for conversion at any one time by the
same holder, the number of full shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of
Series B Preferred so surrendered. In lieu of any fractional shares of Common
Stock which would otherwise be issuable upon conversion of any shares of Series
B Preferred the Corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to the then Current Market Price (as
defined below) of a share of Common Stock as of the date of conversion,
multiplied by such fractional interest. Fractional interests shall not be
entitled to dividends, and the holders of fractional interests shall not be
entitled to any rights as shareholders of the Corporation in respect of such
fractional interest.
(ii) For the purpose of any computation pursuant to this Section
3(d), the Current Market Price at any date of one share of Common Stock shall be
deemed to be the closing price as of the day before the day in question. If the
Common Stock is not traded in such manner that the closing price is readily
available, the Current Market Price shall be determined in good faith by the
Directors of the Corporation.
(e) Adjustments to Series B Conversion Price. The Series B Conversion
----------------------------------------
Price for the Series B Preferred shall be subject to adjustment from time to
time as follows:
(i) Stock Dividends, Split-Ups, Etc. If, at any time after the
-------------------------------
Original Issuance Date, the number of shares of Common Stock outstanding is
increased by a stock dividend payable in shares of Common Stock or by a
subdivision or split-up of shares of Common Stock, then, following the record
date fixed for the determination of holders of Common Stock entitled to receive
such stock dividend, subdivision or split-up, the Series B Conversion Price of
the Series B Preferred shall be appropriately decreased so that the number of
shares of Common Stock issuable on conversion of each share of Series B
Preferred shall be increased in proportion to such increase in outstanding
shares.
(ii) Combinations. If, at any time after the Original Issuance
------------
Date, the number of shares of Common Stock outstanding is decreased by a
combination of the outstanding shares of Common Stock, then, following the
record date for such combination, the Series B Conversion Price shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion of each share of Series B Preferred shall be decreased in proportion
to such decrease in outstanding shares.
<PAGE>
(iii) Reorganizations, Reclassifications, Etc. In case, at any
---------------------------------------
time after the Original Issuance Date, of any Capital Events (as defined below
in Section 3(k)) each share of Series B Preferred shall after such Capital Event
be (unless, in the case of a consolidation, merger, sale or other disposition,
payment shall have been made to the holders of all shares of Series B Preferred
of the full amount to which they respectively shall have been entitled pursuant
to Section 2 hereof) convertible into the kind and number of shares of stock or
other securities or property of the Corporation or of the corporation resulting
from such consolidation or surviving such merger or to which such properties and
asset shall have been sold or otherwise disposed to which the holder of the
number of shares of Common Stock deliverable (immediately prior to the time of
such Capital Event) upon conversion of such shares would have been entitled upon
such Capital Event. The provisions of this Section 3(e)(iii) shall similarly
apply to successive Capital Events.
(iv) Dilutive Issuances.
------------------
(1) If the Corporation shall at any time or from time to
time after the Original Issuance Date issue any shares of Common Stock other
than Excluded Stock (as defined below in Section 3(k)) without consideration or
for a consideration per share less than the Series B Conversion Price then in
effect (such issuance being referred to in this clause (iv) as a "Dilutive
--------
Issuance"), the Series B Conversion Price in effect immediately prior to such
- --------
Dilutive Issuance shall be reduced with effect from the first to occur of (A)
the record date for the issuance of the securities or (B) the date of original
issuance (as the case may be the "Issue Date"), so that it shall equal the price
----------
determined by multiplying the Series B Conversion Price by a fraction (i) the
numerator of which shall be (X) the number of shares of Common Stock outstanding
at the close of business on the day next preceding the Issue Date, plus (Y) the
number of shares of Common Stock which the aggregate consideration received by
the Corporation for the Dilutive Issuance would purchase at the Series B
Conversion Price, and (ii) the denominator of which shall be the number of
shares of Common Stock outstanding at the close of business on the Issue Date
after giving effect to such Dilutive Issuance.
(2) For the purposes of any adjustment of the Series B
Conversion Price pursuant to this clause (iv), the following provisions shall
apply:
(A) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
after deducting therefrom any discounts or commissions allowed or paid by the
Corporation for any underwriting or otherwise in connection with the issuance
and sale thereof.
(B) In the case of the issuance of 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 market value thereof to the Corporation as
determined in good faith by the Board of Directors, irrespective of any
accounting treatment.
<PAGE>
(C) In the case of the issuance of (i) options to
purchase or rights to subscribe for Common Stock, (ii) securities by their terms
convertible into or exchangeable for Common Stock, or (iii) options to purchase
or rights to subscribe for such convertible or exchangeable securities:
(I) the shares of Common Stock deliverable upon
exercise of such options to purchase or rights to subscribe for Common Stock
shall be deemed to have been issued at the time such options or rights were
issued and for a consideration equal to the consideration (determined in the
manner provided in subclauses (A) and (B), above), if any, received by the
Corporation upon the issuance of such options or rights plus the minimum
purchase price provided in such options or rights for the Common Stock covered
thereby;
(II) the shares of Common Stock deliverable upon
conversion of or in exchange 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 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 additional consideration, if any, to be
received by the Corporation 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 subclauses (A) and (B), above);
(III) on any change in the number of shares or
exercise price of Common Stock deliverable upon exercise of any such options or
rights or upon conversion of or in exchange for such convertible or exchangeable
securities, other than a change resulting from the antidilution provisions
thereof, the Series B Conversion Price shall forthwith be readjusted to such
Series B Conversion Price as would have obtained had the adjustment made upon
the issuance of such options, rights or securities not converted prior to such
change or options or rights related to such securities not converted prior to
such change been made upon the basis of such change; and
(IV) on 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 Series B Conversion Price shall forthwith be readjusted to such
Series B Conversion Price as would have obtained had such options, rights,
securities or options or rights related to such securities not been issued.
(v) All calculations under this paragraph (e) shall be made to
the nearest one-tenth (1/10) of a share or to the nearest one tenth (1/10) of a
cent, as the case may be.
(vi) In any case in which the provisions of this Section 3(e)
shall require that an adjustment shall become effective immediately after a
record date for an event the
<PAGE>
Corporation may defer until the occurrence of such event (1) issuing to the
holder of any share of Series B Preferred converted after such record date and
before the occurrence of such event the additional shares of capital stock
issuable upon such conversion by reason of the adjustment required by such event
over and above the shares of capital stock issuable upon such conversion before
giving effect to such adjustment and (2) paying to such holder any amount in
cash in lieu of a fractional share of capital stock pursuant to Section 3(d)
hereof; provided, however, that the Corporation shall deliver to such holder a
-------- -------
due bill or other appropriate instrument evidencing such holder's right to
receive such additional shares, and such cash, immediately upon the occurrence
of the event requiring such adjustment.
(vii) The Corporation will not voluntarily, by amendment of its
Certificate of Incorporation, as amended, or through any reorganization,
transfer of assets, merger, dissolution, issuance or sale or 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 the Corporation, but
will at all times in good faith assist in the carrying out of all of the
provisions of this Section 3 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 B Preferred against impairment.
(f) Whenever the Series B Conversion Price of the Series B Preferred
shall be adjusted as provided in Section 3(e), the Corporation shall forthwith
file, at the office of the transfer agent for the Series B Preferred or at such
other place as may be designated by the Corporation, a statement showing in
detail the facts requiring such adjustment and the Series B Conversion Price of
the Series B Preferred that shall be in effect after such adjustment. The
Corporation shall also cause a copy of such statement to be sent by mail, first-
class certified mail, return receipt requested, postage prepaid, to each holder
of shares of any series of preferred stock in respect of which an adjustment to
the Series B Conversion Price was required to be made at his address appearing
on the Corporation's records. Where appropriate, such copy may be given in
advance and may be included as part of a notice required to be mailed under the
provisions of Section 4(g) hereof.
(g) If the Corporation shall propose to take any action of the types
described in clauses (i), (ii), (iii) or (iv) of Section 3(e), the Corporation
shall give notice to each holder of shares of Series B Preferred in the manner
set forth in Section 3(f) hereof, which notice shall specify the record date, if
any, with respect to any such action and the date on which such action is to
take place. Such notice shall also set forth such facts with respect thereto as
shall be reasonably necessary to indicate the effect of such action (to the
extent such effect may be known at the date of such notice) on the Series B
Conversion Price and the number, kind or series of shares or other securities or
property which shall be deliverable or purchasable upon the occurrence of such
action or deliverable upon conversion of shares of each such series of Series B
Preferred. In the case of any action which would require the fixing of a record
date, such notice shall be given at least twenty (20) days prior to the date so
fixed, and in case of all other actions, such notice shall be given at least
thirty (30) days prior to the taking of such proposed
<PAGE>
action. Failure to give such notice, or any defect therein, shall not affect the
legality or validity of any such action.
(h) The Corporation shall pay all documentary, stamp or other
transaction taxes attributable to the issuance or delivery of shares of capital
stock of the Corporation upon conversion of shares of Series B Preferred;
provided, however, that the Corporation shall not be required to pay any taxes
- -----------------
which may be payable in respect of any transfer involved in the issuance of
delivery of any certificate for such shares in a name other than that of the
holder of the shares of Series B Preferred in respect of which such shares are
being issued.
(i) The Corporation shall reserve and at all times from and after such
date keep reserved, free from preemptive rights, out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Series B Preferred, sufficient shares to provide for
the conversion of all outstanding shares of Series B Preferred and all
outstanding shares of Series B Preferred issuable upon conversion of the
Debentures issued with respect to that certain Securities Purchase Agreement of
the Corporation entered into with Winfield Capital Corp. (the "Securities
----------
Purchase Agreement"), and shall take all action as may be necessary to enable
- ------------------
the Corporation lawfully to issue such Common Stock upon the conversion of
shares of Series B Preferred.
(j) All shares of Common Stock which may be issued in connection with
the conversion provisions set forth herein will, upon issuance by the
Corporation, be validly issued, fully paid and nonassessable with no personal
liability attaching to the ownership thereof and free from all taxes, liens or
charges with respect thereto.
(k) Definitions. As used herein, the following terms have the
-----------
following meanings:
(i) "Capital Events" means any capital reorganization,
--------------
recapitalization, or any reclassification of the stock of the Corporation (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a stock dividend or subdivision, split-up
or combination of shares), or the consolidation or merger of the Corporation
with or into another person (other than a consolidation or merger in which the
Corporation is the continuing corporation and which does not result in any
change in the Common Stock), or the sale or other disposition of all or
substantially all of the properties and assets of the Corporation to any person
or third party.
(ii) "Excluded Stock" means shares of Common Stock issued by the
--------------
Corporation: (A) as a stock dividend payable in shares of Common Stock or upon
any subdivision or split-up of the outstanding shares of Common Stock, (B) upon
conversion of the shares of Series A Preferred, Series B Preferred or Series C
Preferred at any time outstanding, (C) to officers, employees or directors of,
or consultants to, the Corporation (whether as an issuance of Common Stock,
options to purchase or rights to subscribe for such Common Stock,
<PAGE>
or options to purchase or rights to subscribe for such convertible or
exchangeable securities), in each case approved by the Board of Directors of the
Corporation; provided, however, that the maximum number of shares of Common
-----------------
Stock issued or issuable to officers, employees or directors of, or consultants
to, the Corporation to which this clause (C) shall apply shall not exceed the
number of shares issuable under the incentive stock option plans of the
Corporation presently in effect or as may be approved from time to time by the
Corporation and the holders of the Series B Preferred in accordance with Section
6(b)(ix) hereof (including any Common Stock issued pursuant to the exercise of
any such options), and (D) pursuant to any options (other than those described
in (C), above), warrants or other rights outstanding on the Original Issuance
Date.
(iii) "Original Issuance Date" means the date of original issuance
----------------------
by the Corporation of the first share of Series B Preferred.
(iv) "Original Issuance Price" means Four Dollars and Sixty Cents
-----------------------
($4.60), the price of the first share of Series B Preferred issued by the
Corporation.
(v) "Person" means any corporation, general or limited
------
partnership, limited liability partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other entity.
(vi) "Subsidiary" means with respect to any Person (the "Owner"),
---------- -----
any corporation or other Person of which securities or other interests having
the power to elect a majority of that corporation's or other Person's board of
directors or similar governing body, or otherwise having the power to direct the
business and policies of that corporation or other Person (other than securities
or other interests having such power only upon the happening of a contingency
that has not occurred), are held by the Owner or one or more of its
Subsidiaries; when used without reference to a particular Person, "Subsidiary"
means a Subsidiary of the Corporation.
4. Status of Converted Stock. If any shares of Series B Preferred shall
-------------------------
be converted pursuant to Section 3 hereof, the shares so converted shall be
canceled and shall not be reissuable by the Corporation.
5. Redemption. Shares of Series B Preferred are not redeemable.
----------
6. Voting Rights.
-------------
(a) General. Except as otherwise provided below, on all matters
-------
submitted to a vote of the holders of shares of Common Stock, the holder of each
share of Series B Preferred shall have the right to one vote for each Common
Share into which such Series B Preferred could then be converted (with any
fractional share determined on an aggregate conversion basis being rounded to
the nearest whole share), and with respect to such vote, such holder shall have
full
<PAGE>
voting rights and powers equal to the voting rights and powers of the holders of
such shares of Common Stock, and shall be entitled, notwithstanding any
provision hereof, to notice of any shareholders' meeting in accordance with the
by-laws of the Corporation and shall be entitled to vote, together with holders
of shares of Common Stock with respect to any question upon which holders of
shares of Common Stock have the right to vote.
(b) Protective Provisions. So long as twenty-five percent (25%) or
---------------------
more of the shares of Series B Preferred are outstanding, the Corporation shall
not, and shall not attempt to, without first obtaining the approval (by vote or
written consent) of the holders of at least a majority of the then outstanding
shares of Series B Preferred, voting as a separate class:
(i) authorize any additional shares of Series B Preferred, or
authorize and issue any shares of, (a) any class or series of equity security
having superior rights to the Series B Preferred as to dividends (except for the
Series C Preferred), redemptions, or as to payment upon liquidation, dissolution
or a winding up of the Corporation, or otherwise, or (b) any notes or debt
securities convertible into or exchangeable for any equity securities or
containing profit participation features;
(ii) redeem or repurchase outstanding Common Stock in excess of
an aggregate of 75,000 shares, provided that the Corporation may redeem shares
of Common Stock from persons having been granted and exercised stock options
pursuant to the Corporation's incentive stock plans as in effect as of the
Original Issuance Date, or as may be approved from time to time by the
Corporation and by the holders of the Series B Preferred pursuant to Section
6(b)(ix) below;
(iii) enter into any agreement that would restrict the
Corporation's ability to perform its obligations under any agreement to which
the Corporation is a party concerning the Corporation's original issuance of any
shares of the Series B Preferred (including the Certificate of Incorporation and
this Certificate of Designation);
(iv) amend the Certificate of Incorporation (including any
existing or new Certificate of Designation) or By-Laws of the Corporation in any
manner that adversely affects the powers, rights, privileges or restrictions or
relative preferences of the Series B Preferred or the holders thereof as a
class, or increase the powers, preferences, rights, privileges or restrictions
of any other class or series of preferred stock unless the Series B Preferred is
treated in the same manner;
(v) sell, transfer, convey or lease greater than twenty-five
percent (25%) of the assets of the Corporation in one or more of a series of
related transactions, except for the sale of inventory in the ordinary course of
the Corporation's business;
(vi) issue additional equity securities of any class or series to
the employees, officers or directors of the Corporation, except for such equity
securities as may be
<PAGE>
issuable upon the exercise of options or warrants outstanding as of the Original
Issuance Date (or as may be approved from time to time by the Corporation and
the holders of the Series B Preferred in accordance with this Section 6(b)(vi));
provided that any such equity securities, including any options or warrants for
equity securities of the Corporation, shall be granted at no less than the fair
market value for such equity securities, as determined in good faith by a
majority of the independent directors residing on the Board of Directors of the
Corporation;
(vii) issue any equity securities of any class or series for a
price less than fair market value, as determined in good faith by the Board of
Directors of the Corporation, except as may be required pursuant to contractual
commitments of the Corporation existing as of the Original Issuance Date;
(viii) enter into any transaction or series of transactions or any
agreement or other arrangement, including, without limitation, any loan, with or
to any officer or director (or any family member or person affiliated with any
officer or director) or other affiliate (excluding any Subsidiary of the
Corporation) of the Corporation in excess of $100,000, individually, or
$250,000, in the aggregate, during any calendar year, except as may be required
pursuant to contractual commitments of the Corporation existing as of February
27, 1998 (except that such limitations shall not be applicable to any employment
or other compensatory arrangements on reasonable arms' length terms (including,
without limitation, the granting of stock options under any stock option plan in
effect as of the Original Issuance Date, or as may be approved from time to time
by the Corporation and the holders of the Series B Preferred in accordance with
Section 6(b)(ix) below), as may be approved by the Board of Directors of the
Corporation);
(ix) adopt any stock option plans or increase the number of
shares available or reserved for issuance under any stock option plan or related
plan in effect as of the Original Issuance Date, or as may be approved from time
to time by the Corporation and by the holders of the Series B Preferred pursuant
to Section 6(b)(ix);
(x) engage in any transaction which would impair or reduce the
rights of the holders of shares of the Series B Preferred as a class (except
that the Corporation may effect a reverse-split of its Common Stock without the
consent of the holders of shares of the Series B Preferred);
(xi) merge or consolidate with any Person or permit any
Subsidiary to merge or consolidate with any Person (other than a Subsidiary that
is wholly-owned by the Corporation, directly or indirectly);
(xii) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including, without limitation, any
reorganization into a limited liability company, a partnership or any other non-
corporate entity which is treated as a partnership for federal income tax
purposes); or
<PAGE>
(xiii) issue any dividends on any class or series of capital stock
of the Corporation (other than the Series B Preferred and the Series C Preferred
(as provided in the Certificate of Designation therefor)).
7. Preemptive Rights. Shares of Series B Preferred have no preemptive
-----------------
rights.
<PAGE>
EXHIBIT C
TERMS OF SERIES C CONVERTIBLE PREFERRED STOCK
OF
CYBERIAN OUTPOST, INC.
Designation of Series C Convertible Preferred Stock. There is hereby
---------------------------------------------------
established a series of Preferred Stock designated "Series C Convertible
Preferred Stock" (the "Series C Preferred"), consisting of 3,000,000 shares,
------------------
without nominal or par value, and having the relative rights, designations,
preferences, qualifications, privileges, limitations and restrictions applicable
thereto as follows:
1. Dividend Provisions. Except as may be otherwise approved in writing by
-------------------
the holders of at least sixty-six and two-thirds percent (66 2/3%) of the
outstanding shares of Series C Preferred:
(a) (i) The holders of the shares of Series C Preferred shall be
entitled to receive, when and as declared by the Board of Directors of the
Corporation, cumulative annual dividends, out of any assets of Cyberian
Outpost, Inc. (the "Corporation") legally available therefor, in an amount per
-----------
share of Series C Preferred equal to 7.0% per annum of the Original Issuance
Price (as defined below in Section 3(k)) (the "Cumulative Annual Dividend")
--------------------------
which shall be declared by the Board of Directors of the Corporation (in the
case of clause (z) below) and be payable to said holders (in the case of clauses
(x), (y) and (z) below) upon the first of the following events to occur: (x) the
liquidation of the Corporation (including a deemed liquidation of the
Corporation pursuant to Section 2(b) hereof), (y) the Corporation's redemption
of any shares of Series C Preferred pursuant to Section 5 hereof, or (z) the
conversion of any shares of Series C Preferred into shares of common stock, no
par value, of the Corporation ("Common Stock") pursuant to Section 3(a) or
------------
Section 3(b) hereof. Notwithstanding the foregoing, no holder of shares of
Series C Preferred shall be entitled to Cumulative Annual Dividends and no
Cumulative Annual Dividends shall be payable to such holder of shares of Series
C Preferred upon and after the conversion of any shares of Series C Preferred
held by such holder into shares of Common Stock pursuant to Section 3(a) or
Section 3(b) hereof, if such conversion occurs prior to the third anniversary
of the Original Issuance Date.
(ii) Cumulative Annual Dividends shall accrue on a daily basis
commencing as of the date of issuance of the shares of Series C Preferred to the
holder of said shares, whether or not earned or declared, and will be cumulative
so that if at any time the entire amount of such Cumulative Annual Dividend has
not been paid, or declared or set apart for payment as required pursuant to this
Section 1(a), the deficiency shall be fully paid or declared and set apart for
payment, before any dividend is paid on, declared or set apart for payment on
any other class or series of stock, including without limitation, Common Stock,
Series A Preferred (as defined below) and Series B Preferred (as defined below).
Cumulative Annual Dividends shall be payable in preference and priority to any
payment of dividends on any other
<PAGE>
class or series of capital stock of the Corporation, including, without
limitation, the Common Stock, Series A Preferred and Series B Preferred.
Cumulative Annual Dividends shall be subject to proportionate adjustment in the
event of any stock dividend, stock split, reverse stock split, combination of
shares, reorganization, recapitalization, reclassification or other similar
event affecting the Series C Preferred which occurs after the Original Issuance
Date (as defined below in Section 3(k)).
(b) The holders of the shares of Series C Preferred shall be entitled
to receive dividends, out of any assets legally available therefor, in an amount
per share of Series C Preferred which is equal to the product of (i) the number
of shares of Common Stock into which one share of Series C Preferred is
convertible at the time of declaration of such dividend, multiplied by (ii) the
aggregate amount per share of Common Stock of all cash dividends and the
aggregate amount per share (payable, at the option of the holder, in kind or in
cash, based upon the fair market value at the time the non-cash dividend or
other distribution is declared or paid (the fair market value of any in-kind
dividend shall be deemed to be equal to the amount agreed to by the Corporation
and the holders of at least sixty-six and two-thirds percent (66 2/3%) of the
outstanding shares of Series C Preferred) of all non-cash dividends or other
distributions on the Common Stock, when, as and if a dividend is declared on the
shares of Common Stock. Such dividends shall accumulate and be declared and
paid contemporaneously with the declaration and payment of the related dividend
on the Common Stock, so that the Series C Preferred participates equally with
the Common Stock in such dividend or distribution with respect to the number of
shares of Common Stock into which the Series C Preferred is then convertible
pursuant to Section 3 hereof. Any dividends declared and paid to the holders of
Series C Preferred pursuant to this Section 1(b) shall be in addition to (and
not in lieu of) any dividends paid to the holders of Series C Preferred pursuant
to Section 1(a) hereof.
(c) So long as any Series C Preferred shall remain outstanding, no
deposit, payment, dividend or other distribution shall be paid or made on any
other class of stock of the Corporation and no shares of any other class of
stock of the Corporation shall be purchased or otherwise acquired by the
Corporation or any subsidiary of the Corporation other than, (i) except as may
be otherwise provided in the Certificate of Incorporation, including in any
class or series designation concerning any capital stock of the Corporation (as
such may be amended from time to time), or (ii) upon exercise of the
Corporation's rights or a stockholder's rights under any restricted stock
purchase agreement (or any similar agreement pursuant to which the Corporation
is obligated to redeem its stock) in effect as of the Original Issuance Date or
otherwise pursuant to incentive stock plans of the Corporation in effect as of
the Original Issuance Date, or as may be approved from time to time by the
Corporation and the holders of the Series C Preferred in accordance with Section
6(c) hereof, or (iii) upon the exercise of a stockholder's put rights in effect
as of the Original Issuance Date, or as may be approved from time to time by the
Corporation and the holders of the Series C Preferred in accordance with Section
6(c) hereof, or (iv) by exchange therefor of shares of the stock of the
Corporation.
-33-
<PAGE>
Subject to the above limitations and to the provisions of Section 6,
dividends may be paid on any class of stock of the Corporation out of any funds
legally available for such purpose when and as declared by the Board of
Directors.
2. Liquidation Preference. Except as may be otherwise approved in writing
----------------------
by the holders of at least sixty-six and two-thirds percent (66 2/3%) of the
outstanding shares of Series C Preferred:
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of shares of Series C
Preferred shall be entitled to receive out of the assets of the Corporation
available for distribution to shareholders, (i) before any distribution or
payment shall be made in respect of the holders of shares of Common Stock but
pari passu with holders of Series A Convertible Preferred Stock of the
Corporation (the "Series A Preferred") and Series B Convertible Preferred Stock
------------------
of the Corporation (the "Series B Preferred"), a liquidation distribution in an
------------------
amount equal to the Original Issuance Price per share, plus an amount equal to
all accrued but unpaid dividends thereon to the date fixed for such distribution
or payment, and then (ii) to share with the holders of shares of Common Stock,
Series A Preferred and Series B Preferred as if the shares of Series A
Preferred, Series B Preferred and Series C Preferred were then converted into
shares of Common Stock. In the case of the distribution of assets other than
cash, the value of such assets shall be deemed to be the fair market value
thereof (which shall be the amount agreed to by the Corporation and the holders
of at least sixty-six and two-thirds percent (66 2/3%) of the shares of Series C
Preferred). If, upon any such liquidation, dissolution or winding up of the
affairs of the Corporation, the assets of the Corporation available for
distribution to shareholders shall be insufficient to permit the payment in full
to the holders of Series A Preferred, Series B Preferred and Series C Preferred
of the amounts to which they are each entitled in preference to holders of
shares of Common Stock, then all of such available assets shall be distributed
to the holders of shares of Series A Preferred, Series B Preferred and Series C
Preferred ratably in proportion to the liquidation payment otherwise due
pursuant to clause (i) above to each such holder.
(b) A consolidation or merger of the Corporation with or into any
other corporation or corporations, or the consolidation or merger of any other
corporation or corporations into the Corporation, or the sale or transfer by the
Corporation of all or substantially all of its assets or the effectuation by the
Corporation or any holders of its capital stock of a transaction or series of
related transactions in which more than fifty percent (50%) of the voting power
of the Corporation is sold, transferred or otherwise disposed of, shall be
deemed to be a liquidation, dissolution or winding up within the meaning of this
Section 2.
3. Conversion. The holders of the shares of Series C Preferred shall have
----------
conversion rights as follows:
(a) Optional Conversion. The holder of any shares of Series C
-------------------
Preferred
-34-
<PAGE>
shall have the right, at such holder's option, at any time or from time to time
by the giving of written notice thereof to the Corporation (the "Conversion
----------
Date") to convert all or any of such shares of Series C Preferred into such
- ----
number of fully paid and nonassessable shares of Common Stock as obtained by
multiplying the Original Issuance Price by the number of shares of Series C
Preferred being converted, and dividing the product thereof by the Series C
Conversion Price (as hereinafter defined) (as last adjusted and then in effect)
for the shares of Series C Preferred then being converted. The conversion price
per share (the "Series C Conversion Price") at which shares of Common Stock
-------------------------
shall be issuable shall be Eight Dollars ($8.00) per share; provided, however,
-----------------
that the Series C Conversion Price shall be subject to adjustment as set forth
in Section 3(e) hereof. Subject to the last sentence of Section 1(a)(i), above,
the holder of any shares of Series C Preferred converted into shares of Common
Stock pursuant to this Section 3(a) shall be entitled to payment of all accrued
but unpaid dividends on such shares being converted up to and including the
Conversion Date.
(b) Mandatory Conversion. Upon (i) the consummation of a public
--------------------
offering of shares of Common Stock of the Corporation registered pursuant to the
Securities Act of 1933, as amended, in which the gross proceeds to the
Corporation exceed Twenty Million Dollars ($20,000,000) and at an offering price
per share greater than or equal to (x) 200% of the then applicable Series C
Conversion Price if said offering occurs within twelve (12) months of the
Original Issuance Date, or (y) 250% of the then applicable Series C Conversion
Price if said offering occurs more than twelve (12) months after the Original
Issuance Date, and as the result of which shares of Common Stock are traded on
either the New York Stock Exchange, the American Stock Exchange or the NASDAQ
National Market System (a "Qualified Public Offering"), or (ii) upon the
-------------------------
approval (by vote or written consent) of holders of at least seventy-five
percent (75%) of the then outstanding shares of Series C Preferred (each such
event referred to in clauses (i) and (ii) is referred to herein as an "Event of
--------
Conversion"), all shares of Series C Preferred then outstanding shall, by virtue
- ----------
of and simultaneously with the occurrence of the Event of Conversion and without
any action on the part of the holder thereof, be deemed automatically converted
into such whole number of fully paid and nonassessable shares of Common Stock as
obtained by multiplying the Original Issuance Price by the number of shares of
Series C Preferred being converted, and dividing the product thereof by the
Series C Conversion Price (as last adjusted and then in effect) for the shares
of Series C Preferred being converted (such Series C Conversion Price being
subject to adjustment as set forth in Section 3(e) hereof). Subject to the last
sentence of Section 1(a)(i), above, the holder of any shares of Series C
Preferred converted into shares of Common Stock pursuant to this Section 3(b)
shall be entitled to payment of all accrued but unpaid dividends on such shares
of Series C Preferred up to and including the Conversion Date.
(c) Procedure for Conversion. Upon conversion of the shares of Series
------------------------
C Preferred pursuant to Section 3(a) hereof, the holder of any shares of Series
C Preferred shall deliver to the Corporation during regular business hours, at
the office of any transfer agent of the Corporation for the Series C Preferred,
or at such other place as may be designated by the
-35-
<PAGE>
Corporation, the certificate or certificates for the shares to be converted,
duly endorsed or assigned in blank or to the Corporation (if required by it),
accompanied by written notice stating the name or names (with address) in which
the certificate or certificates for the shares of Common Stock are to be issued.
As promptly as practicable thereafter, the Corporation shall issue and deliver
to or upon the written order of such holder, to the place designated by such
holder, a certificate or certificates for the number of full shares of Common
Stock to which such holder is entitled, a check or cash in respect of any
fractional interest in a share of Common Stock as provided in Section 3(d)
hereof and a check or cash in payment of all accrued but unpaid dividends, if
any, payable with respect to the shares of Series C Preferred so converted up to
and including the Conversion Date. The person in whose names the certificate or
certificates for Common Stock are to be issued shall be deemed to have become a
shareholder of record on the applicable Conversion Date unless the transfer
books of the Corporation are closed on that date, in which event he shall be
deemed to have become a shareholder of record on the next succeeding date on
which the transfer books are open, but the Series C Conversion Price for the
Series C Preferred shall be that in effect on the Conversion Date.
(d) Additional Conversion Provisions. The following additional terms
--------------------------------
shall apply upon any conversion of the Series C Preferred:
(i) No fractional shares of Common Stock or scrip shall be
issued upon conversion of shares of Series C Preferred. If more than one share
of Series C Preferred shall be surrendered for conversion at any one time by the
same holder, the number of full shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of
Series C Preferred so surrendered. In lieu of any fractional shares of Common
Stock which would otherwise be issuable upon conversion of any shares of Series
C Preferred the Corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to the then Current Market Price (as
defined below) of a share of Common Stock as of the date of conversion,
multiplied by such fractional interest. Fractional interests shall not be
entitled to dividends, and the holders of fractional interests shall not be
entitled to any rights as shareholders of the Corporation in respect of such
fractional interest.
(ii) For the purpose of any computation pursuant to this Section
3(d), the Current Market Price at any date of one share of Common Stock shall be
deemed to be the closing price as of the day before the day in question. If the
Common Stock is not traded in such manner that the closing price is readily
available, the Current Market Price shall be determined in good faith by the
Directors of the Corporation.
(e) Adjustments to Series C Conversion Price. The Series C Conversion
----------------------------------------
Price for the Series C Preferred shall be subject to adjustment from time to
time as follows:
(i) Stock Dividends, Split-Ups, Etc. If, at any time after the
-------------------------------
Original Issuance Date, the number of shares of Common Stock outstanding is
increased by a stock
-36-
<PAGE>
dividend payable in shares of Common Stock or by a subdivision or split-up of
shares of Common Stock, then, following the record date fixed for the
determination of holders of Common Stock entitled to receive such stock
dividend, subdivision or split-up, the Series C Conversion Price of the Series C
Preferred shall be appropriately decreased so that the number of shares of
Common Stock issuable on conversion of each share of Series C Preferred shall be
increased in proportion to such increase in outstanding shares.
(ii) Combinations. If, at any time after the Original Issuance
------------
Date, the number of shares of Common Stock outstanding is decreased by a
combination of the outstanding shares of Common Stock, then, following the
record date for such combination, the Series C Conversion Price shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion of each share of Series C Preferred shall be decreased in proportion
to such decrease in outstanding shares.
(iii) Reorganizations, Reclassifications, Etc. In case, at any
---------------------------------------
time after the Original Issuance Date, of any Capital Events (as defined below
in Section 3(k)) each share of Series C Preferred shall after such Capital Event
be (unless, in the case of a consolidation, merger, sale or other disposition,
payment shall have been made to the holders of all shares of Series C Preferred
of the full amount to which they respectively shall have been entitled pursuant
to Section 2 hereof) convertible into the kind and number of shares of stock or
other securities or property of the Corporation or of the corporation resulting
from such consolidation or surviving such merger or to which such properties and
asset shall have been sold or otherwise disposed to which the holder of the
number of shares of Common Stock deliverable (immediately prior to the time of
such Capital Event) upon conversion of such shares would have been entitled upon
such Capital Event. The provisions of this Section 3(e)(iii) shall similarly
apply to successive Capital Events.
(iv) Dilutive Issuances.
------------------
(1) If the Corporation shall at any time or from time to
time after the Original Issuance Date issue any shares of Common Stock other
than Excluded Stock (as defined below in Section 3(k)) without consideration or
for a consideration per share less than the Series C Conversion Price then in
effect (such issuance being referred to in this clause (iv) as a "Dilutive
--------
Issuance"), the Series C Conversion Price in effect immediately prior to such
- --------
Dilutive Issuance shall be reduced with effect from the first to occur of (A)
the record date for the issuance of the securities or (B) the date of original
issuance (as the case may be the "Issue Date"), so that it shall equal the price
----------
determined by multiplying the Series C Conversion Price by a fraction (i) the
numerator of which shall be (X) the number of shares of Common Stock outstanding
at the close of business on the day next preceding the Issue Date, plus (Y) the
number of shares of Common Stock which the aggregate consideration received by
the Corporation for the Dilutive Issuance would purchase at the Series C
Conversion Price, and (ii) the denominator of which shall be the number of
shares of Common Stock outstanding at the
-37-
<PAGE>
close of business on the Issue Date after giving effect to such Dilutive
Issuance.
(2) For the purposes of any adjustment of the Series C
Conversion Price pursuant to this clause (iv), the following provisions shall
apply:
(A) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
after deducting therefrom any discounts or commissions allowed or paid by the
Corporation for any underwriting or otherwise in connection with the issuance
and sale thereof.
(B) In the case of the issuance of 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 market value thereof (which shall be
the amount agreed to by the Corporation and the holders of at least sixty-six
and two-thirds percent (66 2/3%) of the shares of Series C Preferred),
irrespective of any accounting treatment.
(C) In the case of the issuance of (i) options to
purchase or rights to subscribe for Common Stock, (ii) securities by their terms
convertible into or exchangeable for Common Stock, or (iii) options to purchase
or rights to subscribe for such convertible or exchangeable securities:
(I) the shares of Common Stock deliverable
upon exercise of such options to purchase or rights to subscribe for Common
Stock shall be deemed to have been issued at the time such options or rights
were issued and for a consideration equal to the consideration (determined in
the manner provided in subclauses (A) and (B), above), if any, received by the
Corporation upon the issuance of such options or rights plus the minimum
purchase price provided in such options or rights for the Common Stock covered
thereby;
(II) the shares of Common Stock deliverable
upon conversion of or in exchange 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 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 additional consideration, if any, to be
received by the Corporation 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 subclauses (A) and (B), above);
(III) on any change in the number of shares or
exercise price of Common Stock deliverable upon exercise of any such options or
rights or upon conversion of or in exchange for such convertible or exchangeable
securities, other than a change
-38-
<PAGE>
resulting from the antidilution provisions thereof, the Series C Conversion
Price shall forthwith be readjusted to such Series C Conversion Price as would
have obtained had the adjustment made upon the issuance of such options, rights
or securities not converted prior to such change or options or rights related to
such securities not converted prior to such change been made upon the basis of
such change; and
(IV) on 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 Series C Conversion Price shall forthwith be readjusted to such
Series C Conversion Price as would have obtained had such options, rights,
securities or options or rights related to such securities not been issued.
(v) Special Adjustment. If at any time after the Original
------------------
Issuance Date, (1) the Corporation is subject to liquidation (including a deemed
liquidation), dissolution or winding up as contemplated by Section 2 herein, or
(2) the Corporation completes a public offering of any class or series of
capital stock of the Corporation other than a Qualified Public Offering, then
the Series C Conversion Price for the Series C Preferred shall be appropriately
decreased so that the number of shares of Common Stock issuable upon the
conversion of each share of Series C Preferred shall be increased such that the
percentage ownership of the Corporation, on an as-converted basis (and on a
diluted basis to the extent of any "at" or "in the money" options or warrants
that are vested at the time of such determination), by the holders of the Series
C Preferred before giving effect to the Common Stock issued or issuable (A)
pursuant to warrants granted on January 13, 1998 to Winfield Capital Corp. (or
any successor or replacement warrants issued with respect to said warrant), and
(B) pursuant to warrants issued to BT Alex. Brown Incorporated (and its
nominees) and any other broker or investment banker in connection with the
issuance of shares of Series C Preferred, shall be the same after giving effect
to the issuance or deemed issuance of such Common Stock.
(vi) All calculations under this paragraph (e) shall be made to
the nearest one-tenth (1/10) of a share or to the nearest one tenth (1/10) of a
cent, as the case may be.
(vii) In any case in which the provisions of this Section 3(e)
shall require that an adjustment shall become effective immediately after a
record date for an event the Corporation may defer until the occurrence of such
event (1) issuing to the holder of any share of Series C Preferred converted
after such record date and before the occurrence of such event the additional
shares of capital stock issuable upon such conversion by reason of the
adjustment required by such event over and above the shares of capital stock
issuable upon such conversion before giving effect to such adjustment and (2)
paying to such holder any amount in cash in lieu of a fractional share of
capital stock pursuant to Section 3(d) hereof; provided, however, that the
-------- -------
Corporation shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares, and
such cash, immediately upon the occurrence of the event requiring such
adjustment.
-39-
<PAGE>
(viii) The Corporation will not voluntarily, by amendment of its
Certificate of Incorporation, as amended, or through any reorganization,
transfer of assets, merger, dissolution, issuance or sale or 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 the Corporation, but
will at all times in good faith assist in the carrying out of all of the
provisions of this Section 3 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 C Preferred against impairment.
(f) Whenever the Series C Conversion Price of the Series C Preferred
shall be adjusted as provided in Section 3(e), the Corporation shall forthwith
file, at the office of the transfer agent for the Series C Preferred or at such
other place as may be designated by the Corporation, a statement showing in
detail the facts requiring such adjustment and the Series C Conversion Price of
the Series C Preferred that shall be in effect after such adjustment. The
Corporation shall also cause a copy of such statement to be sent by mail, first-
class certified mail, return receipt requested, postage prepaid, to each holder
of shares of any series of preferred stock in respect of which an adjustment to
the Series C Conversion Price was required to be made at his address appearing
on the Corporation's records. Where appropriate, such copy may be given in
advance and may be included as part of a notice required to be mailed under the
provisions of Section 4(g) hereof.
(g) If the Corporation shall propose to take any action of the types
described in clauses (i), (ii), (iii) or (iv) of Section 3(e), the Corporation
shall give notice to each holder of shares of Series C Preferred in the manner
set forth in Section 3(f) hereof, which notice shall specify the record date, if
any, with respect to any such action and the date on which such action is to
take place. Such notice shall also set forth such facts with respect thereto as
shall be reasonably necessary to indicate the effect of such action (to the
extent such effect may be known at the date of such notice) on the Series C
Conversion Price and the number, kind or series of shares or other securities or
property which shall be deliverable or purchasable upon the occurrence of such
action or deliverable upon conversion of shares of each such series of Series C
Preferred. In the case of any action which would require the fixing of a record
date, such notice shall be given at least twenty (20) days prior to the date so
fixed, and in case of all other actions, such notice shall be given at least
thirty (30) days prior to the taking of such proposed action. Failure to give
such notice, or any defect therein, shall not affect the legality or validity of
any such action.
(h) The Corporation shall pay all documentary, stamp or other
transaction taxes attributable to the issuance or delivery of shares of capital
stock of the Corporation upon conversion of shares of Series C Preferred;
provided, however, that the Corporation shall not be required to pay any taxes
- -----------------
which may be payable in respect of any transfer involved in the issuance of
delivery of any certificate for such shares in a name other than that of the
holder of
-40-
<PAGE>
the shares of Series C Preferred in respect of which such shares are being
issued.
(i) The Corporation shall reserve and at all times from and after such
date keep reserved, free from preemptive rights, out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Series C Preferred, sufficient shares to provide for
the conversion of all outstanding shares of Series C Preferred and shall take
all action as may be necessary to enable the Corporation lawfully to issue such
Common Stock upon the conversion of shares of Series C Preferred.
(j) All shares of Common Stock which may be issued in connection with
the conversion provisions set forth herein will, upon issuance by the
Corporation, be validly issued, fully paid and nonassessable with no personal
liability attaching to the ownership thereof and free from all taxes, liens or
charges with respect thereto.
(k) Definitions. As used herein, the following terms have the
-----------
following meanings:
(i) "Capital Events" means any capital reorganization,
--------------
recapitalization or any reclassification of the stock of the Corporation (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a stock dividend or subdivision, split-up
or combination of shares), or the consolidation or merger of the Corporation
with or into another person (other than a consolidation or merger in which the
Corporation is the continuing corporation and which does not result in any
change in the Common Stock), or the sale or other disposition of all or
substantially all of the properties and assets of the Corporation to any person
or third party.
(ii) "Excluded Stock" means shares of Common Stock issued by the
--------------
Corporation: (A) as a stock dividend payable in shares of Common Stock or upon
any subdivision or split-up of the outstanding shares of Common Stock, (B) upon
conversion of the shares of Series A Preferred, Series B Preferred or Series C
Preferred at any time outstanding, (C) to officers, employees or directors of,
or consultants to, the Corporation (whether as an issuance of Common Stock,
options to purchase or rights to subscribe for such Common Stock, or options to
purchase or rights to subscribe for such convertible or exchangeable
securities), in each case approved by the Board of Directors of the
Corporation; provided, however, that the maximum number of shares of Common
-----------------
Stock issued or issuable to officers, employees or directors of, or consultants
to, the Corporation to which this clause (C) shall apply shall not exceed the
number of shares issuable under the incentive stock option plans of the
Corporation in effect as of the Original Issuance Date or as may be approved
from time to time by the Corporation and the holders of the Series C Preferred
in accordance with Section 6(c)(ix) hereof (including any Common Stock issued
pursuant to the exercise of any such options), and (D) pursuant to any options
(other than those described in (C), above), warrants or other rights outstanding
on the Original Issuance Date.
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<PAGE>
(iii) "Original Issuance Date" means the date of original
----------------------
issuance by the Corporation of the first share of Series C Preferred.
(iv) "Original Issuance Price" means Eight Dollars ($8.00),
-----------------------
the price of the first share of Series C Preferred issued by the Corporation.
(v) "Person" means any corporation, general or limited
------
partnership, limited liability partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other entity.
(vi) "Subsidiary" means with respect to any Person (the
---------------
"Owner"), any corporation or other Person of which securities or other interests
- -------
having the power to elect a majority of that corporation's or other Person's
board of directors or similar governing body, or otherwise having the power to
direct the business and policies of that corporation or other Person (other than
securities or other interests having such power only upon the happening of a
contingency that has not occurred), are held by the Owner or one or more of its
Subsidiaries; when used without reference to a particular Person, "Subsidiary"
means a Subsidiary of the Corporation.
4. Status of Converted Stock. If any shares of Series C Preferred shall
-------------------------
be converted pursuant to Section 3 hereof or redeemed pursuant to Section 5 or
otherwise acquired by the Corporation, the shares so converted or redeemed or
acquired shall be canceled and shall not be reissuable by the Corporation.
5. Redemption.
----------
(a) Redemption Request. From time to time on or after July 28, 2002,
------------------
the holders of a majority of the shares of Series C Preferred may request
redemption of all (but not less than all) of the outstanding shares of Series C
Preferred (the "Redemption Shares"), by giving written notice (a "Redemption
----------------- ----------
Notice") to the Corporation (the date upon which such notice is given to the
- ------
Corporation is referred to herein as a "Redemption Notice Date"). Within five
----------------------
(5) days after the giving of such Redemption Notice, the Corporation shall send
a copy of the Redemption Notice to each holder of shares of Series C Preferred.
The Corporation shall redeem all of the issued and outstanding shares of Series
C Preferred in accordance with this Section 5 and the holders of the Redemption
Shares (the "Redeeming Stockholders") shall sell and deliver their Redemption
-----------------------
Shares to the Corporation in accordance with this Section 5. Upon the giving of
the Redemption Notice, each Redemption Share shall no longer be subject to
conversion under Section 3 herein. Each Redemption Share shall otherwise be
deemed to be outstanding for all other purposes of this Certificate of
Designation (and shall be entitled to all of the rights and privileges of a
share of Series C Preferred) until such time as the Redemption Price is actually
paid to the holder thereof.
-42-
<PAGE>
(b) Redemption Terms and Price.
--------------------------
(i) Subject to Section 5(c) hereof, the Redemption Shares shall
be redeemed from the Redeeming Stockholders ratably in proportion to their
ownership of the Redemption Shares, on the following dates:
(A) one-third of the Redemption Shares shall be redeemed
by the Corporation on a date selected by the Corporation that is not later than
eight (8) months after the Redemption Notice Date (the "First Redemption Date");
---------------------
and
(B) two-thirds of the Redemption Shares shall be redeemed
by the Corporation on the one (1) year anniversary of the First Redemption Date,
or if such date is not a business day then on the next business day (the "Second
------
Redemption Date").
- ---------------
The First Redemption Date and the Second Redemption Date are at times singularly
referred to herein as a "Redemption Date" and collectively referred to herein as
---------------
the "Redemption Dates."
-----------------
(ii) The redemption price for each of the Redemption Shares (the
"Redemption Price") shall be equal to the greater of the Original Issuance Price
- -----------------
(plus all accrued and unpaid dividends), or the fair market value thereof (plus
all accrued and unpaid dividends), determined as follows:
(A) If as of the Redemption Notice Date any Common Stock
is registered pursuant to the Securities Act of 1933, as amended, and such
shares of Common Stock are traded on either the New York Stock Exchange, the
American Stock Exchange or any NASDAQ National Market System ("Publicly
--------
Traded"), then the fair market value for each of the Redemption Shares shall be
- ------
equal to the closing price per share of the Common Stock as reported for the
business day immediately prior to the Redemption Notice Date, multiplied by the
number of shares of Common Stock that would have been issuable upon the
conversion of each of the Redemption Shares as of the Redemption Notice Date; or
(B) If as of the Redemption Notice Date no Common Stock is
Publicly Traded, then the fair market value for each of the Redemption Shares
shall be equal to a fraction, (x) the numerator of which shall be the fair
market value of the Corporation (determined by appraisal in accordance with this
Section 5(b)(ii)(B)), and (y) the denominator of which shall be the total number
of issued and outstanding shares of each class or series of stock of the
Corporation as of the Redemption Notice Date, determined on an as-converted to
Common Stock basis (and on a diluted basis to the extent of any "at" or "in the
money" options or warrants that are vested at the time of such determination);
the quotient of which shall be multiplied by the number of shares of Common
Stock that would have been issuable upon the conversion of each of the
Redemption Shares as of the Redemption Notice Date.
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<PAGE>
(1) If it shall be necessary to determine the fair market
value of each of the Redemption Shares by appraisal, then within thirty (30)
days after the Redemption Notice Date, the Corporation shall engage, at its sole
cost and expense, a reputable independent investment banking firm reasonably
acceptable to the holders of a majority of the Series C Preferred that shall
determine, as of the Redemption Notice Date, the fair market value of the
Corporation as a whole, on a going-concern basis (and without any minority or
lack of liquidity discounts), using customary and appropriate valuation methods.
As soon as is reasonably practicable (and in any event within thirty (30) days
after such engagement), such investment banking firm shall deliver to the
Corporation a written report as to the fair market value of the Corporation (the
"First Report"). The Corporation shall deliver a copy of the First Report to
------------
each Redeeming Stockholder within five (5) days after its receipt by the
Corporation.
(2) The valuation set forth in the First Report shall be
conclusive and binding on the Corporation and the holders of the Series C
Preferred unless, within ten (10) days after its receipt by the Redeeming
Stockholders, Redeeming Stockholders representing ownership of at least sixty-
six and two-thirds percent (66 2/3%) of the Redemption Shares notify the
Corporation in writing that the Redeeming Stockholders contest the valuation set
forth in the First Report. If the Redeeming Stockholders so notify the
Corporation, the Redeeming Stockholders shall promptly engage a reputable
investment banking firm, at their sole cost and expense, to render a second
written report as to the fair market value, as of the Redemption Notice Date, of
the Corporation as a whole, on a going-concern basis (and without any minority
or lack of liquidity discounts), using customary and appropriate valuation
methods (the "Second Report"). The Redeeming Stockholders shall deliver a copy
-------------
of the Second Report to the Corporation within five (5) days after its receipt
by the Redeeming Stockholders.
(3) The valuation set forth in the Second Report shall be
conclusive and binding on the Corporation and the holders of the Series C
Preferred unless, within ten (10) days after its receipt by the Corporation, the
Corporation shall notify the Redeeming Stockholders in writing that the
Corporation contests the valuation set forth in the Second Report. If the
Corporation so notifies the Redeeming Stockholders that it contests the
valuation of the Corporation set forth in the Second Report, then (x) if the
Corporation and Redeeming Stockholders representing ownership of at least sixty-
six and two-thirds percent (66 2/3%) of the Redemption Shares so agree, the fair
market value of the Corporation shall be deemed to be equal to the arithmetic
mean of the valuations for the Corporation set forth in the First Report and the
Second Report, or (y) if the Corporation and the Redeeming Stockholders do not
so agree, the matter shall be submitted to binding arbitration in accordance
with the procedures set forth in Section 9 herein. The arbitrator's discretion
with respect to these matters shall be limited to selecting either the valuation
for the Corporation set forth in the First Report (in which case the costs of
arbitration shall be borne by the Redeeming Stockholders, in proportion to their
ownership of the Redemption Shares) or the valuation for the Corporation set
forth in the Second Report (in which case the costs and expenses of arbitration
shall be borne by
-44-
<PAGE>
the Corporation), whichever valuation the arbitrator or arbitrators may
determine is closer to the actual fair market value of the Corporation. The
results of such arbitration shall be binding and conclusive on the Corporation,
the Redeeming Stockholders, and on all other persons and entities.
(4) If the fair market value of the Corporation is
determined pursuant to this Section 5(b)(ii)(B), then such determination shall
under all circumstances occur within one hundred eighty days (180) after the
Redemption Notice Date.
(c) Insufficient Funds. If the Corporation's Board of Directors
------------------
reasonably determines that on the applicable Redemption Date the Corporation
does not have sufficient funds legally available to redeem all of the Redemption
Shares for which redemption is required pursuant to Section 5(a) herein, then
the Corporation shall to the maximum lawful extent redeem Redemption Shares from
the Redeeming Stockholders, on a pro rata basis in accordance with their
ownership thereof, and the Corporation shall redeem the remaining Redemption
Shares on the same basis, as soon as sufficient funds become legally available
therefor from time to time thereafter.
(d) Mechanics of Redemption. Each Redeeming Stockholder shall
-----------------------
surrender the certificate or certificates representing his Redemption Shares to
be redeemed on each Redemption Date to the Corporation, at the Corporation's
principal executive office, and thereupon the Corporation will pay the
Redemption Price for such Redemption Shares, as follows:
(i) on the First Redemption Date, the entire Redemption Price
for the Redemption Shares to be redeemed shall be paid in immediately available
funds, by wire transfer to an account designated by the Redeeming Stockholder,
or by certified or bank check payable to the Redeeming Stockholder ("Immediately
-----------
Available Funds");
- ---------------
(ii) on the Second Redemption Date, fifty percent (50%) of the
Redemption Price for the Redemption Shares to be redeemed shall be paid in
Immediately Available Funds and the remaining fifty percent (50%) of the
Redemption Price for the Redemption Shares to be redeemed shall be paid by the
execution and delivery by the Corporation of a promissory note, in a form
reasonably satisfactory to the Redeeming Stockholder, the outstanding principal
balance of which (together with all accrued and unpaid interest thereon) shall
be payable in full (subject to prepayment without penalty and to acceleration on
customary terms, including upon the bankruptcy or insolvency of the Corporation)
on the one (1) year anniversary of the Second Redemption Date, bearing interest
at the per annum rate equal to the "Prime Rate" of interest as published in the
Eastern edition of the Wall Street Journal on the Redemption Notice Date or the
-------------------
next date of publication, and with installments of interest to be due and
payable, in arrears, on the first day of each calendar month.
Each stock certificate surrendered for redemption shall be canceled and retired.
If the number of
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<PAGE>
Redemption Shares represented by any certificate surrendered in respect of any
such redemption exceeds the number of Redemption Shares to be redeemed from the
Redeeming Stockholder thereof, the Corporation shall issue and deliver to such
Redeeming Stockholder a new certificate representing the unredeemed balance of
such Redemption Shares.
6. Voting Rights.
-------------
(a) General. Except as otherwise provided below, on all matters
-------
submitted to a vote of the holders of shares of Common Stock, the holder of each
share of Series C Preferred shall have the right to one vote for each Common
Share into which such Series C Preferred could then be converted (with any
fractional share determined on an aggregate conversion basis being rounded to
the nearest whole share), 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 such shares of Common Stock, and shall be entitled, notwithstanding
any provision hereof, to notice of any shareholders' meeting in accordance with
the by-laws of the Corporation, and, except as expressly provided in Section
6(b) hereof, shall be entitled to vote, together with holders of shares of
Common Stock with respect to any question upon which holders of shares of Common
Stock have the right to vote.
(b) Election of Directors. Except as may be otherwise approved by
---------------------
vote or by the written consent of the holders of at least sixty-six and two-
thirds percent (66 2/3%) of the shares of Series C Preferred then outstanding,
the Board of Directors shall consist of up to 7 members. The holders of the
Series C Preferred, voting as a separate class, shall have the right to elect
two (2) directors. Except as may otherwise be provided by law or in the
Certificate of Incorporation of the Corporation (including the Certificate of
Designation for the Series A Preferred), the holders of the Common Stock shall
have the right to elect the remaining members of the Board of Directors and the
Series C Preferred shall not be entitled to vote in the election of the
remaining members of the Board of Directors. Each director shall be elected at
the annual meeting of shareholders and shall serve until his successor is
elected and qualified or until his earlier resignation or removal. Any director
who shall have been elected by the holders of Series C Preferred may be removed
during his term of office, either for or without cause, by and only by, the
affirmative vote of the holders of at least sixty-six and two-thirds percent (66
2/3%) of the shares of Series C Preferred then outstanding, given at a special
meeting of such shareholders duly called for that purpose, and any vacancy
thereby created may be filled by the holders of the Series C Preferred
represented at that meeting.
(c) Protective Provisions. So long as twenty-five percent (25%) or
---------------------
more of the shares of Series C Preferred are outstanding, the Corporation shall
not, and shall not attempt to, without first obtaining the approval (by vote or
written consent) of the holders of at least sixty-six and two-thirds percent (66
2/3%) of the then outstanding shares of Series C Preferred, voting as a separate
class:
-46-
<PAGE>
(i) authorize any additional shares of Series C Preferred, or
authorize and issue any shares of, (a) any class or series of equity security
having superior rights to the Series C Preferred as to dividends, redemptions or
as to payment upon liquidation, dissolution or a winding up of the Corporation,
or otherwise, or (b) any notes or debt securities convertible into or
exchangeable for any equity securities or containing profit participation
features;
(ii) redeem or repurchase outstanding Common Stock in excess of
an aggregate of 75,000 shares, provided that the Corporation may redeem shares
of Common Stock from persons having been granted and exercised stock options
pursuant to the Corporation's incentive stock plans as in effect as of the
Original Issuance Date, or as may be approved from time to time by the
Corporation and by the holders of the Series C Preferred pursuant to Section
6(c)(ix) below;
(iii) enter into any agreement that would restrict the
Corporation's ability to perform its obligations under any agreement to which
the Corporation is a party concerning the Corporation's original issuance of any
shares of the Series C Preferred (including the Certificate of Incorporation and
this Certificate of Designation);
(iv) amend the Certificate of Incorporation (including any
existing or new Certificate of Designation) or By-Laws of the Corporation in any
manner that adversely affects the powers, rights, privileges or restrictions or
relative preferences of the Series C Preferred or the holders thereof as a
class, or increase the powers, preferences, rights, privileges or restrictions
of any other class or series of preferred stock unless the Series C Preferred is
treated in the same manner;
(v) sell, transfer, convey or lease greater than twenty-five
percent (25%) of the assets of the Corporation in one or more of a series of
related transactions, except for the sale of inventory in the ordinary course of
the Corporation's business;
(vi) issue additional equity securities of any class or series
to the employees, officers or directors of the Corporation, except for such
equity securities as may be issuable upon the exercise of options or warrants
outstanding as of the Original Issuance Date (or as may be approved from time to
time by the Corporation and the holders of the Series C Preferred in accordance
with this Section 6(c)); provided that any such equity securities, including any
options or warrants for equity securities of the Corporation, shall be granted
at no less than the fair market value for such equity securities (which shall be
the amount agreed to by the Corporation and the holders of at least sixty-six
and two-thirds percent (66 2/3%) of the outstanding shares of Series C
Preferred);
(vii) issue any equity securities of any class or series for a
price less than fair market value (which shall be the amount agreed to by the
Corporation and the holders of at least sixty-six and two-thirds percent (66
2/3%) of the outstanding shares of Series C
-47-
<PAGE>
Preferred) of the Corporation, except as may be required pursuant to contractual
commitments of the Corporation existing as of the Original Issuance Date;
(viii) enter into any transaction or series of transactions or any
agreement or other arrangement, including, without limitation, any loan, with or
to any officer or director (or any family member or person affiliated with any
officer or director) or other affiliate (excluding any Subsidiary of the
Corporation) of the Corporation in excess of $100,000, individually, or
$250,000, in the aggregate, during any calendar year, except as may be required
pursuant to contractual commitments of the Corporation existing as of the
Original Issuance Date (except that such limitations shall not be applicable to
any employment or other compensatory arrangements on reasonable arms' length
terms (including, without limitation, the granting of stock options under any
stock option plan in effect as of the Original Issuance Date, or as may be
approved from time to time by the Corporation and the holders of the Series C
Preferred in accordance with Section 6(c)(ix) below), as may be approved by the
Board of Directors of the Corporation);
(ix) adopt any stock option plans or increase the number of
shares available or reserved for issuance under any stock option plan or related
plan in effect as of the Original Issuance Date;
(x) engage in any transaction which would impair or reduce the
rights of the holders of shares of the Series C Preferred as a class (except
that the Corporation may effect a reverse-split of its Common Stock without the
consent of the holders of shares of the Series C Preferred);
(xi) merge or consolidate with any Person or permit any
Subsidiary to merge or consolidate with any Person (other than a Subsidiary that
is wholly-owned by the Corporation, directly or indirectly);
(xii) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including, without limitation, any
reorganization into a limited liability company, a partnership or any other non-
corporate entity which is treated as a partnership for federal income tax
purposes); or
(xiii) issue any dividends on any class or series of capital stock
of the Corporation (other than the Series C Preferred).
7. Preemptive Rights.
-----------------
(a) Each holder of Series C Preferred shall have a right to purchase
its aggregate pro rata portion, based on the ratio of the number of shares of
Common Stock and Series C Preferred held by such stockholder on an as-converted
basis to the total number of
-48-
<PAGE>
shares of Common Stock, Series A Preferred, Series B Preferred and Series C
Preferred on an as-converted basis held by all stockholders, of any issuance of
new common stock, preferred stock or securities convertible into any class of
capital stock of the Corporation ("New Equity"). This right shall be
----------
transferable and terminate if unexercised within twenty (20) days after receipt
of the Preemption Notice (as defined below).
(b) If the Corporation proposes to undertake an issuance of New
Equity, it shall give each holder of Series C Preferred written notice (a
"Preemption Notice") of its intention, describing the type of New Equity, and
- ------------------
the price and the general terms upon which the Corporation proposes to issue the
same. Each holder of Series C Preferred shall have twenty (20) days after
receipt of the Preemption Notice to agree to purchase all or any portion of such
pro rata share of such New Equity for the price and upon the terms specified in
the Preemption Notice by giving written notice to the Corporation and stating
therein the quantity (including amounts, if any, such holder of Series C
Preferred would be willing to purchase over and above such holder of Series C
Preferred's pro rata portion) of New Equity purchased. If a holder of Series C
Preferred does not purchase any or all of its pro rata portion of New Equity,
the remaining holders of Series C Preferred shall have the right to purchase
such unpurchased New Equity or respective pro rata portion until all of the New
Equity is purchased or until no other holder of Series C Preferred desires to
purchase any more New Equity, provided that a written notice to such effect is
given by such holders to the Corporation within such twenty (20) day period.
(c) The phrase "New Equity" does not include (i) securities issued
upon conversion of shares of Series A Preferred, Series B Preferred, or Series C
Preferred into shares of Common Stock, (ii) securities issued by the Corporation
as consideration pursuant to the acquisition of another corporation by the
Corporation by merger, purchase of all or substantially all of the assets or
other reorganization, (iii) shares of Common Stock issued in connection with any
stock split, stock dividend or recapitalization of the Corporation, (iv) shares
of Common Stock issued to employees, consultants, or directors of the
Corporation upon the exercise of stock options pursuant to incentive stock
plans of the Corporation as in effect as of the Original Issuance Date, or as
may be approved from time to time by the Corporation and by the holders of the
Series C Preferred pursuant to Section 6(c)(ix) hereof, (v) shares of Common
Stock issued upon the exercise of any warrants outstanding as of the Original
Issuance Date, or (vi) securities issued for services in arms' length
transactions to parties other than employees, officers and directors of the
Corporation.
8. Notice. Any notice required or permitted under this Certificate of
------
Designation shall be given in writing and shall be deemed effectively given only
if (i) delivered personally (effective upon delivery), (ii) mailed by registered
or certified mail, postage prepaid (effective three (3) days after dispatch), or
(iii) sent by a reputable, established courier service that guarantees next
business day delivery (effective the next business day) and addressed as
follows: in the case of the Corporation, its principal office, and in the case
of a holder of shares of Series
-49-
<PAGE>
C Preferred, the address of the holder as reflected in the stock records of the
Corporation.
9. Arbitration.
-----------
(a) In the event that the holders of at least sixty-six and two-thirds
percent (66 2/3%) of the outstanding shares of Series C Preferred fail either to
accept or reject the fair market value of any property as determined by the
Corporation for purposes of this Certificate of Designation within thirty (30)
days after the giving of any notice to the holders of the Series C Preferred by
the Corporation setting forth the Corporation's fair market value determination
with respect to such property for purposes of this Certificate of Designation,
the holders of the Series C Preferred shall be deemed to have accepted the
Corporation's fair market value determination with respect to such property as
set forth in such notice.
(b) In the event that the Corporation and the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the outstanding Series C Preferred
(the "Objecting Stockholders") fail to agree upon the fair market value of any
----------------------
property as may be required from time to time by this Certificate of
Designation, then in each such case such determination shall be made by an
arbitration proceeding before a single independent arbitrator. Such arbitrator
shall be appointed by the Corporation, subject to the approval of the Objecting
Stockholders. The Corporation shall give written notice designating the
arbitrator to each of the holders of shares of Series C Preferred. Upon such
written notice from the Corporation, the Objecting Stockholders shall have ten
(10) days to deliver written notice of any objection that they may have to the
arbitrator selected by the Corporation and designating an alternative selection
for an independent arbitrator, otherwise the Objecting Stockholders shall be
deemed to have accepted the arbitrator appointed by the Corporation. If the
parties fail to appoint a single arbitrator within ten (10) days after such
notice by the Objecting Stockholders, then such fair market value determination
shall be made by an arbitration proceeding before three (3) arbitrators. The
arbitrator originally selected by the Corporation shall be appointed the first
such arbitrator. The arbitrator next selected by the Objecting Stockholders
shall be appointed the second such arbitrator. The two arbitrators so
appointed shall appoint a third independent arbitrator within five (5) days
after the expiration of the time period for the appointment of a single
arbitrator by the Corporation and the Objecting Stockholders. The single
arbitrator or the three arbitrators thus appointed shall resolve the matter in
dispute within thirty (30) days after the appointment of the final arbitrator.
All Arbitration proceedings shall be held in Boston, Massachusetts in accordance
with the rules of the American Arbitration Association ("AAA"). Any decision or
---
award made by the arbitrator(s) will be binding upon the Corporation and the
Objecting Stockholders, no appeal may be taken from such decision or award, and
judgment thereon may be entered in any court of competent jurisdiction. Except
as otherwise provided in Section 5(b)(ii)(B)(3), the costs and expenses of any
arbitration proceeding pursuant to this Section 9 shall be borne by the
Corporation.
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<PAGE>
Exhibit 3.4
AMENDED AND RESTATED BY-LAWS
----------------------------
OF
CYBERIAN OUTPOST, INC.
(a Connecticut corporation)
---------
ARTICLE I
---------
SHAREHOLDERS
------------
1. CERTIFICATES REPRESENTING SHARES. Share certificates may be under
seal, or facsimile seal, of the corporation and shall be signed by the President
or a Vice President and by the Secretary or an Assistant Secretary or the
Treasurer or an Assistant Treasurer or by any two officers of the corporation so
authorized to sign by a resolution of the Board of Directors, except that such
signatures may be facsimile if such certificate is signed by a transfer agent,
or a transfer clerk acting on behalf of such corporation or registrar. If any
officer who has signed or whose facsimile signature has been used on any such
certificate ceases to serve the corporation as an officer in the capacity as to
which his signature was so used before such certificate has been delivered by
such corporation, the certificate may, nevertheless, be adopted by the
corporation and be issued and delivered as though such officer had not ceased to
hold such office. In addition to any other statements which may be required by
law, each certificate representing shares shall set forth upon the face thereof,
as at the time of the issue, the name of the corporation; a statement that the
corporation is organized under the laws of Connecticut; the name of the person
to whom issued, or that the same is issued to bearer; the number, class and
designation of series, if any, of shares which such certificate represents; and
the par value of each share represented by such certificate or a statement that
the shares are without par value.
No certificate shall be issued for any share until such share is fully
paid.
The corporation may issue a new certificate for shares in place of any
certificate theretofore issued by it, alleged to have been lost or destroyed,
and the Board of Directors may require the owner of any lost or destroyed
certificate, or his legal representative, to give the corporation a bond
sufficient to indemnify the corporation against any claim that may be made
against it on account of the alleged loss or destruction of any such certificate
or the issuance of any such new certificate.
2. SHARE TRANSFERS. Upon compliance with provisions restricting the
----- ---------
transferability of shares, if any, transfers of shares of the corporation shall
be made only on the share record of the corporation by the registered holder
thereof, or by his attorney thereunto authorized by power of attorney duly
executed and filed with the Secretary of the corporation or with a transfer
agent or a registrar, if any, and on surrender of the certificate or
certificates for such shares properly endorsed and the payment of all taxes due
thereon.
-1-
<PAGE>
3. RECORD DATE FOR SHAREHOLDERS. For the purpose of determining
------ ---- --- ------------
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or entitled to receive payment of any distribution, or
for any other proper purpose, the Board of Directors may provide that the stock
transfer books shall be closed for a stated period but such period shall not
exceed, in any case, seventy days. If the stock transfer books are closed for
the purpose of determining shareholders entitled to notice of or to vote at a
meeting of shareholders, such books shall be closed for at least ten full days
immediately preceding the date of such meeting. In lieu of closing the stock
transfer books, the Board of Directors by resolution may fix a date as the
record date for any such determination of shareholders, such date in any case to
be not earlier than the date such action is taken by the Board of Directors and
not more than seventy days, and, in case of a meeting of shareholders, not less
than ten full days, immediately preceding the date on which the particular
event, requiring such determination of shareholders, is to occur. If the stock
transfer books are not closed and no record date is fixed for the determination
of shareholders entitled to notice of or to vote at a meeting or of shareholders
entitled to receive payment of a distribution, the date on which notice of the
meeting is mailed or the date on which the resolution of the Board of Directors
declaring such distribution is adopted, as the case may be, shall be the record
date for such determination of shareholders. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof.
4. MEANING OF CERTAIN TERMS. As used herein in respect of the right
------- -- ------- -----
to notice of a meeting of shareholders or a waiver thereof or to participate or
vote thereat or to consent or dissent in writing in lieu of a meeting, as the
case may be, the term "share" or "shares" or "shareholder" or "shareholders"
refers to an outstanding share or shares and to a holder or holders of record of
outstanding shares when the corporation is authorized to issue only one class of
shares, and said reference is also intended to include any outstanding share or
shares and any holder or holders of record of outstanding shares of any class
upon which or upon whom the Certificate of Incorporation confers such rights
where there are two or more classes or series of shares or upon which or upon
whom the Connecticut Business Corporation Act confers such rights
notwithstanding that the Certificate of Incorporation may provide for more than
one class or series of shares, one or more of which are limited or denied such
rights thereunder. Unless the Certificate of Incorporation or the subscription
for shares otherwise provides, a subscriber for shares shall be deemed to be a
shareholder within the meaning of this section.
5. SHAREHOLDER MEETINGS.
----------- --------
- TIME. The annual meeting shall be held at the time fixed, from time
----
to time, by the directors. If, for any reason, the directors shall fail to fix
the time for an annual meeting, such meeting shall be held on the second Tuesday
in February, or if such day is a legal holiday, then on the next following
business day. A special meeting shall be held on the date fixed by the
directors.
- PLACE. Annual meetings and special meetings shall be held at such
-----
place, within or without the State of Connecticut, as the directors may, from
time to time, fix. Whenever the directors shall fail to fix such place, the
meeting shall be held at the principal office of the corporation in the State of
Connecticut.
-2-
<PAGE>
- CALL. Annual meetings may be called by the directors or by the
----
President or by any officer instructed by the directors to call the meeting.
Special meetings may be called in like manner. Upon the written request of the
holders of at least ten percent (10%) of the outstanding shares, the President
shall call a special shareholders' meeting for the purposes specified in such
request and cause notice thereof to be given.
- NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER OF NOTICE. A notice in
------ -- ------ -- ------------ ------ -- ------
writing of each meeting of shareholders shall be given by or at the direction of
the President or Secretary or the officer or person calling the meeting to each
shareholder by leaving such notice with him or at his residence or usual place
of business, or by mailing a copy thereof addressed to him at his last-known
post-office address as last shown on the stock records of the corporation,
postage prepaid, not less than ten days nor more than fifty days before the date
of the meeting. Each notice of a meeting of shareholders shall state the place,
day and hour of the meeting. The general purpose or purposes for which a
special meeting is called shall be stated in the notice thereof, and no other
business shall be transacted at the meeting. Any matter relating to the affairs
of the corporation may be brought up for action at an annual meeting of
shareholders, whether or not stated in the notice of the meeting, provided,
unless stated in the notice of the meeting, (1) no By-Law may be brought up for
adoption, amendment or repeal, and (2) no matter, other than election of
directors, may be brought up which expressly requires the vote of shareholders
pursuant to the Connecticut Business Corporation Act. Notice of a meeting need
not be given to any shareholder who submits a signed waiver of notice before or
after the meeting. The attendance of a shareholder at a meeting without
protesting prior to the conclusion of the meeting the lack of notice of such
meeting shall constitute a waiver of notice by him. The provisions of this
paragraph may not be amended, modified or repealed without the affirmative vote
of the holders of a majority of the voting power of the shares.
- VOTING LIST. The Secretary or other corporate officer having
------ ----
responsibility for the share transfer books for shares of the corporation shall
make, or cause to be made, at least five days before each meeting of
shareholders of which at least seven days' notice is given, a complete list or
other equivalent record of the shareholders entitled to vote at such meeting,
arranged in alphabetical order, with the address of, and the number and class of
shares held by, each. Such list or other equivalent record shall, for a period
of five days prior to such meeting, be kept on file at the principal office of
the corporation in Connecticut or at the office or place of business of a
transfer agent in Connecticut and shall be subject to inspection by any
shareholder during usual business hours for any proper purpose.
- CONDUCT OF MEETING. Meetings of the shareholders shall be presided
------- -- -------
over by one of the following officers in the order of seniority and if present
and acting - the Chairman of the Board, if any, the Vice-Chairman of the Board,
if any, the President, a Vice-President, or, if none of the foregoing is in
office and present and acting, by a chairman to be chosen by the shareholders.
The Secretary of the corporation, or in his absence, an Assistant Secretary,
shall act as secretary of every meeting, but if neither the Secretary nor an
Assistant Secretary is present and acting the Chairman of the meeting shall
appoint a secretary of the meeting.
- PROXY REPRESENTATION. Every shareholder may authorize another person
----- --------------
or persons to act for him by proxy in all matters in which a shareholder is
entitled to participate, whether by waiving notice of any meeting, voting or
participating at a meeting, furnishing releases, or expressing consent or
dissent without a meeting. A proxy shall not be valid after
-3-
<PAGE>
eleven months from its date of execution unless it specifies the length of time
for which it is to continue in force or limits its use to a particular meeting
not yet held. Every proxy must be in writing and executed by the shareholder. A
photographic or similar reproduction of a proxy or a telegram, cablegram,
wireless or similar transmission of a proxy sent by such shareholder shall be a
sufficient writing.
- INSPECTORS - APPOINTMENT. The directors, in advance of any meeting,
---------- -----------
may, but need not, appoint one or more inspectors to act at the meeting or any
adjournment thereof. If an inspector or inspectors are not so appointed by the
directors or shall fail to qualify, if appointed, the person presiding at the
shareholders' meeting may, and on the request of any shareholder entitled to
vote thereat, shall, make such appointment. In case any person appointed as
inspector fails to appear or act, the vacancy may be filled by appointment made
by the directors in advance of the meeting or at the meeting by the person
presiding at the meeting. Each inspector appointed, if any, before entering
upon the discharge of his duties, shall take and sign an oath faithfully to
execute the duties of inspector at such meeting with strict impartiality and
according to the best of his ability. No person shall be elected a director at
a meeting at which he has served as an inspector. The inspectors, if any, shall
determine the number of shares outstanding and the voting power of each, the
shares represented at the meeting, the existence of a quorum, the validity and
effect of proxies, and shall receive votes or consents, hear and determine all
challenges and questions arising in connection with the right to vote, count and
tabulate all votes or consents, determine the result, and do such acts as are
proper to conduct the election or vote with fairness to all shareholders. If
there are three or more inspectors, the act of a majority shall govern. On
request of the person presiding at the meeting or any shareholder entitled to
vote thereat, the inspectors shall make a report in writing of any challenge,
question or matter determined by them. Any report made by them shall be prima
facie evidence of the facts therein stated, and such report shall be filed with
the minutes of the meeting.
- QUORUM. The holders of a majority of the voting power shall
------
constitute a quorum at a meeting of shareholders. The holders of a majority of
the voting power represented at a meeting may adjourn such meeting from time to
time.
- VOTING. Each share shall entitle the holder thereof to one vote or
------
such greater number as may be determined in accordance with the Certificate of
Incorporation. Except as may otherwise be provided by the Connecticut Business
Corporation Act, the Certificate of Incorporation, or these By-Laws, any action
shall be authorized by a majority of the voting power of the shareholders.
6. SHAREHOLDER ACTION WITHOUT MEETINGS. Any action, including an
----------- ------ ------- --------
election of directors, required or permitted to be taken at a meeting of
shareholders may be taken without a meeting if all the shareholders consent
thereto in writing.
Except in the election of directors, any action required or permitted
to be taken at a meeting of shareholders may be taken without a meeting upon the
written consent of less than all the shareholders entitled to vote thereon if
the shareholders who so consent would be entitled to cast at least the minimum
number of votes which would be required to take such action at a meeting of
shareholders. If such action by written consent of less than all shareholders
is proposed to be taken, as herein authorized, notice in writing of such
proposed action shall be given to each shareholder of the corporation. Such
notice shall be given in the manner of giving
-4-
<PAGE>
notice of a meeting of shareholders not less than twenty days and not more than
fifty days before the date that any such consent is to become effective.
7. FINANCIAL STATEMENT. At intervals of not more than twelve months,
--------- ---------
the corporation shall prepare a balance sheet showing the financial condition of
the corporation as of a date not more than four months prior thereto and a
profit and loss statement respecting its operation for the twelve months
preceding such date. Within thirty days after preparation, the corporation
shall mail a copy of such balance sheet and profit and loss statement to each
shareholder.
ARTICLE II
----------
GOVERNING BOARD
--------- -----
1. FUNCTIONS, DEFINITIONS AND COMPENSATION. The business, property,
---------- ----------- --- ------------
and affairs of the corporation shall be managed by or under the direction of its
Board of Directors. The use of the phrase "entire board" herein refers to the
total number of directors which the corporation would have if there were no
vacancies. The Board of Directors shall have authority to establish reasonable
allowance for expenses actually incurred in connection with their duties.
2. QUALIFICATION AND NUMBER. A director need not be a shareholder, a
------------- --- ------
citizen of the United States, or a resident of the State of Connecticut. The
number of directors of the corporation shall be not fewer than three nor more
than seven. Upon the adoption of these By-Laws the Board of Directors shall
consist of seven directors until changed as hereinafter provided or as otherwise
required by the Certificate of Incorporation of the corporation. The directors
shall have power from time to time by resolution, in the interim between annual
and special meetings of the shareholders, to increase or decrease their number
within the minimum and maximum number hereinbefore prescribed; and said minimum
and maximum number may be changed from time to time by an amendment to these By-
Laws, provided that said minimum number may never be fewer than three except
when all of the issued and outstanding shares of the corporation are owned
beneficially and of record by less than three shareholders. In that event, the
number of directors shall not be fewer than the number of shareholders, unless
one shareholder owns ninety-five per cent or more of the issued and outstanding
shares in which case only one directorship shall be required.
Notwithstanding the foregoing, subject to the provisions of the Certificate
of Incorporation of the corporation while any shares of Series A Convertible
Preferred Stock, without par value, of the corporation (the "Series A Stock")
are outstanding, (i) the holders of the Series A Stock, voting as a separate
class, shall have the right to elect one (1) director, and (ii) the holders of
the Series A Stock shall not be entitled to vote in the election of the
remaining members of the Board of Directors.
Notwithstanding the foregoing, subject to the provisions of the Certificate
of Incorporation of the corporation while any shares of Series C Convertible
Preferred Stock, without par value, of the corporation (the "Series C Stock")
are outstanding, (i) the holders of the Series C Stock, voting as a separate
class, shall have the right to elect two (2) directors, and (ii) the holders of
the Series C Stock shall not be entitled to vote in the election of the
remaining
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<PAGE>
members of the Board of Directors.
3. ELECTION AND TERM. The first Board of Directors shall hold office
-------- --- ----
until the first annual meeting of shareholders and until their successors have
been elected and qualified. Thereafter, directors who are elected at an annual
meeting of shareholders, and directors who are elected in the interim to fill
vacancies and newly created directorships, shall hold office until the next
succeeding annual meeting of shareholders and until their successors have been
elected and qualified. In the interim between annual meetings of shareholders
or of special meetings of shareholders called for the election of directors, any
existing vacancies in the Board of Directors, including vacancies resulting from
the removal of directors by the shareholders which have not been filled by said
shareholders, may be filled by the affirmative vote of the remaining directors,
although less than a quorum exists or by the sole remaining director, and newly
created directorships may be filled by the concurring vote of directors holding
a majority of the directorships, which number of directorships shall be the
number prior to the vote on any such increase. A director may resign by written
notice to the corporation. The resignation shall be effective upon receipt
thereof by the corporation or at such subsequent time as shall be specified in
the notice of resignation.
4. REMOVAL OF DIRECTORS. One or more or all the directors of the
------- -- ---------
corporation may be removed for cause or without cause by the shareholders. The
Board of Directors shall have the power to remove directors for cause and to
suspend directors pending a final determination that cause exists for removal.
Notwithstanding the foregoing, subject to the provisions of the Certificate
of Incorporation of the corporation while any shares of Series A Stock are
outstanding, any director who shall have been elected by the holders of Series A
Stock may be removed during his or her term of office, either for or without
cause, by and only by, the affirmative vote of the holders of at least sixty-six
and two-thirds percent (66 2/3%) of the shares of Series A Stock then
outstanding, given at a special meeting of such shareholders duly called for
that purpose, and any vacancy thereby created may be filled by the holders of
the Series A Stock represented at that meeting.
Notwithstanding the foregoing, subject to the provisions of the Certificate
of Incorporation of the corporation while any shares of Series C Stock are
outstanding, any director who shall have been elected solely by the holders of
Series C Stock may be removed during his or her term of office, either for or
without cause, by and only by, the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the shares of Series C Stock then
outstanding, given at a special meeting of such shareholders duly called for
that purpose, and any vacancy thereby created or otherwise created may be filled
by the holders of the Series C Stock represented at that meeting.
5. MEETINGS.
--------
- TIME. Meetings shall be held at such time as the Board shall fix,
----
except that the first meeting of a newly elected Board shall be held as soon
after its election as the directors may conveniently assemble.
- PLACE. Meetings shall be held at such place within or without the
-----
State of
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<PAGE>
Connecticut as shall be fixed by the Board.
- CALL. No call shall be required for regular meetings for which the
----
time and place have been fixed. Special meetings may be called by or at the
direction of the Chairman of the Board, if any, of the President, or of a
majority of the directors in office.
- NOTICE QR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be
------ -- ------ -- ------------ ------
required for regular meetings for which the time and place have been fixed.
Written, oral, or any other mode of notice of the time and place shall be given
for special meetings in sufficient time for the convenient assembly of the
directors thereat. The notice of any meeting need not specify the business to
be transacted at, or the purpose of, the meeting. Any requirement of furnishing
a notice shall be waived by any director who signs a waiver of notice before or
after the meeting, or who attends the meeting without protesting, prior to the
conclusion of the meeting, the lack of notice to him.
- QUORUM AND ACTION. A majority of the entire Board shall constitute
------ --- ------
a quorum except when a vacancy or vacancies prevent such majority, whereupon a
majority of the directors in office shall constitute a quorum, provided such
majority shall constitute not less than the greater of at least two persons or
at least one-third of the entire Board. The Board of Directors may act
notwithstanding a vacancy or vacancies in its membership. A majority of the
directors present, whether or not a quorum is present, may adjourn a meeting to
another time and place. Except as herein otherwise provided, the act of the
Board shall be the act, at a meeting duly assembled, by vote of a majority of
the directors present at the time of the vote, a quorum being present at such
time.
A director or a member of a committee of the Board of Directors may
participate in a meeting of the Board of Directors or of such committee, as the
case may be, by means of conference telephone or similar communications
equipment enabling all directors participating in the meeting to hear one
another, and participation in such a meeting shall constitute presence in person
at such meeting.
- CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if
-------- -- --- -------
present and acting, shall preside at all meetings. Otherwise, the President, if
present and acting, or any other director chosen by the Board, shall preside,
6. COMMITTEES. Whenever the Board of Directors shall consist of
----------
three or more members, the Board of Directors, by resolution adopted by a
majority of the entire Board of Directors, may appoint from among its members
two or more directors to constitute an Executive Committee and one or more other
committees, each of which, to the extent provided in the resolution appointing
it, shall have and may exercise all of the authority of the Board of Directors.
7. AUDIT COMMITTEE. As and when the same may be required by the
----- ---------
provisions of subsection (c) of section 33-753 of the Connecticut Business
Corporation Act, the Board of Directors shall designate at least two directors
to constitute an Audit Committee in conformity with said provisions.
8. WRITTEN ACTION WITHOUT MEETINGS. If all the directors, or all
------- ------ ------- --------
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<PAGE>
members of a committee of the Board of Directors, as the case may be, severally
or collectively consent in writing to any action taken or to be taken by the
corporation, and the number of such directors or members constitutes a quorum
for such action, such action shall be as valid corporate action as though it had
been authorized at a meeting of the Board of Directors or committee, as the case
may be. The secretary shall file such consents with the minutes of the meetings
of the Board of Directors.
ARTICLE III
-----------
OFFICERS
--------
The directors shall appoint or elect a President and a Secretary, and
may appoint or elect a Chairman of the Board, a Vice Chairman of the Board, a
Treasurer, one or more Vice-Presidents, Assistant Vice-Presidents, Assistant
Secretaries, and Assistant Treasurers, and such other officers and agents as
they shall determine. The President may but need not be a director. Any two or
more offices may be held by the same person except the offices of President and
Secretary.
Unless otherwise provided in the resolution of appointment or
election, each officer shall hold office until the meeting of the Board of
Directors following the next annual meeting of shareholders and until his
successor has been elected and qualified.
Officers shall have the powers and duties defined in the resolutions
appointing them.
The Board of Directors may remove any officer for cause or without
cause.
ARTICLE IV
----------
STATUTORY NOTICES TO SHAREHOLDERS
--------- ------- -- ------------
The directors may appoint the Treasurer or other fiscal officer and/or
the Secretary or any other officer to cause to be prepared and furnished to
shareholders entitled thereto any special notice which may be required by any
provision of law, and which, more specifically, may be required by Sections 33-
687 of the Connecticut Business Act.
ARTICLE V
---------
BOOKS AND RECORDS
----- --- -------
The corporation shall maintain complete books and records of account
and shall keep minutes of the proceedings of its incorporators, shareholders,
Board of Directors, and the Executive Committee and other committee or
committees, if any. The corporation shall keep at its principal office or at
the office of its transfer agent or registrar in the State of Connecticut a
record of its shareholders, giving the names and addresses of all shareholders
and the number and class of shares held by each.
The balance sheet and a profit and loss statement prescribed by
Section 33-951 of
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<PAGE>
the Connecticut Business Corporation Act shall be deposited at the principal
office of the corporation in the State of Connecticut and kept for at least ten
years from the date thereof.
ARTICLE VI
----------
The corporate seal shall be in such form as the Board of Directors
shall prescribe.
ARTICLE VII
-----------
FISCAL YEAR
------ ----
The fiscal year of the corporation shall be fixed, and shall be
subject to change, by the Board of Directors.
ARTICLE VIII
------------
CONTROL OVER BY-LAWS
------- ---- -------
On and after the date upon which there have been adopted the initial
corporate By-Laws, which shall be deemed to have been adopted by the
shareholders for the purposes of the Connecticut Business Corporation Act, the
power to adopt, amend, or repeal the By-Laws of the corporation may be exercised
by the directors or the shareholders; provided, that any such By-Laws adopted,
amended, or repealed shall require the affirmative vote of the holders of a
majority of the voting power of the shares or the affirmative vote of the
directors holding a majority of the directorships, as the case may be; and
provided further that the notice of any meeting at which the By-Laws are to be
adopted, amended, or repealed shall include notice of such proposed action.
I HEREBY CERTIFY that the foregoing is a full, true and correct copy
of the By-Laws of Cyberian Outpost, Inc., a Connecticut corporation, as in
effect on the date hereof.
WITNESS my hand and the seal of the corporation.
February 26, 1998
/s/ Katherine N. Vick
- ---------------------
Name: Katherine N. Vick
Title: Secretary of Cyberian Outpost, Inc.
(SEAL)
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<PAGE>
Exhibit 10.1
LEASE
This indenture made by and between Barton Kent LLC, a Connecticut
Limited Liability Company of 272 West Cornwall Road, West Cornwall, Connecticut
06797 hereinafter called the LESSOR and Cyberian Outpost Inc. located at 27
North main Street, Kent CT 06757 hereinafter called the LESSEE.
WITNESSETH
That the LESSOR has leased and does hereby lease to said LESSEE the
following described premises (hereinafter called the "leased premises") situated
in said Kent, Connecticut:
ARTICLE I-LEASED PREMISES
The leased premises are located within a shopping center/office known
as Kent Town Center located at 27 North Main Street, Kent Connecticut, and are
located in Building South, Unit No: see below **. Said unit consists of
approximately 1374 leaseable square feet (the actual amount of leaseable square
feet will be confirmed by the LESSOR'S and LESSEE'S architects and this figure
will be adjusted accordingly). LESSOR, LESSEE and other tenants of the shopping
center and their respective customers, LESSEES, subtenants, agents, employees
and invitees; shall have the right to use the portion of the shopping center
intended for common use, including but not limited to parking areas, exterior
ramps and arcades, which use shall, however, be regulated by the landlord's
reasonable rules and regulations and provided such use is not inconsistent with
the other provisions of this lease.
ARTICLE II-DELIVERY OF PREMISES
Not applicable
ARTICLE III-TERM
The term of this Lease shall be one (1) years commencing from December
1, 1997. On December 1, 1997 the LESSEE will pay to the LESSOR the first months
rent and beginning December 1, 1997, the LESSEE will begin paying the full
monthly rental as detailed in Article V of this Lease. In addition, LESSEE is
hereby granted six (6) renewal option periods pursuant to Article XV of this
lease.
** 12A, 13
<PAGE>
ARTICLE IV-AUTHORIZED USE
The leased premises shall be used only as an office. In the event of
a breach of the "use" provision hereof, the term herein shall immediately cease
and terminate at the option of the LESSOR as if it were the expiration of the
original term.
ARTICLE V-RENTAL
A. That the LESSEE shall pay, in equal monthly payments on the first
day of each month in advance, to the LESSOR a rental hereinafter called the base
rent as follows:
Base Monthly Base Yearly
Rental Period Rental Rental
1st year $ 1,145.00 $13,740.00
2nd year $ 1,145.00 $13,740.00
3rd year
4th year
5th year
6th year
7th year
8th year
ARTICLE VI-CARE OF PREMISES
A. LESSEE shall take good care of the leased premises and shall at
its own expense and cost make all repairs and any replacements to those that
service the leased premises exclusively, (including but not limited to HVAC,
plumbing and electrical) that are not structural, of any nature and at the end
or other expiration of the term shall deliver up the leased premises in good
order and condition, damages by the elements, fire or other unavoidable
casualty, and reasonable wear and tear excepted.
B. That the LESSEE shall commit no waste upon the leased premises and
shall repair at its own expense all broken window and plate glass and peaceably
quit and surrender the leased premises at the end of the term or other
termination of this Lease, and the LESSEE shall at all times keep the front of
the building in an attractive, clean and neat condition; and it shall at its own
expense remove all waste materials and refuse from the leased premises promptly
and shall not permit them to accumulate.
ARTICLE VII-LESSOR'S RIGHT TO INSPECT
That the LESSEE agrees that the LESSOR and its agents and other
representatives shall have the right to enter into and upon said premises or any
part thereof at all reasonable hours and upon reasonable prior notice to LESSEE
(except in emergency
2
<PAGE>
situations), provided same does not interfere with the LESSEE'S business, for
the purpose of examining the same or making such repairs or alterations therein
as may be required under the terms of this Lease by the LESSOR for the safety
and preservation thereof.
ARTICLE VIII-LESSOR'S RIGHT TO SHOW
That the LESSEE also agrees to permit the LESSOR or its agents to show the
leased premises at all reasonable hours upon reasonable prior notice to LESSEE,
to persons wishing to purchase the same; and, during the last six (6) months of
the initial term hereof, or renewal option term, as the case may be, to persons
wishing to hire the same.
ARTICLE IX-PROMPT PAYMENT OF RENT
It is agreed that if LESSEE shall fail to pay the rent or any installment
thereof as aforesaid within the ten (10) days after same shall become due and
payable and/or any additional rent as herein provided, although no demand shall
have been made for the same, or if LESSEE shall violate or fail or neglect to
keep and perform any of the covenants, conditions, rules, regulations and
agreements herein contained on the part of LESSEE to be kept and performed or if
demised premises shall become vacant or deserted, then, in each and every such
event, from thenceforth and at all times thereafter, at the option of the
LESSOR, the LESSEE'S right of possession shall thereupon cease, and the LESSOR
shall be entitled to possession of demised premises and to re-enter the same
without notice to quit or demand of rent or demand of possession, and may relet
the premises as the agent of LESSEE, and receive the rent therefor, upon such
terms as shall be satisfactory to the LESSOR, and all rights of the LESSEE to
repossess the premises under this Lease shall be forfeited. Notwithstanding
anything contained hereinabove in this paragraph, the LESSEE shall not be
considered in default unless the subject situation is not cured by the LESSEE
within ten (10) days for non-payment of rent and twenty (20) days for all other
the LESSOR'S notice to cure is mailed to LESSEE by LESSOR. LESSOR, however,
shall not be obligated to give a notice to cure more than two times during each
year of the lease term or more than two times each leased year during the
extension thereof. Such re-entry by the LESSOR shall not operate to release the
LESSEE from any rent to be paid or covenants to be performed hereunder during
the full term of this Lease. The LESSOR shall make all reasonable efforts to
mitigate the LESSEE'S obligations to the LESSOR by attempting to relet the
demised premises. For the purpose of reletting, the LESSOR shall be authorized
to make such reasonable repairs or alterations in or to the leased premises as
may be necessary to place the same in good order and condition. The LESSEE
shall be liable to the LESSOR for the cost of such reasonable repairs or
alterations, and all reasonable expenses of such reletting. If the sum realized
or to
3
<PAGE>
be realized from the reletting is insufficient to satisfy the monthly or term
rent provided in this Lease, the LESSOR, at his option, may require the LESSEE
to pay such deficiency to be realized during the term of the reletting. The
LESSEE shall not be entitled to any surplus accruing as a result of the
reletting. The LESSEE agrees to pay, as additional rent, reasonable attorneys
fees and other expenses incurred by the LESSOR in enforcing any of the
obligations under this Lease. No provision of this Lease shall be deemed to have
been waived by LESSOR unless such waiver shall be in writing signed by LESSOR.
No payment by LESSEE or receipt by LESSOR of a lesser amount than the monthly
installments of rent herein stipulated shall be deemed to be other than on
account of the earliest stipulated rent, nor shall any endorsement or statement
on any check or any letter accompanying any check or payment as rent be deemed
an accord and satisfaction, and LESSOR may accept such check or payment without
prejudice to LESSOR'S right to recover the balance of such rent or pursue any
other remedy in this Lease provided.
ARTICLE X-TERMINATION
In the event of any termination of the Lease by the LESSOR for any of the
reasons set forth herein or elsewhere in the Lease, termination shall not
relieve the LESSEE from its liabilities or responsibilities for the rental
payments due hereunder, or for damages to the LESSOR from the LESSEE by virtue
of the LESSEE'S breach of the Lease agreement.
ARTICLE XI-LESSOR NOT LIABLE FOR DAMAGE
That it is expressly agreed and understood by and between the parties to
this Lease that except for their own fault or negligence, the LESSOR shall not
be liable for any damage or injury by water which may be sustained by the LESSEE
or other persons or for any damage or injury resulting from the carelessness,
negligence or improper conduct on the part of any other tenant or agents or
employees.
ARTICLE XII-MORTGAGE SUBORDINATION
That this Lease shall be subject and subordinate at all times to the lien
of any mortgages now affecting the leased premises, and to all advances made or
hereafter to be made upon the security thereof, and shall be automatically
subject and subordinate to the lien of any mortgage or mortgages which at any
time may be made a lien upon or affecting the premises herein leased. The
LESSOR, however, shall, prior to the granting of any mortgage covering the fee
interest of the leased premises, obtain from such mortgagee a "Non Disturbance"
Agreement, in form reasonably acceptable to counsel to the LESSEE.
4
<PAGE>
ARTICLE XIII-NON-WAIVER
That upon the failure of the LESSOR to insist upon a strict performance of
any of the terms, conditions and covenants herein, it shall not be deemed a
waiver of any rights or remedies that the LESSOR may have and shall not be
deemed a waiver by them of any subsequent breach or default in the terms,
conditions and covenants contained herein. The non-waiver provisions of this
Article shall also apply in favor of the LESSEE.
ARTICLE XIV-PEACEABLE AND QUIET ENJOYMENT
That the LESSOR covenants that the LESSEE on paying said rent and
performing the covenants aforesaid shall and may peaceably and quietly have,
hold and enjoy the leased premises during all of the term and this covenant is a
covenant running with the land and will bind any subsequent owner of the leased
LESSOR warrants and represents that they are the present fee title owners of the
leased premises.
ARTICLE XV-OPTION TO EXTEND LEASE TERM
(a) The lease term may be extended provided the LESSEE is not in default
under this lease, for six (6) additional option terms, the first one (1) year
option period will begin immediately upon expiration of the initial term, the
second one (1) year option period shall begin immediately upon expiration of the
first one (1) year option period and the third one (1) year option period shall
begin immediately after the expiration of the second one (1) year option period
upon the same terms and conditions as herein set forth, except the annual rental
payable monthly shall be:
The LESSEE agrees to pay to the LESSOR without prior demand therefore a base
rental for each successive year of this lease which shall be see below ( )
payable in equal monthly installments in advance, on the first day of each and
every month of each such lease year.
(b) LESSOR shall also pay additional rent computed in accordance with
paragraph XVII, XVIII and XIX of this Lease.
(c) This option to extend shall not be available to LESSEE if it is in
default of any of the terms of this Lease.
(d) Each option as described in Article XV shall automatically be exercised
unless the LESSEE notifies the LESSOR that it does not want to exercise the next
option herein by certified mail no less than one hundred eighty (180) days prior
to the expiration of this Lease, or any option period.
(e) This option is personal to the LESSEE and shall not be sublet or
assigned without the prior written consent of the LESSOR.
First 1 year option $10.00 sq. ft.
Second 1 year option $11.00 sq. ft.
Third 1 year option $12.00 sq. ft.
Fourth 1 year option $12.00 sq. ft.
Fifth 1 year option $13.00 sq. ft.
Sixth 1 year option $14.00 sq. ft.
5
<PAGE>
(f) During any option period herein, LESSEE can cancel the balance of the
term by giving the LESSORS one year's notice.
ARTICLE XVI-UTILITIES AND CHARGES
The LESSEE shall pay any and all utilities used and consumed in the leased
premises, including but not limited to, electricity, gas, telephone.
LESSEE agrees not to use excessive amounts of water so as to adversely
affect the well(s) that serve the demised premises.
ARTICLE XVII-TAXES AND SEWER ASSESSMENT
ADDITIONAL RENTAL
Not applicable.
ARTICLE XVIII-INSURANCE-ADDITIONAL RENTAL
Not applicable.
6
<PAGE>
ARTICLE XVIII-COMMON FACILITIES AND AREAS ADDITIONAL RENTAL
The LESSEE shall pay as additional rent hereunder CAM for unit 13 only of
LESSOR'S total operating costs of the common facilities and areas as the gross
rentable floor area of the leased premises bears to the gross rentable floor
area of all buildings of the LESSOR in the shopping center, which additional
rent will be pale in advance in equal monthly installments together with the
rental as described in Article V.
For the purposes of this Article, LESSOR'S "total operating costs of common
facilities and areas' is defined as including all of LESSOR'S portion of the
cost and expense (excluding any cost or expense that should be properly
capitalized on the books and records of the LESSOR) of operating and maintaining
the common facilities and areas in the office and shopping center and shall be
deemed to include without limitation, landscaping, trash removal, sanitary
control, cleaning, lighting, snow removal, protection, repairs, policing, and
LESSOR'S overhead expenses for administrating the same.
Until such time as the LESSOR'S total operating costs of the common
facilities and areas can be ascertained, the LESSEE shall pay CAM on unit 13 as
additional rent $156.04 per month in advance together with the rental as
described in Article V. As soon as practical, the LESSOR will calculate the
LESSEE'S actual costs hereunder and an adjustment will be made to the amount
actually paid by the LESSEE to the LESSOR hereunder.
ARTICLE XX-SECURITY DEPOSIT
The LESSEE shall deposit at the time of the signing of this lease, the sum
of xxxxx DOLLARS and xxx ($ xxx) with the LESSOR as a security deposit for the
faithful performance of the terms and conditions of this Lease. Said security
deposit will be returned without interest to the LESSEE thirty (30) days after
the termination of the term of this Lease provided the LESSEE is not in default
of this Lease and has complied with all of the terms and conditions thereof,
including but not in limitation, the restoration of the leased premises to their
condition at the time of the commencement of the Lease, ordinary wear and tear
excepted.
ARTICLE XXI-INDEMNIFICATION-HOLD HARMLESS
Except for their own fault or negligence, the LESSEE agrees at all times it
will indemnify and save, protect and keep harmless the LESSOR and the leased
premises from every and all costs, loss or damage, liability, expense, penalty
and fine whatsoever, which may arise from or be claimed against the LESSOR or
the leased premises by any person or persons, for any injuries to person or
property, or damage of whatever kind or character
7
<PAGE>
consequent, upon or arising from the use or occupancy of the leased premises by
the LESSEE or consequent upon or arising from any neglect or fault of the LESSEE
or its agents and employees in the use and occupancy of the leased premises.
ARTICLE XXII-INSURANCE
A. During the term of this Lease, the following insurance coverages shall
be maintained on the leased premises: Fire, extended coverage, vandalism, and
malicious mischief insurance in appropriate amounts, which insurance shall
protect LESSOR'S and LESSEE'S interests, respectively.
B. LESSEE shall procure and maintain beginning at the lease commencement
as described in Article III herein and continuing until this lease and any
option expires, at its cost, the insurance coverages required under Section A of
this Article.
C. LESSEE shall procure and maintain, at LESSEE'S cost, comprehensive
public liability insurance with limits of liability of not less than
$1,000,000.00 for injury to one person, $2,000,000.00 for injury to two or more
persons, and property damage coverage on the improvements to the extent of the
fair insurable value thereof.
D. All insurance required to be maintained under this Lease shall be
affected under enforceable policies issued by insurers of recognized
responsibility licensed to do business in the state in which the Leased premises
are located. Each policy shall, to the extent possible, name as insureds LESSOR,
LESSEE, and any mortgagee of LESSOR, as their respective interests may appear.
Each policy shall to the extent obtainable, be written pursuant to an agreement
that such policy shall not be cancelled without at least fifteen (15) days
notice to the party not required by this Lease to maintain such insurance.
E. LESSEE shall provide LESSOR with proof of the existence of the
required insurance.
F. LESSOR and LESSEE and all parties claiming under them by way of
subrogation or otherwise mutually release each other from all liabilities
arising from any hazard covered by insurance with respect to the leased
premises, regardless of the cause of the loss. This release shall be in effect
only so long as the applicable insurance policy contains a clause to the effect
that this release shall not affect the right of the insured to recover under the
policy. Such a clause shall be obtained by the parties whenever possible.
8
<PAGE>
ARTICLE XXIII-DESTRUCTION BY FIRE OR OTHER CASUALTY
A. If the leased premises should be totally destroyed by fire or such
other casualty, or should be so damaged that rebuilding or repairs cannot
reasonably be completed within sixty (60) days from the date of the notice by
LESSEE to LESSOR of the happening of the damage, then this Lease shall, at the
sole option of LESSEE, terminate.
B. If the leased premises should be damaged by fire or such other
casualty, but not to such an extent that rebuilding or repairs cannot reasonably
be completed within one hundred eighty (180) days from the date of the notice by
LESSEE to LESSOR of the happening of the damage, or if LESSEE has not exercised
its option to terminate pursuant to Section B of this Article, then, provided
that the casualty has occurred either prior to the final twelve (12) months of
the initial term of this Lease, or any renewal option term, or during such final
twelve (12) months and LESSOR has not exercised its option to terminate this
Lease as set forth in this Section, then this Lease shall remain in full effect
and LESSOR shall at its sole cost, proceed at once to rebuild or repair the
leased premises to substantially the condition in which they existed prior to
such damage. If the casualty occurs during the final twelve (12) months of the
initial term of this Lease, or any renewal option term, LESSOR shall have the
right, at its option, to terminate this Lease by sending notice of termination
to LESSEE within ten (10) days from the date of the notice by LESSEE to LESSOR
of the happening of the damage, upon which notice this Lease shall terminate.
C. If the leased premises are to be rebuilt or repaired and are
untenantable in whole or in part following such damage, the rent during the
period in which the leased premises are untenantable shall be equitably adjusted
proportionated to tenantability, in the reasonable objective determination of
LESSEE and LESSOR.
D. Wherever in this Article the phrase "this Lease shall terminate" is
used, it shall mean this Lease shall terminate and rent and all charges payable
as additional rent shall abate for the unexpired portion of this Lease,
effective as of the dates the notice by LESSEE to LESSOR of the happening of the
damage (except that LESSEE shall pay rent and additional rent for any portion of
the leased premises used by it prior to the time same is surrendered to LESSOR)
and LESSEE shall as soon as reasonably possible surrender to LESSOR the leased
premises and LESSOR may re-enter and take possession of the leased premises;
and, thereafter, LESSEE shall be discharged from this Lease.
E. If a dispute should arise between LESSOR and LESSEE with respect to
the number of days required to repair or rebuild any damage pursuant to this
Article, either or both parties shall
9
<PAGE>
request a mutually agreed upon arbitrator to make a determination of the number
of days so required. Such request shall also contain an agreement by the
parties to hold the insurance company harmless for any good faith determination
made by it. The determination so made shall be conclusive and binding on the
LESSOR and the LESSEE.
ARTICLE XXIV-ASSIGNMENT AND SUBLETTING BY LESSEE
LESSEE will not sublet the demised premises or any part hereof, or transfer
possession or occupancy thereof to any person, firm, partnership or corporation,
or transfer or assign this tease without the prior written consent of LESSOR,
nor shall any subletting or assignment hereof be effected by operation of law or
otherwise than by the prior written consent of LESSOR. However, in neither case
shall the LESSOR unreasonably withhold consent to such a subletting or
assignment.
ARTICLE XXV-CONDEMNATION
In the event that all or any part of the Demised Premises are taken or
condemned by competent authority during the term of this Lease, this Lease will
terminate as of the date of transfer of title or the date of taking possession
by the condemning authority whichever is earlier. The LESSEE shall not be
entitled to any portion of the condemnation award. The entire condemnation award
shall be the sole property of the LESSOR; provided, however, that nothing
contained herein shall prevent the LESSEE from collecting moving expenses as
provided by the Connecticut General Statutes. The LESSOR shall give the LESSEE
written notice of any condemnation within five (5) days after the LESSOR becomes
aware of such condemnation. There shall be no compensation to LESSEE for
destruction of the Lease term. In the event that less than all of the premise
are condemned by any competent condemning authority, the LESSEE shall have the
right to:
(a) Terminate this Lease as of the earlier date of the transfer of title or
the date of the taking of possession by the condemning authority, in which event
any unearned rent paid or credited will be refunded by the LESSOR to the LESSEE;
or
(b) Continue this Lease in full force and effect with a reduced fixed
rental commensurate with the reduced area and/or with reduced utilities to the
premises in lieu of the amount of rental herein provided, which reduced rental
will become effective on the earlier date of the title transfer or the date of
such taking. The LESSEE shall elect between these rights and shall give notice
to the LESSOR of its election within sixty (60) days after the date when
possession of the premises is acquired by the condemning authority. Any taking
of fifty (50%) percent or less of the parking area in front of the building
shall not be considered a substantial condemnation so as to entitled LESSEE to a
reduction of
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rent, provided the rear parking area remains as now established.
ARTICLE XXVI-ATTORNEYS FEES AND COSTS
Upon default by the LESSEE, the LESSEE agrees to pay any reasonable
attorneys fees, court costs, or other expenses, incurred by the LESSOR in the
successful enforcement of any provision of this Lease.
ARTICLE XXVII-SIGNS
The LESSOR will advise the LESSEE the size and location of any sign that is
currently approved for the leased premises.
In the event the LESSEE desires a sign other than the one already approved
for the demised premises, subject to the written approval of the LESSOR, the
LESSEE will at its own expense have any sign it requires approved by the
Planning & Zoning Commission of the Town of KENT. In the event a zoning variance
is required, the LESSEE will at its own expense petition the Zoning Board of
Appeals of the Town of KENT to obtain the variance. The failure of the LESSEE to
obtain a variance is not a conditioned precedent to the inception of this lease
pursuant to its terms.
ARTICLE XXVIII-PARKING AREA
LESSOR shall provide a parking area for the common use of the occupants of
the shopping center. LESSEE shall have the nonexclusive right, to use for its
intended purposes, such parking area for itself, its employees, agents, invitees
and licensees subject, however, to the rights given other LESSEES. LESSOR shall
have the right to change the size, location, elevation and/or nature of the
parking area. LESSEE to park all employee's cars in rear of parking lot, to make
room for customer parking in front and sides.
LESSEE agrees that it, any concessioner and their repective officers,
employees, contractors and agents will park their automobiles and other vehicles
only where it is permitted by the LESSOR.
Provided however, that the resulting parking area(s) shall comply with KENT
zoning regulations for the continued use and occupancy of the leased premises by
the LESSEE and LESSEE'S business operation.
ARTICLE XXIX-EASEMENT FOR REPAIRS
LESSEE shall permit LESSOR or its designees to erect, use, maintain and
repair pipes, cables, conduits, plumbing, vents and wires, in and to and through
the demised premises, as and to the extent that the LESSOR may now or hereafter
deem to be necessary or convenient for the proper operation and maintenance of
the building which the demised premises are located or any other portion of the
shopping center. All such work shall be done, so far as practical in such a
manner as to avoid interference with the LESSEE'S use of the premises.
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ARTICLE XXX-ALTERATIONS
The LESSEE hereby agrees that any and all alterations, additions,
improvements or repairs after the commencement of the Lease as described in
Article III to the leased premises shall be at the LESSEE'S sole cost and
expense and that prior to making any alterations, additions, improvements or
repairs, the LESSEE shall obtain the written consent of the LESSOR, which
consent will not unreasonably be withheld or delayed. All alterations, additions
or improvements whether temporary or permanent in character, which may be made
on the leased premises either by the LESSOR or the LESSEE shall be the property
of the LESSOR and shall remain upon the leased premises without compensation to
the LESSEE at the end of the Lease term.
ARTICLE XXXI-ESTOPPEL CERTIFICATES
Each party shall at any time execute, acknowledge and deliver to the other
party a statement prepared by the requesting party, in writing certifying to the
current status of the Lease stating any modifications to the Lease and the dates
to which rental and other charges have been paid.
ARTICLE XXXII-BINDING-SUCCESSORS AND ASSIGNS
It is mutually agreed that the covenants and agreements contained herein
shall be binding upon the parties hereto and upon their respective successors
and legal representatives and assigns, except as expressly otherwise provided
hereinbefore.
ARTICLE XXXIII-NOTICES
A. Any notice to be given to LESSOR under this lease shall be in writing
and sent by registered or certified mail, return receipt requested, addressed as
follows:
To: Barton Kent LLC
PO Box 97
West Cornwall, CT 06797
B. An notice to be given to LESSEE under this Lease shall be in writing
and sent by registered or certified mail, return receipt requested, addressed as
follows:
To: Cyberian Outpost, Inc.
PO Box 636
Kent, CT 06757
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Each party may change the addresses for notice to it by written notice to
the other party, in the manner herein provided.
ARTICLE XXXIV-RECORDING
This Lease shall not be recorded. LESSOR and LESSEE shall at any time,
however, upon not less than ten (10) days prior written request by the other
party execute, acknowledge, and deliver to the other party an instrument in
recordable form, which instrument may be recorded by either party describing
such elements of this Lease as are required for a short form recording.
ARTICLE XXXV-HOLDOVER
In no event shall any holding over by the LESSEE constitute a renewal of
the term of this Lease.
ARTICLE XXXVI-LATE CHARGES
If the LESSOR has not received the full amount of any rental payment or any
additional rental payment by the tenth calendar day after the date it is due,
the LESSEE will pay the LESSOR a late charge. The amount of the charge will be
5% of any overdue payment. The LESSEE agrees to pay this late charge promptly.
ARTICLE XXXVII-CAPTIONS
The captions at the head of each article of this lease are inserted for
convenience and reference only and are not to be construed as affecting the
contents or limiting the scope of the particular articles which they head.
ARTICLE XXXVIII-EXECUTION
This Lease may be executed in one or more counterparts, each of which shall
be deemed an original and which together shall constitute one and the same
instrument.
ARTICLE XXXIX-MISCELLANEOUS
A. All agreements in this Lease shall be deemed to be "covenants" as
though the words importing such covenants were set forth in each instance.
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B. Words used in the singular shall include the plural as appropriate and
words used in the plural shall include the singular as appropriate and words
used in any gender shall include the other gender as appropriate.
C. References to "this Lease" shall include renewal as appropriate.
D. Any notice required or permitted under this Lease shall be in writing
in accordance with Article XXVIII hereof.
E. Where any period would otherwise begin or end on a day not a business
day, such period shall begin or end on the on the next regular business day.
F. All schedules annexed to this Lease shall be dated and signed by the
parties and shall be a part of this Lease.
ARTICLE XXXX-BROKERAGE
The parties acknowledge that no one is the only broker in this transaction.
ARTICLE XXXXI-SAVINGS
If any portion of this Lease shall be found invalid, such invalidity shall
not affect the validity of the remainder of this Lease.
ARTICLE XXXXII-ENTIRE AGREEMENT
This Lease contains all the agreements made between the parties and may not
be modified other than by an agreement in writing signed by each of the parties
or its respective successor in interest.
ARTICLE XXXXIII-HAZARDOUS WASTE
LESSEE shall indemnify and hold LESSOR harmless from any liability arising
in conjunction with the removal, leakage and disposition by LESSEE of any
hazardous waste materials including but not limited to leakage from any tanks,
storage facilities or related materials. LESSEE further agrees to comply with
all regulations of the Department of Environmental Protection of any local,
state or federal municipal agency. LESSEE further agrees that the provisions of
this Article shall bind the principals of LESSEE individually who will sign this
Lease acknowledging their personal guaranty as to this provision only for which
they shall be personally responsible and act as sole guarantors; but only to the
extent as follows: (i) said indemnity applies only to the actual conduct of
LESSEE and/or his agents and employees, and as to the acts of conduct of LESSOR
or any prior LESSEE of the leased premises or to any adjoining LESSEE; (ii) said
indemnity shall be extinguished upon the assignment of this Lease by LESSEE,
provided the new LESSEE gives both a corporate and personal guarantee relative
to hazardous waste, as included in this Lease.
The LESSOR covenants and agrees to indemnify and to save and hold the
LESSEE harmless from any and all loss, damage, or liability incurred by LESSEE
in the clean-up or mitigation of any discharge or spill caused by the LESSOR and
not LESSEE for which the LESSOR shall be found responsible and which
indemnification shall include costs and attorney's
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fees incurred by the LESSEE in the defense of any environmental enforcement
action and in the enforcement of LESSOR'S obligations under this Article.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
this 2/nd/ day of December, 1997.
Barton Kent LLC
------------------------------
(LESSOR)
BY: /s/ Dale Barton
- ------------------------- ---------------------------
Duly Authorized Member
- -------------------------
BY: /s/ Darryl Peck
- ------------------------- ---------------------------
Cyberian Outpost, Inc.
Its President
Duly Authorized
- -------------------------
STATE OF CONNECTICUT
ss:
COUNTY OF FAIRFIELD
The foregoing instrument was acknowledged before me by Dale Barton, a
Member of Federal Road Brookfield LLC, duly authorized to be their free act and
deed and the free act and deed of Federal Road Brookfield LLC on this the 5/th/
day of December, 1997.
/s/ Melanie Chernak
------------------------------
Notary Public
STATE OF CT
ss.
COUNTY OF LITCHFIELD
The foregoing instrument was acknowledged before me by Darryl Peck,
President of Cyberian Outpost to be his free act and deed and the free act and
deed of said Cyberian Outpost on this the 2/nd/ day of December, 1997.
/s/ Melanie Chernak
-------------------------------
Notary Public
15
<PAGE>
GUARANTY OF LEASE
GUARANTY given by Cyberian Outpost, Inc., the undersigned, to Barton Kent
LLC, a Limited Liability Company.
The undersigned, .in consideration of the letting by Barton Kent LLC, as
LESSOR, of the premises located at 27 North Main Street Kent, Connecticut, to
Cyberian Outpost, Inc. of 27 North Main Street, Kent, Connecticut, as LESSEE,
under a certain lease dated December 2, 1997 does hereby covenant with the
LESSOR that if default shall at any time be made by the LESSEE in the payment of
rent or in the performance of any other covenants contained in such lease, the
undersigned will pay to the LESSOR, his personal representatives: or assigns the
rent or any arrears thereof, and all damages that may arise in consequence of
any default by the LESSEE under such lease, on receipt of written notice of such
default from the LESSOR, his personal representatives, or assigns. This guaranty
shall continue for the initial term of the lease or any renewal option term from
the date of the signing of the lease and be of no force and effect thereafter.
In witness whereof the undersigned has signed this guaranty.
/s/ Darryl Peck
---------------------------------
Darryl Peck, President
Cyberian Outpost, Inc.
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<PAGE>
Exhibit 10.2
LEASE
This indenture made by and between Barton Kent LLC, a Connecticut
Limited Liability Company of 272 West Cornwall Road, West Cornwall, Connecticut
06797 hereinafter called the LESSOR and Cyberian Outpost Inc. located at 27
North main Street, Kent CT 06757 hereinafter called the LESSEE.
WITNESSETH
That the LESSOR has leased and does hereby lease to said LESSEE the
following described premises (hereinafter called the "leased premises") situated
in said Kent, Connecticut:
ARTICLE I-LEASED PREMISES
The leased premises are located within a shopping center/offices known
as Kent Town Center located at 27 North Main Street, Kent Connecticut, and are
located in Building North, Unit No: see below **. Said unit consists of
approximately 5381 leaseable square feet (the actual amount of leaseable square
feet will be confirmed by the LESSOR'S and LESSEE'S architects and this figure
will be adjusted accordingly). LESSOR, LESSEE and other tenants of the shopping
center and their respective customers, LESSEES, subtenants, agents, employees
and invitees; shall have the right to use the portion of the shopping center
intended for common use, including but not limited to parking areas, exterior
ramps and arcades, which use shall, however, be regulated by the landlord's
reasonable rules and regulations and provided such use is not inconsistent with
the other provisions of this lease.
ARTICLE II-DELIVERY OF PREMISES
Not applicable
ARTICLE III-TERM
The term of this Lease shall be two (2) years commencing from December
1, 1997. On December 1, 1997 the LESSEE will pay to the LESSOR the first months
rent and beginning December 1, 1997, the LESSEE will begin paying the full
monthly rental as detailed in Article V of this Lease. In addition, LESSEE is
hereby granted six (6) renewal option periods pursuant to Article XV of this
lease.
**3A, 3B, 9A, 8, 9B, 7B
<PAGE>
ARTICLE IV-AUTHORIZED USE
The leased premises shall be used only as a offices. In the event of a
breach of the "use" provision hereof, the term herein shall immediately cease
and terminate at the option of the LESSOR as if it were the expiration of the
original term.
ARTICLE V-RENTAL
A. That the LESSEE shall pay, in equal monthly payments on the first day
of each month in advance, to the LESSOR a rental hereinafter called the base
rent as follows:
Base Monthly Base Yearly
Rental Period Rental Rental
1st year $4,484.17 $53,810.00
2nd year $4,484.17 $53,810.00
3rd year
4th year
5th year
6th year
7th year
8th year
ARTICLE VI-CARE OF PREMISES
A. LESSEE shall take good care of the leased premises and shall at its
own expense and cost make all repairs and any replacements to those that service
the leased premises exclusively, (including but not limited to HVAC, plumbing
and electrical) that are not structural, of any nature and at the end or other
expiration of the term shall deliver up the leased premises in good order and
condition, damages by the elements, fire or other unavoidable casualty, and
reasonable wear and tear excepted.
B. That the LESSEE shall commit no waste upon the leased premises and
shall repair at its own expense all broken window and plate glass and peaceably
quit and surrender the leased premises at the end of the term or other
termination of this Lease, and the LESSEE shall at all times keep the front of
the building in an attractive, clean and neat condition; and it shall at its own
expense remove all waste materials and refuse from the leased premises promptly
and shall not permit them to accumulate.
ARTICLE VII-LESSOR'S RIGHT TO INSPECT
That the LESSEE agrees that the LESSOR and its agents and other
representatives shall have the right to enter into and upon said premises or any
part thereof at all reasonable hours and upon reasonable prior notice to LESSEE
(except in emergency
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<PAGE>
situations), provided same does not interfere with the LESSEE'S business, for
the purpose of examining the same or making such repairs or alterations therein
as may be required under the terms of this Lease by the LESSOR for the safety
and preservation thereof.
ARTICLE VIII-LESSOR'S RIGHT TO SHOW
That the LESSEE also agrees to permit the LESSOR or its agents to show the
leased premises at all reasonable hours upon reasonable prior notice to LESSEE,
to persons wishing to purchase the same; and, during the last six (6) months of
the initial term hereof, or renewal option term, as the case may be, to persons
wishing to hire the same.
ARTICLE IX-PROMPT PAYMENT OF RENT
It is agreed that if LESSEE shall fail to pay the rent or any installment
thereof as aforesaid within the ten (10) days after same shall become due and
payable and/or any additional rent as herein provided, although no demand shall
have been made for the same, or if LESSEE shall violate or fail or neglect to
keep and perform any of the covenants, conditions, rules, regulations and
agreements herein contained on the part of LESSEE to be kept and performed or if
demised premises shall become vacant or deserted, then, in each and every such
event, from thenceforth and at all times thereafter, at the option of the
LESSOR, the LESSEE'S right of possession shall thereupon cease, and the LESSOR
shall be entitled to possession of demised premises and to re-enter the same
without notice to quit or demand of rent or demand of possession, and may relet
the premises as the agent of LESSEE, and receive the rent therefor, upon such
terms as shall be satisfactory to the LESSOR, and all rights of the LESSEE to
repossess the premises under this Lease shall be forfeited. Notwithstanding
anything contained hereinabove in this paragraph, the LESSEE shall not be
considered in default unless the subject situation is not cured by the LESSEE
within ten (10) days for non-payment of rent and twenty (20) days for all other
the LESSOR'S notice to cure is mailed to LESSEE by LESSOR. LESSOR, however,
shall not be obligated to give a notice to cure more than two times during each
year of the lease term or more than two times each leased year during the
extension thereof. Such re-entry by the LESSOR shall not operate to release the
LESSEE from any rent to be paid or covenants to be performed hereunder during
the full term of this Lease. The LESSOR shall make all reasonable efforts to
mitigate the LESSEE'S obligations to the LESSOR by attempting to relet the
demised premises. For the purpose of reletting, the LESSOR shall be authorized
to make such reasonable repairs or alterations in or to the leased premises as
may be necessary to place the same in good order and condition. The LESSEE
shall be liable to the LESSOR for the cost of such reasonable repairs or
alterations, and all reasonable expenses of such reletting. If the sum realized
or to
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<PAGE>
be realized from the reletting is insufficient to satisfy the monthly or term
rent provided in this Lease, the LESSOR, at his option, may require the LESSEE
to pay such deficiency to be realized during the term of the reletting. The
LESSEE shall not be entitled to any surplus accruing as a result of the
reletting. The LESSEE agrees to pay, as additional rent, reasonable attorneys
fees and other expenses incurred by the LESSOR in enforcing any of the
obligations under this Lease. No provision of this Lease shall be deemed to have
been waived by LESSOR unless such waiver shall be in writing signed by LESSOR.
No payment by LESSEE or receipt by LESSOR of a lesser amount than the monthly
installments of rent herein stipulated shall be deemed to be other than on
account of the earliest stipulated rent, nor shall any endorsement or statement
on any check or any letter accompanying any check or payment as rent be deemed
an accord and satisfaction, and LESSOR may accept such check or payment without
prejudice to LESSOR'S right to recover the balance of such rent or pursue any
other remedy in this Lease provided.
ARTICLE X-TERMINATION
In the event of any termination of the Lease by the LESSOR for any of the
reasons set forth herein or elsewhere in the Lease, termination shall not
relieve the LESSEE from its liabilities or responsibilities for the rental
payments due hereunder, or for damages to the LESSOR from the LESSEE by virtue
of the LESSEE'S breach of the Lease agreement.
ARTICLE XI-LESSOR NOT LIABLE FOR DAMAGE
That it is expressly agreed and understood by and between the parties to
this Lease that except for their own fault or negligence, the LESSOR shall not
be liable for any damage or injury by water which may be sustained by the LESSEE
or other persons or for any damage or injury resulting from the carelessness,
negligence or improper conduct on the part of any other tenant or agents or
employees.
ARTICLE XII-MORTGAGE SUBORDINATION
That this Lease shall be subject and subordinate at all times to the lien
of any mortgages now affecting the leased premises, and to all advances made or
hereafter to be made upon the security thereof, and shall be automatically
subject and subordinate to the lien of any mortgage or mortgages which at any
time may be made a lien upon or affecting the premises herein leased. The
LESSOR, however, shall, prior to the granting of any mortgage covering the fee
interest of the leased premises, obtain from such mortgagee a "Non Disturbance"
Agreement, in form reasonably acceptable to counsel to the LESSEE.
4
<PAGE>
ARTICLE XIII-NON-WAIVER
That upon the failure of the LESSOR to insist upon a strict performance of
any of the terms, conditions and covenants herein, it shall not be deemed a
waiver of any rights or remedies that the LESSOR may have and shall not be
deemed a waiver by them of any subsequent breach or default in the terms,
conditions and covenants contained herein. The non-waiver provisions of this
Article shall also apply in favor of the LESSEE.
ARTICLE XIV-PEACEABLE AND QUIET ENJOYMENT
That the LESSOR covenants that the LESSEE on paying said rent and
performing the covenants aforesaid shall and may peaceably and quietly have,
hold and enjoy the leased premises during all of the term and this covenant is a
covenant running with the land and will bind any subsequent owner of the leased
LESSOR warrants and represents that they are the present fee title owners of the
leased premises.
ARTICLE XV-OPTION TO EXTEND LEASE TERM
(a) The lease term may be extended provided the LESSEE is not in default
under this lease, for six (6) additional option terms, the first two (2) year
option period will begin immediately upon expiration of the initial term, the
second two (2) year option period shall begin immediately upon expiration of the
first two (2) year option period and the third two (2) year option period shall
begin immediately after the expiration of the second two (2) year option period
upon the same terms and conditions as herein set forth, except the annual rental
payable monthly shall be:
The LESSEE agrees to pay to the LESSOR without prior demand therefore a base
rental for each successive year of this lease which shall be see below payable
---------
in equal monthly installments in advance, on the first day of each and every
month of each such lease year.
(b) LESSOR shall also pay additional rent computed in accordance with
paragraph XVII, XVIII and XIX of this Lease.
(c) This option to extend shall not be available to LESSEE if it is in
default of any of the terms of this Lease.
(d) Each option as described in Article XV shall automatically be exercised
unless the LESSEE notifies the LESSOR that it does not want to exercise the next
option herein by certified mail no less than one hundred eighty (180) days prior
to the expiration of this Lease, or any option period.
(e) This option is personal to the LESSEE and shall not be sublet or
assigned without the prior written consent of the LESSOR.
First 2 year option $11.00 ft and $12.00 ft (second year);
Second 2 year option $12.00 ft and $13.00 ft (fourth year);
Third 2 year option $14.00 ft and $15.00 ft (sixth year)
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(f) During any option period herein, LESSEE can cancel the balance of the
term by giving the LESSORS one year's notice.
ARTICLE XVI-UTILITIES AND CHARGES
The LESSEE shall pay any and all utilities used and consumed in the leased
premises, including but not limited to, electricity, gas, telephone, plus $30.00
per month for electric outside after normal business hours.
LESSEE agrees not to use excessive amounts of water so as to adversely
affect the well(s) that serve the demised premises.
ARTICLE XVII-TAXES AND SEWER ASSESSMENT
ADDITIONAL RENTAL
Not applicable.
ARTICLE XVIII-INSURANCE-ADDITIONAL RENTAL
Not applicable.
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<PAGE>
ARTICLE XVIII-COMMON FACILITIES AND AREAS ADDITIONAL RENTAL
The LESSEE shall pay as additional rent hereunder CAM for unit 13 only of
LESSOR'S total operating costs of the common facilities and areas as the gross
rentable floor area of the leased premises bears to the gross rentable floor
area of all buildings of the LESSOR in the shopping center, which additional
rent will be pale in advance in equal monthly installments together with the
rental as described in Article V.
For the purposes of this Article, LESSOR'S "total operating costs of common
facilities and areas' is defined as including all of LESSOR'S portion of the
cost and expense (excluding any cost or expense that should be properly
capitalized on the books and records of the LESSOR) of operating and maintaining
the common facilities and areas in the office and shopping center and shall be
deemed to include without limitation, landscaping, trash removal, sanitary
control, cleaning, lighting, snow removal, protection, repairs, policing, and
LESSOR'S overhead expenses for administrating the same.
Until such time as the LESSOR'S total operating costs of the common
facilities and areas can be ascertained, the LESSEE shall pay (* Cam for 7B) as
additional rent $197.67 per month in advance together with the rental as
described in Article V. As soon as practical, the LESSOR will calculate the
LESSEE'S actual costs hereunder and an adjustment will be made to the amount
actually paid by the LESSEE to the LESSOR hereunder.
ARTICLE XX-SECURITY DEPOSIT
The LESSEE shall deposit at the time of the signing of this lease, the sum
of $2,500.00 (already given) DOLLARS and no cents ($ 2,500) with the LESSOR as a
security deposit for the faithful performance of the terms and conditions of
this Lease. Said security deposit will be returned without interest to the
LESSEE thirty (30) days after the termination of the term of this Lease provided
the LESSEE is not in default of this Lease and has complied with all of the
terms and conditions thereof, including but not in limitation, the restoration
of the leased premises to their condition at the time of the commencement of the
Lease, ordinary wear and tear excepted.
ARTICLE XXI-INDEMNIFICATION-HOLD HARMLESS
Except for their own fault or negligence, the LESSEE agrees at all times it
will indemnify and save, protect and keep harmless the LESSOR and the leased
premises from every and all costs, loss or damage, liability, expense, penalty
and fine whatsoever, which may arise from or be claimed against the LESSOR or
the leased premises by any person or persons, for any injuries to person or
property, or damage of whatever kind or character
7
<PAGE>
consequent, upon or arising from the use or occupancy of the leased premises by
the LESSEE or consequent upon or arising from any neglect or fault of the LESSEE
or its agents and employees in the use and occupancy of the leased premises.
ARTICLE XXII-INSURANCE
A. During the term of this Lease, the following insurance coverages shall
be maintained on the leased premises: Fire, extended coverage, vandalism, and
malicious mischief insurance in appropriate amounts, which insurance shall
protect LESSOR'S and LESSEE'S interests, respectively.
B. LESSEE shall procure and maintain beginning at the lease commencement
as described in Article III herein and continuing until this lease and any
option expires, at its cost, the insurance coverages required under Section A of
this Article.
C. LESSEE shall procure and maintain, at LESSEE'S cost, comprehensive
public liability insurance with limits of liability of not less than
$1,000,000.00 for injury to one person, $2,000,000.00 for injury to two or more
persons, and property damage coverage on the improvements to the extent of the
fair insurable value thereof.
D. All insurance required to be maintained under this Lease shall be
affected under enforceable policies issued by insurers of recognized
responsibility licensed to do business in the state in which the Leased premises
are located. Each policy shall, to the extent possible, name as insureds LESSOR,
LESSEE, and any mortgagee of LESSOR, as their respective interests may appear.
Each policy shall to the extent obtainable, be written pursuant to an agreement
that such policy shall not be cancelled without at least fifteen (15) days
notice to the party not required by this Lease to maintain such insurance.
E. LESSEE shall provide LESSOR with proof of the existence of the
required insurance.
F. LESSOR and LESSEE and all parties claiming under them by way of
subrogation or otherwise mutually release each other from all liabilities
arising from any hazard covered by insurance with respect to the leased
premises, regardless of the cause of the loss. This release shall be in effect
only so long as the applicable insurance policy contains a clause to the effect
that this release shall not affect the right of the insured to recover under the
policy. Such a clause shall be obtained by the parties whenever possible.
8
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ARTICLE XXIII-DESTRUCTION BY FIRE OR OTHER CASUALTY
A. If the leased premises should be totally destroyed by fire or such
other casualty, or should be so damaged that rebuilding or repairs cannot
reasonably be completed within sixty (60) days from the date of the notice by
LESSEE to LESSOR of the happening of the damage, then this Lease shall, at the
sole option of LESSEE, terminate.
B. If the leased premises should be damaged by fire or such other
casualty, but not to such an extent that rebuilding or repairs cannot reasonably
be completed within one hundred eighty (180) days from the date of the notice by
LESSEE to LESSOR of the happening of the damage, or if LESSEE has not exercised
its option to terminate pursuant to Section B of this Article, then, provided
that the casualty has occurred either prior to the final twelve (12) months of
the initial term of this Lease, or any renewal option term, or during such final
twelve (12) months and LESSOR has not exercised its option to terminate this
Lease as set forth in this Section, then this Lease shall remain in full effect
and LESSOR shall at its sole cost, proceed at once to rebuild or repair the
leased premises to substantially the condition in which they existed prior to
such damage. If the casualty occurs during the final twelve (12) months of the
initial term of this Lease, or any renewal option term, LESSOR shall have the
right, at its option, to terminate this Lease by sending notice of termination
to LESSEE within ten (10) days from the date of the notice by LESSEE to LESSOR
of the happening of the damage, upon which notice this Lease shall terminate.
C. If the leased premises are to be rebuilt or repaired and are
untenantable in whole or in part following such damage, the rent during the
period in which the leased premises are untenantable shall be equitably adjusted
proportionated to tenantability, in the reasonable objective determination of
LESSEE and LESSOR.
D. Wherever in this Article the phrase "this Lease shall terminate" is
used, it shall mean this Lease shall terminate and rent and all charges payable
as additional rent shall abate for the unexpired portion of this Lease,
effective as of the dates the notice by LESSEE to LESSOR of the happening of the
damage (except that LESSEE shall pay rent and additional rent for any portion of
the leased premises used by it prior to the time same is surrendered to LESSOR)
and LESSEE shall as soon as reasonably possible surrender to LESSOR the leased
premises and LESSOR may re-enter and take possession of the leased premises;
and, thereafter, LESSEE shall be discharged from this Lease.
E. If a dispute should arise between LESSOR and LESSEE with respect to
the number of days required to repair or rebuild any damage pursuant to this
Article, either or both parties shall
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request a mutually agreed upon arbitrator to make a determination of the number
of days so required. Such request shall also contain an agreement by the
parties to hold the insurance company harmless for any good faith determination
made by it. The determination so made shall be conclusive and binding on the
LESSOR and the LESSEE.
ARTICLE XXIV-ASSIGNMENT AND SUBLETTING BY LESSEE
LESSEE will not sublet the demised premises or any part hereof, or transfer
possession or occupancy thereof to any person, firm, partnership or corporation,
or transfer or assign this tease without the prior written consent of LESSOR,
nor shall any subletting or assignment hereof be effected by operation of law or
otherwise than by the prior written consent of LESSOR. However, in neither case
shall the LESSOR unreasonably withhold consent to such a subletting or
assignment.
ARTICLE XXV-CONDEMNATION
In the event that all or any part of the Demised Premises are taken or
condemned by competent authority during the term of this Lease, this Lease will
terminate as of the date of transfer of title or the date of taking possession
by the condemning authority whichever is earlier. The LESSEE shall not be
entitled to any portion of the condemnation award. The entire condemnation award
shall be the sole property of the LESSOR; provided, however, that nothing
contained herein shall prevent the LESSEE from collecting moving expenses as
provided by the Connecticut General Statutes. The LESSOR shall give the LESSEE
written notice of any condemnation within five (5) days after the LESSOR becomes
aware of such condemnation. There shall be no compensation to LESSEE for
destruction of the Lease term. In the event that less than all of the premise
are condemned by any competent condemning authority, the LESSEE shall have the
right to:
(a) Terminate this Lease as of the earlier date of the transfer of title or
the date of the taking of possession by the condemning authority, in which event
any unearned rent paid or credited will be refunded by the LESSOR to the LESSEE;
or
(b) Continue this Lease in full force and effect with a reduced fixed
rental commensurate with the reduced area and/or with reduced utilities to the
premises in lieu of the amount of rental herein provided, which reduced rental
will become effective on the earlier date of the title transfer or the date of
such taking. The LESSEE shall elect between these rights and shall give notice
to the LESSOR of its election within sixty (60) days after the date when
possession of the premises is acquired by the condemning authority. Any taking
of fifty (50%) percent or less of the parking area in front of the building
shall not be considered a substantial condemnation so as to entitled LESSEE to a
reduction of
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rent, provided the rear parking area remains as now established.
ARTICLE XXVI-ATTORNEYS FEES AND COSTS
Upon default by the LESSEE, the LESSEE agrees to pay any reasonable
attorneys fees, court costs, or other expenses, incurred by the LESSOR in the
successful enforcement of any provision of this Lease.
ARTICLE XXVII-SIGNS
The LESSOR will advise the LESSEE the size and location of any sign that is
currently approved for the leased premises.
In the event the LESSEE desires a sign other than the one already approved
for the demised premises, subject to the written approval of the LESSOR, the
LESSEE will at its own expense have any sign it requires approved by the
Planning & Zoning Commission of the Town of KENT. In the event a zoning
variance is required, the LESSEE will at its own expense petition the Zoning
Board of Appeals of the Town of KENT to obtain the variance. The failure of the
LESSEE to obtain a variance is not a conditioned precedent to the inception of
this lease pursuant to its terms.
ARTICLE XXVIII-PARKING AREA
LESSOR shall provide a parking area for the common use of the occupants of
the shopping center. LESSEE shall have the nonexclusive right, to use for its
intended purposes, such parking area for itself, its employees, agents, invitees
and licensees subject, however, to the rights given other LESSEES. LESSOR shall
have the right to change the size, location, elevation and/or nature of the
parking area. LESSEE to park all employee's cars in rear of parking lot, to make
room for customer parking in front and sides.
LESSEE agrees that it, any concessioner and their respective officers,
employees, contractors and agents will park their automobiles and other vehicles
only where it is permitted by the LESSOR.
Provided however, that the resulting parking area(s) shall comply with KENT
zoning regulations for the continued use and occupancy of the leased premises by
the LESSEE and LESSEE'S business operation.
ARTICLE XXIX-EASEMENT FOR REPAIRS
LESSEE shall permit LESSOR or its designees to erect, use, maintain and
repair pipes, cables, conduits, plumbing, vents and wires, in and to and through
the demised premises, as and to the extent that the LESSOR may now or hereafter
deem to be necessary or convenient for the proper operation and maintenance of
the building which the demised premises are located or any other portion of the
shopping center. All such work shall be done, so far as practical in such a
manner as to avoid interference with the LESSEE'S use of the premises.
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ARTICLE XXX-ALTERATIONS
The LESSEE hereby agrees that any and all alterations, additions,
improvements or repairs after the commencement of the Lease as described in
Article III to the leased premises shall be at the LESSEE'S sole cost and
expense and that prior to making any alterations, additions, improvements or
repairs, the LESSEE shall obtain the written consent of the LESSOR, which
consent will not unreasonably be withheld or delayed. All alterations, additions
or improvements whether temporary or permanent in character, which may be made
on the leased premises either by the LESSOR or the LESSEE shall be the property
of the LESSOR and shall remain upon the leased premises without compensation to
the LESSEE at the end of the Lease term.
ARTICLE XXXI-ESTOPPEL CERTIFICATES
Each party shall at any time execute, acknowledge and deliver to the other
party a statement prepared by the requesting party, in writing certifying to the
current status of the Lease stating any modifications to the Lease and the dates
to which rental and other charges have been paid.
ARTICLE XXXII-BINDING-SUCCESSORS AND ASSIGNS
It is mutually agreed that the covenants and agreements contained herein
shall be binding upon the parties hereto and upon their respective successors
and legal representatives and assigns, except as expressly otherwise provided
hereinbefore.
ARTICLE XXXIII-NOTICES
A. Any notice to be given to LESSOR under this lease shall be in writing
and sent by registered or certified mail, return receipt requested, addressed as
follows:
To: Barton Kent LLC
PO Box 97
West Cornwall, CT 06797
B. An notice to be given to LESSEE under this Lease shall be in writing
and sent by registered or certified mail, return receipt requested, addressed as
follows:
To: Cyberian Outpost, Inc.
PO Box 636
Kent, CT 06757
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Each party may change the addresses for notice to it by written notice to
the other party, in the manner herein provided.
ARTICLE XXXIV-RECORDING
This Lease shall not be recorded. LESSOR and LESSEE shall at any time,
however, upon not less than ten (10) days prior written request by the other
party execute, acknowledge, and deliver to the other party an instrument in
recordable form, which instrument may be recorded by either party describing
such elements of this Lease as are required for a short form recording.
ARTICLE XXXV-HOLDOVER
In no event shall any holding over by the LESSEE constitute a renewal of
the term of this Lease.
ARTICLE XXXVI-LATE CHARGES
If the LESSOR has not received the full amount of any rental payment or any
additional rental payment by the tenth calendar day after the date it is due,
the LESSEE will pay the LESSOR a late charge. The amount of the charge will be
5% of any overdue payment. The LESSEE agrees to pay this late charge promptly.
ARTICLE XXXVII-CAPTIONS
The captions at the head of each article of this lease are inserted for
convenience and reference only and are not to be construed as affecting the
contents or limiting the scope of the particular articles which they head.
ARTICLE XXXVIII-EXECUTION
This Lease may be executed in one or more counterparts, each of which shall
be deemed an original and which together shall constitute one and the same
instrument.
ARTICLE XXXIX-MISCELLANEOUS
A. All agreements in this Lease shall be deemed to be "covenants" as
though the words importing such covenants were set forth in each instance.
B. Words used in the singular shall include the plural as appropriate and
words used in the plural shall include the
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<PAGE>
singular as appropriate and words used in any gender shall include the other
gender as appropriate.
C. References to "this Lease" shall include renewal as appropriate.
D. Any notice required or permitted under this Lease shall be in writing
in accordance with Article XXVIII hereof.
E. Where any period would otherwise begin or end on a day not a business
day, such period shall begin or end on the on the next regular business day.
F. All schedules annexed to this Lease shall be dated and signed by the
parties and shall be a part of this Lease.
ARTICLE XXXX-BROKERAGE
The parties acknowledge that no one is the only broker in this transaction.
ARTICLE XXXXI-SAVINGS
If any portion of this Lease shall be found invalid, such invalidity shall
not affect the validity of the remainder of this Lease.
ARTICLE XXXXII-ENTIRE AGREEMENT
This Lease contains all the agreements made between the parties and may not
be modified other than by an agreement in writing signed by each of the parties
or its respective successor in interest.
ARTICLE XXXXIII-HAZARDOUS WASTE
LESSEE shall indemnify and hold LESSOR harmless from any liability arising
in conjunction with the removal, leakage and disposition by LESSEE of any
hazardous waste materials including but not limited to leakage from any tanks,
storage facilities or related materials. LESSEE further agrees to comply with
all regulations of the Department of Environmental Protection of any local,
state or federal municipal agency. LESSEE further agrees that the provisions of
this Article shall bind the principals of LESSEE individually who will sign this
Lease acknowledging their personal guaranty as to this provision only for which
they shall be personally responsible and act as sole guarantors; but only to the
extent as follows: (i) said indemnity applies only to the actual conduct of
LESSEE and/or his agents and employees, and as to the acts of conduct of LESSOR
or any prior LESSEE of the leased premises or to any adjoining LESSEE; (ii) said
indemnity shall be extinguished upon the assignment of this Lease by LESSEE,
provided the new LESSEE gives both a corporate and personal guarantee relative
to hazardous waste, as included in this Lease.
The LESSOR covenants and agrees to indemnify and to save and hold the
LESSEE harmless from any and all loss, damage, or liability incurred by LESSEE
in the clean-up or mitigation of any discharge or spill caused by the LESSOR and
not LESSEE for which the LESSOR shall be found responsible and which
indemnification shall include costs and attorney's fees incurred by the LESSEE
in the defense of any environmental enforcement action and in the enforcement of
LESSOR'S obligations under this Article.
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<PAGE>
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
this 2/nd/ day of December, 1997.
Barton Kent LLC
-----------------------------------------
(LESSOR)
BY: /s/ Dale Barton
- ---------------------------------- -------------------------------------
Duly Authorized Member
- ----------------------------------
BY: /s/ Darryl Peck
- ---------------------------------- -------------------------------------
Cyberian Outpost, Inc.
Its President
Duly Authorized
- ----------------------------------
STATE OF CONNECTICUT
ss:
COUNTY OF FAIRFIELD
The foregoing instrument was acknowledged before me by Dale Barton, a
Member of Federal Road Brookfield LLC, duly authorized to be their free act and
deed and the free act and deed of Federal Road Brookfield LLC on this the 5/th/
day of December, 1997.
/s/ Melanie Chernak
-------------------------------------
Notary Public
STATE OF CT
ss.
COUNTY OF LITCHFIELD
The foregoing instrument was acknowledged before me by Darryl Peck,
President of Cyberian Outpost to be his free act and deed and the free act and
deed of said Cyberian Outpost on this the 2/nd/ day of December, 1997.
/s/ Melanie Chernak
-------------------------------------
Notary Public
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<PAGE>
GUARANTY OF LEASE
GUARANTY given by Cyberian Outpost, Inc., the undersigned, to Barton Kent
LLC, a Limited Liability Company.
The undersigned, .in consideration of the letting by Barton Kent LLC, as
LESSOR, of the premises located at 27 North Main Street Kent, Connecticut, to
Cyberian Outpost, Inc. of 27 North Main Street, Kent, Connecticut, as LESSEE,
under a certain lease dated December 2, 1997 does hereby covenant with the
LESSOR that if default shall at any time be made by the LESSEE in the payment of
rent or in the performance of any other covenants contained in such lease, the
undersigned will pay to the LESSOR, his personal representatives: or assigns the
rent or any arrears thereof, and all damages that may arise in consequence of
any default by the LESSEE under such lease, on receipt of written notice of such
default from the LESSOR, his personal representatives, or assigns. This guaranty
shall continue for the initial term of the lease or any renewal option term from
the date of the signing of the lease and be of no force and effect thereafter.
In witness whereof the undersigned has signed this guaranty.
/s/ Darryl Peck
-------------------------------------
Darryl Peck, President
Cyberian Outpost, Inc.
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<PAGE>
Exhibit 10.3
LEASE
This indenture made by and between Barton Kent LLC, a Connecticut Limited
Liability Company of 272 West Cornwall Road, West Cornwall, Connecticut 06797
hereinafter called the LESSOR and Cyberian Outpost Inc. located at 27 North main
Street, Kent CT 06757 hereinafter called the LESSEE.
WITNESSETH
That the LESSOR has leased and does hereby lease to said LESSEE the
following described premises (hereinafter called the "leased premises") situated
in said Kent, Connecticut:
ARTICLE I-LEASED PREMISES
The leased premises are located within a shopping center/office known as
Kent Town Center located at 27 North Main Street, Kent Connecticut, and are
located in Building South, Unit No: 12B. Said unit consists of approximately
670 +/- leaseable square feet (the actual amount of leaseable square feet will
be confirmed by the LESSOR'S and LESSEE'S architects and this figure will be
adjusted accordingly). LESSOR, LESSEE and other tenants of the shopping center
and their respective customers, LESSEES, subtenants, agents, employees and
invitees; shall have the right to use the portion of the shopping center
intended for common use, including but not limited to parking areas, exterior
ramps and arcades, which use shall, however, be regulated by the landlord's
reasonable rules and regulations and provided such use is not inconsistent with
the other provisions of this lease.
ARTICLE II-DELIVERY OF PREMISES
Not applicable
ARTICLE III-TERM
The term of this Lease shall be nine months (3/4) years commencing from
February 15, 1998. On February 15, 1998 the LESSEE will pay to the LESSOR Three
Hundred and Fifty Dollars and beginning March 1, 1998, the LESSEE will begin
paying the full monthly rental as detailed in Article V of this Lease. In
addition, LESSEE is hereby granted six (6) renewal option periods pursuant to
Article XV of this lease.
<PAGE>
ARTICLE IV-AUTHORIZED USE
The leased premises shall be used only as an office. In the event of a
breach of the "use" provision hereof, the term herein shall immediately cease
and terminate at the option of the LESSOR as if it were the expiration of the
original term.
ARTICLE V-RENTAL
A. That the LESSEE shall pay, in equal monthly payments on the first day of
each month in advance, to the LESSOR a rental hereinafter called the base rent
as follows:
Base Monthly Base Yearly
Rental Period Rental Rental
1st year $563.31 $1,759.72
2nd year $563.31 1,759.72
3rd year
4th year
5th year
6th year
7th year
8th year
ARTICLE VI-CARE OF PREMISES
A. LESSEE shall take good care of the leased premises and shall at its own
expense and cost make all repairs and any replacements to those that service the
leased premises exclusively, (including but not limited to HVAC, plumbing and
electrical) that are not structural, of any nature and at the end or other
expiration of the term shall deliver up the leased premises in good order and
condition, damages by the elements, fire or other unavoidable casualty, and
reasonable wear and tear excepted.
B. That the LESSEE shall commit no waste upon the leased premises and shall
repair at its own expense all broken window and plate glass and peaceably quit
and surrender the leased premises at the end of the term or other termination of
this Lease, and the LESSEE shall at all times keep the front of the building in
an attractive, clean and neat condition; and it shall at its own expense remove
all waste materials and refuse from the leased premises promptly and shall not
permit them to accumulate.
ARTICLE VII-LESSOR'S RIGHT TO INSPECT
That the LESSEE agrees that the LESSOR and its agents and other
representatives shall have the right to enter into and upon said premises or any
part thereof at all reasonable hours and upon reasonable prior notice to LESSEE
(except in emergency
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<PAGE>
situations), provided same does not interfere with the LESSEE'S business, for
the purpose of examining the same or making such repairs or alterations therein
as may be required under the terms of this Lease by the LESSOR for the safety
and preservation thereof.
ARTICLE VIII-LESSOR'S RIGHT TO SHOW
That the LESSEE also agrees to permit the LESSOR or its agents to show
the leased premises at all reasonable hours upon reasonable prior notice to
LESSEE, to persons wishing to purchase the same; and, during the last six (6)
months of the initial term hereof, or renewal option term, as the case may be,
to persons wishing to hire the same.
ARTICLE IX-PROMPT PAYMENT OF RENT
It is agreed that if LESSEE shall fail to pay the rent or any
installment thereof as aforesaid within the ten (10) days after same shall
become due and payable and/or any additional rent as herein provided, although
no demand shall have been made for the same, or if LESSEE shall violate or fail
or neglect to keep and perform any of the covenants, conditions, rules,
regulations and agreements herein contained on the part of LESSEE to be kept and
performed or if demised premises shall become vacant or deserted, then, in each
and every such event, from thenceforth and at all times thereafter, at the
option of the LESSOR, the LESSEE'S right of possession shall thereupon cease,
and the LESSOR shall be entitled to possession of demised premises and to re-
enter the same without notice to quit or demand of rent or demand of possession,
and may relet the premises as the agent of LESSEE, and receive the rent
therefor, upon such terms as shall be satisfactory to the LESSOR, and all rights
of the LESSEE to repossess the premises under this Lease shall be forfeited.
Notwithstanding anything contained hereinabove in this paragraph, the LESSEE
shall not be considered in default unless the subject situation is not cured by
the LESSEE within ten (10) days ** after the LESSOR'S notice to cure is mailed
to LESSEE by LESSOR. LESSOR, however, shall not be obligated to give a notice to
cure more than two times during each year of the lease term or more than two
times each leased year during the extension thereof. Such re-entry by the
LESSOR shall not operate to release the LESSEE from any rent to be paid or
covenants to be performed hereunder during the full term of this Lease. The
LESSOR shall make all reasonable efforts to mitigate the LESSEE'S obligations to
the LESSOR by attempting to relet the demised premises. For the purpose of
reletting, the LESSOR shall be authorized to make such reasonable repairs or
alterations in or to the leased premises as may be necessary to place the same
in good order and condition. The LESSEE shall be liable to the LESSOR for the
cost of such reasonable repairs or alterations, and all reasonable expenses of
such reletting. If the sum realized or to
**10 days for non payment of rent and 20 days for all other.
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<PAGE>
be realized from the reletting is insufficient to satisfy the monthly or term
rent provided in this Lease, the LESSOR, at his option, may require the LESSEE
to pay such deficiency to be realized during the term of the reletting. The
LESSEE shall not be entitled to any surplus accruing as a result of the
reletting. The LESSEE agrees to pay, as additional rent, reasonable attorneys
fees and other expenses incurred by the LESSOR in enforcing any of the
obligations under this Lease. No provision of this Lease shall be deemed to have
been waived by LESSOR unless such waiver shall be in writing signed by LESSOR.
No payment by LESSEE or receipt by LESSOR of a lesser amount than the monthly
installments of rent herein stipulated shall be deemed to be other than on
account of the earliest stipulated rent, nor shall any endorsement or statement
on any check or any letter accompanying any check or payment as rent be deemed
an accord and satisfaction, and LESSOR may accept such check or payment without
prejudice to LESSOR'S right to recover the balance of such rent or pursue any
other remedy in this Lease provided.
ARTICLE X-TERMINATION
In the event of any termination of the Lease by the LESSOR for any of
the reasons set forth herein or elsewhere in the Lease, termination shall not
relieve the LESSEE from its liabilities or responsibilities for the rental
payments due hereunder, or for damages to the LESSOR from the LESSEE by virtue
of the LESSEE' S breach of the Lease agreement.
ARTICLE XI-LESSOR NOT LIABLE FOR DAMAGE
That it is expressly agreed and understood by and between the parties
to this Lease that except for their own fault or negligence, the LESSOR shall
not be liable for any damage or injury by water which may be sustained by the
LESSEE or other persons or for any damage or injury resulting from the
carelessness, negligence or improper conduct on the part of any other tenant or
agents or employees.
ARTICLE XII-MORTGAGE SUBORDINATION
That this Lease shall be subject and subordinate at all times to the
lien of any mortgages now affecting the leased premises, and to all advances
made or hereafter to be made upon the security thereof, and shall be
automatically subject and subordinate to the lien of any mortgage or mortgages
which at any time may be made a lien upon or affecting the premises herein
leased. The LESSOR, however, shall, prior to the granting of any mortgage
covering the fee interest of the leased premises, obtain from such mortgagee a
"Non Disturbance" Agreement, in form reasonably acceptable to counsel to the
LESSEE.
4
<PAGE>
ARTICLE XIII-NON-WAIVER
That upon the failure of the LESSOR to insist upon a strict
performance of any of the terms, conditions and covenants herein, it shall not
be deemed a waiver of any rights or remedies that the LESSOR may have and shall
not be deemed a waiver by them of any subsequent breach or default in the terms,
conditions and covenants contained herein. The non-waiver provisions of this
Article shall also apply in favor of the LESSEE.
ARTICLE XIV-PEACEABLE AND QUIET ENJOYMENT
That the LESSOR covenants that the LESSEE on paying said rent and
performing the covenants aforesaid shall and may peaceably and quietly have,
hold and enjoy the leased premises during all of the term and this covenant is a
covenant running with the land and will bind any subsequent owner of the leased
LESSOR warrants and represents that they are the present fee title owners of the
leased premises.
ARTICLE XV-OPTION TO EXTEND LEASE TERM
(a) The lease term may be extended provided the LESSEE is not in
default under this lease, for six (6) additional option terms, the first one (1)
year option period will begin immediately upon expiration of the initial term,
the second one (1) year option period shall begin immediately upon expiration of
the first one (1) year option period and the third one (1) year option period
shall begin immediately after the expiration of the second one (1) year option
period upon the same terms and conditions as herein set forth, except the annual
rental payable monthly shall be:
The LESSEE agrees to pay to the LESSOR without prior demand therefore a base
rental for each successive year of this lease which shall be see below payable
---------
in equal monthly installments in advance, on the first day of each and every
month of each such lease year.
(b) LESSOR shall also pay additional rent computed in accordance with
paragraph XVII, XVIII and XIX of this Lease.
(c) This option to extend shall not be available to LESSEE if it is in
default of any of the terms of this Lease.
(d) Each option as described in Article XV shall automatically be
exercised unless the LESSEE notifies the LESSOR that it does not want to
exercise the next option herein by certified mail no less than one hundred
eighty (180) days prior to the expiration of this Lease, or any option period.
(e) This option is personal to the LESSEE and shall not be sublet or
assigned without the prior written consent of the LESSOR.
First 1 year option $10.00 sq. ft.
Second 1 year option $11.00 sq. ft.
Third 1 year option $12.00 sq. ft.
Fourth 1 year option $12.00 sq. ft.
Fifth 1 year option $13.00 sq. ft.
Sixth 1 year option $14.00 sq. ft.
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(f) During any option period herein, LESSEE can cancel the balance of
the term by giving the LESSORS one year's notice.
ARTICLE XVI-UTILITIES AND CHARGES
The LESSEE shall pay any and all utilities used and consumed in the
leased premises, including but not limited to, electricity, gas, telephone,
water, (now well water), sewer use charges.
LESSEE agrees not to use excessive amounts of water so as to adversely
affect the well(s) that serve the demised premises.
ARTICLE XVII-TAXES AND SEWER ASSESSMENT
ADDITIONAL RENTAL
Not applicable.
ARTICLE XVIII-INSURANCE-ADDITIONAL RENTAL
Not applicable.
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ARTICLE XVIII-COMMON FACILITIES AND AREAS ADDITIONAL RENTAL
The LESSEE shall pay as additional rent hereunder CAM for 12B $136.69
only of LESSOR'S total operating costs of the common facilities and areas as the
gross rentable floor area of the leased premises bears to the gross rentable
floor area of all buildings of the LESSOR in the shopping center, which
additional rent will be pale in advance in equal monthly installments together
with the rental as described in Article V.
For the purposes of this Article, LESSOR'S "total operating costs of
common facilities and areas' is defined as including all of LESSOR'S portion of
the cost and expense (excluding any cost or expense that should be properly
capitalized on the books and records of the LESSOR) of operating and maintaining
the common facilities and areas in the office and shopping center and shall be
deemed to include without limitation, landscaping, trash removal, sanitary
control, cleaning, lighting, snow removal, protection, repairs, policing, and
LESSOR'S overhead expenses for administrating the same.
ARTICLE XX-SECURITY DEPOSIT
Not applicable.
ARTICLE XXI-INDEMNIFICATION-HOLD HARMLESS
Except for their own fault or negligence, the LESSEE agrees at all
times it will indemnify and save, protect and keep harmless the LESSOR and the
leased premises from every and all costs, loss or damage, liability, expense,
penalty and fine whatsoever, which may arise from or be claimed against the
LESSOR or the leased premises by any person or persons, for any injuries to
person or property, or damage of whatever kind or character
7
<PAGE>
consequent, upon or arising from the use or occupancy of the leased premises by
the LESSEE or consequent upon or arising from any neglect or fault of the LESSEE
or its agents and employees in the use and occupancy of the leased premises.
ARTICLE XXII-INSURANCE
A. During the term of this Lease, the following insurance coverages
shall be maintained on the leased premises: Fire, extended coverage, vandalism,
and malicious mischief insurance in appropriate amounts, which insurance shall
protect LESSOR'S and LESSEE'S interests, respectively.
B. LESSEE shall procure and maintain beginning at the lease
commencement as described in Article III herein and continuing until this lease
and any option expires, at its cost, the insurance coverages required under
Section A of this Article.
C. LESSEE shall procure and maintain, at LESSEE'S cost, comprehensive
public liability insurance with limits of liability of not less than
$1,000,000.00 for injury to one person, $2,000,000.00 for injury to two or more
persons, and property damage coverage on the improvements to the extent of the
fair insurable value thereof.
D. All insurance required to be maintained under this Lease shall be
affected under enforceable policies issued by insurers of recognized
responsibility licensed to do business in the state in which the Leased premises
are located. Each policy shall, to the extent possible, name as insureds LESSOR,
LESSEE, and any mortgagee of LESSOR, as their respective interests may appear.
Each policy shall to the extent obtainable, be written pursuant to an agreement
that such policy shall not be cancelled without at least fifteen (15) days
notice to the party not required by this Lease to maintain such insurance.
E. LESSEE shall provide LESSOR with proof of the existence of the
required insurance.
F. LESSOR and LESSEE and all parties claiming under them by way of
subrogation or otherwise mutually release each other from all liabilities
arising from any hazard covered by insurance with respect to the leased
premises, regardless of the cause of the loss. This release shall be in effect
only so long as the applicable insurance policy contains a clause to the effect
that this release shall not affect the right of the insured to recover under the
policy. Such a clause shall be obtained by the parties whenever possible.
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<PAGE>
ARTICLE XXIII-DESTRUCTION BY FIRE OR OTHER CASUALTY
A. If the leased premises should be totally destroyed by fire or such
other casualty, or should be so damaged that rebuilding or repairs cannot
reasonably be completed within sixty (60) days from the date of the notice by
LESSEE to LESSOR of the happening of the damage, then this Lease shall, at the
sole option of LESSEE, terminate.
B. If the leased premises should be damaged by fire or such other
casualty, but not to such an extent that rebuilding or repairs cannot reasonably
be completed within one hundred eighty (180) days from the date of the notice by
LESSEE to LESSOR of the happening of the damage, or if LESSEE has not exercised
its option to terminate pursuant to Section B of this Article, then, provided
that the casualty has occurred either prior to the final twelve (12) months of
the initial term of this Lease, or any renewal option term, or during such final
twelve (12) months and LESSOR has not exercised its option to terminate this
Lease as set forth in this Section, then this Lease shall remain in full effect
and LESSOR shall at its sole cost, proceed at once to rebuild or repair the
leased premises to substantially the condition in which they existed prior to
such damage. If the casualty occurs during the final twelve (12) months of the
initial term of this Lease, or any renewal option term, LESSOR shall have the
right, at its option, to terminate this Lease by sending notice of termination
to LESSEE within ten (10) days from the date of the notice by LESSEE to LESSOR
of the happening of the damage, upon which notice this Lease shall terminate.
C. If the leased premises are to be rebuilt or repaired and are
untenantable in whole or in part following such damage, the rent during the
period in which the leased premises are untenantable shall be equitably adjusted
proportionated to tenantability, in the reasonable objective determination of
LESSEE and LESSOR.
D. Wherever in this Article the phrase "this Lease shall terminate"
is used, it shall mean this Lease shall terminate and rent and all charges
payable as additional rent shall abate for the unexpired portion of this Lease,
effective as of the dates the notice by LESSEE to LESSOR of the happening of the
damage (except that LESSEE shall pay rent and additional rent for any portion of
the leased premises used by it prior to the time same is surrendered to LESSOR)
and LESSEE shall as soon as reasonably possible surrender to LESSOR the leased
premises and LESSOR may re-enter and take possession of the leased premises;
and, thereafter, LESSEE shall be discharged from this Lease.
E. If a dispute should arise between LESSOR and LESSEE with respect
to the number of days required to repair or rebuild any damage pursuant to this
Article, either or both parties shall
9
<PAGE>
request a mutually agreed upon arbitrator to make a determination of the number
of days so required. Such request shall also contain an agreement by the
parties to hold the insurance company harmless for any good faith determination
made by it. The determination so made shall be conclusive and binding on the
LESSOR and the LESSEE.
ARTICLE XXIV-ASSIGNMENT AND SUBLETTING BY LESSEE
LESSEE will not sublet the demised premises or any part hereof, or
transfer possession or occupancy thereof to any person, firm, partnership or
corporation, or transfer or assign this tease without the prior written consent
of LESSOR, nor shall any subletting or assignment hereof be effected by
operation of law or otherwise than by the prior written consent of LESSOR.
However, in neither case shall the LESSOR unreasonably withhold consent to such
a subletting or assignment.
ARTICLE XXV-CONDEMNATION
In the event that all or any part of the Demised Premises are taken or
condemned by competent authority during the term of this Lease, this Lease will
terminate as of the date of transfer of title or the date of taking possession
by the condemning authority whichever is earlier. The LESSEE shall not be
entitled to any portion of the condemnation award. The entire condemnation award
shall be the sole property of the LESSOR; provided, however, that nothing
contained herein shall prevent the LESSEE from collecting moving expenses as
provided by the Connecticut General Statutes. The LESSOR shall give the LESSEE
written notice of any condemnation within five (5) days after the LESSOR becomes
aware of such condemnation. There shall be no compensation to LESSEE for
destruction of the Lease term. In the event that less than all of the premise
are condemned by any competent condemning authority, the LESSEE shall have the
right to:
(a) Terminate this Lease as of the earlier date of the transfer of
title or the date of the taking of possession by the condemning authority, in
which event any unearned rent paid or credited will be refunded by the LESSOR to
the LESSEE; or
(b) Continue this Lease in full force and effect with a reduced fixed
rental commensurate with the reduced area and/or with reduced utilities to the
premises in lieu of the amount of rental herein provided, which reduced rental
will become effective on the earlier date of the title transfer or the date of
such taking. The LESSEE shall elect between these rights and shall give notice
to the LESSOR of its election within sixty (60) days after the date when
possession of the premises is acquired by the condemning authority. Any taking
of fifty (50%) percent or less of the parking area in front of the building
shall not be considered a substantial condemnation so as to entitled LESSEE to a
reduction of
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<PAGE>
rent, provided the rear parking area remains as now established.
ARTICLE XXVI-ATTORNEYS FEES AND COSTS
Upon default by the LESSEE, the LESSEE agrees to pay any reasonable
attorneys fees, court costs, or other expenses, incurred by the LESSOR in the
successful enforcement of any provision of this Lease.
ARTICLE XXVII-SIGNS
The LESSOR will advise the LESSEE the size and location of any sign
that is currently approved for the leased premises.
In the event the LESSEE desires a sign other than the one already
approved for the demised premises, subject to the written approval of the
LESSOR, the LESSEE will at its own expense have any sign it requires approved by
the Planning & Zoning Commission of the Town of KENT. In the event a zoning
variance is required, the LESSEE will at its own expense petition the Zoning
Board of Appeals of the Town of KENT to obtain the variance. The failure of the
LESSEE to obtain a variance is not a conditioned precedent to the inception of
this lease pursuant to its terms.
ARTICLE XXVIII-PARKING AREA
LESSOR shall provide a parking area for the common use of the
occupants of the shopping center. LESSEE shall have the nonexclusive right, to
use for its intended purposes, such parking area for itself, its employees,
agents, invitees and licensees subject, however, to the rights given other
LESSEES. LESSOR shall have the right to change the size, location, elevation
and/or nature of the parking area. LESSEE to park all employee's cars in rear of
parking lot, to make room for customer parking in front and sides.
LESSEE agrees that it, any concessioner and their respective officers,
employees, contractors and agents will park their automobiles and other vehicles
only where it is permitted by the LESSOR.
Provided however, that the resulting parking area(s) shall comply with
KENT zoning regulations for the continued use and occupancy of the leased
premises by the LESSEE and LESSEE'S business operation.
ARTICLE XXIX-EASEMENT FOR REPAIRS
LESSEE shall permit LESSOR or its designees to erect, use, maintain
and repair pipes, cables, conduits, plumbing, vents and wires, in and to and
through the demised premises, as and to the extent that the LESSOR may now or
hereafter deem to be necessary or convenient for the proper operation and
maintenance of the building which the demised premises are located or any other
portion of the shopping center. All such work shall be done, so far as practical
in such a manner as to avoid interference with the LESSEE'S use of the premises.
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ARTICLE XXX-ALTERATIONS
The LESSEE hereby agrees that any and all alterations, additions,
improvements or repairs after the commencement of the Lease as described in
Article III to the leased premises shall be at the LESSEE'S sole cost and
expense and that prior to making any alterations, additions, improvements or
repairs, the LESSEE shall obtain the written consent of the LESSOR, which
consent will not unreasonably be withheld or delayed. All alterations, additions
or improvements whether temporary or permanent in character, which may be made
on the leased premises either by the LESSOR or the LESSEE shall be the property
of the LESSOR and shall remain upon the leased premises without compensation to
the LESSEE at the end of the Lease term.
ARTICLE XXXI-ESTOPPEL CERTIFICATES
Each party shall at any time execute, acknowledge and deliver to the
other party a statement prepared by the requesting party, in writing certifying
to the current status of the Lease stating any modifications to the Lease and
the dates to which rental and other charges have been paid.
ARTICLE XXXII-BINDING-SUCCESSORS AND ASSIGNS
It is mutually agreed that the covenants and agreements contained
herein shall be binding upon the parties hereto and upon their respective
successors and legal representatives and assigns, except as expressly otherwise
provided hereinbefore.
ARTICLE XXXIII-NOTICES
A. Any notice to be given to LESSOR under this lease shall be in
writing and sent by registered or certified mail, return receipt requested,
addressed as follows:
To: Barton Kent LLC
PO Box 97
West Cornwall, CT 06797
B. An notice to be given to LESSEE under this Lease shall be in
writing and sent by registered or certified mail, return receipt requested,
addressed as follows:
To: Cyberian Outpost, Inc.
PO Box 636
Kent, CT 06757
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Each party may change the addresses for notice to it by written notice
to the other party, in the manner herein provided.
ARTICLE XXXIV-RECORDING
This Lease shall not be recorded. LESSOR and LESSEE shall at any time,
however, upon not less than ten (10) days prior written request by the other
party execute, acknowledge, and deliver to the other party an instrument in
recordable form, which instrument may be recorded by either party describing
such elements of this Lease as are required for a short form recording.
ARTICLE XXXV-HOLDOVER
In no event shall any holding over by the LESSEE constitute a renewal
of the term of this Lease.
ARTICLE XXXVI-LATE CHARGES
If the LESSOR has not received the full amount of any rental payment
or any additional rental payment by the tenth calendar day after the date it is
due, the LESSEE will pay the LESSOR a late charge. The amount of the charge will
be 5% of any overdue payment. the LESSEE agrees to pay this late charge
promptly.
ARTICLE XXXVII-CAPTIONS
The captions at the head of each article of this lease are inserted
for convenience and reference only and are not to be construed as affecting the
contents or limiting the scope of the particular articles which they head.
ARTICLE XXXVIII-EXECUTION
This lease may be executed in one or more counterparts, each of which
shall be deemed an original and which together shall constitute one and the same
instrument.
ARTICLE XXXIX-MISCELLANEOUS
A. All agreements in this lease shall be deemed to be "covenants" as
though the words importing such covenants were set forth in each instance.
B. Words used in the singular shall include the plural as appropriate
and words used in the plural shall include the
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<PAGE>
singular as appropriate and words used in any gender shall include the other
gender as appropriate.
C. References to "this Lease" shall include renewal as appropriate.
D. Any notice required or permitted under this lease shall be in
writing in accordance with Article XXVIII hereof.
E. Where any period would otherwise begin or end on a day not a
business day, such period shall begin or end on the on the next regular business
day.
F. All schedules annexed to this Lease shall be dated and signed by
the parties and shall be a part of this Lease.
ARTICLE XXXX-BROKERAGE
The parties acknowledge that no one is the only broker in this
transaction.
ARTICLE XXXXI-SAVINGS
If any portion of this Lease shall be found invalid, such invalidity
shall not affect the validity of the remainder of this Lease.
ARTICLE XXXXII-ENTIRE AGREEMENT
This Lease contains all the agreements made between the parties and
may not be modified other than by an agreement in writing signed by each of the
parties or its respective successor in interest.
ARTICLE XXXXIII-HAZARDOUS WASTE
LESSEE shall indemnify and hold LESSOR harmless from any liability
arising in conjunction with the removal, leakage and disposition by LESSEE of
any hazardous waste materials including but not limited to leakage from any
tanks, storage facilities or related materials. LESSEE further agrees to comply
with all regulations of the department of environmental protection of any local,
state or federal municipal agency. LESSEE further agrees that the provisions of
this article shall bind the principals of LESSEE individually who will sign this
lease acknowledging their personal guaranty as to this provision only for which
they shall be personally responsible and act as sole guarantors; but only to the
extent as follows: (i) said indemnity applies only to the actual conduct of
LESSEE and/or his agents and employees, and as to the acts of conduct of LESSOR
or any prior LESSEE of the leased premises or to any adjoining LESSEE; (ii) said
indemnity shall be extinguished upon the assignment of this lease by LESSEE,
provided the new LESSEE gives both a corporate and personal guarantee relative
to hazardous waste, as included in this Lease.
The LESSOR covenants and agrees to indemnify and to save and hold the
LESSEE harmless from any and all loss, damage, or liability incurred by LESSEE
in the clean-up or mitigation of any discharge or spill caused by the LESSOR and
not LESSEE for which the LESSOR shall be found responsible and which
indemnification shall include costs and attorney's fees incurred by the LESSEE
in the defense of any environmental enforcement action and in the enforcement of
LESSOR'S obligations under this Article.
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IN WITNESS WHEREOF, the parties have hereunto set their hands and
seals this 2nd day of December, 1997.
BARTON KENT LLC
-----------------------------------------
(LESSOR)
Russell Barton For Dale Barton
BY: /s/ Dale Barton
- -------------------------------- -------------------------------------
Duly Authorized Member
- --------------------------------
BY: /s/ Katherine N. Vick
- -------------------------------- -------------------------------------
Cyberian Outpost, Inc.
Its Vice President & CFO
Duly Authorized
- --------------------------------
STATE OF CONNECTICUT
ss:
COUNTY OF FAIRFIELD
The foregoing instrument was acknowledged before me by Russ Barton, a
Member of Barton Kent LLC, duly authorized to be their free act and deed and the
free act and deed of Russ Barton on this the 16th day of February, 1998.
/s/ Melanie Chernak
-------------------------------------
Notary Public
STATE OF CT
ss.
COUNTY OF LITCHFIELD
The foregoing instrument was acknowledged before me by Katherine Vick, vp &
CFO of Cyberian Outpost to be his free act and deed and the free act and deed of
said Katherine Vick on this the 11th day of February, 1998.
/s/ Melanie Chernak
-------------------------------------
Notary Public
15
<PAGE>
GUARANTY OF LEASE
GUARANTY given by Cyberian Outpost, Inc., the undersigned, to Barton
Kent LLC, a Limited Liability Company.
The undersigned, in consideration of the letting by Barton Kent LLC,
as LESSOR, of the premises located at 27 North Main Street Kent, Connecticut, to
Cyberian Outpost, Inc. of 27 North Main Street, Kent, Connecticut, as LESSEE,
under a certain lease dated december 2, 1997 does hereby covenant with the
LESSOR that if default shall at any time be made by the LESSEE in the payment of
rent or in the performance of any other covenants contained in such lease, the
undersigned will pay to the LESSOR, his personal representatives: or assigns the
rent or any arrears thereof, and all damages that may arise in consequence of
any default by the LESSEE under such lease, on receipt of written notice of such
default from the LESSOR, his personal representatives, or assigns. This guaranty
shall continue for the initial term of the lease or any renewal option term from
the date of the signing of the lease and be of no force and effect thereafter.
In witness whereof the undersigned has signed this guaranty.
/s/ Katherine N. Vick
------------------------------------------
Katherine Vick
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<PAGE>
Exhibit 10.4
L E A S E
---------
LEASE, made the _______ day of April , 1998, between BARTON KENT LLC,
a Connecticut limited liability company with an address of P.O. Box 97, West
Cornwall, CT 06796, its successors and assigns (hereinafter called Landlord) and
CYBERIAN OUTPOST, INC., a Connecticut Corporation with an address of 27 North
Main Street, Kent CT, 06757 (hereinafter collectively called Tenant).
W I T N E S E T H:
-----------------
ARTICLE I - DEMISED PREMISES
1.1 That in consideration of the rents and covenants herein provided
and contained on the part of the Tenant to be paid, performed and observed, the
Landlord does hereby demise and lease unto the Tenant:
1.1.2 A two-story building containing approximately 18,000 square feet
subject to the issuance of the necessary land use approvals and building
permits, to be constructed on a lot as more particularly described as
Tract Two on Exhibit A ("Lot") which building shall be referred to herein
as "Bldg. B".
1.1.3 Bldg. B and said Lot shall be collectively referred to as the
"Demised Premises"). Said Demised Premises is shown on the Site Plan
attached hereto as Exhibit B and made a part hereof. Demised Premises may
also include basement space for storage and equipment at no additional
rental cost to Tenant.
1.1.4 Tenant Construction Escrow Condition. It shall be a condition
of this Lease that Tenant shall pay an escrow of $100,000 ("Construction
Escrow") to Landlord upon signing of this Lease for the purpose of
providing good faith evidence of Tenant's intention for Landlord to
construct Bldg. B under the terms hereof and of Tenant to carry out
Tenant's Work as provided for herein. During Tenant's Work such escrow
shall be paid to Tenant as Tenant's Work (Schedule D) progresses so that
1/3 of the escrow is released to Tenant at time the Kent Building Official
inspects and approves the rough electric, 1/3 is released to Tenant when
drywall is ready for paint (and inspected and approved by building
official to the extent required by building official) and the final 1/3 is
released when the Certificate of Occupancy is issued by the Kent Building
Official. The Landlord shall credit the any earnest deposit previously
paid by Tenant to the Construction Escrow. Secor, Cassidy & McPartland, PC
("SCM") shall act as escrow agent for the Construction Escrow and under
the terms of this Lease and shall deposit the Construction Escrow in an
interest bearing account with interest payable to Tenant. The Parties
hereby consent to the appointment of SCM and to the terms of the escrow
set forth at Exhibit G hereto.
1.2 Landlord's Construction- Landlord's Expense. Subject to the
-------------------------------------------
terms hereof, the Landlord, at its own expense, shall complete work in the
construction of Bldg. B in accordance with the renderings, plans and
specifications attached hereto as Exhibit C, which renderings, plans and
specifications are hereby approved by the Tenant. Such construction enumerated
in Exhibit C is hereinafter referred to as "Landlord's Work".
1.3 Tenant's Construction- Tenant's Expense. Any work in or upon
---------------------------------------
Bldg. B in addition to the items of Landlord's Work (Exhibits C) shall be
"Tenant's Work" and shall be performed in accordance with Exhibit D, by Tenant
at its expense. Tenant shall coordinate Tenant's Work with Landlord's
contractor and, in the event of any problems with such coordination, Landlord's
contractor's reasonable decision regarding said problems shall control. Tenant
shall provide Landlord with fully completed mechanics' lien waiver forms for all
Tenant's Work as Tenant's Work progresses so that no mechanics or materialmen's
lien shall be filed against the property. Tenant shall be responsible for
defending and bonding off, within 30 days of filing, any lien so filed and shall
hold Landlord harmless for any costs incurred by Landlord, including reasonable
attorney fees, relating to any such lien.
1.4 Ready for Delivery Defined. The parties agree that the Demised
--------------------------
Premises shall be considered "Ready for Delivery" and "Ready for Delivery" is
hereby defined as the date which is ten (10) days after the date that the
building under construction is water tight (meaning the building has doors,
windows, roof and tyvak or similar protective covering) at which point Tenant's
Work may commence. Tenant shall complete rough electric in no more than 30 days
from Ready for Delivery date.
Following Tenant's completion of rough electric and building official's approval
of same, Landlord will complete Landlord's Work concurrent with the Tenant's
completion of remaining Tenant's Work.
<PAGE>
1.5 Two-year Commitment for North Building at 27 North Main Street,
--------------------------------------------------------------
Kent, CT. It is a condition of this lease that Tenant will lease and timely pay
- ---------
rent for Units 3A, 3B, 7B, 8, 9A and 9B of the North building at 27 North Main
Street, Kent, Connecticut, for at least two years after the commencement of this
lease and if Tenant fails to pay such rent within 10 days of due date for any
reason during the two years (providing that three times during any 12 month
period of such two year period, Landlord will be required to give notice of such
nonpayment and Tenant's payment shall be deemed timely if made within seven
days of such notice), the base rent for the Demised Premises shall be increased
to $12 per square foot or $18,000 per month until the commencement of year three
(3) of this Lease, when base rent shall return to the amount set forth in
Article III of this Lease.
1.6 Rent Due Landlord After Assignment or Sublet. If there is any
--------------------------------------------
assignment of this Lease by Tenant or a subletting of the whole of the Demised
Premises by Tenant at a rent which, in either case, exceeds the rent payable
hereunder by Tenant, or if there is a subletting of a portion of the Demised
Premises by Tenant at a rent in excess of the subleased portion's pro rata share
of the rent payable hereunder by Tenant, then Tenant shall pay to Landlord, as
additional rent, forthwith upon Tenant's receipt of each installment of any such
excess rent, the full amount of any such excess rent net of all reasonable,
typical and actual costs and expenses associated with such assignment or sublet.
The provisions of this Section shall apply to each and every assignment of the
Lease and each and every subletting of all or a portion of the Demised Premises,
whether to a subsidiary or controlling corporation or any other person, firm or
entity, in each case on the terms and conditions set forth herein. Each request
by Tenant for permission to assign this Lease, or to sublet the whole or any
part of the Demised Premises shall be accompanied by a warranty by Tenant as to
the amount of rent to be paid to Tenant by the proposed assignee, or sublessee.
For the purposes of this Section 1.6, the term "rent" shall mean all base rent,
additional rent or other payments and/or consideration payable by one party to
another for the use and occupancy of all or a portion of the Demised Premises.
1.8 Affect of Sale of Tenant's Business. Unless otherwise previously
-----------------------------------
consented to in writing by Landlord, which consent shall be at Landlord's
absolute discretion, if substantially all the assets, the stock and or the
business of Tenant is sold or transferred to any person or entity including,
without limitation, sister company(ies), subsidiaries or parent companies of
Tenant, this Lease and all the terms hereof shall be automatically assumed by
any purchaser, transferee or successor, whether such purchase or transfer is
prior to or after the construction of Bldg. B.
ARTICLE II - TERM OF LEASE AND OPTION TO RENEW
2.1 Initial Term. The term of this Lease shall commence on the
date of signing this Lease by all parties (Lease Commencement Date) and expiring
7 years from the Rent Commencement Date as defined below.
2.2 Commencement of Rent Monthly rent payments shall commence on
--------------------
the first day of the month following the issuance of a Certificate of Occupancy
or 4 months after the date that the Bldg. B is Ready for Delivery whichever is
earlier ("Rent Commencement Date"). Subject to the terms hereof, Landlord
agrees to proceed expeditiously with such construction and to use its best good
faith efforts to deliver the Demised Premises to the Tenant for occupancy by
September 30, 1998. Provided, however, that Landlord shall be in no way liable
to tenant for damages of any nature for failure to delivery occupancy by said
date. Tenant's only remedy for Landlord's failure to deliver occupancy by said
date, or any written, signed extension of said date, or within a reasonable time
thereafter shall be the right to terminate this Lease.
2.3 Addendum and Renewal. The parties agree to execute an addendum
--------------------
to this Lease upon the Rent Commencement Date indicating the Rent Commencement
Date, the date the original term ends, the commencement and ending date of each
Renewal Term and the rent for each year as computed under this Lease. Provided
that Tenant shall not be in default under the Lease and provided Tenant shall
have well and faithfully performed in a timely manner all of the terms,
covenants, and conditions on Tenant's part to be performed under the Lease, the
Tenant shall have the option to renew its Lease for one additional seven (7 )
year period ("Renewal Term") upon the same terms and conditions, except for the
basic annual rent which shall be computed as set forth in Article III herein.
Tenant shall exercise said renewal by giving the Landlord notice of its
intention to do so by certified mail, return receipt requested, no later than
six (6) months prior to the end of the original term of the lease. The date of
the commencement of the Renewal Term shall be the day after the expiration of
the initial term of the Lease. Time shall be of the essence with respect to such
renewal notice.
ARTICLE III - RENT AND SECURITY DEPOSIT
2
<PAGE>
3.1 Base Rent. Tenant agrees to pay to Landlord at the offices of
---------
the Landlord, or at such other place designated by Landlord, without any prior
demand therefor, and without any deduction or set-off whatsoever, an annual
rental during the term of this Lease and any Renewal Term as follows:
3.1.1 Base Rent. Subject to the provisions of Section 1.5, during
the first twenty-four (24) months of the lease term an annual triple net base
rent of $11.00 per square foot based upon 18,000 square feet (on two floors)
payable in equal monthly installments of $16,500 in advance, on the first day of
each month during said period; thereafter, annual triple net base rent for each
succeeding twelve (12) month period for the remainder of the term shall be as
follows:
3rd, 4th and 5th year $18,000 per month or $12 per square feet
for 18,000 sq.ft.
6th year $ 19,500 per month or $13 per square feet for 18,000 sq.
ft.
7th year $ 21,000 per month or $14 per square feet for 18,000 sq.
ft.
18,000 square feet shall be used to determine the rent but may not be the actual
finished square footage of Bldg. B. Furthermore, the 18,000 square feet figure
does not include any usable basement area which shall be included in the Lease
without additional rent.
3.1.2 The rent during the Renewal Term shall be adjusted as
follows: During the first twelve (12) months of the Renewal Term, an annual base
rent shall be calculated as follows: For the first year of the renewal term
(commencing the day after expiration), the rent shall be $270,000 based upon $15
per square foot for said stipulated 18,000 square feet, payable in equal monthly
installments of $22,500, in advance, on the first day of each month during said
term. On the anniversary date of each year of the Renewal Term, the rent shall
increase by $.50 per said 18,000 square feet over the base rent for the previous
twelve (12) months.
3.2 Pro-Rata Initial Rent Payment. In addition to the above rent,
-----------------------------
the Tenant shall pay, during the period from date of the issuance of a
Certificate of Occupancy, or four (4) months after the date that the Bldg. B is
Ready for Delivery, whichever is earlier, to the Rent Commencement Date a per
diem rent equal to 1/30th the monthly Base and additional rent due and owing for
the first month of the lease term for every day during such period.
3.3 Triple Net. The annual base rent as set forth above, shall be
----------
absolutely net to Landlord during the original term and during the Renewal Term,
and all costs, expenses and obligations of any nature whatsoever relating to the
Demised Premises or any improvements thereon which may arise or become due
during the term and Renewal Term of the Lease, shall be paid by Tenant, even if
they are not expressly set out as Tenant's obligations in subsequent sections of
this Lease.
3.4 Additional Rent. The Tenant shall pay as additional rent any
---------------
money other than Base Rent required to be paid by Tenant under this Lease,
whether or not the same be designated "additional rent". If such amounts or
charges are not paid at the time provided in this Lease, they shall
nevertheless, if not paid when due, be collectible as additional rent with the
next installment of rent thereafter falling due hereunder, but nothing herein
contained shall be deemed to suspend or delay the payment of any amount of money
or charge at the time the same becomes due and payable hereunder, or limit any
other remedy of the Landlord.
3.5 Late Payment Penalty and Interest. If Tenant shall fail to pay,
---------------------------------
when the same is due and payable or within the ten (10) days thereafter, any
rent or any additional rent, or any amounts or charges of the character
described in Article III hereof, Tenant shall pay to Landlord a late charge
equal to five percent (5%) of any such late payment and shall pay interest on
the unpaid balance at the rate of twelve percent (12%) per annum from the date
the charges became due until it is paid in full.
3.6. At Rent Commencement Date, Tenant shall deposit with Landlord a
Security Deposit in the amount of $16,500 as security for the performance of
Tenant's obligation under this lease and any renewals and extensions of this
Lease. Landlord shall have a right to apply any part or all of said security
deposit to remedy any default by Tenant hereunder, after any applicable notice
and cure period, including but not limited to, payment of any rent, additional
rent, holdover rent, repair of all damage to the Demised Premises caused by
Tenant, or any of its agent, employees, invitees or licensees. If Landlord
applies any part of said security deposit to remedy any default of Tenant,
Tenant shall upon demand deposit with Landlord the amount so applied so that
Landlord shall have the full deposit on hand at all times during the terms of
this Lease.
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Landlord shall not be required to keep the security deposit separate from its
own funds and tenant will not be entitled to interest on the security deposit.
If Tenant pays the rent including additional rent and performs all of its other
obligations under this Lease (including renewals and extensions) Landlord will
return the unused portion of the Security Deposit to Tenant within 60 days after
the end of the term, as extended; however, if Landlord has evidence that the
security deposit has been assigned to an assignee of the lease, Landlord will
return the deposit to the assignee. Landlord may deliver the security deposit
to a purchaser of the Demised Premises and be discharged from further liability
with respect to it.
ARTICLE IV - REPAIRS, MAINTENANCE, LANDLORD CONTROL AND ALTERATIONS
4.1 Repairs and Maintenance ("R and M") by Tenant. Tenant shall be
---------------------------------------------
solely responsible for internal and external repair and maintenance of the
Demised Premises, including without limitation, the heating, ventilating, air
conditioning, mechanical, electrical, elevator, and plumbing systems, structural
roof, walls, roof, and exterior walls and the fixtures and appurtenances of the
Demised Premises and the related parking areas and facilities, access roads,
driveways, retaining walls, sidewalks, walkways, loading docks, delivery and
pick-up areas, landscaped areas, exterior lighting facilities, comfort stations
and public washrooms, (if any). Such Repairs and maintenance shall be as and
when needed to preserve them in good working order and condition and regardless
of whether the repairs, restorations and replacements are ordinary or
extraordinary, foreseeable or unforeseeable, capital or noncapital, or the fault
or not the fault of the tenant, its agents, employees, invitees, visitors, or
contractors. Tenant shall be responsible for all such costs which are
collectively referred to herein as "R and M". Except as otherwise set forth in
this agreement, no costs or expenses in connection with the original
construction of the Demised Premises or any of the construction of new
structures or buildings as part of the Demised Premises shall be included in R
and M. But repaving of Parking Areas and other replacements of improvements in
external areas so as to maintain them in good repair shall be considered R and
M. The responsibilities under this section shall be subject to Landlord's one
year warranty for Landlord's Work. Any warranties beyond one year period
received by Landlord for Landlord's work shall be transferred to Tenant.
R and M shall include all costs and expenses of every kind and nature
in operating, policing, protecting, securing, managing, equipping, lighting,
repairing, providing general signage, repaving, replacing, and maintaining the
Demised Premises including, but not limited to, the cost and expenses of:
4.1.1 Operating, maintaining, repairing, lighting, cleaning,
sweeping, painting, resurfacing and striping of and removing snow,
ice and debris and removing garbage and trash from the Demised
Premises;
4.1.2 Exterior maintenance, replanting and replacing of flowers,
shrubbery, plants, trees and other landscaping, and all water used to
irrigate and water flowers, shrubbery, plants, trees and other
landscaping located in or on the Demised Premises;
4.1.3 Maintenance of smoke detectors and fire protection;
4.1.4 The cost of recorded music, electricity, and other
utilities used with respect to the Demised Premises and public areas
including, but not limited to, electricity for lighting the parking
facilities, loading areas, and entrance/exit areas;
4.1.5 Personnel or services, including, without limitation,
security and maintenance;
4.2 Failure of Tenant to Properly Maintain. In the event that Tenant
--------------------------------------
does not adequately maintain the Demised Premises or any part thereof, as
determined in the reasonable discretion of the Landlord, after notice to Tenant
and a right to cure within 30 days after such notice Landlord may take over the
maintenance, in part or in full, and charge tenant for such services. (However,
if Tenant initiates such cure within said 30 days and is diligently proceeding
to complete the cure, but due to the nature of the problem the work cannot be
completed within such 30 day period, Tenant shall have such additional time as
is necessary up to a maximum of 90 days. However, such 90 day period shall be
extended for force majeure. In such case, Tenant shall pay Landlord's management
fees in an amount equal to five percent (5%) of the gross annual rent from
Tenant. Furthermore, Landlord may cause any or all maintenance services for the
Demised Premises to be provided by an independent contractor or contractors or
other parties. Tenant shall pay to Landlord, as Additional Rent, R and M costs
incurred by Landlord for each calendar year. The additional rent provided to be
paid by Tenant in this Section shall be a
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monthly charge equal to one-twelfth (1/12th) of Landlord's estimate of the total
R and M as determined for each lease year adopted by Landlord for such purpose,
and shall be payable in equal monthly installments in advance on the first of
each month without any prior demand therefor from Landlord and without any
deduction or set-off whatsoever. This Additional Rent for R and M shall be due
and payable five (5) business days from receipt of a bill. As soon as reasonably
possible following the end of each calendar year, Landlord shall furnish Tenant
a statement covering such calendar year just expired in reasonable detail (with
copies of invoices and proof of payment upon request of Tenant), showing the R
and M for such lease year and the payments made by Tenant with respect to such
lease year as set forth above. If R and M is less than Tenant's payments so
made, Landlord shall refund the difference to Tenant within thirty (30) days
after Tenant's receipt of such statement. If R and M, however, is greater than
Tenant's payments, Tenant shall pay Landlord the difference as Additional Rent
within thirty (30) days after receipt of such statement.
4.3 Repair of Damage. The Tenant also agrees, at its own expense,
----------------
to immediately repair any damages to the Demised Premises caused by the
operation of its business on or about the Demised Premises, including, without
limitation, any damage to the parking areas caused by the operation (including
without limitation, the driving, loading or unloading) of delivery vans, trucks,
carts or vehicles of any sort servicing Tenant's business or the Demised
Premises. Failure to repair same within thirty (30) days after notice from
Landlord will permit Landlord to remedy the damage and to demand immediate
payment from Tenant for the cost of said remediation. If Tenant does not pay
Landlord within thirty (30) days of receipt of the notice of such demand,
Landlord may deduct the reasonable cost of such remediation from Tenant's
Security Deposit and demand immediate replacement of the Security Deposit up to
the original amount posted. Failure to restore Security Deposit upon thirty (30)
days' notice after such demand shall be a default under this Lease and Landlord
shall have all the default remedies set forth in this Lease.
4.4 Landlord Control. Landlord may, at any time and from time to
----------------
time: Upon ten (10) days prior notice, close all or any portion of the parking
and access areas to the Demised Premises to make repairs or changes or to such
extent as may, in the opinion of Landlord, be necessary to prevent a dedication
thereof or of the accrual of any rights to any person or to the public therein;
close temporarily any or all portions of the said areas to discourage non-tenant
parking; and do and perform such other acts in and to said areas as, in the
exercise of good business judgment, Landlord shall determine to be advisable
with a view to the improvement of the convenience and use thereof by tenants,
their employees, agents and invitees. Any such closings and improvements by
Landlord shall not unreasonably interfere with Tenant's business or reduce the
available parking on the Demised Premises by more than 15 spaces closed on such
temporary basis.
4.4.1 No motor vehicle may be stored in the Demised Premises.
Any vehicle relating to Tenant's business parked in one customer
parking space for more than ten (10) continuous business days
shall be deemed "stored" and shall be towed by Tenant at its
expense or if not so towed may be towed by Landlord at Tenant's
expense.
4.4.2 No inoperable motor vehicle, unregistered motor vehicle,
parts of any motor vehicle, or any other related item, material,
or substance shall be stored or located in the Demised Premises.
Neither Tenant nor its employees nor any other person may work
on or repair any car or other vehicle in the Demised Premises,
including the parking areas, and/or on adjacent streets. With
consent of Tenant, Landlord may designate space provided for
employee or Tenant parking as public parking at specific times.
4.5 Alteration, Improvements, Changes and Additions by Landlord.
-----------------------------------------------------------
4.5.1 By Tenant and Reservations to Landlord . Landlord
--------------------------------------
reserves the right to construct other buildings and improvements in the Demised
Premises from time to time, to make alterations thereof or additions thereto, to
build additional stories thereon, to build adjoining same, to construct
additional elevated and/or other parking facilities, and to demolish, alter,
renovate, make additions to any buildings and improvements located on the
Demised Premises. Tenant shall be permitted to rearrange and renovate interior
fit-ups in the core of the building which were installed as part of Tenant's
Work (Schedule D) providing such work does not alter or damage the shell and
portion of the building constructed by Landlord (Schedule C). In such case,
Tenant shall provide prior notice to Landlord of all such alterations. Any such
remodeling, requested or desired by Tenant, other than Landlord's Work, shall be
at Tenant's sole expense. All such work by Tenant shall be done with due
diligence, in a good and workmanlike manner, and in compliance with the laws,
ordinances, orders rules, regulations, certificates of occupancy or other
governmental requirements; Tenant shall provide Landlord with absolute
mechanic's lien waiver
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for all work performed by Tenant, or its agents, contractors and subcontractors
and shall keep the Demised Premises free of all liens. If any such mechanic's or
materialmen's liens are filed, Tenant shall bond off those liens within 30 days
of filing and shall hold Landlord harmless for all costs, including reasonable
attorney's fees, actually and reasonably incurred by Landlord with respect to
such liens.
4.5.2 By Landlord to Comply with Laws Tenant agrees that Landlord
-------------------------------
shall at all times have the right and privilege of making changes, alterations,
rearrangements, additions which are a result of any federal, state or local
environmental protection or other law, rule, regulation, guideline or order.
Nothing described in Exhibit A or B shall limit or prevent Landlord from
effecting any changes or alteration to the Demised Premises as described in this
Section. Notwithstanding anything set forth above to the contrary, the Landlord
shall not make any changes to the Demised Premises which would materially
interfere with the Tenant's operation of its business in the Demised Premises.
4.5.3. Removal at End of Term All alterations, additions, fixtures
----------------------
and improvement, permanent in character, made in or upon the Demised Premises by
Tenant, will remain on the Demised Premises without compensation to the Tenant;
provided, tenant shall be entitled to remove by the last day of the term, its
furnishings, equipment, machinery, and trade fixtures. Tenant will remove the
trade fixtures, equipment, machinery and furnishings at Tenant's sole cost and
except to the extent expressly waived or requested by Landlord in writing, will
restore the Demised Premises to the condition in which it was in before
installation of such trade fixtures, equipment, machinery and furnishings,
reasonable wear and tear excepted. If Tenant fails to remove such items by the
last day of the term, Tenant waives is right to remove same and Landlord may
remove and dispose of same without complaint by Tenant and Tenant shall pay all
costs reasonably incurred by such removal and disposal.
ARTICLE V - REAL ESTATE TAXES
5.1 Tenant shall pay as Additional Rent to the Landlord all the real
estate taxes against and attributable to the Demised Premises including Building
B and Tract Two as described on Exhibit A.
5.1.1 Tenant shall also pay all taxes assessed on improvements made
in or about the Demised Premises by Landlord and Tenant.
5.1.2. Tenant shall pay to Landlord monthly, on the first day of
each month during the term of this Lease and any extension thereof, an amount
equal to 1/12th of its share of the real estate taxes as provided above.
Landlord shall hold said funds for the benefit of the Tenant and use them to pay
such taxes as they fall due. If said funds are insufficient to pay the taxes
when due, the Landlord shall bill the Tenant for the difference and Tenant shall
make payment to Landlord within fifteen (15) days after receipt of said bill. If
said funds are in excess of the taxes due, then Landlord shall return the unused
portion of said funds to the Tenant within thirty (30) days after the taxes
become due, except that if the Tenant is in default in the payment of rent as
provided for herein, Landlord may apply said unused funds to the payment of said
rent. Tax bills shall be supplied to Tenant when available from Town and shall
be sufficient evidence of the amount of such taxes and shall be used for the
calculation of the amount to be paid by the Tenant. Landlord shall provide
Tenant with copy of paid tax bills or other proof of such payment. "Real Estate
Taxes" shall mean all taxes or assessments and governmental charges whether
federal, state, county, or municipal which are levied or charged against real
estate or rent, or on the right or privilege of leasing real estate or
collecting rent and any other taxes and assessments attributable to the Demised
Premises or its operation, excluding federal, state or other income taxes, and
federal and/or state succession or inheritance taxes.
If any payment for taxes shall be due for any tax year in which said
Lease shall be in force and effect for less than a full tax year, such payment
shall be prorated so the amount payable by Tenant shall be based on the actual
number of months that said Lease shall be in force and effect during such tax
year.
ARTICLE VI - COMPLIANCE WITH ENVIRONMENTAL LAWS, FIRE CODES, AND OTHER LAWS
6.1 Laws in General. The Tenant, at its sole expense, shall comply
---------------
with all laws, orders, and regulations of federal, state, and municipal
authorities, and with any direction of any public officer, pursuant to law,
which shall impose any duty upon the Landlord or the Tenant with respect to the
Demised Premises, including, but not limited to, such as relate to the venting
of noxious odors and fumes, cleanliness, safety, occupation and use of said
premises and the nature, character and manner of operation of the business
conducted in or at the Demised Premises. The Tenant, at its sole expense, shall
obtain all licenses or permits which may be required for the conduct
6
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of its business within the terms of this Lease, or for the making of repairs,
alterations, improvements, or additions, and the Landlord, where necessary, will
join the Tenant in applying for all such permits or licenses.
6.2 Environmental Laws - Landlord. Landlord represents, that except
-----------------------------
as specifically disclosed to Tenant, that as of the date hereof, the Landlord
and the Demised Premises are not in violation of any local, state or federal law
or regulation concerning the handling and disposal of oil, petroleum products,
hazardous substances, and/or hazardous waste or concerning any air, water or
noise pollution.
6.3 Environmental Laws - Tenant. Tenant shall comply with all local,
---------------------------
state and federal laws and regulations concerning the generation, handling,
transportation, and disposal of oil, petroleum products, hazardous waste,
hazardous substances, special waste, toxic or hazardous material, and/or
biochemical waste and air, water and noise pollution (all as defined under
federal or Connecticut laws and regulations).
6.3.1 If Tenant intends to generate, produce, store, or create,
on the Demised Premises, any oil or petroleum product, anti-freeze or
any chemical defined as hazardous waste, hazardous substance, special
waste, toxic or hazardous material, and/or biochemical waste by the
Department of Environmental Protection of the State of Connecticut
(DEP), or by the Environmental Protection Agency of the Federal
Government (EPA), it must submit a plan to said agency or agencies
and to the Landlord, prior to occupancy, for the safe handling,
storage and use and removal of any such substance. If a permit is
required by the DEP or EPA for the generation, use, storage,
transportation, and/or removal of such substance, Tenant must obtain
and maintain such permit throughout tenancy and shall submit a copy
to Landlord prior to occupancy and provide renewals, amendments,
cancellations to Landlord during the term of this Lease.
6.3.2 If there is a "spill" of any substance set forth in
Section 6.2 and 6.3 above and such spill is caused by Tenant, its
agents, employees, or invitees or is related to Tenant's, its agents,
employees, or invitees' use of the Demised Premises, such "spill"
shall be immediately reported by Tenant to the local fire marshall,
to the DEP, to the EPA if required, and to the Landlord. Tenant shall
take immediate remedial action to contain and clean up such "spill"
and shall be solely responsible for all costs of remedial action
including, but not limited to, the cost of professional environmental
studies and reports, damages to any person or entity, attorneys'
fees, clean up, soil removal, monitoring costs, fines and penalties.
6.3.3 If Tenant does not take immediate remedial action to
contain and clean up such "spill", or if Landlord is ordered by the
fire marshall, DEP or EPA to take remedial action to contain and
clean up such "spill", and after notice to Tenant, Landlord may take
all necessary remedial action to contain and clean up such spill,
Tenant shall reimburse Landlord for all costs of such remedial
action, including, but not limited to, the cost of professional
environmental studies, damages to any person or entity, attorneys'
fees, soil removal, clean up, monitoring costs, fines and penalties,
and interest from the date Landlord incurs each expense until such
expense is paid by Tenant at the rate of twelve percent (12%) per
annum.
6.3.4 At the conclusion of the term of this Lease or any
modifications, renewals, or extensions thereof, or upon Tenant's sale
of its business to a third party, or upon Landlord's mortgaging of
the Demised Premises from time to time, or upon Landlord's sale of
the Demised Premises to a third party, Tenant shall submit a Negative
Declaration and a Certification to Landlord pursuant to the
provisions of Connecticut Public Act No. 87-475 or any successor
statute. Said Declaration and Certification shall state that there
has been no discharge, spillage, uncontrolled loss, seepage or
filtration of hazardous waste, toxic waste and/or biochemical waste
on the Demised Premises or the grounds, or that any such discharge,
spillage, uncontrolled loss, seepage or filtration has been cleaned
and removed in accordance with procedures approved by the
Commissioner of Environmental Protection of the State of Connecticut
or determined by him to pose no threat to human health or safety or
the environment which would warrant containment and removal or other
mitigation measures, and that any hazardous waste, toxic or hazardous
material, and/or biochemical waste which remains on site is being
managed in accordance with Chapters 445 and 446k of the Connecticut
General Statutes and regulations adopted thereunder, and in
accordance with any other State or Federal law or regulation which
shall then be applicable. Failure or inability of the Tenant to
provide said Declaration and Certification, or the presence of any
waste on the Demised Premises contravened by said Declaration and
Certification shall entitle the
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Landlord to recover damages from the Tenant on the basis of
strict liability, without regard to fault, for all clean up and
removal costs and direct and indirect damages arising therefrom,
including reasonable attorney's fees incurred in the enforcement
of this Article.
6.4 Fire Code. The Landlord represents that, without reference to
---------
Tenant's use or Tenant's Work, the Demised Premises is in conformance with
applicable fire codes or will be in conformance with applicable fire codes on
the date that Tenant takes occupancy. Tenant will comply with all applicable
fire and building codes in the construction of Tenant's Work and in Tenant's use
of the Demised Premises. If, because of the nature of Tenant's operations, the
Landlord is required by the fire codes to make modifications or additions to the
fire protection or smoke detection system, fire walls, exits, fire escapes or
any other fire prevention system, then Tenant agrees to pay for any such
modification or addition as additional rent, payable in full upon completion of
such modifications and/or additions.
6.5 Compliance with Laws and Codes. Tenant shall comply with all
------------------------------
local, state and federal laws and regulations. If Tenant does not so comply
after notice and reasonable time to cure, said failure shall be a default under
this Lease and Landlord shall have all the default remedies hereunder for which
it is entitled. Landlord represents that, upon occupancy by the Tenant for
office space, the Demised Premises will be in compliance with the applicable
zoning regulations and that such use is a permitted use subject to the terms of
the Special Permit issued by the Kent Planning and Zoning Commission for such
office use; Landlord will obtain all required permits and approvals except as
required for Tenants Work, which shall be the responsibility of the Tenant.
ARTICLE VII - USE OF DEMISED PREMISES
7.1 Use of Demised Premises. Tenant covenants and agrees that
-----------------------
throughout the term of this Lease, including any Renewal Term, the Demised
Premises shall only be used for and as offices under the terms of the Special
Permit issued for such offices by the Town of Kent Planning and Zoning
Commission and for no other purpose.
7.2 Rules and Regulations. Tenant covenants and agrees that
---------------------
throughout the term of this Lease and any extension or renewal thereof:
7.2.1 It will not overload, damage or deface the Demised
Premises;
7.2.2 It will comply with the rules and regulations set forth in
Exhibit E attached hereto relative to the operation and use of
the Demised Premises and with such rules and regulations
established by Landlord from time to time with respect thereto;
7.2.3 It will vent all noxious and hazardous odors and fumes from
its operations, maintain humidity controls, maintain noise
levels, and provide safe procedures for the handling and storage
of chemicals and other hazardous materials in such a manner so as
not to affect or interfere with occupants of other properties
adjacent to or within close proximity of the building, and in
such a manner so as not to cause damage to the building, the
building lot upon which the building is located, and neighboring
properties. Tenant shall present plans and specifications for the
installation of any vents to Landlord for its written approval
prior to installation. If the Tenant fails to comply with this
provision, the Landlord may install said ventilation or other
controls and charge the Tenant the reasonable costs thereof which
the Tenant agrees to pay as additional rent, or at the Landlord's
election, the Landlord may terminate this Lease upon thirty (30)
days written notice to the Tenant.
7.2.4 It will place all of its rubbish and waste only in
dumpsters provided by Tenant, approved by Landlord and in the
area designated by the Landlord; Tenant shall be responsible for
the actual costs of removal and/or provision for dumpsters.
Tenant will be responsible daily policing and clean-up of all
rubbish, waste, and litter deposited by Tenant, its agents,
employees, or customers on the Demised Premises so that its
business does not present an untidy public appearance. If Tenant
fails to provide such adequate daily policing and clean-up,
Landlord, at its option, may bill Tenant as Additional Rent the
extra costs relating to such policing and clean-up. Tenant shall
provide, at Tenant's expense, sufficient and appropriately placed
waste receptacles for use by its employees and customers, which
receptacles shall be preapproved by Landlord as to type and
location and Tenant shall be solely responsible for disposal of
contents so that there is no unsightly accumulation of trash in
the Demised Premises.
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7.2.5 It will not place or suffer to be placed or maintained on
any exterior door, wall or window of the Demised Premises, any
sign, awning or canopy, or advertising matter or other thing of
any kind, and will not place or maintain any decoration,
lettering or advertising matter on the glass of any window or
door of the Demised Premises without first obtaining Landlord's
written approval, which approval shall not be unreasonable
withheld. Tenant further agrees to maintain in good condition and
repair at all times such sign, awning, canopy, decoration,
lettering, advertising matter or other thing as may be approved.
Any of said items so installed without such written approval and
consent or which are not maintained in good condition and repair
may be removed by Landlord at Tenant's expense. Landlord will
require signs to be as uniform as possible for the entire Demised
Premises. All signage must comply with local zoning regulations
and must be as approved by the Commission.
ARTICLE VIII - MANNER AND HOURS OF OPERATION
Intentionally Blank.
- --------------------
ARTICLE IX - MAINTENANCE, REPAIRS, AND ALTERATIONS
9.1 Tenant Alterations. Tenant may make alterations or improvements
------------------
in and to the Demised Premises, at its own cost, as set forth in Exhibit D and
as it may deem desirable for its use thereof, except no alteration shall be made
that modifies the basic building structure, systems or utilities without the
written approval of Landlord, which approval shall not be unreasonably withheld.
All repairs and alterations shall be of quality at least equal to the original
construction. At the termination of this Lease, except for casualty losses
insured against, or losses occasioned by floods, earthquakes, wars, acts of God,
or other losses over which Tenant has no control, Tenant shall deliver the
Demised Premises to Landlord in good condition and repair, allowance being made
for ordinary wear, tear and obsolescence. Tenant shall be responsible for any
damage to the Demised Premises as a result of removal of Tenant's sign. In
addition, all of said alterations or improvements (except Tenant's trade
fixtures and subject to the terms of Section 4.5.3) shall remain the property of
Landlord. However, should the Landlord elect that such alterations or
improvements be removed by Tenant, then Tenant agrees to remove same at Tenant's
sole expense and to restore the Demised Premises to the condition it was in at
the commencement of this Lease. If Tenant shall fail to remove same, then
Landlord shall cause same to be removed and Tenant agrees to reimburse the
Landlord for the actual cost of such removal, together with any and all damages
which Landlord may suffer by reason of Tenant's failure to remove same.
9.2 Maintenance and Repair. The Tenant agrees to maintain and repair
-----------------------
the interior of the Demised Premises, including but not limited to, the interior
walls and partitions, and all of the mechanical systems including the furnace,
plumbing and electrical system. Tenant shall also maintain and repair both the
interior and exterior of all windows and doors, including overhead doors,
located within the Demised Premises. Tenant shall provide and maintain an
adequate number of fire extinguishers and smoke alarms in the Demised Premises
in order to comply with local fire codes. Tenant, at its sole expense, will,
throughout the term of this Lease, obtain and keep in force a maintenance
contract with a service company acceptable to Landlord to regularly inspect and
perform maintenance services to the heating, ventilating and air-conditioning
system serving the Demised Premises. Tenant shall furnish Landlord with a copy
of said maintenance contract, and of renewals or replacements thereof. If Tenant
does not timely provide such contract(s) or renewal(s), Landlord shall obtain
same and the cost shall be charged to the Tenant as Additional Rent.
9.3 Glass. The Tenant further covenants and agrees to promptly
------
replace all broken glass on the Demised Premises during the term of this Lease
or any month-to-month extension thereof at its own expense, and Tenant shall
carry plate glass insurance naming Landlord as additional insureds. Tenant
further agrees to clean all glass on the interior and exterior of the Demised
Premises with reasonable frequency so as to provide a reasonably clean
appearance.
9.4 Exterior Structural Repair. Landlord shall be responsible only for exterior
structural repair of the foundation unless such repairs are due to the
negligence of the Tenant or its agents, servants, employees, invitees, or
customers. All other structural repairs shall be the sole responsibility of
Tenant.
ARTICLE X - UTILITIES
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10.1 Utility Charges. Tenant agrees to pay all charges for
---------------
electricity, gas, fuel oil, water, telephone and fire service line charges for
fire protection including sprinkler protection and monitoring, if applicable,
and any other utilities used by the Demised Premises, whether or not the
services are billed directly to Tenant. If possible, separate meters or
submeters for gas, electricity and water shall be provided and installed by
Landlord.
10.2 Temperature. Tenant shall maintain a temperature within the
-----------
entire Demised Premises of at least 50 degrees Fahrenheit in order to prevent
freezing of pipes and plumbing located therein.
10.3 No Liability of Landlord. Landlord shall not be liable in
------------------------
damages or otherwise for any failure to furnish or interruption of the services
of heat or any utility consumed or used in the Demised Premises, providing that
such failure is beyond the reasonable control of Landlord and not due to
Landlord's negligence.
ARTICLE XI - INDEMNITY AND INSURANCE
11.1 Tenant to Provide Insurance. Tenant covenants and agrees that
---------------------------
it will obtain and maintain during the term of this Lease, at its own expense,
"all-Risk" coverage insurance naming the Landlord and the Tenant as insured as
their interest may appear. The amount of the insurance will be designated by
Landlord no more frequently than once every twelve (12) months, will be set
forth on an "agreed amount endorsement" to the policy of insurance, will not be
less than the agreed value of the buildings and improvements, and will be
subject to arbitration if Landlord and Tenant do not agree with regard to such
value. The initial agreed upon value will be $1,500,000.00. Tenant shall also
obtain and maintain general comprehensive public liability insurance (commercial
general liability insurance) with responsible companies qualified to do business
in Connecticut which shall insure Landlord and all persons in privity with
Landlord, as well as Tenant, against all claims for injuries to persons or for
death occurring in or about the Demised Premises, in the amount of at least Two
Million Dollars ($2,000,000.00), and against all claims for damages to or loss
of property occurring in or about the Demised Premises in the amount of at least
One Million Dollars ($1,000,000.00). Tenant shall also provide the following:
11.3.1 Insurance of Tenant Improvements. Tenant agrees that it
---------------------------------
will, at its own cost and expense, keep its own Tenant
improvements, including those listed on Schedule C, fixtures, and
office equipment adequately insured during the term hereof
against all loss and casualty, with the usual extended coverage
endorsements.
11.3.2 Worker's Compensation. Tenant shall also maintain
----------------------
worker's compensation insurance.
11.3.3 Builder's Risk Insurance. Tenant shall also maintain
------------------------
adequate Builder's Risk insurance during Tenant's Work (Schedule
D).
11.3.4 Certificates of Insurance and Notices. Tenant agrees to
-------------------------------------
furnish Landlord and Premises owner with policies or certificates
of the insurance described herein prior to the commencement of
the term hereof and each renewal policy or certificate thereof at
least ten (10) days prior to the expiration of the policy it
renews. Each such policy shall provide that the policy may not be
materially modified or cancelled with respect to the Landlord's
and Premises owner's interest without at least thirty (30) days'
prior written notice to the Landlord and Premises owner; all such
insurance policies shall name Landlord as an additional insured.
All insurance policies will be promptly provided to Landlord and
shall contain typical provisions considering the type of
insurance, quality and type of building and use of the Demised
Premises.
11.2 Control. Tenant covenants and agrees to assume exclusive
-------
control of the Demised Premises, and all tort liabilities incident to the
control or leasing thereof, and to save Landlord harmless from all claims or
damages arising on account of any injury or damage to any person or property on
said Demised Premises, or otherwise resulting from the use and maintenance and
occupancy of the Demised Premises or of any thing or facility kept or used
thereon, unless such injury or damage is caused by Landlord's negligence or
breach of its obligations hereunder; further, Tenant shall save Landlord
harmless from any liability on account of any accident or injury to Tenant, or
to any of Tenant's servants, employees, agents, visitors, customers, or
licensees, or to any person or persons in or about the said Demised Premises.
In case Landlord shall, without fault on its part, be made a party to any
litigation commenced by or against Tenant, then Tenant shall protect and hold
Landlord harmless and shall pay on demand all costs, expenses and reasonable
attorneys' fees incurred or paid by Landlord in connection with such litigation.
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11.3 Limited Liability of Landlord. Landlord shall not be liable for
-----------------------------
any damage to the Demised Premises, or to any property of the Tenant or of any
other person thereon, from water, rain, snow, ice, sewage, toxic substances or
waste, steam, gas or electricity which may leak into or issue or flow from any
part of the Demised Premises, or from the bursting, breaking, obstruction,
leaking or any defect of any of the pipes or plumbing, appliances, or from
electric wiring or other fixtures in or on the Demised Premises or any part
thereof, or from the street or subsurface, except such damage or injury as may
be caused by the negligent act or omission on the part of the Landlord, its
agents, servants or employees.
11.4 Insured Losses. Landlord and Tenant each hereby waive such
--------------
causes of action either may have or acquire against the other which are
occasioned by the negligence of either of them or their employees or agents
resulting in the destruction of or damage to real or personal property belonging
to the other and located on the Demised Premises which are caused by fire and/or
the hazards insured against in an extended coverage endorsement to a standard
fire insurance policy approved in the State of Connecticut. Each party to this
agreement further agrees to cause any insurance policy covering destruction of
or damage to such real or personal property from fire and/or the hazards covered
under the aforementioned extended coverage endorsement to contain a waiver of
subrogation clause or endorsement under which the insurance company waives its
right of subrogation against either party to this agreement in case of
destruction of or damage to the aforementioned real or personal property of
either such party.
ARTICLE XII - SUBORDINATION, ATTORNMENT, ESTOPPEL CERTIFICATES
12.1 Subordination. Tenant agrees that this Lease is subject and
-------------
subordinate to any easements relating to the real property of which the Demised
Premises is a part, and to the lien of any mortgage granted by Landlord which is
now on or which at any time may be made a lien upon the real property of which
the Demised Premises is a part. This subordination provision shall be self-
operative and no further instrument of subordination shall be required. Tenant
agrees to execute and deliver promptly, upon request, such further instrument or
instruments confirming such subordinations as shall be desired by Landlord or by
any easement holder, proposed easement holder, mortgagee or proposed mortgagee;
and Tenant hereby constitutes and appoints Landlord as Tenant's attorney-in-fact
to execute any such instrument or instruments. Landlord will provide non-
disturbance and attornment agreements from such mortgagees.
12.2 Attornment. In the event any proceedings are brought for
----------
foreclosure of any mortgage deed to secure debt given by Landlord and/or Demised
Premises owner and covering the Demised Premises, Tenant shall attorn to the
foreclosing mortgagee or purchaser upon any such foreclosure and recognize such
purchaser or mortgagee as the owner and landlord under this Lease, provided such
owner, as landlord, shall recognize Tenant's rights to continue to occupy the
Demised Premises and exercise and enjoy all of its rights hereunder so long as
Tenant complies with the terms and provisions of this Lease and further provided
any such purchaser or mortgagee shall be deemed to assume and agree to perform
the duties of the Landlord hereunder providing said purchaser or mortgagee shall
not be required to cure the defaults, if any, of Landlord.
12.3 Estoppel Certificates. Tenant agrees, at any time and from time
---------------------
to time upon not less than ten (10) days' prior written notice by Landlord, to
execute, acknowledge, and deliver to Landlord a statement in writing (i)
certifying that this Lease has not been modified and is in full force and
effect (or, if there have been modifications, the specific terms of same), (ii)
stating the dates to which the annual rent and Additional Rent have been paid by
Tenant, (iii) stating whether or not, to the best knowledge of Tenant, Landlord
is in default in the performance of any covenant, agreement, or condition
contained in this Lease, and, if so, specifying each such default, and (iv)
stating the name and address to which notice to Tenant should be sent. Any such
statement delivered pursuant hereto may be relied upon by an owner of the
Demised Premises, any mortgagee of the real property of which the Demised
Premises is a part, or any prospective assignee of any such mortgagee.
12.4. No liens by Tenant. Tenant shall not mortgage or permit a lien
------------------
on its leasehold interest.
ARTICLE XIII - DAMAGE BY FIRE OR OTHER CASUALTY
13.1 General. In the event the Demised Premises shall be damaged or
-------
destroyed by reason of fire or any other cause, Tenant will immediately notify
Landlord and: a) to the extent such destruction or damage relates to Tenant's
Work (Schedule D) or alterations of same, Tenant will promptly repair or
rebuild the building at Tenant's expense, and b) to the extent such destruction
or damage relates to Landlord's Work (Schedule C) or alterations of same,
Landlord will promptly repair or rebuild the building at Landlord's expense;
such reconstruction and repair
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shall make the building at least equal in value to the building existing
immediately prior to the occurrence and as nearly similar to it in character as
is practicable and reasonable. Landlord and Tenant will apply and make available
the net proceeds of any fire or other casualty insurance, after deduction of any
costs of collection, including attorneys' fees, for repairing or rebuilding as
the same progresses. All such payments shall be subject to the interests of any
of Landlord's mortgagees and loss payees with respect to the property and
improvements. Payments will be made against properly certified vouchers of a
competent architect in charge of the work and approved by Landlord. If the
proceeds of insurance are paid to the holder of any mortgage or Landlords
interest in the Demised Premises, Landlord will make available net proceeds of
the insurance in accordance with the provision of this Section. Before beginning
repairs or rebuilding, or letting any contracts in connection with repairs or
rebuilding, Tenant will submit for Landlord's approval, which approval Landlord
will not unreasonably withhold or delay, complete and detailed plans and
specifications for the repairs or rebuilding of Tenant's Work. Promptly after
receiving Landlord's approval of those plans and specifications, Landlord and
Tenant will begin the repairs or rebuilding and will prosecute the repairs or
rebuilding to completion with diligence, subject however to strikes, lockouts,
acts of God, embargoes, governmental restrictions, and other causes beyond
Landlord and Tenant's reasonable control. Tenant will obtain and deliver to
Landlord a temporary or final certificate of occupancy before the Demised
Premises are reoccupied for any purpose. The repairs or rebuilding will be
completed free and clear of mechanics' or other liens, and in accordance with
the building codes and all applicable laws, ordinance, regulations, or orders of
the State, the Town of Kent, or other applicable authority affecting the repairs
or rebuilding, and also in accordance with all requirements of the insurance
rating organization, or similar body and any liability insurance company
insuring Landlord against liability for accidents related to the Demised
Premises. The provisions of this Paragraph 13.1 are subject to the terms of
Paragraph 13.5 below.
13.2 Landlord's inspection. During the progress of the repairs or
---------------------
rebuilding, Landlord and its architects and engineers may from time to time
inspect the building and will be furnished, if required by them, with copies of
plans, drawings and specifications relating to the repairs or rebuilding.
Tenant will keep all plans, shop drawings, and specifications at the building,
and Landlord and its architects an designers may examine them at all reasonable
times. If, during repairs and rebuilding, Landlord and its architects and
engineers determine that the repairs and rebuilding are not being done in
accordance with the approved plans and specifications, Landlord will give prompt
notice in writing to Tenant, specifying in detail the particular deficiency,
omission, or other respect in which Landlord claims the repairs or rebuilding do
not accord with the approved plans and specifications. Upon the receipt of that
notice, Tenant will cause corrections to be made to any deficiencies, omissions,
or such other respect. Tenant's obligations to supply insurance according to
this Lease will be applicable to any repairs or building under this Article.
13.3 Landlord's Cost. The charges of any architect or engineer of
---------------
Landlord employed to pass upon any plans and specifications and to supervise and
approve any construction or for any services rendered by the architect or
engineer to Landlord as contemplated by any of the provision of this Lease, will
be paid to tenant as a cost of the repair or rebuilding. The fees of such
architect or engineer will be those customarily paid for comparable services.
13.4. No Rent Abatement. Monthly rent and additional rent will not
------------------
abate pending the repairs or rebuilding except to the extent to which Landlord
receives a net sum as proceeds of any rent insurance.
13.5. Damage During Last Two Years of Lease. If at any time during
-------------------------------------
the last two years of the term (or any renewal term) the building is so damaged
by fire or otherwise that the cost of restoration exceeds fifty percent (50%) of
the replacement value of the building (exclusive of foundations) immediately
prior to the damage, either Landlord or Tenant, may within thirty (30) days
after such damage, given notice of its election to terminate this Lease and,
subject to the further provisions of this Section, this Lease will case on the
tenth (10th) day after the delivery of that notice. Monthly rent will be
apportioned and paid to the time of termination. If this Lease is so
terminated, Tenant will have no obligation to repair or rebuild, and the entire
insurance proceeds will belong to the Landlord.
ARTICLE XIV - EMINENT DOMAIN
14.1 Whole Premises. In the event that the whole of Demised Premises
--------------
shall be taken under the power of eminent domain, this Lease shall thereupon
terminate as of the date possession shall be so taken.
14.2 Portion of Premises. In the event that a portion of the floor
-------------------
area of the Demised Premises shall be taken under the power of eminent domain
and the portion not so taken will not be reasonably adequate for the operation
of Tenant's business notwithstanding Tenant's performance or restoration as
hereinafter provided, this
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<PAGE>
Lease shall thereupon terminate as of the date possession of said portion is
taken. In the event of any taking under the power of eminent domain which does
not terminate this Lease as aforesaid, all of the provisions of this Lease shall
remain in full force and effect, except that the Base rent shall be reduced in
the same proportion that the amount of floor area of the Demised Premises taken
bears to the total floor area of the Demised Premises immediately prior to such
taking, and Landlord shall at Landlord's own cost and expense, restore such part
of the Demised Premises as is not taken to as near its former condition as the
circumstances will permit and Tenant shall do likewise with respect to all
exterior signs, trade fixtures, equipment, furniture, furnishings and other
installations of Tenant.
14.3. Damages. All damages awarded for any such taking under the
--------
power of eminent domain, whether for the whole or a part of the Demised
Premises, shall belong to and be the property of the Landlord, whether such
damages shall be awarded as compensation for diminution in value of the
leasehold or for the fee of the Demised Premises, provided, however, that
Landlord shall not be entitled to any award made to Tenant for loss of or damage
to Tenant's trade fixtures and removable personal property or for damages to
improvements made by Tenant with approval of Landlord during the term of this
Lease and any extension thereof or for damages for cessation or interruption of
Tenant's business.
14.4. Rent Paid in Advance. If this Lease is terminated as provided
--------------------
in this Article, all rent shall be paid up to the date that possession is taken
by public authority, and Landlord shall make an equitable refund of any rent
paid by Tenant in advance and not yet earned.
14.5 Voluntary Sales. A voluntary sale by Landlord to any public or
---------------
quasi-public body, agency or person, corporate or otherwise, having the power of
eminent domain, either under threat of condemnation or while condemnation
proceedings are pending, shall be deemed to be a taking by eminent domain for
the purpose of this Article.
ARTICLE XV - DEFAULT OF THE TENANT OR LANDLORD
15.1 Tenant Default. If Tenant: a) is in default in payment of rents
--------------
for a period of ten (10) days, or (b) if Tenant shall default in the performance
or observance of any other of the covenants, agreements, terms, provisions or
conditions contained herein and on its part to be performed or observed and such
default continues for thirty (30) days after written notice from the Landlord
specifying such default and after exhaustion of any applicable cure periods and
Tenant is not diligently prosecuting the cure thereof, or (c) if any assignment
shall be made by Tenant for the benefit of creditors, or Tenant becomes involved
in any proceedings as a debtor under the bankruptcy laws of the United States in
effect at the time of default, or (d) if Tenant's leasehold interest shall be
taken on execution, then and in any of such cases, Landlord and the agents and
servants of Landlord lawfully may, in addition to and not in derogation of any
remedies for any other breach of covenant, immediately or at any time
thereafter and without prior demand or statutory notice to quit, commence an
action of summary process to evict Tenant from the Demised Premises, without
prejudice to any remedies which might otherwise be used for arrearages of rent
or any other breaches of covenant. Notwithstanding the above, once during any
12 month interval, if Tenant does not pay monthly rent within such ten (10) day
period, Landlord shall provide notice thereof and Tenant shall be permitted to
cure such nonpayment default within seven (7) days of such notice. Tenant hereby
waives the statutory notice to quit, and Tenant covenants and agrees that in the
case of such termination, or termination under statute by reason of default on
Tenant's part, Tenant will, at the election of the Landlord:
15.1.1 Pay to Landlord in equal monthly installments, in advance,
sums equal to the aggregate rent herein provided for or, if the
Demised Premises have been relet, sums equal to the excess of the
aggregate rent herein provided for over the sums actually
received by Landlord.; or
15.1.2 Indemnify Landlord against loss of the aggregate rent
herein provided for from the time of such termination or from the
time to which installments of liquidated damages shall have been
paid to the expiration of the term hereof as above set forth.
For the purpose of this Article, the phrase "aggregate rent", as
used herein, shall include the annual base rent and all
Additional Rents and charges payable hereunder, including
interest, if any, and reasonable attorneys' fees incurred by
Landlord in enforcing its rights hereunder. In the event of a
default by the Tenant as above provided, if Landlord shall elect
not to terminate this Lease, it may relet the Demised Premises or
any part or parts thereof, either in the name of
13
<PAGE>
Landlord or Tenant, for a term or terms which may, at Landlord's
option, extend beyond the balance of the term of this Lease, and
Tenant agrees that in the event of such reletting Tenant shall
pay Landlord any deficiency between the aggregate rent hereby
reserved and covenanted to be paid and the net amount of the
rents collected on such reletting, as well as any expense
incurred by Landlord in such reletting including, but not limited
to, attorney's fees, broker's fees and expenses of remodeling and
putting the Demised Premises in good order and preparing the same
for re-letting. Such deficiency shall be paid in monthly
installments upon statements rendered by the Landlord to the
Tenant.
15.2 Rights cumulative. Any and all rights and remedies which
-----------------
Landlord may have under this Lease and at law and in equity shall be cumulative
and shall not be deemed inconsistent with each other, and any two or more of all
such rights and remedies may be exercised at the same time or independently.
15.3 Landlord Default. Landlord shall not be deemed in default in
----------------
the performance of any of its obligations hereunder unless it shall fail to
perform such obligations and such failure shall continue for a period of thirty
(30) days or such additional time as is reasonably required to correct any such
default after written notice has been given by Tenant to Landlord specifying the
nature of Landlord's alleged default.
15.4 Cost of Enforcement. Tenant agrees that Tenant shall be
-------------------
responsible for all reasonable costs and attorneys' fees incurred by Landlord in
enforcing any provision of this Lease.
15.5 Jury Trial Waiver. Tenant and Landlord hereby waive trial by
-----------------
jury on any and all claims arising out of this Lease.
ARTICLE XVI - HOLDING OVER
16.1 General. If Tenant holds possession of the Demised Premises
-------
after the Expiration Date or any other termination of this Lease, Landlord shall
have the option, exercisable in writing thirty (30) days after the date of
termination as aforesaid, to treat Tenant as a Tenant at Sufferance, or as a
tenant by the month. If Landlord fails to make such election, then the Tenant
shall be deemed a tenant by the month, commencing with the first day after the
termination of the Lease at 1.5 times the monthly base rent paid during the last
month of the expired term together with Additional Rents and shall occupy
subject to all other terms of this Lease, including the provision of this
Section. Said holdover term shall terminate upon thirty (30) days' notice from
one party to the other. Nothing contained herein shall be construed as a
consent by Landlord to the occupancy or possession of the Demised Premises by
Tenant after the termination of the Lease, and Landlord, upon said termination,
if Landlord elects to treat Tenant as a Tenant at sufferance, shall be entitled
to the benefit of all public, general or public laws relating to the speedy
recovery of the possession of land and tenements held over by Tenant, whether
now or hereafter in farce and effect.
ARTICLE XVII - MISCELLANEOUS PROVISIONS
17.1 Waiver. Failure of Landlord to notify Tenant of any act or
------
omission on the part of the Tenant, no matter how long the same may continue,
shall not be deemed to be a waiver by Landlord of any of its rights hereunder.
No waiver by Landlord at any time, express or implied, of any breach of any
provision of this Lease shall be deemed a waiver of a breach of any other
provision of this Lease or a consent to any subsequent breach of the same or any
other provision. If any action by Tenant shall require Landlord's consent or
approval, Landlord's consent to or approval of such action on any one occasion
shall not be deemed a consent to or an approval of said action on any subsequent
occasion or a consent to or approval of any other action on the same or any
subsequent occasion. No payment by Tenant or acceptance by Landlord of a lesser
amount than shall be due from Tenant to Landlord shall be deemed to be anything
but payment on account; the acceptance by Landlord of a check for a lesser
amount than due with an endorsement or statement thereon or upon a letter
accompanying said check that said lesser amount is payment in full shall not be
deemed an accord and satisfaction, and Landlord may accept said check without
prejudice to receive the balance due or pursue any other remedy. Any and all
rights and remedies which Landlord may have under this Lease or by operation of
law, either at law or in equity, upon any breach, shall be distinct, separate,
and cumulative and shall not be deemed inconsistent with each other and no one
of them, whether exercised by Landlord or not, shall be deemed to be in
exclusion of any other; and any two or more or all of such rights and remedies
may be exercised at the same time.
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<PAGE>
17.2 Partial Invalidity. If any term, covenant, or condition of this
------------------
Lease or the application thereof to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Lease, or the
application of such term, covenant or condition to persons or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby and each term, covenant or condition of this Lease shall be
valid and be enforced to the fullest extent permitted by law.
17.3 Recording. A Notice of this Lease may be recorded in the Town
---------
Clerk's Office in the Town of Kent, State of Connecticut, in accordance with the
requirements of the applicable laws of the State of Connecticut relating to
leases. In the event this Lease is terminated, cancelled, released or assigned
before the expiration of the term, the Landlord and Tenant shall, upon the
request of either party, execute and deliver a written instrument in form for
recording setting forth such termination, cancellation, release or assignment.
The parties agree at the appropriate time to execute and deliver an instrument
in recordable form evidencing the commencement date of the term hereunder.
17.4 Covenant of Landlord. Upon payment by the Tenant of the rents
--------------------
herein provided, and upon the observance and performance of all the covenants,
terms and conditions on Tenant's part to be observed and performed, Tenant shall
peaceably and quietly hold and enjoy the Demised Premises for the term hereby
demised without hindrance or interruption by Landlord or any other person or
persons lawfully or equitably claiming by, through, or under the Landlord,
subject, nevertheless, to the terms and conditions of this Lease.
17.5 Use of "Landlord" and "Tenant". All the provisions hereof are
------------------------------
to be construed as covenants and agreements as though the words imparting such
covenants and agreements were used in each separate provision and Section
hereof. The words "Landlord" and "Tenant" and the pronouns referring thereto,
as used in this Lease, shall mean, where the context requires or admits, the
persons named herein as Landlord and Tenant, respectively, and their respective
heirs, legal representatives, successors and assigns, irrespective of whether
singular or plural, masculine, feminine or neuter. It is agreed that the
agreements and conditions in this Lease contained on the part of Tenant to be
performed and observed shall be binding upon Tenant and its successors and
assigns and shall inure to the benefit of Landlord and its successors and
assigns; and the agreements and conditions in this Lease contained on the part
of the Landlord to be performed and observed shall be binding upon Landlord and
its successors and assigns and shall inure to the benefit of Tenant and its
successors and assigns. Tenant agrees that at all times on and after the
Commencement Date of this Lease the sole liability for performance of all
Landlord's obligations hereunder shall be that of the Landlord.
17.6 Entire Agreement. This instrument contains the entire and only
----------------
agreement between the parties, and no oral statements or representations or
prior written matter not contained in this instrument shall have any force or
effect. This Lease shall not be modified in any way except by a writing
subscribed by both parties.
17.7 Notices. All notices and other communications authorized or
-------
required hereunder shall be in writing and shall be given by mailing the same by
certified or registered mail, return receipt requested, postage prepaid. The
same shall be mailed to Tenant at the Demised Premises or to such other person
or at such other address as Tenant may hereafter designate by written notice to
Landlord; and the same shall be mailed to Landlord at:
Barton Kent LLC
P.O. Box 97
West Cornwall, CT 06796
Attn: Russell or Dale Barton
with a copy to:
Gail E. McTaggart
Secor, Cassidy & McPartland, P.C.
P. O. Box 2818
Waterbury, CT 06723
or to such other person or at such other address as Landlord may hereafter
designate by written notice to Tenant.
CYBERIAN OUTPOST, INC.
P.O. Box 636
Kent, Conn.
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<PAGE>
Attention: Mr. Darryl Peck
with a copy to:
Robert E. Paul, Esq.
Riemer & Braunstein
Counsellors At Law
Three Center Plaza
Boston, Mass. 02108
17.8 Access. Landlord shall have the right to enter the Demised
------
Premises during Tenant's business hours upon reasonable notice to Tenant for the
purpose of showing the Demised Premises to a prospective purchaser or tenant or
to make repairs, or to remove any alteration, improvement or sign which is in
violation of the provisions of this Lease. Such entry, to the extent possible,
shall be accomplished with minimal interference with Tenant's business. In case
of emergency, Landlord shall have the right to immediately enter the Demised
Premises without prior notice. Tenant shall at all times provide Landlord with
a key and appropriate security code for such access. Landlord will have the
right to use any means Landlord may deem proper to open doors in the Demised
Premises and to the Demised Premises in an emergency in order to enter the
Demised Premises. No entry to the Demised Premises by Landlord by any means
will be a forcible or unlawful entry into the Demised Premises or a detainer of
the Demised Premises or an eviction, actual or constructive of Tenant from the
Demises Premises, or any part of the Demised Premises, nor will any entry
entitle Tenant to damages or abatement of rent or other charges which this Lease
requires Tenant to pay.
17.9 Liens. Tenant agrees immediately to discharge (either by
-----
payment or by the filing of the necessary bond, or otherwise) any mechanic's,
materialmen's or other lien against the Demised Premises and/or Landlord's
interest therein, which liens may arise out of any payment due for, or purported
to be due for, any labor, services, materials, supplies or equipment alleged to
have been furnished to or for Tenant in, upon or about the Demised Premises, or
lodged for any other reason against the Demised Premises. Failure to discharge
any such lien within fifteen (15) days from the date that Tenant receives
written notice of such lien from Landlord shall be considered a default
hereunder and Landlord shall have all rights upon default as are specified
herein. Tenant acknowledges that Tenant is not an agent of the Landlord and
Tenant has no authority to contract for labor, services, materials, supplies or
equipment for Tenant's use in the Demised Premises as agent for Landlord.
17.10 PREJUDGMENT REMEDY. THE PARTIES HERETO ACKNOWLEDGE THAT THIS
------------------
IS A "COMMERCIAL TRANSACTION" AS THAT TERM IS DEFINED IN CONN. GEN. STAT.
CHAPTER 903a, ?52-278a(a), AS AMENDED, AND THAT PURSUANT TO CONN. STAT. ?52-278f
TENANT HEREBY EXPRESSLY AND VOLUNTARILY WAIVES ANY AND ALL RIGHTS THAT IT MAY
HAVE UNDER CONN. GEN. STAT. ?52-278a, ET SEQ., OR OTHERWISE FOR NOTICE AND
HEARING WITH RESPECT TO ANY "PREJUDGMENT REMEDY", AS THAT TERM IS THEREIN
DEFINED, AND THE TENANT HEREBY SPECIFICALLY CONSENTS TO THE ISSUANCE OF ANY WRIT
FOR SUCH PREJUDGMENT REMEDY OR REMEDIES ON BEHALF OF SAID LANDLORD OR THE
SUCCESSORS OR ASSIGNS OF SAID LANDLORD, WITH RESPECT TO ANY LAWSUIT OR CAUSE OF
ACTION RELATING TO THIS LEASE AND/OR ANY CLAIMS INCIDENTAL HERETO, WITHOUT SAID
LANDLORD HAVING TO FIRST OBTAIN A COURT ORDER PERMITTING SAME, AS MIGHT
OTHERWISE BE REQUIRED UNDER SAID CHAPTER 903a.
17.11 Broker. Tenant represents and warrants to Landlord that it has
------
not authorized any broker, agent or finder to act on its behalf in respect of
this Lease transaction, nor has it dealt with any broker purporting to be acting
on behalf of the Landlord, except for the broker listed below (if any), and
Tenant hereby agrees to indemnify and hold harmless Landlord from and against
any cost, expense, claims, liability or damage resulting from a breach of the
representation and warranty herein contained. Landlord represents and warrants
to Tenant that there is no broker which it has authorized to act on its behalf
in respect to this Lease transaction, and Landlord hereby agrees to pay any and
all commissions on this Lease, and any extensions, renewals or enlargements as
the same may become due to said broker or its successors or assigns, and to
indemnify and hold harmless Tenant from and against any cost, expense, claims,
liability or damage resulting from a breach of the representation and warranty
contained herein.
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17.12 Captions and Section Numbers. The captions, section numbers,
----------------------------
and article numbers appearing in this Lease are inserted only as a matter of
convenience and in no way define, limit, construe, or describe the scope or
intent of such sections or articles of this Lease nor in any way affect this
Lease.
17.13 No Offer. The delivery of an unexecuted copy of this Lease
--------
shall not be deemed an offer. No rights are to be conferred upon any party
until this Lease has been executed and delivered to each party.
17.14 Effective Date. This Lease shall be effective only when it is
--------------
signed by both the Landlord and Tenant. The Tenant's submission of a signed
lease for review by the Landlord does not give the Tenant any interest, right,
or option in the Demised Premises.
17.15 Authority to Bind. Tenant hereby certifies that it is legally
-----------------
constituted, in good standing and authorized to do business in Connecticut and
that the person signing below has full authority to bind Tenant to all the
responsibilities and liabilities herein.
17.16 Financial Condition of Tenant. It shall be a condition of this
-----------------------------
Lease that Tenant shall provide copies of their filed federal tax returns for
the last three years, including all schedules, CPA prepared (review quality)
annual financial statements for said years, and such further information as
Landlord may reasonably request in order to assess the financial strength of
Tenant and their ability to pay all amounts owing hereunder. Further, each year
during the term of the Lease and any renewal term, as soon as available after
the end of Tenant's fiscal year, Tenant shall supply Landlord with annual
financial statements and if Tenant is in default with most recent tax return
when available. It shall also be a condition of this Lease that such
statements, and returns if applicable, shall evidence the financial ability of
Tenant to pay all amounts due hereunder. Landlord will keep all such tax
returns and financial statements strictly confidential.
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IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
and seals, and to a duplicate of the same tenor and date this 4/th/ day of May,
1998.
Signed sealed and delivered
in the presence of:
BARTON KENT, LLC, LANDLORD
Illegible signature
- -------------------------------
By /s/ Russell Barton
- ------------------------------- ----------------------------------
Russell Barton
Its member
CYBERIAN OUTPOST, INC.,
TENANT
Illegible signature
- -------------------------------
By /s/ Darryl Peck
- ------------------------------- ----------------------------------
Darryl Peck
Its Pres.
STATE OF CONNECTICUT )
) ss:
COUNTY OF LITCHFIELD )
On this 4/th/ the day of May, 1998, before me, the undersigned
officer, personally appeared, Russell Barton, who acknowledged himself to be the
Member of Barton Kent LLC, a Connecticut Limited Liability Company, and that he
as such member, being authorized so to do, executed the foregoing instrument for
the purposes therein contained, by signing the name of the limited liability
company by himself as such member.
IN WITNESS WHEREOF, I hereunto set my hand.
/s/ Melanie Chernak
------------------------------------
Commissioner of the Superior Court
Notary Public
My commission expires: 6/30/98
STATE OF CONNECTICUT )
) ss:
COUNTY OF LITCHFIELD )
On this 4/th/ the day of May, 1998, before me, the undersigned
officer, personally appeared, Darryl Peck, who acknowledged himself to be the
president of Cyberian Outpost, Inc., a corporation, and that he as such officer,
being authorized so to do, executed the foregoing instrument for the purposes
therein contained, by signing the name of the corporation by himself as such
officer.
IN WITNESS WHEREOF, I hereunto set my hand.
/s/ Melanie Chernak
-------------------------------------
Commissioner of the Superior Court
Notary Public
My commission expires: 6/30/98
18
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Exhibit C
LANDLORD'S WORK AT LANDLORD'S COST
a) Landlord, at Landlord's sole cost and expense, shall construct Building "B"
and related parking and landscaping as BASE BUILDING CONDITIONS, as set forth
below, to be completed on or before September 30, 1998. Provided that the
portion of Landlord's Work described below as LANDLORD'S CONCURRENT WORK and
TENANT'S CONCURRENT WORK (collectively the "Concurrent Work") shall be performed
by the Landlord / Tenant concurrently with the TENANT'S FIT UP Work (as defined
in Exhibit D) in a timely manner so as not to delay the completion of both the
Landlord's Base Building and the Tenant's Fit Up Work.
b) "Base Building Conditions" shall include all items necessary to construct
Building "B" - watertight (Tyvek, roof, doors, and windows installed) and ready
for Tenant Fit Up and Concurrent Work - as shown on THE PLANS prepared by Robert
L. Knapp Sheets S-1, A-1 through A-6, last revised 23 April 1998, attached and
made a part of the Agreement, including but not limited to:
1. All Site Work shown on S-1: Parking, asphalt drives, stripping,
plantings, grass lawn, exterior lighting and switching, fencing, sidewalks,
storm drainage and all utilities brought underground into Basement of
Building "B".
2. Building envelope including:
A. 10" thick reinforced concrete foundation walls on 1'-10" x 10".
B. 2x6 exterior walls using douglas fir studs or spruce @ 16" o/c
with 2x6 cats at mid span.
C. R-19 bate insulation with 3 mil vapor harder.
D. Clear vertical grain cedar clapboard siding installed 6" to the
weather and nailed with stainless steel shingle nails.
E. 3-0 x 6-0 clad single hung windows equal to Acorn with clear
insulated Low E glazing wish internal or SDL muntin bars as shown
on the "Plans". Windows shall have wood extension jambs,
(interior casing included in Tenant's Fit Up).
F. "Architectural" 30 year fiberglass roofing shingle equal to
Owens-Corning.
G. 1/2" OSB sheathing for exterior walls and roof.
H. 3/4" OSB T&G sheathing for all subfloors.
I. All finished stair enclosures, elevator and ductwork shafts
(rated) and toilet / hall walls as shown on Plans.
3. Building Finishes including:
A. All required fire doors, front and other exterior french doors
(similar to existing Building), Toilet Room and Janitor's Closet
doors. All interior doors to be 1-3/4" thick x 6'-8" high oak
veneer solid core wood equal to Weyerhaeuser in metal jambs bucks
with passage sets equal to Arrow in chrome finish.
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B. Completed Toilet Rooms including ceramic tile floor and 3'-0"
high wainscoting around full perimeter (tile material as supplied
by the Tenant), toilet fixtures equal as shown on a quotation
from Modern Plumbing (attached), toilet accessories including
large roil paper holders (one per toilet fixture) paper towel
dispenser (two standard size per Toilet Room), liquid soap
dispenser (one per lavatory), all required handicapped
accessories and metal toilet petitions (color as selected by
Tenant).
C. Exterior painting / staining (2 coats - one of which is pre-
stained) of all mutes (except dad windows).
D. Installation of Tenant's 18 x 18 stone tile in 1/st/ Floor Lobby
and Elevator Lobbys (Rooms 101 and 202). Tile to be laid in a.
minimum 3/4" thick bed of mortar with galvanized wire mesh nailed
to floor..
E. Finish lighting, switching and required receptacles in Toilet
Rooms, Stair Towers and Mechanical Rooms.
F. 2'x2' concealed spline suspended ceiling and acoustic pads equal
to Armstrong in all Toilet Rooms and Elevator Lobbies.
G. .2 'x2' concealed spline suspended ceiling and acoustic pads
equal to Armstrong in all Toilet Rooms aid Elevator Lobbies.
4. Mechanical Equipment including:
A. 800 amp, 3 phase, 4 wire, 120/208 volt underground service with
meter, CT cabinet and 800 amp main distribution circuit panel
including wiring and four (4) 200 amp, single phase, 120/208 volt
subpanels to individual Tenant wings. Location of subpanels to
be determined. All Mechanical equipment, pumps and motors to be
wired to the main 800 amp panel as part of dc Landlord's Base
Building cost.
B. Complete fire alarm system including detectors, pull stations and
fan shut down relays and all emergency lighting and exit signage
as required by the Fire Marshall. (Except as may be required for
supplemental detectors / pull stations due to office design).
C. Hydraulic 3 stop elevator equal to Otis 2500 lb. Capacity in
standard finishes as selected by the Tenant.
D. All HVAC equipment and main trunk ducting (rectangular sheet
metal), fire dampers and controls per contract from AC 2000 dated
4/15/98, attached.
E. Water fountains (plumbed) where shown on Plans, equal to code
requirements. Janitor's Closet fiberglass sink (plumbed for 3/4"
hot and cold water) where shown on Plans.
F. 80 gallon Amtrol domestic hot water storage tank connected to
boiler. Provide all hot water piping insulated) to all Toilet
Rooms and Janitor's Closets.
G. Sunup pump and all ether pumps as may be required.
20
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H. Exhaust venting of all Toilet Rooms. Fresh air make up louvers
and dining as required by Code.
I. Basement ventilation per code requirements.
c) "Landlord's Concurrent Work" shall include all items provided by the
Landlord, as part of the "Base Building", at Landlord's sole cost, which work
items run concurrently with the Tenant's Fit Up work. Landlord's Concurrent
Work items shall specifically include:
1. 1/2" thick gypsum board on all exterior walls, toilet rooms, Elevator
Lobby, Stairwells and all other exposed wall and ceiling areas as shown on
the Plans. Fire code gypsum board shall be provided where required by the
code. All gypsum board, except for concealed ceiling areas, shall be taped
and finished with 3 coats joint compound, lightly sanded and ready fix
interior painting.
2. Insulation of exterior walls.
3. Placement and wiring of nine(9) thermostats equal to Honeywell
programmable heat/cooling.
d) "Tenant's Concurrent Work" shall include all items provided by the Tenant,
as part of the Tenant's Fit Up Work, at Tenant's sole cost, which work items run
concurrently with the Landlord's Base Building Work. Tenant's Concurrent Work
items shall specifically include:
1. Electrical wiring contained in exterior or core walls as constructed
by the Landlord.
2. Special exhaust or intake louvers, if any, through the exterior
envelope.
3. Partition in Room 101, Lobby, in order to separate the Main Lobby with
the Elevators.
4. Security System.
Any Building Permits required for Tenant's Work. Landlord hereby agrees to sign
all required permits as the Owner of the Building. Tenant hereby agrees to
assume responsibility for compliance with codes of Tenant's Work only.
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<PAGE>
Exhibit D
TENANT'S WORK AT TENANT'S COST
1. General Requirements
(a) Tenant shall provide the construction material, hardware and
equipment and the labor to construct and install the improvements to the Bldg. B
described in the Plans (as that term is hereinafter described). The material,
hardware and equipment as incorporated into the Demised Premises pursuant to the
Plans are herein collectively referred to as the "Tenant's Work". Subject to the
provisions of this Exhibit D, Tenant shall proceed diligently to cause the
Tenant's Work approved by Landlord to be completed in accordance with the terms
and conditions of the Lease and this Exhibit.
(b) Tenant agrees to cause its interior space planner, (the
"Interior Space Planner"), to deliver to Landlord on or before 45 days from the
date this Lease is executed by both parties, plans for Bldg. B (" Space Plans").
Such Space Plans shall be initialed by both parties and attached to this Lease
and made a part of this Exhibit D of said Lease.
(c) Plans showing details of space occupancy; (ii) smoke detector
locations; (iii) reflected ceiling plans; (iv) partition and door location
plans; (v) electrical and telephone plans noting any special requirements; (vi)
fire safety systems; (vii) detail plans; and (viii) finish plans and schedules)
and also specifications for the Tenant's Work to be performed at the Demised
Premises which architectural construction drawings and specifications are
acceptable to Tenant and sufficient in all respects for Tenant to cause Tenant's
mechanical/electrical engineer, (the "Engineer") to prepare the
Mechanical/Electrical Drawings (as hereinafter defined). Such architectural
drawings and specifications shall be subject to Landlord's prior written
approval, which approval shall not be unreasonably withheld or delayed, within
ten (10) days of receipt by Landlord of a complete set of such architectural
construction drawings and specifications. If Landlord does not approve the same,
Landlord shall advise Tenant in writing generally of the changes required in
such architectural construction drawings and specifications so that they will
meet with Landlord's approval. Tenant shall cause the Interior Space Planner to
revise such architectural construction drawings and specifications pursuant to
Landlord's comments and to deliver to Landlord, within seven (7) days after
receipt by Tenant of such comments, revised architectural construction drawings
and specifications noting the changes for Landlord's approval. Landlord shall
continue to comment on such architectural construction drawings and
specifications and Tenant shall continue to revise said architectural
construction drawings and specifications within seven (7) days of receipt of
comments from Landlord until such architectural construction drawings and
specifications are approved by Landlord. Such architectural construction
drawings and specifications when approved by Landlord are referred to herein as
the " Architectural Plans" and shall be initialed by both parties and attached
to this Lease and made a part of this Exhibit D of said Lease.
(d) Tenant agrees to cause the Interior Space Planner and the
Engineer to prepare mechanical and electrical drawings for the Demised Premises
and deliver said drawings to Landlord within ten (10) business days after
Landlord approves the Architectural Plans. Tenant and the Engineer shall
cooperate fully to provide all information necessary for the timely completion
of the mechanical and electrical drawings and approval thereof by Landlord.
Landlord agrees to either approve or disapprove said mechanical and electrical
drawings in writing within seven (7) days of receipt thereof by Landlord. If
Landlord disapproves of said drawings, Landlord agrees to advise Tenant in
writing generally of the required changes. Tenant shall deliver to Landlord
mechanical and electrical drawings revised pursuant to Landlord's comments
within ten (10) business days of receipt of Landlord's comments. This procedure
shall be repeated until Landlord approves the mechanical and electrical drawings
for the Demised Premises. The mechanical and electrical drawings for the
Premises which are approved by Landlord shall be referred to herein as the
"Mechanical/Electrical Drawings".
(e) Tenant represents to Landlord that Tenant has reviewed its
needs and the above-specified delivery dates with the Interior Space Planner and
that Tenant has assured itself that the Plans can be delivered as herein above
required. Tenant agrees to cooperate with the Interior Space Planner as promptly
as possible and in any event in sufficient time to cause the Plans to be
prepared and timely delivered as herein above required.
(f) Neither review nor approval by Landlord of any of the Plans
shall constitute a representation or warranty by Landlord that such Plans either
(i) are complete or suitable for their intended purpose or (ii) comply with
applicable laws, ordinances, codes and regulations, it being expressly agreed by
Tenant that Landlord assumes
22
<PAGE>
no responsibility or liability whatsoever to Tenant or to any other person or
entity for such completeness, suitability or compliance.
(g) All costs specified in this Exhibit D shall be paid by
Tenant.
(h) Tenant's obligation to pay Rent on the Rent Commencement Date
under the Lease shall be delayed one day for each day that the completion of the
Tenant's Work is delayed as a result of the fact that Landlord fails to
substantially complete the Landlord's Work (other than the Concurrent Work)
before 90 days from the issuance of the building permits for Landlord's Work,
other than punch list items, or Landlord fails to complete the Concurrent Work
on or before 120 days from the issuance of the building permits for Landlord's
Work, other than punch list items ("Landlord Delays"). Notwithstanding the
foregoing, however, Tenant's obligation to pay Rent under the Lease shall not be
affected or deferred on account of any such delay to the extent the same results
from any of the following events (collectively, "Tenant Delays"):
(1) The failure of Tenant to furnish any of the Plans in accordance
with the schedule and meeting the requirements set forth in this
subsection (1) including, without limitation, the failure of Landlord
and Tenant to agree upon final versions of the Plans and Drawings
required under the Lease and this Exhibit D; or
(2) Changes in the Plans requested by Tenant (notwithstanding
Landlord's approval of such changes); or
(3) The performance of any work by Tenant or any person, firm or
corporation employed by Tenant; or
(4) Any default or delay by Tenant or its agents hereunder or any
Default under the Lease.
2. Cost of Tenant's Work.
(a) Before commencement of any portion of the Tenant's Work,
Tenant agrees to promptly give Landlord a list of the contractor(s),
construction supervisor and subcontractors who will be doing Tenant's Work and
shall update that list with Landlord as contractors, subcontractors and
supervisors change or are added.
(b) Tenant shall pay a construction coordination and overhead fee
to Landlord in an amount up to $10,000 to cover Landlord's coordination,
architectural review and overhead and related expenses allocable to such work
(the "Coordination Fee"). The Coordination Fee is intended to be all inclusive
and includes: (i) the cost of Landlord's preliminary and ongoing review of the
Space Plans, the Plans and all other construction documents; (ii) coordination
of the Landlord's Work among Landlord and Tenant's contractors, subcontractors,
Interior Space Planner, agents, representatives and agents; (iii) the cost of
temporary electricity, temporary toilets and hot and cold water to the Demised
Premises during the Tenant's Work construction period; (iv) initiation and
monitoring of the punchlist process; (v) cost of normal building security during
Tenant's Work construction and move-in period. Except for Construction Escrow,
Landlord agrees that Tenant shall not be required to pay any sums in addition to
the Coordination Fee for other coordination services by Landlord unless such
services are requested in writing by Tenant. Tenant shall make Coordination Fee
payments as construction progresses within fifteen (15) days of Landlord
providing Tenant with actual invoices for Coordination Fee work.
(c) The Construction Escrow shall be paid as set forth in the
Lease. Escrow Agent shall only be required to make payments from the
Construction Escrow upon receipt of mechanics' lien waivers as provided herein,
and such other documentation as Landlord and Escrow Agent may reasonably
request. Escrow agent shall have no obligation to make any payment of the
Construction Escrow at any time that Tenant is in Default hereunder. Such
payments shall be made within fifteen (15) days of satisfactory presentation to
Landlord that the Lease condition for payment has been met.
(d) Before the Rent Commencement Date, Tenant shall provide to
Landlord a preliminary cost estimate of Tenant's Work, followed by a final
accounting within 3 months of Rent Commencement Date.
3. Access By Tenant; Work in Harmony.
At its absolute discretion, Landlord shall permit Tenant and Tenant's
agents, representatives, employees, suppliers, contractors, subcontractors,
mechanics and workmen to enter the Demised Premises before the
23
<PAGE>
completion of the Landlord's Work. Tenant agrees for itself and its agents,
representatives, employees, suppliers, contractors, subcontractors, workmen,
mechanics, and suppliers, that all such parties shall work in harmony and not
unreasonably interfere with Landlord and Landlord's agents, representatives,
employees, suppliers, contractors, subcontractors, mechanics, and workmen in
doing the Landlord's Work in the Demised Premises. Landlord agrees for itself
and its agents, representatives, workmen, mechanics and suppliers that all such
parties shall work in harmony and not unreasonably interfere with Tenant and
Tenant's agents, representatives, employees, suppliers, contractors,
subcontractors, mechanics, and workmen in doing the Tenant Work.
4. Construction Requirements.
(a) Tenant agrees that the entry into the Demised Premises by Tenant
and its contractors shall be deemed to be under all of the terms, covenants,
conditions and provisions of the Lease except as to the covenant to pay Rent,
and Tenant further agrees that in connection therewith Landlord shall not be
liable in any way for any injury, loss or damage which may occur to any of
Tenant's Work or installations made in the Demised Premises or to property
placed therein before the Rent Commencement Date for Bldg. B. and thereafter,
the same being at Tenant's sole risk. In addition, Tenant shall require all
entities performing work on behalf of Tenant to provide protection for existing
improvements to an extent that is satisfactory to Landlord and shall allow
Landlord access to the Demised Premises, for inspection purposes, at all times
during the period when Tenant is undertaking construction activities therein. If
any entity performing work on behalf of Tenant causes any injury to any person
or any damage to the Demised Premises, (including the Landlord's Work), any
other property of Landlord or any other person, then Tenant agrees to indemnify,
defend and hold Landlord harmless from any loss, damage or injury suffered in
connection with any such damage or injury. Further, Tenant shall cause such
damage to be repaired at Tenant's expense and if Tenant fails to cause such
damage to be repaired promptly upon Landlord's demand therefor, Landlord may in
addition to any other rights or remedies available to Landlord under this Lease
or at law or equity cause such damage to be repaired, in which event Tenant
shall promptly upon Landlord's demand pay to Landlord the cost of such repairs.
If any entity or person performing work on behalf of Landlord causes
any injury to any person acting on behalf of Tenant or any damage to the
Tenant's Work or any other property of Tenant, then Landlord agrees to
indemnify, defend and hold Tenant harmless from any loss, damage or injury
suffered by Tenant in connection with any such damage or injury. Further,
Landlord shall cause such damage to be repaired at Landlord's expense and if
Landlord fails to cause such damage to be repaired promptly upon Tenant's demand
therefor, Tenant may in addition to any other rights or remedies available to
Landlord under this Lease or at law or equity cause such damage to be repaired,
in which event Landlord shall promptly upon Tenant's demand pay to Tenant the
cost of such repairs.
(b) During the performance of Tenant's Work including Tenant's
fixturing, Tenant shall provide trash removal service from a location designated
by Landlord. Tenant shall be responsible for breaking down boxes and placing
trash in containers at such designated location. Tenant shall accumulate its
trash in containers supplied by Tenant and Tenant shall not permit trash to
accumulate within or about the Demised Premises or in the corridors or public
areas adjacent to the Demised Premises. Tenant shall cause each entity employed
by it to perform work on the Demised Premises to abide by the provisions of this
Exhibit as to the storage of trash and shall require each such entity to perform
its work in a way that dust or dirt is contained entirely within the Demised
Premises and not within any other portion of the Building and shall cause
Tenant's contractors to leave the Demised Premises in broom clean condition at
the end of each day. Should Landlord deem it necessary to remove Tenant's trash
because of accumulation, Tenant shall pay to Landlord an additional reasonable
charge for such removal on a time and material basis. The cost to Tenant for
Landlord removing such trash will be based on reasonable and competitive cost
which Tenant could have secured independently had Landlord not provided such
service.
(c) Tenant agrees that all services and work performed on the Demised
Premises by, on behalf of, or for the account of Tenant, including installation
of telephones, carpeting, materials and personal property delivered to the
Demised Premises shall be done in a first-class workmanlike manner using only
good grades of material.
(d) Tenant and Landlord each agree to protect, indemnify, defend and
hold the other and its agents, partners, contractors, and employees harmless
from and against any and all losses, damages, liabilities, claims, liens, costs
and expenses, including reasonable attorneys' fees, of whatever nature including
those to the person and property of the other, its employees, agents, invitees,
licensees and others arising out of or in connection with the activities of the
other or its contractors in or about the Demised Premises or Bldg. B, and the
cost of any repairs to the Demised Premises or the Bldg. B necessitated by
activities of the other or its contractors.
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(e) Tenant shall secure, pay for, and maintain during the continuance
of its work within the Demised Premises, policies of insurance with such
coverages and such amounts as Landlord may reasonably require, which policies
shall be endorsed to include Landlord and its contractor and their respective
employees and agents and Landlord's mortgagees as additional insured parties and
which shall provide thirty (30) days' prior written notice of any alteration or
termination of coverage, in such amounts and insuring such risks as Landlord may
require. Tenant shall not permit Tenant's contractors to commence any work until
all required insurance has been obtained by Tenant and certificates evidencing
such coverage have been delivered to Landlord.
(f) Tenant's agents, subcontractors and vendors shall be required to
conform with the "Contractor & Vendor Guidelines" to be agreed upon by Landlord
and Tenant.
5. Miscellaneous.
(a) Except as expressly set forth herein, Landlord has no other
agreement with Tenant and has no other obligation to do any other work or pay
any amounts with respect to the Construction of Bldg. B. Any other construction
work in Bldg. B which may be permitted by Landlord pursuant to the terms and
conditions of the Lease shall be done at Tenant's sole cost and expense and in
accordance with the terms and conditions of the Lease and Exhibit D.
(b) Other than Bldg. B, this Exhibit shall not be deemed
applicable to any other additional space added to the Demised Premises at any
time or from time to time.
(c) The failure by Tenant to pay any monies due Landlord pursuant
to this Exhibit within the time period herein stated shall be deemed a Default
under the terms of the Lease for which Landlord shall be entitled to exercise
all remedies available to Landlord for nonpayment of Rent. All late payments
shall bear interest and shall be subject to a late charge pursuant to the Lease.
(d) This Exhibit is being executed in conjunction with the Lease
and is subject to each and every term and condition thereof, including, without
limitation, the limitations of Landlord's liability set forth therein.
(e) Tenant shall be solely responsible to determine at the site
all dimensions of the Demised Premises and the Building which affect any work to
be performed by or for Tenant hereunder. This provision shall not control the
rent calculation.
6. Tenant's Work. "Tenant's Work" or "Tenant's Fit Up Work" shall include all
interior work required by the Tenant for Tenant's use which is NOT part of
Landlord's Base Building or Landlord's Concurrent Work as defined by Exhibit C
including the items on attached Schedule D-6.
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EXHIBIT E
RULES AND REGULATIONS
Tenant agrees as follows:
1. All loading and unloading of goods shall be done through the rear
entrance, if any, at such times designated for such purposes by Landlord.
2. The delivery or shipping of inventory, merchandise, supplies and
fixtures to and from the Demised Premises shall be subject to such rules and
regulations as in the judgment of Landlord are necessary for the proper
operation of the Demised Premises.
3. No aerial or antennae shall be erected without, in each instance,
the written consent of Landlord. Any of said items so installed without such
written consent shall be subject to removal without notice at any time.
4. No loud speakers, televisions, phonographs, radios or other
devices shall be used in a manner so as to be heard outside of the Demised
Premises without prior written consent of Landlord.
5. No amusement machine (including, but not limited to arcade games,
video games, jute boxes and pin ball machines) shall be installed without first
obtaining in each instance Landlord's consent in writing.
6. Tenant shall cooperate in keeping the Demised Premises and any
adjacent sidewalks and driveways used by the Demised Premises clean and free
from snow, ice, dirt and rubbish and Tenant shall not place or permit any
obstructions in such areas.
7. Plumbing facilities located within the Demised Premises shall not
be used for any other purpose than that for which they are constructed, and no
foreign substance of any kind shall be thrown therein, and the expense of any
breakage, stoppage, or damage resulting from a violation of this provision shall
be borne by Tenant, who shall, or whose employees, agents or invitees shall have
caused it.
8. Tenant shall use at Tenant's cost a pest extermination contractor
at such intervals as Landlord may reasonably require
9. Tenant shall not burn any trash or garbage of any kind in or about
the Demised Premises.
10. Tenant shall not place a load on any floor in the Demised
Premises which exceeds the load which it was designed to carry, or which may
result in improper weight distribution on such floors.
12. Tenant shall not install, operate, or maintain in the Demised
Premises any electrical equipment which does not bear the Underwriters
Laboratories seal of approval, or which would overload the electrical system or
any part thereof beyond its capacity for proper effective and safe operation as
determined by Landlord.
13. To the extent required by Landlord, or any environmental or other
law, rule, regulation, guideline, or order, Tenant shall provide sound barriers
for all mechanical systems serving the Demised Premises.
14. Tenant shall not store, display, sell or distribute any dangerous
materials, flammable materials, explosives, or weapons in the Demised Premises,
or conduct any unsafe activities therein.
15. Tenant shall not use the parking lot, driveways for the operation
of any business activity.
16. Tenant shall not dispose of any oil or other waste products from
trucks or automobiles into the plumbing or sewer or water system serving the
Demised Premises but shall dispose of such products in a manner approved by
Landlord in writing.
17. Tenant shall keep floors of the Demised Premises clean and free
from solvents and debris at all times.
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EXHIBIT F
Guaranty of Lease
THIS GUARANTY, made this day of April, 1998, by Cyberian
Management Solutions, Inc. (hereinafter called "Guarantor"), in favor of Barton
Kent LLC, a Connecticut Limited Liability Company (hereinafter called
"Landlord"),
W I T N E S E T H:
WHEREAS, Landlord has entered into a Lease Agreement (the "Lease") of
even date with this Guaranty with Cyberian Outpost, Inc. ("Tenant"), which Lease
demises certain Leased Premises in Kent, Connecticut located in the County of
Litchfield, State of Connecticut ("Demised Premises");
WHEREAS, Guarantor has a financial interest in Tenant, and Landlord
would not have entered into the Lease in the absence of the execution and
delivery of this Guaranty; and
WHEREAS, Guarantor has examined the Lease and is fully cognizant of
the covenants, conditions, and agreements contained in it, and its obligations
under this Guaranty with respect to the Lease.
NOW, THEREFORE, in consideration of the premises and the sum of One
and No/100 Dollar ($1.00) paid by Landlord to Guarantor, the receipt of which is
hereby acknowledged, Guarantor agrees as follows:
1. Guarantor hereby unconditionally Guarantees to Landlord the full
and prompt performance and observance of all covenants, conditions, and
agreements provided in the Lease to be performed and observed by Tenant, its
successors and assigns, including but not by way of limitation, if any, to
fixture and ready the Demised Premises for Tenant's occupancy at the time and in
the manner specified for that performance and observance.
2. Guarantor agrees that its obligations under this Guaranty shall not
be terminated, reduced, or affected in any way by reason of the assertion by
Landlord against Tenant of any right or remedy for the enforcement of the
obligations of Tenant under the Lease, or by reason of the waiver by Landlord
of, or its failure to enforce, any of the terms, covenants, or conditions of the
Lease, or the granting of any indulgence or extension of time to Tenant; and
Guarantor waives notice of any of the foregoing and of default by Tenant in
payment of rent and any other sum of money required to be paid under the Lease
and breach by Tenant of any covenant, condition, or agreement contained in the
Lease. Guarantor further agrees that its obligations hereunder shall apply with
full force and effect to any amendment, renewal, or extension of the Lease, even
though made without notice thereof to Guarantor. Guarantor hereby consents to
any sublease of the Demised Premises covered by the Lease which may be made or
proposed by Tenant.
3. Guarantor agrees that its liability under this Guaranty shall be
primary and that with respect to any right of action which shall accrue to
Landlord under the Lease, Landlord may at its option proceed against Guarantor
without having commenced any action or having obtained any judgment against
Tenant. Guarantor waives any and all defenses available to it in connection with
the enforcement of the Guaranty, including, but not limited to, the right to
require pursuit of any remedies against Tenant or any other person or to require
that security held by Landlord be foreclosed or that resort be had to any other
security or to any balance of any account or credit, before pursuit against
Guarantor under this Guaranty.
5. This Guaranty shall be binding upon Guarantor, its successors and
assigns, and shall inure to the benefit of Landlord, its successors and assigns.
27
<PAGE>
IN WITNESS WHEREOF, the undersigned Guarantor, Darryl Peck, has caused
this Guaranty to be executed in its name and on its behalf by its duly
authorized officer, and its seal to be affixed to this Guaranty and attested on
the day and year first set forth above.
In witness hereof:
CYBERIAN MANAGEMENT SOLUTIONS, INC.
/s/ Darryl Peck
----------------------------
By: Darryl Peck
Its: President
STATE OF CONNECTICUT )
) ss:
COUNTY OF LITCHFIELD )
On this 4/th/ the day of May, 1998, before me, the undersigned
officer, personally appeared, Darryl Peck, who acknowledged himself to be the
president of Cyberian Management Solutions, Inc., a corporation, and that he as
such officer, being authorized so to do, executed the foregoing instrument for
the purposes therein contained, by signing the name of the corporation by
himself as such officer.
IN WITNESS WHEREOF, I hereunto set my hand.
/s/ Melanie Chernak
--------------------
Commissioner of the Superior Court
Notary Public
My commission expires:
28
<PAGE>
EXHIBIT G
CONDITIONS OF ACCEPTANCE OF CONSTRUCTION ESCROW
In consideration of the acceptance of $100,000 Construction Escrow by
Secor, Cassidy & McPartland, P.C. of Waterbury, Connecticut as Escrow Agent
("Escrow Agent"), all of the undersigned parties agree that the Construction
Escrow is held under the terms of the Lease and is subject to the following
conditions:
1. Escrow Agent shall be liable only for funds and instruments
actually deposited with it and received by it for the Construction Escrow.
Escrow Agent shall have a lien on all funds and instruments deposited with it to
secure payment of fees and costs incurred arising out of any dispute regarding
the escrow transaction.
2. Escrow Agent may deposit any funds received by it under the terms
of the escrow instructions in Escrow Agent's escrow account in any financial
institution selected by Escrow Agent. Escrow Agent will forward all interest
derived from such investments to Tenant. Escrow Agent shall not be liable for
the payment of any funds in the event of the insolvency or suspension of
payments by any depository selected by it. All disbursements shall be made by
the issuance of checks on Escrow Agent's escrow account.
3. If a dispute arises between Landlord and Tenant as to the release
of any funds from escrow and Escrow Agent receives written notice of same,
Escrow Agent may refuse to disburse funds or deliver any instruments unless
Escrow Agent receives a written agreement, signed by all parties, authorizing
such disbursement or delivery, or unless such disbursement or delivery is
ordered by a court.
4. All parties to the transaction jointly and severally promise to
save Escrow Agent harmless from all damages or losses resulting from the
termination of escrow and agree to indemnify Escrow Agent from any and all
amounts Escrow Agent may be required to pay on account of such termination,
including, but not limited to costs, expenses and reasonable attorneys' fees.
5. Escrow Agent assumes no responsibility for, and shall not be
liable for any loss or damage resulting from, the following:
a. The identify of parties or the sufficiency of any agency.
b. The validity, collectibility, genuineness of signature and
negotiability of any check or negotiable instrument deposited
in Construction Escrow;
c. Delay of escrow payment due to fires, forces of nature,
governmental acts, strikes, or any other cause beyond Escrow
Agent's control;
29
<PAGE>
d. Any good faith act or forbearance by Escrow Agent;
6. The parties understand that this document represents a binding and
enforceable agreement, and they have carefully read and examined it before
signing.
7. Upon completion of each condition precedent to partial releases of
the Construction Escrow as set forth in the Lease, funds will be release as
required under Construction Escrow provisions of Lease;
8. If Escrow Agent releases said monies under the terms of said
Lease, this escrow agreement shall terminate and Escrow Agent shall have no
further liability hereunder;
9. As consideration for Escrow Agent agreeing to act in such
capacity, the parties hereby agree that Escrow Agent shall not be liable for any
of its acts or omissions done in good faith, nor shall Escrow Agent be liable
for any claims, demands, costs, or damages made or suffered by any party hereto,
excepting such as may arise through or be caused by the Escrow Agent's willful
or gross negligence; further, any party hereto bringing an action to which
Escrow Agent is joined shall reimburse Escrow Agent for any expense, including
attorneys' fees, incurred by Escrow Agent as a result of this agreement.
10. This escrow agreement shall be binding upon and inure to the
benefit of the parties hereto, their successors and assigns.
11. All amendments to this escrow agreement shall be made in writing
and signed by all parties hereto or their duly authorized representatives and
shall be effective upon written acceptance by the Escrow Agent.
12. The parties agree that notwithstanding this escrow agreement,
Escrow Agent may continue to represent Landlord with respect to the Lease
transaction other matters. thereto.
13. Escrow Agent may at any time relieve himself of further
responsibility for the Construction Escrow by paying such funds as may be held
thereunder into any Connecticut Court that would have jurisdiction over a
dispute between the parties arising out of said escrow, upon contemporaneous
notice to both parties. Providing, Escrow Agent shall not be required to take
such action and such action shall be at Escrow Agent's sole discretion.
BARTON KENT, LLC, LANDLORD CYBERIAN OUTPOST, INC.
/s/ Russell Barton
- ----------------------------------
Russell Barton, its member
/s/ Dale Barton By /s/ Darryl Peck
--------------------------------- --------------------------------------
Dale Barton, its member Its Duly Authorized
30
<PAGE>
Exhibit 10.5
CYBERIAN OUTPOST, INC.
1997 INCENTIVE STOCK PLAN
-------------------------
1. Objectives. The CYBERIAN OUTPOST, INC. 1997 Incentive Stock Plan (the
"Plan") is designed to retain directors, executives and selected employees and
consultants and reward them for making major contributions to the success of the
Company. These objectives are accomplished by making long-term incentive awards
under the Plan thereby providing Participants with a proprietary interest in the
growth and performance of the Company.
2. Definitions.
(a) "Board" - The Board of Directors of the Company.
-----
(b) "Code" - The Internal Revenue Code of 1986, as amended from time to
----
time.
(c) "Committee" - The Compensation Committee of the Company's Board, or
---------
such other committee of the Board that is designated by the Board to administer
the Plan, composed of not less than two members of the Board all of whom are
disinterested persons, as contemplated by Rule 16b-3 ("Rule 16b-3") promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
foregoing requirement for disinterested administration shall not apply prior to
the date of the first registration of any of the securities of the Company under
the Exchange Act.
(d) "Company" - CYBERIAN OUTPOST, INC. and its subsidiaries including
-------
subsidiaries of subsidiaries.
(e) "Exchange Act" - The Securities Exchange Act of 1934, as amended from
------------
time to time.
(f) "Fair Market Value" - The fair market value of the Company's issued
-----------------
and outstanding Stock as determined in good faith by the Board or Committee.
(g) "Grant" - The grant of any form of stock option to a Participant
-----
pursuant to such terms, conditions and limitations as the Committee may
establish in order to fulfill the objectives of the Plan.
(h) "Grant Agreement" - An agreement between the Company and a Participant
---------------
that sets forth the terms, conditions and limitations applicable to a Grant.
(i) "Option" - Either an Incentive Stock Option, in accordance with
------
Section 422 of Code, or a Nonstatutory Option, to purchase the Company's Stock
that may be awarded to a Participant under the Plan. A Participant who receives
a Grant of an Option shall be referred to as an "Optionee."
(j) "Participant" - A director, officer, employee or consultant of the
-----------
Company to whom a Grant has been made under the Plan.
(k) "Securities Act" - The Securities Act of 1933, as amended from time to
--------------
time.
(l) "Stock" - Authorized and issued or unissued shares of common stock,
-----
without par value, of the Company.
Page 1
<PAGE>
3. Administration.
(a) The Plan shall be administered by the Board, provided however, that
the Board may delegate such administration to the Committee. A majority of the
members of the Committee shall constitute a quorum, and, subject to the
limitations in this Section 3, all actions of the Committee shall require the
affirmative vote of members who constitute a majority of such quorum. Members
of the Committee may vote on any matters affecting the administration of the
Plan, except that no such member shall act on the granting of any Option to
himself or herself (but any such member may be counted in determining the
existence of a quorum at any meeting of the Committee during which action is
taken with respect to the granting of an Option to him or her).
(b) Subject to the provisions of the Plan, the Board and/or the Committee
shall have authority to (i) grant, in its discretion, Incentive Stock Options in
accordance with Section 422 of the Code, or Nonstatutory Options; (ii) determine
in good faith the fair market value of the Stock covered by any Grant; (iii)
determine which eligible persons shall receive Grants and the number of shares,
restrictions, terms and conditions to be included in such Grants; (iv) construe
and interpret the Plan; (v) promulgate, amend and rescind rules and regulations
relating to its administration, and correct defects, omissions and
inconsistencies in the Plan or any Grant; (vi) consistent with the Plan and with
the consent of the Participant, as appropriate, amend any outstanding Grant or
amend the exercise date or dates thereof; (vii) determine the duration and
purpose of leaves of absence which may be granted to Participants without
constituting termination of their employment for the purpose of the Plan or any
Grant; and (viii) make all other determinations necessary or advisable for the
Plan's administration. The interpretation and construction by the Board of any
provisions of the Plan or selection of Participants shall be conclusive and
final. No member of the Board or the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any Grant made
thereunder.
4. Eligibility.
(a) General: The persons who shall be eligible to receive Grants shall be
-------
directors, officers, employees or consultants to the Company. The term
consultant shall mean any person, other than an employee, who is engaged by the
Company to render services and is compensated for such services. An Optionee
may hold more than one Option. Any issuance of a Grant to an officer or
director of the Company subsequent to the first registration of any of the
securities of the Company under the Exchange Act shall comply with the
requirements of Rule 16b-3.
(b) Incentive Stock Options: Incentive Stock Options may only be issued to
-----------------------
employees of the Company. Incentive Stock Options may be granted to officers or
directors, provided they are also employees of the Company. Payment of a
director's fee shall not be sufficient to constitute employment by the Company.
The Company shall not grant an Incentive Stock Option under the Plan to any
employee if such Grant would result in such employee holding the right to
exercise for the first time in any one calendar year, under all Incentive Stock
Options granted under the Plan or any other plan maintained by the Company, with
respect to shares of Stock having an aggregate fair market value, determined as
of the date of the Option is granted, in excess of $100,000. Should it be
determined that an Incentive Stock Option granted under the Plan exceeds such
maximum for any reason other than a failure in good faith to value the Stock
subject to such option, the excess portion of such option shall be considered a
Nonstatutory Option. To the extent the employee holds two (2) or more such
Options which become exercisable for the first time in the same calendar year,
the foregoing limitation on the exercisability of such Option as Incentive
Stock Options under the Federal tax laws shall be applied on the basis of the
order in which such Options are granted. If, for any reason, an entire Option
does not qualify as an Incentive Stock Option by reason of exceeding such
maximum, such Option shall be considered a Nonstatutory Option.
Page 2
<PAGE>
(c) Nonstatutory Option: The provisions of the foregoing Section 4(b)
-------------------
shall not apply to any Option designated as a "Nonstatutory Option" or which
sets forth the intention of the parties that the Option be a Nonstatutory
Option.
(d) Additional Requirements: At the discretion of the Board or the
-----------------------
Committee, each prospective Participant's eligibility to receive Grants of
Options under the Plan shall be dependent upon the execution and delivery by
each such prospective Participant of agreements or similar contractual
arrangements relative to assigning patents and inventions to the Company,
restricting disclosure of the confidential and proprietary information and trade
secrets of the Company, and restricting solicitation of the customers, vendors
and employees of the Company.
5. Stock.
(a) Authorized Stock: Stock subject to Grants may be either unissued or
----------------
reacquired Stock.
(b) Number of Shares: Subject to adjustment as provided in Section 6(i) of
----------------
the Plan, the total number of shares of Stock which may be granted as Options
under the Plan shall not exceed Three Hundred Thousand (300,000). If any Grant
shall for any reason terminate or expire, any shares allocated thereto but
remaining unpurchased upon such expiration or termination shall again be
available for Grants with respect thereto under the Plan as though no Grant had
previously occurred with respect to such shares. Any shares of Stock issued
pursuant to a Grant and repurchased pursuant to the terms thereof shall be
available for future Grants as though not previously covered by a Grant.
(c) Reservation of Shares: The Company shall reserve and keep available at
---------------------
all times during the term of the Plan such number of shares as shall be
sufficient to satisfy the requirements of the Plan. If, after reasonable
efforts, which efforts shall not include the registration of the Plan or Grants
under the Securities Act, the Company is unable to obtain authority from any
applicable regulatory body, which authorization is deemed necessary by legal
counsel for the Company for the lawful issuance of shares hereunder, the Company
shall be relieved of any liability with respect to its failure to issue and sell
the shares for which such requisite authority was so deemed necessary unless and
until such authority is obtained.
(d) Application of Funds: The proceeds received by the Company from the
--------------------
sale of Stock pursuant to the exercise of Options will be used for general
corporate purposes.
(e) No Obligation to Exercise: The issuance of a Grant shall impose no
-------------------------
obligation upon the Participant to exercise any rights under such Grant.
6. Terms and Conditions of Options. Options granted hereunder shall be
evidenced by agreements between the Company and the respective Optionees, in
such form and substance as the Board or Committee shall from time to time
approve. Grant Agreements need not be identical, and in each case may include
such provisions as the Board or Committee may determine, but all such agreements
shall be subject to and limited by the following terms and conditions:
(a) Number of Shares: Each Option shall state the number of shares to
----------------
which it pertains.
(b) Exercise Price: Each Option shall state the exercise price, which
--------------
shall be determined as follows:
Page 3
<PAGE>
(i) Any Option granted to a person who at the time the Option is
granted owns (or is deemed to own pursuant to Section 424(d) of the
Code) stock possessing more than ten percent (10%) of the total
combined voting power or value of all classes of stock of the Company
("Ten Percent Holder") shall have an exercise price of no less than
110% of the Fair Market Value of the Stock as of the date of grant;
and
(ii) Incentive Stock Options granted to a person who at the time
the Option is granted is not a Ten Percent Holder shall have an
exercise price of no less than 100% of the Fair Market Value of the
Stock as of the date of grant; and
(iii) Nonstatutory Options granted to a person who at the time the
Option is granted is not a Ten Percent Holder shall have an exercise
price of no less than 90% of the Fair Market Value of the Stock as of
the date of grant.
For the purposes of this Section 6(b), the Fair Market Value shall be as
determined by the Board in good faith, which determination shall be conclusive
and binding; provided however, that if there is a public market for such Stock,
the Fair Market Value per share shall be the average of the bid and asked prices
(or the closing price if such stock is listed on the NASDAQ National Market
System or Small Cap Issue Market) on the date of grant of the Option, or if
listed on a stock exchange, the closing price on such exchange on such date of
grant.
(c) Medium and Time of Payment: The exercise price shall become
--------------------------
immediately due upon exercise of the Option and shall be paid in cash or check
made payable to the Company. Should the Company's outstanding Stock be
registered under Section 12(g) of the Exchange Act at the time the Option is
exercised, then the exercise price may also be paid as follows:
(i) in shares of Stock held by the Optionee for the requisite
period necessary to avoid a charge to the Company's earnings for
financial reporting purposes and valued at Fair Market Value on the
exercise date, or
(ii) through a special sale and remittance procedure pursuant to
which the Optionee shall concurrently provide irrevocable written
instructions (a) to a Company designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the Company, out
of the sale proceeds available on the settlement date, sufficient
funds to cover the aggregate exercise price payable for the purchased
shares plus all applicable Federal, state and local income and
employment taxes required to be withheld by the Company by reason of
such purchase and (b) to the Company to deliver the certificates for
the purchased shares directly to such brokerage firm in order to
complete the sale transaction.
At the discretion of the Board, exercisable either at the time of Option grant
or of Option exercise, the exercise price may also be paid (i) by Optionee's
delivery of a promissory note in form and substance satisfactory to the Company
and permissible under the laws of the State of Connecticut and bearing interest
at a rate determined by the Board in its sole discretion but in no event less
than the minimum rate of interest required to avoid the imputation of
compensation income to the Optionee under the Federal tax laws, or (ii) in such
other form of consideration permitted by the Connecticut corporations law as may
be acceptable to the Board.
(d) Term and Exercise of Options: Any Option granted to an employee of the
----------------------------
Company shall become exercisable over a period of no longer than five (5) years,
and no less than twenty percent (20%) of the shares covered thereby shall become
exercisable annually. No Option shall be exercisable, in whole or in part,
prior to one (1) year from the date it is granted unless the Board shall
specifically
Page 4
<PAGE>
determine otherwise, as provided herein. In no event shall any Option be
exercisable after the expiration of ten (10) years from the date it is granted,
and no Incentive Stock Option granted to a Ten Percent Holder shall, by its
terms, be exercisable after the expiration of five (5) years from the date of
the Option. Unless otherwise specified by the Board or the Committee in the
resolution authorizing such Option, the date of grant of an Option shall be
deemed to be the date upon which the Board or the Committee authorizes the
granting of such Option.
Each Option shall be exercisable to the nearest whole share, in installments
or otherwise, as the respective Option agreements may provide. During the
lifetime of an Optionee, the Option shall be exercisable only by the Optionee
and shall not be assignable or transferable by the Optionee, and no other person
shall acquire any rights therein. To the extent not exercised, installments (if
more than one) shall accumulate, but shall be exercisable, in whole or in part,
only during the period for exercise as stated in the Grant Agreement, whether or
not other installments are then exercisable.
(e) Termination of Status as Employee, Consultant or Director: If
---------------------------------------------------------
Optionee's status as an employee shall terminate for any reason other than
Optionee's disability or death, then Optionee (or if the Optionee shall die
after such termination, but prior to exercise, Optionee's personal
representative or the person entitled to succeed to the Option) shall have the
right to exercise the portions of any of Optionee's Incentive Stock Options
which were exercisable as of the date of such termination, in whole or in part,
not less than thirty (30) days nor more than three (3) months after such
termination (or, in the event of "termination for cause" (subject to the laws of
the State of Connecticut) by the terms of the Plan or a Grant Agreement or an
employment agreement, or the established policies and directives of the Company,
the Option shall automatically terminate as of the termination of employment as
to all shares covered by the Option).
With respect to Nonstatutory Options granted to employees, directors or
consultants, the Board may specify such period for exercise, not less than
thirty (30) days (except that in the case of "termination for cause" or removal
of a director, the Option shall automatically terminate as of the termination of
employment or services as to shares covered by the Option, following termination
of employment or services as the Board deems reasonable and appropriate). The
Option may be exercised only with respect to installments that the Optionee
could have exercised at the date of termination of employment or services.
Nothing contained herein or in any Option granted pursuant hereto shall be
construed to affect or restrict in any way the right of the Company to terminate
the employment or services of an Optionee with or without cause.
Each Option shall terminate with respect to all installments which are not
exercisable at the date of an Optionee's termination of employment or services,
as applicable.
(f) Disability of Optionee: If an Optionee is disabled (within the meaning
----------------------
of Section 22(e)(3) of the Code) at the time of termination, the three (3) month
period set forth in Section 6(e) shall be a period, as determined by the Board
and set forth in the Option, of not less than six (6) months nor more than one
year after such termination.
(g) Death of Optionee: If an Optionee dies while employed by, engaged as a
-----------------
consultant to, or serving as a Director of the Company, the portion of such
Optionee's Option which was exercisable at the date of death may be exercised,
in whole or in part, by the estate of the decedent or by a person succeeding to
the right to exercise such Option at any time within (i) a period, as determined
by the Board and set forth in the Option, of not less than six (6) months nor
more than one (1) year after Optionee's death, which period shall not be more,
in the case of a Nonstatutory Option, than the period for exercise following
termination of employment or services, or (ii) during the remaining term of the
Option, whichever is the lesser. The Option may be so exercised only with
respect to installments exercisable at the time of Optionee's death and not
previously exercised by the Optionee.
Page 5
<PAGE>
(h) Nontransferability of Option: No Option shall be transferable by the
----------------------------
Optionee, except by will or by the laws of descent and distribution. Any
violation or attempted violation of such restriction shall result in the
immediate termination of the Option.
(i) Recapitalization: Subject to any required action of shareholders, the
----------------
number of shares of Stock covered by each outstanding Option, and the exercise
price per share thereof set forth in each such Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Stock of
the Company resulting from a stock split, stock dividend, combination,
subdivision or reclassification of shares, or the payment of a stock dividend,
or any other increase or decrease in the number of such shares affected without
receipt of consideration by the Company; provided, however, the conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration" by the Company.
In the event of a proposed dissolution or liquidation of the Company, a merger
or consolidation in which the Company is not the surviving entity, or a sale of
all or substantially all of the assets or capital stock of the Company
(collectively, a "Reorganization"), unless otherwise provided by the Board, each
outstanding Option shall terminate immediately prior to such date as is
determined by the Board, which date shall be no later than the consummation of
such Reorganization. In such event, if the entity which shall be the surviving
entity does not tender to an Optionee an offer, for which it has no obligation
to do so, to substitute for any unexercised Option a stock option or capital
stock of such surviving entity, as applicable, which on an equitable basis shall
provide the Optionee with substantially the same economic benefit as such
unexercised Option, then the Board may grant to such Optionee, in its sole and
absolute discretion and without obligation, the right for a period commencing
thirty (30) days prior to and ending immediately prior to the date determined by
the Board pursuant hereto for termination of the Option or during the remaining
term of the Option, whichever is the lesser, to exercise any unexpired Option or
Options without regard to the installment provisions of Paragraph 6(d) of the
Plan; provided, that any such right granted shall be granted to all Optionees
not receiving an offer to receive substitute options on a consistent basis, and
provided further, that any such exercise shall be subject to the consummation of
such Reorganization.
Subject to any required action of shareholders, if the Company shall be the
surviving entity in any merger or consolidation, each outstanding Option
thereafter shall pertain to and apply to the securities to which a holder of
shares of Stock equal to the shares subject to the Option would have been
entitled by reason of such merger or consolidation.
In the event of a change in the Stock of the Company as presently constituted,
which is limited to a change of all of its authorized shares without par value
into the same number of shares with a par value, the shares resulting from any
such change shall be deemed to be the Stock within the meaning of the Plan.
To the extent that the foregoing adjustments relate to stock or securities of
the Company, such adjustments shall be made by the Board, whose determination in
that respect shall be final, binding and conclusive. Except as expressly
provided in this Section 6(i), the Optionee shall have no rights by reason of
any subdivision or consolidation of shares of stock of any class or the payment
of any stock dividend or any other increase or decrease in the number of shares
of stock of any class, and the number or price of shares of Stock subject to any
Option shall not be affected by, and no adjustment shall be made by reason of,
any dissolution, liquidation, merger, consolidation or sale of assets or capital
stock, or any issue by the Company of shares of stock of any class or securities
convertible into shares of stock of any class.
Page 6
<PAGE>
The Grant of an Option pursuant to the Plan shall not affect in any way the
right or power of the Company to make any adjustments, reclassifications,
reorganizations or changes in its capital or business structure or to merge,
consolidate, dissolve, or liquidate or to sell or transfer all or any part of
its business or assets.
(j) Rights as a Shareholder: An Optionee shall have no rights as a
-----------------------
shareholder with respect to any shares covered by an Option until the effective
date of the issuance of the shares following exercise of such Option by
Optionee. No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other rights
for which the record date is prior to the date such stock certificate is issued,
except as expressly provided in Section 6(i) hereof.
(k) Modification, Acceleration, Extension, and Renewal of Options: Subject
-------------------------------------------------------------
to the terms and conditions and within the limitations of the Plan, the Board
may modify an Option, or, once an Option is exercisable, accelerate the rate at
which it may be exercised, and may extend or renew outstanding Options granted
under the Plan or accept the surrender of outstanding Options (to the extent not
theretofore exercised) and authorize the granting of new Options in substitution
for such Options, provided such action is permissible under Section 422 of the
Code and applicable state securities laws. Notwithstanding the provisions of
this Section 6(k), however, no modification of an Option shall, without the
consent of the Optionee, alter to the Optionee's detriment or impair any rights
or obligations under any Option theretofore granted under the Plan.
(l) Exercise Before Exercise Date: At the discretion of the Board, the
-----------------------------
Option may, but need not, include a provision whereby the Optionee may elect to
exercise all or any portion of the Option prior to the stated exercise date of
the Option or any installment thereof. Any shares so purchased prior to the
stated exercise date shall be subject to repurchase by the Company upon
termination of Optionee's employment as contemplated by Section 6(n) hereof
prior to the exercise date stated in the Option and such other restrictions and
conditions as the Board or Committee may deem advisable.
(m) Other Provisions: The Grant Agreements authorized under the Plan shall
----------------
contain such other provisions, including, without limitation, restrictions upon
the exercise of the Options, as the Board or the Committee shall deem advisable.
Shares shall not be issued pursuant to the exercise of an Option, if the
exercise of such Option or the issuance of shares thereunder would violate, in
the opinion of legal counsel for the Company, the provisions of any applicable
law or the rules or regulations of any applicable governmental or administrative
agency or body, such as the Code, the Securities Act, the Exchange Act,
applicable state securities laws, Connecticut corporation law, and the rules
promulgated under the foregoing or the rules and regulations of any exchange
upon which the shares of the Company are listed. Without limiting the
generality of the foregoing, the exercise of each Option shall be subject to the
condition that if at any time the Company shall determine that (i) the
satisfaction of withholding tax or other similar liabilities, or (ii) the
listing, registration or qualification of any shares covered by such exercise
upon any securities exchange or under any state or federal law, or (iii) the
consent or approval of any regulatory body, or (iv) the perfection of any
exemption from any such withholding, listing, registration, qualification,
consent or approval is necessary or desirable in connection with such exercise
or the issuance of shares thereunder, then in any such event, such exercise
shall not be effective unless such withholding, listing registration,
qualification, consent, approval or exemption shall have been effected, obtained
or perfected free of any conditions not acceptable to the Company.
(n) Repurchase Agreement: The Board may, in its discretion, require as a
--------------------
condition to the Grant of an Option hereunder, that an Optionee execute an
agreement with the Company, in form and substance satisfactory to the Board in
its discretion (a "Repurchase Agreement"), (i) restricting the Optionee's right
to transfer shares purchased under such Option without first offering such
shares to the Company or other shareholders of the Company upon the same terms
and conditions as provided therein; and, among other things, (ii) providing that
upon termination of Optionee's employment with the Company, for any
Page 7
<PAGE>
reason, the Company (or other shareholders of the Company, as provided in the
Repurchase Agreement) shall have the right at its discretion (or the discretion
of such other shareholders) to purchase and/or redeem all such shares owned by
the Optionee on the date of termination of his or her employment, upon further
terms (including as to purchase price and terms of payment) to be determined by
the Board or the Committee, at its discretion. The terms and conditions of any
Repurchase Agreement may be incorporated into a Grant Agreement.
7. Investment Intent. All Grants under the Plan are intended to be exempt
from registration under the Securities Act provided by Rule 701 thereunder.
Unless and until the granting of Options or sale and issuance of Stock subject
to the Plan are registered under the Securities Act or shall be exempt pursuant
to the rules promulgated thereunder, each Grant under the Plan shall provide
that the purchases or other acquisitions of Stock thereunder shall be for
investment purposes and not with a view to, or for resale in connection with,
any distribution thereof. Further, unless the issuance and sale of the Stock
have been registered under the Securities Act, each Grant shall provide that no
shares shall be purchased upon the exercise of the rights under such Grant
unless and until (i) all then applicable requirements of state and federal laws
and regulatory agencies shall have been fully complied with to the satisfaction
of the Company and its counsel, and (ii) if requested to do so by the Company,
the person exercising the rights under the Grant shall (i) give written
assurances as to knowledge and experience of such person (or a representative
employed by such person) in financial and business matters and the ability of
such person (or representative) to evaluate the merits and risks of exercising
the Option, and (ii) execute and deliver to the Company a letter of investment
intent and/or such other form related to applicable exemptions from
registration, all in such form and substance as the Company may require. If
shares are issued upon exercise of any rights under a Grant without registration
under the Securities Act, subsequent registration of such shares shall relieve
the purchaser thereof of any investment restrictions or representations made
upon the exercise of such rights.
8. Amendment, Modification, Suspension or Discontinuance of the Plan. The
Board may, insofar as permitted by law, from time to time, with respect to any
shares at the time not subject to outstanding Grants, suspend or terminate the
Plan or revise or amend it in any respect whatsoever, except that without the
approval of the shareholders of the Company, no such revision or amendment shall
(i) increase the number of shares subject to the Plan, (ii) decrease the price
at which Grants may be granted, (iii) materially increase the benefits to
Participants, or (iv) change the class of persons eligible to receive Grants
under the Plan; provided, however, no such action shall alter or impair the
rights and obligations under any Option outstanding as of the date thereof
without the written consent of the Participant thereunder. No Grant may be
issued while the Plan is suspended or after it is terminated, but the rights and
obligations under any Grant issued while the Plan is in effect shall not be
impaired by suspension or termination of the Plan.
In the event of any change in the outstanding Stock by reason of a stock
split, stock dividend, combination or reclassification of shares,
recapitalization, merger, or similar event, the Board or the Committee may
adjust proportionally (a) the number of shares of Stock (i) reserved under the
Plan, and (ii) available for Incentive Stock Options and Nonstatutory Options;
(b) the Stock prices related to outstanding Grants; and (c) the appropriate Fair
Market Value and other price determinations for such Grants. In the event of
any other change affecting the Stock or any distribution (other than normal cash
dividends) to holders of Stock, such adjustments as may be deemed equitable by
the Board or the Committee, including adjustments to avoid fractional shares,
shall be made to give proper effect to such event. In the event of a corporate
merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation, the Board or the Committee shall be authorized to
issue or assume stock options, whether or not in a transaction to which Section
424(a) of the Code applies, and other Grants by means of substitution of new
Grant Agreements for previously issued Grants or an assumption of previously
issued Grants.
Page 8
<PAGE>
9. Tax Withholding. At the time of delivery or exercise of Options, as may
be applicable, the Company shall have the right to deduct from amounts otherwise
due to any Optionee and/or withhold an appropriate number of shares for payment
of taxes required by law or to take such other action as may be necessary in the
opinion of the Company to satisfy all obligations for withholding of such taxes.
If Stock is used to satisfy tax withholding, such Stock shall be valued based on
the Fair Market Value when the tax withholding is required to be made.
10. Availability of Information. During the term of the Plan and any
additional period during which a Grant granted pursuant to the Plan shall be
exercisable, the Company shall make available, not later than one hundred and
twenty (120) days following the close of each of its fiscal years, such
financial and other information regarding the Company as is required by the
Bylaws of the Company and applicable law to be furnished in an annual report to
the shareholders of the Company.
11. Notice. Any written notice to the Company required by any of the
provisions of the Plan shall be addressed to the chief personnel officer or to
the chief executive officer of the Company, and shall become effective when it
is received by the office of the chief personnel officer or the chief executive
officer.
12. Indemnification of Board. In addition to such other rights or
indemnifications as they may have as directors or otherwise, and to the extent
allowed by applicable law, the members of the Board and the Committee shall be
indemnified by the Company against the reasonable expenses, including attorneys'
fees, actually and necessarily incurred in connection with the defense of any
claim, action, suit or proceeding, or in connection with any appeal thereof, to
which they or any of them may be a party by reason of any action taken, or
failure to act, under or in connection with the Plan or any Grant granted
thereunder, and against all amounts paid by them in settlement thereof (provided
such settlement is approved by independent legal counsel selected by the
Company) or paid by them in satisfaction of a judgment in any such claim,
action, suit or proceeding, except in any case in relation to matters as to
which it shall be adjudged in such claim, action, suit or proceeding that such
Board or Committee member is liable for negligence or misconduct in the
performance of his or her duties; provided that within sixty (60) days after
institution of any such action, suit or Board proceeding the member involved
shall offer the Company, in writing, the opportunity, at its own expense, to
handle and defend the same.
13. Governing Law. The Plan and all determinations made and actions taken
pursuant hereto, to the extent not otherwise governed by the Code or the
securities laws of the United States, shall be governed by the law of the State
of Connecticut and construed accordingly.
14. Effective and Termination Dates. The Plan shall become effective on the
date it is approved by the holders of a majority of the shares of Stock then
outstanding. The Plan shall terminate (10) ten years later, subject to earlier
termination by the Board pursuant to Section 8.
The foregoing 1997 Incentive Stock Plan (consisting of 9 pages, including this
page) was duly adopted and approved by the Board of Directors on July 8, 1997
and approved by the shareholders of the Corporation August 15, 1997.
/s/ Katherine N. Vick
- ------------------------------------
Katherine N. Vick, Secretary
Page 9
<PAGE>
Exhibit 10.6
CYBERIAN OUTPOST, INC.
1998 INCENTIVE STOCK PLAN
-------------------------
1. Objectives. The CYBERIAN OUTPOST, INC. 1998 Incentive Stock Plan (the
"Plan") is designed to retain directors, executives and selected employees and
consultants and reward them for making major contributions to the success of the
Company. These objectives are accomplished by making long-term incentive awards
under the Plan thereby providing Participants with a proprietary interest in the
growth and performance of the Company.
2. Definitions.
(a) "Board" - The Board of Directors of the Company.
-----
(b) "Code" - The Internal Revenue Code of 1986, as amended from time to
----
time.
(c) "Committee" - The Compensation Committee of the Company's Board, or
---------
such other committee of the Board that is designated by the Board to administer
the Plan, composed of not less than two members of the Board all of whom are
disinterested persons, as contemplated by Rule 16b-3 ("Rule 16b-3") promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
foregoing requirement for disinterested administration shall not apply prior to
the date of the first registration of any of the securities of the Company under
the Exchange Act.
(d) "Company" - CYBERIAN OUTPOST, INC. and its subsidiaries including
-------
subsidiaries of subsidiaries.
(e) "Exchange Act" - The Securities Exchange Act of 1934, as amended
------------
from time to time.
(f) "Fair Market Value" - The fair market value of the Company's issued
-----------------
and outstanding Stock as determined in good faith by the Board or Committee.
(g) "Grant" - The grant of any form of stock option to a Participant
-----
pursuant to such terms, conditions and limitations as the Committee may
establish in order to fulfill the objectives of the Plan.
(h) "Grant Agreement" - An agreement between the Company and a
---------------
Participant that sets forth the terms, conditions and limitations applicable to
a Grant.
(i) "Option" - Either an Incentive Stock Option, in accordance with
------
Section 422 of Code, or a Nonstatutory Option, to purchase the Company's Stock
that may be awarded to a Participant under the Plan. A Participant who receives
a Grant of an Option shall be referred to as an "Optionee."
(j) "Participant" - A director, officer, employee or consultant of the
-----------
Company to whom a Grant has been made under the Plan.
(k) "Securities Act" - The Securities Act of 1933, as amended from time
--------------
to time.
(l) "Stock" - Authorized and issued or unissued shares of common stock,
-----
without par value, of the Company.
3. Administration.
(a) The Plan shall be administered by the Board, provided however, that
the Board may delegate such administration to the Committee. A majority of the
members of the Committee shall constitute a quorum, and, subject to the
limitations in this Section 3, all actions of the Committee shall require the
affirmative vote of members who constitute a majority of such quorum. Members of
the Committee may vote on any matters affecting the administration of the Plan,
except that no such member shall act on the granting of any Option to himself or
herself (but any such member may be counted in determining the existence of a
quorum at any meeting of the Committee during which action is taken with respect
to the granting of an Option to him or her).
(b) Subject to the provisions of the Plan, the Board and/or the
Committee shall have authority to (i) grant, in its discretion, Incentive Stock
Options in accordance with Section 422 of the Code, or Nonstatutory Options;
(ii) determine in good faith the fair market value of the Stock covered by any
Grant; (iii) determine which eligible persons shall receive
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<PAGE>
Grants and the number of shares, restrictions, terms and conditions to be
included in such Grants; (iv) construe and interpret the Plan; (v) promulgate,
amend and rescind rules and regulations relating to its administration, and
correct defects, omissions and inconsistencies in the Plan or any Grant; (vi)
consistent with the Plan and with the consent of the Participant, as
appropriate, amend any outstanding Grant or amend the exercise date or dates
thereof; (vii) determine the duration and purpose of leaves of absence which may
be granted to Participants without constituting termination of their employment
for the purpose of the Plan or any Grant; and (viii) make all other
determinations necessary or advisable for the Plan's administration. The
interpretation and construction by the Board of any provisions of the Plan or
selection of Participants shall be conclusive and final. No member of the Board
or the Committee shall be liable for any action or determination made in good
faith with respect to the Plan or any Grant made thereunder.
4. Eligibility.
(a) General: The persons who shall be eligible to receive Grants shall
-------
be directors, officers, employees or consultants to the Company. The term
consultant shall mean any person, other than an employee, who is engaged by the
Company to render services and is compensated for such services. An Optionee may
hold more than one Option. Any issuance of a Grant to an officer or director of
the Company subsequent to the first registration of any of the securities of the
Company under the Exchange Act shall comply with the requirements of Rule 16b-3.
(b) Incentive Stock Options: Incentive Stock Options may only be issued
-----------------------
to employees of the Company. Incentive Stock Options may be granted to officers
or directors, provided they are also employees of the Company. Payment of a
director's fee shall not be sufficient to constitute employment by the Company.
The Company shall not grant an Incentive Stock Option under the Plan to any
employee if such Grant would result in such employee holding the right to
exercise for the first time in any one calendar year, under all Incentive Stock
Options granted under the Plan or any other plan maintained by the Company, with
respect to shares of Stock having an aggregate fair market value, determined as
of the date of the Option is granted, in excess of $100,000. Should it be
determined that an Incentive Stock Option granted under the Plan exceeds such
maximum for any reason other than a failure in good faith to value the Stock
subject to such option, the excess portion of such option shall be considered a
Nonstatutory Option. To the extent the employee holds two (2) or more such
Options which become exercisable for the first time in the same calendar year,
the foregoing limitation on the exercisability of such Option as Incentive
Stock Options under the Federal tax laws shall be applied on the basis of the
order in which such Options are granted. If, for any reason, an entire Option
does not qualify as an Incentive Stock Option by reason of exceeding such
maximum, such Option shall be considered a Nonstatutory Option.
(c) Nonstatutory Option: The provisions of the foregoing Section 4(b)
-------------------
shall not apply to any Option designated as a "Nonstatutory Option" or which
sets forth the intention of the parties that the Option be a Nonstatutory
Option.
(d) Additional Requirements: At the discretion of the Board or the
-----------------------
Committee, each prospective Participant's eligibility to receive Grants of
Options under the Plan shall be dependent upon the execution and delivery by
each such prospective Participant of agreements or similar contractual
arrangements relative to assigning patents and inventions to the Company,
restricting disclosure of the confidential and proprietary information and trade
secrets of the Company, and restricting solicitation of the customers, vendors
and employees of the Company.
5. Stock.
(a) Authorized Stock: Stock subject to Grants may be either unissued or
----------------
reacquired Stock.
(b) Number of Shares: Subject to adjustment as provided in Section 6(i)
----------------
of the Plan, the total number of shares of Stock which may be granted as Options
under the Plan shall not exceed Five Hundred and Forty Thousand (540,000). If
any Grant shall for any reason terminate or expire, any shares allocated thereto
but remaining unpurchased upon such expiration or termination shall again be
available for Grants with respect thereto under the Plan as though no Grant had
previously occurred with respect to such shares. Any shares of Stock issued
pursuant to a Grant and repurchased pursuant to the terms thereof shall be
available for future Grants as though not previously covered by a Grant.
(c) Reservation of Shares: The Company shall reserve and keep available
---------------------
at all times during the term of the Plan such number of shares as shall be
sufficient to satisfy the requirements of the Plan. If, after reasonable
efforts, which efforts shall not include the registration of the Plan or Grants
under the Securities Act, the Company is unable to obtain authority from any
applicable regulatory body, which authorization is deemed necessary by legal
counsel for the Company
Page 2
<PAGE>
for the lawful issuance of shares hereunder, the Company shall be relieved of
any liability with respect to its failure to issue and sell the shares for which
such requisite authority was so deemed necessary unless and until such authority
is obtained.
(d) Application of Funds: The proceeds received by the Company from the
--------------------
sale of Stock pursuant to the exercise of Options will be used for general
corporate purposes.
(e) No Obligation to Exercise: The issuance of a Grant shall impose no
-------------------------
obligation upon the Participant to exercise any rights under such Grant.
6. Terms and Conditions of Options. Options granted hereunder shall be
evidenced by agreements between the Company and the respective Optionees, in
such form and substance as the Board or Committee shall from time to time
approve. Grant Agreements need not be identical, and in each case may include
such provisions as the Board or Committee may determine, but all such agreements
shall be subject to and limited by the following terms and conditions:
(a) Number of Shares: Each Option shall state the number of shares to
----------------
which it pertains.
(b) Exercise Price: Each Option shall state the exercise price, which
--------------
shall be determined as follows:
(i) Any Option granted to a person who at the time the Option is
granted owns (or is deemed to own pursuant to Section 424(d)
of the Code) stock possessing more than ten percent (10%) of
the total combined voting power or value of all classes of
stock of the Company ("Ten Percent Holder") shall have an
exercise price of no less than 110% of the Fair Market Value
of the Stock as of the date of grant; and
(ii) Incentive Stock Options granted to a person who at the time
the Option is granted is not a Ten Percent Holder shall have
an exercise price of no less than 100% of the Fair Market
Value of the Stock as of the date of grant; and
(iii) Nonstatutory Options granted to a person who at the time the
Option is granted is not a Ten Percent Holder shall have an
exercise price of no less than 90% of the Fair Market Value of
the Stock as of the date of grant.
For the purposes of this Section 6(b), the Fair Market Value shall be as
determined by the Board in good faith, which determination shall be conclusive
and binding; provided however, that if there is a public market for such Stock,
the Fair Market Value per share shall be the average of the bid and asked prices
(or the closing price if such stock is listed on the NASDAQ National Market
System or Small Cap Issue Market) on the date of grant of the Option, or if
listed on a stock exchange, the closing price on such exchange on such date of
grant.
(c) Medium and Time of Payment: The exercise price shall become
--------------------------
immediately due upon exercise of the Option and shall be paid in cash or check
made payable to the Company. Should the Company's outstanding Stock be
registered under Section 12(g) of the Exchange Act at the time the Option is
exercised, then the exercise price may also be paid as follows:
(i) in shares of Stock held by the Optionee for the requisite
period necessary to avoid a charge to the Company's earnings
for financial reporting purposes and valued at Fair Market
Value on the exercise date, or
(ii) through a special sale and remittance procedure pursuant to
which the Optionee shall concurrently provide irrevocable
written instructions (a) to a Company designated brokerage
firm to effect the immediate sale of the purchased shares and
remit to the Company, out of the sale proceeds available on
the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all
applicable Federal, state and local income and employment
taxes required to be withheld by the Company by reason of such
purchase and (b) to the Company to deliver the certificates
for the purchased shares directly to such brokerage firm in
order to complete the sale transaction.
At the discretion of the Board, exercisable either at the time of Option grant
or of Option exercise, the exercise price may also be paid (i) by Optionee's
delivery of a promissory note in form and substance satisfactory to the Company
and permissible under the laws of the State of Connecticut and bearing interest
at a rate determined by the Board in its sole discretion but in no event less
than the minimum rate of interest required to avoid the imputation of
compensation income
Page 3
<PAGE>
to the Optionee under the Federal tax laws, or (ii) in such other form of
consideration permitted by the Connecticut corporations law as may be acceptable
to the Board.
(d) Term and Exercise of Options: Any Option granted to an employee of the
----------------------------
Company shall become exercisable over a period of no longer than five (5) years,
and no less than twenty percent (20%) of the shares covered thereby shall become
exercisable annually. No Option shall be exercisable, in whole or in part,
prior to one (1) year from the date it is granted unless the Board shall
specifically determine otherwise, as provided herein. In no event shall any
Option be exercisable after the expiration of ten (10) years from the date it is
granted, and no Incentive Stock Option granted to a Ten Percent Holder shall, by
its terms, be exercisable after the expiration of five (5) years from the date
of the Option. Unless otherwise specified by the Board or the Committee in the
resolution authorizing such Option, the date of grant of an Option shall be
deemed to be the date upon which the Board or the Committee authorizes the
granting of such Option.
Each Option shall be exercisable to the nearest whole share, in installments
or otherwise, as the respective Option agreements may provide. During the
lifetime of an Optionee, the Option shall be exercisable only by the Optionee
and shall not be assignable or transferable by the Optionee, and no other person
shall acquire any rights therein. To the extent not exercised, installments (if
more than one) shall accumulate, but shall be exercisable, in whole or in part,
only during the period for exercise as stated in the Grant Agreement, whether or
not other installments are then exercisable.
(e) Termination of Status as Employee, Consultant or Director: If
---------------------------------------------------------
Optionee's status as an employee shall terminate for any reason other than
Optionee's disability or death, then Optionee (or if the Optionee shall die
after such termination, but prior to exercise, Optionee's personal
representative or the person entitled to succeed to the Option) shall have the
right to exercise the portions of any of Optionee's Incentive Stock Options
which were exercisable as of the date of such termination, in whole or in part,
not less than thirty (30) days nor more than three (3) months after such
termination (or, in the event of "termination for cause" (subject to the laws of
the State of Connecticut) by the terms of the Plan or a Grant Agreement or an
employment agreement, or the established policies and directives of the Company,
the Option shall automatically terminate as of the termination of employment as
to all shares covered by the Option).
With respect to Nonstatutory Options granted to employees, directors or
consultants, the Board may specify such period for exercise, not less than
thirty (30) days (except that in the case of "termination for cause" or removal
of a director, the Option shall automatically terminate as of the termination of
employment or services as to shares covered by the Option, following termination
of employment or services as the Board deems reasonable and appropriate). The
Option may be exercised only with respect to installments that the Optionee
could have exercised at the date of termination of employment or services.
Nothing contained herein or in any Option granted pursuant hereto shall be
construed to affect or restrict in any way the right of the Company to terminate
the employment or services of an Optionee with or without cause.
Each Option shall terminate with respect to all installments which are not
exercisable at the date of an Optionee's termination of employment or services,
as applicable.
(f) Disability of Optionee: If an Optionee is disabled (within the meaning
----------------------
of Section 22(e)(3) of the Code) at the time of termination, the three (3) month
period set forth in Section 6(e) shall be a period, as determined by the Board
and set forth in the Option, of not less than six (6) months nor more than one
year after such termination.
(g) Death of Optionee: If an Optionee dies while employed by, engaged as a
-----------------
consultant to, or serving as a Director of the Company, the portion of such
Optionee's Option which was exercisable at the date of death may be exercised,
in whole or in part, by the estate of the decedent or by a person succeeding to
the right to exercise such Option at any time within (i) a period, as determined
by the Board and set forth in the Option, of not less than six (6) months nor
more than one (1) year after Optionee's death, which period shall not be more,
in the case of a Nonstatutory Option, than the period for exercise following
termination of employment or services, or (ii) during the remaining term of the
Option, whichever is the lesser. The Option may be so exercised only with
respect to installments exercisable at the time of Optionee's death and not
previously exercised by the Optionee.
(h) Nontransferability of Option: No Option shall be transferable by the
----------------------------
Optionee, except by will or by the laws of descent and distribution. Any
violation or attempted violation of such restriction shall result in the
immediate termination of the Option.
(i) Recapitalization: Subject to any required action of shareholders, the
----------------
number of shares of Stock covered by each outstanding Option, and the exercise
price per share thereof set forth in each such Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Stock of
the Company resulting from a stock split, stock dividend, combination,
subdivision or reclassification of shares, or the payment of a stock dividend,
or any other increase
Page 4
<PAGE>
or decrease in the number of such shares affected without receipt of
consideration by the Company; provided, however, the conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration" by the Company.
In the event of a proposed dissolution or liquidation of the Company, a merger
or consolidation in which the Company is not the surviving entity, or a sale of
all or substantially all of the assets or capital stock of the Company
(collectively, a "Reorganization"), unless otherwise provided by the Board, each
outstanding Option shall terminate immediately prior to such date as is
determined by the Board, which date shall be no later than the consummation of
such Reorganization. In such event, if the entity which shall be the surviving
entity does not tender to an Optionee an offer, for which it has no obligation
to do so, to substitute for any unexercised Option a stock option or capital
stock of such surviving entity, as applicable, which on an equitable basis shall
provide the Optionee with substantially the same economic benefit as such
unexercised Option, then the Board may grant to such Optionee, in its sole and
absolute discretion and without obligation, the right for a period commencing
thirty (30) days prior to and ending immediately prior to the date determined by
the Board pursuant hereto for termination of the Option or during the remaining
term of the Option, whichever is the lesser, to exercise any unexpired Option or
Options without regard to the installment provisions of Paragraph 6(d) of the
Plan; provided, that any such right granted shall be granted to all Optionees
not receiving an offer to receive substitute options on a consistent basis, and
provided further, that any such exercise shall be subject to the consummation of
such Reorganization.
Subject to any required action of shareholders, if the Company shall be the
surviving entity in any merger or consolidation, each outstanding Option
thereafter shall pertain to and apply to the securities to which a holder of
shares of Stock equal to the shares subject to the Option would have been
entitled by reason of such merger or consolidation.
In the event of a change in the Stock of the Company as presently constituted,
which is limited to a change of all of its authorized shares without par value
into the same number of shares with a par value, the shares resulting from any
such change shall be deemed to be the Stock within the meaning of the Plan.
To the extent that the foregoing adjustments relate to stock or securities of
the Company, such adjustments shall be made by the Board, whose determination in
that respect shall be final, binding and conclusive. Except as expressly
provided in this Section 6(i), the Optionee shall have no rights by reason of
any subdivision or consolidation of shares of stock of any class or the payment
of any stock dividend or any other increase or decrease in the number of shares
of stock of any class, and the number or price of shares of Stock subject to any
Option shall not be affected by, and no adjustment shall be made by reason of,
any dissolution, liquidation, merger, consolidation or sale of assets or capital
stock, or any issue by the Company of shares of stock of any class or securities
convertible into shares of stock of any class.
The Grant of an Option pursuant to the Plan shall not affect in any way the
right or power of the Company to make any adjustments, reclassifications,
reorganizations or changes in its capital or business structure or to merge,
consolidate, dissolve, or liquidate or to sell or transfer all or any part of
its business or assets.
(j) Rights as a Shareholder: An Optionee shall have no rights as a
-----------------------
shareholder with respect to any shares covered by an Option until the effective
date of the issuance of the shares following exercise of such Option by
Optionee. No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other rights
for which the record date is prior to the date such stock certificate is issued,
except as expressly provided in Section 6(i) hereof.
(k) Modification, Acceleration, Extension, and Renewal of Options: Subject
-------------------------------------------------------------
to the terms and conditions and within the limitations of the Plan, the Board
may modify an Option, or, once an Option is exercisable, accelerate the rate at
which it may be exercised, and may extend or renew outstanding Options granted
under the Plan or accept the surrender of outstanding Options (to the extent not
theretofore exercised) and authorize the granting of new Options in substitution
for such Options, provided such action is permissible under Section 422 of the
Code and applicable state securities laws. Notwithstanding the provisions of
this Section 6(k), however, no modification of an Option shall, without the
consent of the Optionee, alter to the Optionee's detriment or impair any rights
or obligations under any Option theretofore granted under the Plan.
(l) Exercise Before Exercise Date: At the discretion of the Board, the
-----------------------------
Option may, but need not, include a provision whereby the Optionee may elect to
exercise all or any portion of the Option prior to the stated exercise date of
the Option or any installment thereof. Any shares so purchased prior to the
stated exercise date shall be subject to repurchase by the Company upon
termination of Optionee's employment as contemplated by Section 6(n) hereof
prior to the exercise date stated in the Option and such other restrictions and
conditions as the Board or Committee may deem advisable.
Page 5
<PAGE>
(m) Other Provisions: The Grant Agreements authorized under the Plan shall
----------------
contain such other provisions, including, without limitation, restrictions upon
the exercise of the Options, as the Board or the Committee shall deem advisable.
Shares shall not be issued pursuant to the exercise of an Option, if the
exercise of such Option or the issuance of shares thereunder would violate, in
the opinion of legal counsel for the Company, the provisions of any applicable
law or the rules or regulations of any applicable governmental or administrative
agency or body, such as the Code, the Securities Act, the Exchange Act,
applicable state securities laws, Connecticut corporation law, and the rules
promulgated under the foregoing or the rules and regulations of any exchange
upon which the shares of the Company are listed. Without limiting the
generality of the foregoing, the exercise of each Option shall be subject to the
condition that if at any time the Company shall determine that (i) the
satisfaction of withholding tax or other similar liabilities, or (ii) the
listing, registration or qualification of any shares covered by such exercise
upon any securities exchange or under any state or federal law, or (iii) the
consent or approval of any regulatory body, or (iv) the perfection of any
exemption from any such withholding, listing, registration, qualification,
consent or approval is necessary or desirable in connection with such exercise
or the issuance of shares thereunder, then in any such event, such exercise
shall not be effective unless such withholding, listing registration,
qualification, consent, approval or exemption shall have been effected, obtained
or perfected free of any conditions not acceptable to the Company.
(n) Repurchase Agreement: The Board may, in its discretion, require as a
--------------------
condition to the Grant of an Option hereunder, that an Optionee execute an
agreement with the Company, in form and substance satisfactory to the Board in
its discretion (a "Repurchase Agreement"), (i) restricting the Optionee's right
to transfer shares purchased under such Option without first offering such
shares to the Company or other shareholders of the Company upon the same terms
and conditions as provided therein; and, among other things, (ii) providing that
upon termination of Optionee's employment with the Company, for any reason, the
Company (or other shareholders of the Company, as provided in the Repurchase
Agreement) shall have the right at its discretion (or the discretion of such
other shareholders) to purchase and/or redeem all such shares owned by the
Optionee on the date of termination of his or her employment, upon further terms
(including as to purchase price and terms of payment) to be determined by the
Board or the Committee, at its discretion. The terms and conditions of any
Repurchase Agreement may be incorporated into a Grant Agreement.
7. Investment Intent. All Grants under the Plan are intended to be exempt
from registration under the Securities Act provided by Rule 701 thereunder.
Unless and until the granting of Options or sale and issuance of Stock subject
to the Plan are registered under the Securities Act or shall be exempt pursuant
to the rules promulgated thereunder, each Grant under the Plan shall provide
that the purchases or other acquisitions of Stock thereunder shall be for
investment purposes and not with a view to, or for resale in connection with,
any distribution thereof. Further, unless the issuance and sale of the Stock
have been registered under the Securities Act, each Grant shall provide that no
shares shall be purchased upon the exercise of the rights under such Grant
unless and until (i) all then applicable requirements of state and federal laws
and regulatory agencies shall have been fully complied with to the satisfaction
of the Company and its counsel, and (ii) if requested to do so by the Company,
the person exercising the rights under the Grant shall (i) give written
assurances as to knowledge and experience of such person (or a representative
employed by such person) in financial and business matters and the ability of
such person (or representative) to evaluate the merits and risks of exercising
the Option, and (ii) execute and deliver to the Company a letter of investment
intent and/or such other form related to applicable exemptions from
registration, all in such form and substance as the Company may require. If
shares are issued upon exercise of any rights under a Grant without registration
under the Securities Act, subsequent registration of such shares shall relieve
the purchaser thereof of any investment restrictions or representations made
upon the exercise of such rights.
8. Amendment, Modification, Suspension or Discontinuance of the Plan. The
Board may, insofar as permitted by law, from time to time, with respect to any
shares at the time not subject to outstanding Grants, suspend or terminate the
Plan or revise or amend it in any respect whatsoever, except that without the
approval of the shareholders of the Company, no such revision or amendment shall
(i) increase the number of shares subject to the Plan, (ii) decrease the price
at which Grants may be granted, (iii) materially increase the benefits to
Participants, or (iv) change the class of persons eligible to receive Grants
under the Plan; provided, however, no such action shall alter or impair the
rights and obligations under any Option outstanding as of the date thereof
without the written consent of the Participant thereunder. No Grant may be
issued while the Plan is suspended or after it is terminated, but the rights and
obligations under any Grant issued while the Plan is in effect shall not be
impaired by suspension or termination of the Plan.
In the event of any change in the outstanding Stock by reason of a stock
split, stock dividend, combination or reclassification of shares,
recapitalization, merger, or similar event, the Board or the Committee may
adjust proportionally (a) the number of shares of Stock (i) reserved under the
Plan, and (ii) available for Incentive Stock Options and Nonstatutory Options;
(b) the Stock prices related to outstanding Grants; and (c) the appropriate Fair
Market Value and other price determinations for such Grants. In the event of any
other change affecting the Stock or any distribution (other
Page 6
<PAGE>
than normal cash dividends) to holders of Stock, such adjustments as may be
deemed equitable by the Board or the Committee, including adjustments to avoid
fractional shares, shall be made to give proper effect to such event. In the
event of a corporate merger, consolidation, acquisition of property or stock,
separation, reorganization or liquidation, the Board or the Committee shall be
authorized to issue or assume stock options, whether or not in a transaction to
which Section 424(a) of the Code applies, and other Grants by means of
substitution of new Grant Agreements for previously issued Grants or an
assumption of previously issued Grants.
9. Tax Withholding. At the time of delivery or exercise of Options, as may
be applicable, the Company shall have the right to deduct from amounts otherwise
due to any Optionee and/or withhold an appropriate number of shares for payment
of taxes required by law or to take such other action as may be necessary in the
opinion of the Company to satisfy all obligations for withholding of such taxes.
If Stock is used to satisfy tax withholding, such Stock shall be valued based on
the Fair Market Value when the tax withholding is required to be made.
10. Availability of Information. During the term of the Plan and any
additional period during which a Grant granted pursuant to the Plan shall be
exercisable, the Company shall make available, not later than one hundred and
twenty (120) days following the close of each of its fiscal years, such
financial and other information regarding the Company as is required by the
Bylaws of the Company and applicable law to be furnished in an annual report to
the shareholders of the Company.
11. Notice. Any written notice to the Company required by any of the
provisions of the Plan shall be addressed to the chief personnel officer or to
the chief executive officer of the Company, and shall become effective when it
is received by the office of the chief personnel officer or the chief executive
officer.
12. Indemnification of Board. In addition to such other rights or
indemnifications as they may have as directors or otherwise, and to the extent
allowed by applicable law, the members of the Board and the Committee shall be
indemnified by the Company against the reasonable expenses, including attorneys'
fees, actually and necessarily incurred in connection with the defense of any
claim, action, suit or proceeding, or in connection with any appeal thereof, to
which they or any of them may be a party by reason of any action taken, or
failure to act, under or in connection with the Plan or any Grant granted
thereunder, and against all amounts paid by them in settlement thereof (provided
such settlement is approved by independent legal counsel selected by the
Company) or paid by them in satisfaction of a judgment in any such claim,
action, suit or proceeding, except in any case in relation to matters as to
which it shall be adjudged in such claim, action, suit or proceeding that such
Board or Committee member is liable for negligence or misconduct in the
performance of his or her duties; provided that within sixty (60) days after
institution of any such action, suit or Board proceeding the member involved
shall offer the Company, in writing, the opportunity, at its own expense, to
handle and defend the same.
13. Governing Law. The Plan and all determinations made and actions taken
pursuant hereto, to the extent not otherwise governed by the Code or the
securities laws of the United States, shall be governed by the law of the State
of Connecticut and construed accordingly.
14. Effective and Termination Dates. The Plan shall become effective on the
date it is approved by the holders of a majority of the shares of Stock then
outstanding. The Plan shall terminate (10) ten years later, subject to earlier
termination by the Board pursuant to Section 8.
The foregoing 1998 Incentive Stock Plan (consisting of 7 pages, including this
page) was duly adopted and approved by the Board of Directors on January 7, 1998
and approved by the shareholders of the Corporation on February 26, 1998.
/s/ Katherine N. Vick
- --------------------------------
Katherine N. Vick, Secretary
Page 7
<PAGE>
Exhibit 10.10
-------------
Cyberian Outpost, Inc. has omitted from this Exhibit 10.10 portions of the
Agreement for which Cyberian Outpost, Inc. has requested confidential treatment
from the Securities and Exchange Commission. The portions of the Agreement for
which confidential treatment has been requested are marked with X's in brackets
and such confidential portions have been filed separately with the Securities
and Exchange Commission.
INTERACTIVE MARKETING AGREEMENT
-------------------------------
This Interactive Marketing Agreement (the "Agreement"), is made and entered into
as of December 1, 1997 (the "Effective Date"), by and between America Online,
Inc. ("AOL"), a Delaware corporation, with offices at 22000 AOL Way, Dulles,
Virginia 20166, and Cyberian Outpost, Inc. (the "Marketing Partner" or "MP"), a
Connecticut corporation, with offices at 27 North Main Street, P.O. Box 636,
Kent, Connecticut 06757 (each a "Party" and collectively the "Parties.")
INTRODUCTION
------------
AOL and MP each desires to enter into an interactive marketing relationship
whereby AOL will promote the MP Products and the interactive site referred to
(and further defined) herein as the Affiliated MP Site. This relationship is
further described below and is subject to the terms and conditions set forth in
this Agreement. Defined terms used herein but not defined in the body of the
Agreement shall be as defined in Exhibit B attached hereto.
TERMS
-----
1 PROMOTION, DISTRIBUTION AND MARKETING.
-------------------------------------
1.1. AOL Promotion of MP Products and Affiliated MP Site. AOL will provide MP
---------------------------------------------------
with the promotions for the MP Products and Affiliated MP Site described
in Exhibit A attached hereto (the "Promotions"). Subject to MP's
reasonable approval, AOL will have the right to fulfill its promotional
commitments with respect to any of the foregoing by providing MP with
comparable promotional placements in appropriate alternative areas of the
AOL Network. In addition, if AOL is unable to deliver any particular
Promotion, AOL will work with MP to provide MP, as its sole remedy, with
a comparable promotional placement (a "Comparable Placement"). In the
event the Parties are unable to agree on a Comparable Placement, the
Parties shall mutually agree to submit the matter to the Management
Committee as provided in Section 7 hereof. AOL reserves the right to
redesign or modify the organization, structure, "look and feel,"
navigation and other elements of the AOL services at any time. In the
event such modifications materially and adversely affect any specific
Promotion, AOL will work with MP to provide MP, as its sole remedy, with
a comparable promotional placement.
1.2 Impressions. During the Initial Term, AOL will deliver a total of [XXX
XXXXXXX XXXXX XXXXX XXXXX XXXXX XXXXXXX XXXXXX XXXXXXXXX] Impressions
(the "Impressions Commitment") through the Promotions. With respect to
the Impressions Commitment, AOL will not be obligated to provide more
than such target amounts during the Term. In the event that as of the end
of the seventh month of the Term AOL shall not have provided a minimum of
[XXXXX XXXXXX XXXXXXXXXXXX] Impressions through the Promotions (the
"Impressions Minimum"), AOL shall have a reasonable time, not to exceed
sixty (60) days, within which to deliver the Impressions Minimum. If AOL
shall not have delivered the Impressions Minimum within sixty (60) days,
as its sole remedy, [XXXXX XXXXXX XXXXXXXXXXXX]. If there is a shortfall
in Impressions as of the end of the Initial Term (a "Final Shortfall"),
AOL shall elect to either (i) provide MP with advertising placements out
of excess inventory on the AOL Network which have a total value, based on
AOL's then-current advertising rate card, equal to the value of the Final
Shortfall (determined by multiplying the percentage of Impressions that
were not delivered by the total, guaranteed payment provided for below)
or (ii) continue to provide MP with certain Promotions designated by AOL
in its sole and absolute discretion until the Impressions Commitment is
fulfilled. If at any time during the Term MP shall not be in compliance
with the provisions of this Agreement, and as a result of such non-
compliance AOL is unable to provide the Impressions required hereunder
during such period of non-compliance, then AOL shall have the right to
reduce the Impressions Commitment, on
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a pro-rata basis, for such period of non-compliance (e.g., if MP has
not complied with the provisions of this Agreement for a period of two
months, then AOL shall reduce the Impressions Commitment by an amount
equal to the product of two (2) times [xxxxxxxxxxx] divided by fourteen
(14)).
1.3 Content of Promotions. The specific Content to be contained within the
---------------------
Promotions (including, without limitation, advertising banners and
contextual promotions) (the "Promo Content") will be determined by MP,
subject to (a) AOL's technical limitations, (b) the terms of this
Agreement and (c) AOL's then-applicable policies relating to
advertising and promotions. MP will consistently update the Promo
Content no less than two times per week The Parties will jointly
consult with each other regarding the Promo Content to ensure that it
is designed to maximize performance. Except to the extent expressly
described herein, the specific form, placement, duration and nature of
the Promotions will be as determined by AOL in AOL's reasonable
editorial discretion and in consultation with MP (consistent with the
editorial composition of the applicable screens).
1.4 MP Promotion of AOL. As more fully set forth in Exhibit C attached
-------------------
hereto, MP will promote AOL as its preferred Interactive Service and
will promote the availability of the Affiliated MP Site through the AOL
Network. MP will not implement or authorize any promotion on behalf of
any third party which is inconsistent with promotion of AOL as its
preferred Interactive Service.
2 AFFILIATED MP SITE.
------------------
2.1 Customized Site. The Affiliated MP Site shall be an optimized and
---------------
"mirrored" version of MP's main web site containing the specific
Content described in Section 2.2 below for-distribution hereunder
according to AOL specifications and guidelines to ensure that (i)
the functionality and features within the Affiliated MP Site are
optimized for the client software then in use by a majority of AOL
Members and (ii) the forms used in the Affiliated MP Site are
designed and populated in a manner intended to minimize delays
when AOL Users attempt to access such forms.
2.1.1 Specific Requirements.
---------------------
(i) MP shall design the Affiliated MP Site to conform,
in all respects, with the provisions of Exhibit E
attached hereto, and
(ii) AOL reserves the right to review the Affiliated MP
Site to ensure that such site is compatible with
AOL's then-available client and host software and the
AOL Network. MP will take all necessary steps to
conform its promotion and sale of the MP Products
through the Affiliated MP Site to the then-existing
technologies identified by AOL which are optimized
for the AOL Network. AOL will be entitled to require
changes to the Content (including, without
limitation, the features or functionality) within any
linked pages of the Affiliated MP Site to the extent
such Content will, in AOL's good faith judgment,
adversely affect any operational aspect of the AOL
Network.
2.1.2 Customization. MP shall customize the Affiliated MP Site
-------------
for AOL Members as follows:
(i) ensure that the Affiliated MP Site is only available
to, and accessible by, AOL Users:
(ii) ensure that AOL Users linking to the Affiliated MP
Site do not receive advertisements, promotions or
links for any other Interactive Service or any entity
reasonably construed to be in competition with AOL or
any other entity otherwise in conflict with AOL
advertising policies and exclusivities; and
2
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Confidential
(iii) with the exception of advertising links sold and
implemented pursuant to this Agreement, provide
continuous navigational ability for AOL Users to return
to an agreed-upon point on the AOL Network (for which AOL
shall supply the proper address) from the Affiliated MP
Site (e.g., the point on the AOL Network from which the
Affiliated MP Site is linked), which, at AOL's option,
may be satisfied through the use of a hybrid browser
format.
2.2 Content. MP will provide a comprehensive offering of the MP Products
-------
and other Content described in Exhibit D-1 attached hereto, through the
Affiliated MP Site. MP will review, delete, edit, create, update and
otherwise manage all Content available on or through the Affiliated MP
Site in accordance with the terms of this Agreement or any amendments
thereto. MP will ensure that the Affiliated MP Site does not in any
respect promote, advertise, market or distribute the products, services
or content of any Interactive Service other than AOL. Except as
otherwise mutually agreed upon by the Parties hereto, the Affiliated MP
Site shall not contain Content (including without limitation, third
party content) relating to anything other than the MP Products listed
on Exhibit D-1 attached hereto.
2.3 Production Work. Except as agreed to in writing by the Parties pursuant
---------------
to the "Production Work" section of the Standard Legal Terms &
Conditions attached hereto as Exhibit F, MP will be responsible for all
production work associated with the Affiliated MP Site, including all
related costs and expenses.
2.4 Hosting; Communications. MP will be responsible for all communications,
-----------------------
hosting and connectivity costs and expenses associated with the
Affiliated MP Site. In addition, MP will provide all computer,
telephone and other equipment or resources necessary for MP to access
the AOL Network. MP and AOL shall mutually agree upon the most
appropriate means by which MP will connect the MP data center to AOL's
designated data center; provided, however, that in the event the
Parties determine that MP shall utilize a dedicated high speed
connection from the MP data center to AOL's designated data center,
then MP shall be responsible for all costs associated with such high
speed connection.
2.5 Product Offering. MP will ensure that the Affiliated MP Site includes
----------------
all of the MP Products or Content (including, without limitation, any
features, offers, contests, functionality or technology) that are then
made available by or on behalf of MP through any Additional MP Channel;
provided, however, that (a) such inclusion will not be required where
it is commercially or technically impractical to either Party (i.e.,
inclusion would cause either Party to incur substantial incremental
cost), and (b) the specific changes in scope, nature and/or offerings
required by such inclusion will be subject to AOL's review and approval
and the terms of this Agreement.
2.6 Pricing and Terms. MP will ensure that: (a) the prices (and any other
-----------------
required consideration) for the MP Products in the Affiliated MP Site
will not exceed the prices for the MP Products or any substantially
similar products offered by or on behalf of MP through any Additional
MP Channel; (b) the terms and conditions on which the MP Products or
any other products are offered in or through the Affiliated MP Site
are no less favorable, in any respect, than the terms and conditions
on which the MP Products or any substantially similar products are
offered by or on behalf of MP in or through any Additional MP Channel:
and (c) both the prices and the terms and conditions related to the MP
Products or any other products offered in the Affiliated MP Site are
reasonably competitive in all material respects with the prices and
terms and conditions for the MP Products or substantially similar
products offered by any MP Competitor through any Interactive Site.
2.7 Special Offers. Subject to the provisions of Section 2.5 and 3.3
--------------
hereof, on a regular and
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Confidential
consistent basis, MP shall promote the following through the
Affiliated MP Site;(a) preferred offerings of computer
hardware and peripherals and packaged software to AOL Members
and (b) other special offers exclusively available to AOL
Members and/or AOL Users ((a) and (b) collectively, the
"Special Offers"). MP will provide AOL with reasonable prior
notice of Special Offers so that AOL can market the
availability of such Special Offers in the manner AOL deems
appropriate in its editorial discretion, subject to the terms
and conditions hereof. The Affiliated MP Site and any
promotions made by MP pursuant to the terms of this Agreement
shall be designed to promote revenue.
2.8 Operating Standards. MP will ensure that the Affiliated MP
-------------------
Site and the delivery of the MP Products complies at all times
with the standards set forth in Exhibit E. To the extent site
standards are not established in Exhibit E with respect to any
aspect or portion of the Affiliated MP Site (or the MP
Products or other Content contained therein), MP will provide
such aspect or portion at a level of accuracy, quality,
completeness, and timeliness which meets or exceeds prevailing
standards in the retail computer hardware and peripherals
industry.
2.9 Advertising Sales. Subject to the terms hereof, MP shall have
-----------------
the right to sell promotions, advertisements, links, pointers
or similar services or rights through the Affiliated MP Site
("Advertisements"). The specific advertising inventory within
the Affiliated MP Site shall be determined by MP. MP will
provide AOL with quarterly reports providing detailed
information regarding any advertising sales by MP and any
other information relevant to the computation and sharing of
Advertising Revenues derived from the Affiliated MP Site. MP
and AOL shall share the revenues derived from the sale of
Advertisements in the Affiliated MP Site pursuant to Section
4.3 hereof. All Advertisements in the Affiliated MP Site shall
be subject to AOL's then-applicable advertising policies and
existing exclusivities.
3 AOL EXCLUSIVITY OBLIGATIONS.
---------------------------
3.1 Exclusive Product. With respect to the MP Competitors listed
-----------------
below, from and after February 1, 1998, and for the remainder
of the Initial Term, so long as MP is in compliance with all
material terms of this Agreement, MP shall be the exclusive
third party reseller of computer [xxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxx] as may be mutually agreed upon
by the Parties, but specifically excluding, without
limitation, such products as [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxx] promoted on the Exclusive Screens (the "Exclusive
Products"). The MP Competitors shall consist of the third
parties listed on Exhibit H attached hereto. To the extent
that any MP Competitor is not solely a provider of the
Exclusive Products (i.e. it is also engaged in activities
other than providing the Exclusive Product) such exclusivity
shall only apply to the marketing of the Exclusive Product by
such MP Competitor.
3.2 Exceptions. Notwithstanding anything to the contrary contained
----------
in this Section 3, no provision of this Agreement shall limit
AOL's ability (on or off the AOL Network) to:
(i) advertise Hardware Products sold through the AOL Store
via pop-ups on the AOL Network;
(ii) promote, market or distribute the products of original
equipment manufacturers of computer hardware and peripheral
equipment;
(iii) promote, market or distribute the products of any third
party that markets and/or distributes its products through an
Auction Format or a Retail Club. For the purposes hereof, an
"Auction Format" shall mean a format whereby products are sold
through the
4
<PAGE>
Confidential
bidding by one or more individuals or entities on a product or
group of products, and the price of such product or group of
products is determined by the price paid by the highest
bidder, and a "Retail Club" shall mean either (a) a business
which sells a collection of goods or services and derives a
substantial portion of its revenues from subscription fees
paid by its members in order to gain access to such goods,
services or products (e.g.: CUC International), or (b) a
business which initially offers goods or services to its
members at a steep discount in return for a contractual
commitment from such members to purchase a certain number of
goods or services at some future date (e.g.: Columbia Record
Club or BMG Music Club); or
(iv) enter into an arrangement with any third party (which
third party is not principally in the business of providing
the Exclusive Products) for the primary purpose of acquiring
AOL Users whereby such party is allowed to promote or market
products or services to AOL Users that are acquired as a
result of such agreement.
3.3 Packaged Software. During the Term, MP shall have the right to
-----------------
promote, market and sell pre-packaged software on the AOL.
Service and AOL.com, provided that such prepackaged software
shall not be subject to the exclusivity provisions of Section
3.1.
4 PAYMENTS.
--------
4.1 Guaranteed Payments.
4.1.1 During the Initial Term, MP shall pay to AOL a
guaranteed payment of Five Million Dollars
(US $5,000,000) as follows:
(i) Two Hundred Thousand Dollars (US $200,000)
upon execution of this Agreement;
(ii) Two Hundred Thousand Dollars (US $200,000)
on January 15, 1998;
(iii) Four Million Dollars (US $4,000,000) upon
the occurrence of the earlier of (i) the
receipt of funds by MP in a debt or equity
financing (or series of related financings)
consummated by MP after the Effective Date
yielding aggregate proceeds to MP of at
least Six Million Dollars (US $6,000,000)
and (ii) March 1, 1998;
(iv) Two Hundred Thousand Dollars (US $200,000)
on April 1, 1998;
(v) Two Hundred Thousand Dollars (US $200,000)
on July 1, 1998 and
(vi) Two Hundred Thousand Dollars (US $200,000)
on October 1, 1998.
4.1.2 During the AOL Renewal Term or the MP Renewal Term,
as the case may be. MP will pay to AOL the guaranteed
payments set forth in Section 6.2.
4.2 Sharing of Transaction Revenues. MP shall pay to AOL an amount
-------------------------------
equal to [xxxxxxxxxxxxxx] of Transaction Revenues until such
time as aggregate Transaction Revenues plus [xxxxxxxxxxxxxxx]
of aggregate Advertising Revenue ("MP Revenues") shall equal
a sum total of [XXXXXXX] (the "Threshold"). During the Initial
Term, from and after the Threshold has been met, MP shall pay
to AOL an amount equal to [xxxxxxxxxxxx] of aggregate
Transaction Revenues. MP will pay all of the foregoing amounts
on a quarterly basis within thirty (30) days of the end of the
quarter in which the applicable Transaction Revenues were
generated.
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4.2.1 Sharing of Transaction Revenues During a Renewal Term pursuant to
-----------------------------------------------------------------
Section 6.2.
------------
a. During the AOL Renewal Term, MP shall pay to AOL an amount equal
to [XXXXXXXXX XXXXXXXX] of Transaction Revenues until such time as
MP Revenues shall equal a sum total of [XXXXX XXXX XXXXXXX XXXXX
XXXXXXXXXX] (the "AOL Renewal Threshold"). During the AOL Renewal
Term, from and after the AOL Renewal Threshold has been met, MP
shall pay to AOL an amount equal to [XXXX XXXXXXXX] of aggregate
Transaction Revenues. MP will pay all of the foregoing amounts on a
quarterly basis within thirty (30) days of the end of the quarter in
which the applicable Transaction Revenues were generated.
b. During the MP Renewal Term, MP shall pay to AOL an amount equal
to [XXX XXXXXXXXX] of Transaction Revenues until such time as MP
Revenues shall equal a sum total of [XXX XXXXXX XXXXX XXXX XXXXXXX
XXXXXX XX XXXXXXX] (the "MP Renewal Threshold"). During the MP
Renewal Term, from and after the MP Renewal Threshold has been met,
MP shall pay to AOL an amount equal to [XXXX XXXXXXX] of aggregate
Transaction Revenues. MP will pay all of the foregoing amounts on a
quarterly basis within thirty (30) days of the end of the quarter in
which the applicable Transaction Revenues were generated.
4.3 Sharing of Advertising Revenues. MP shall pay to AOL an amount equal to
-------------------------------
[XXXXX XXXXX XXXX] of all Advertising Revenues generated pursuant ot this
Agreement. MP shall pay to AOL all Advertisng Revenues received and owned
to AOL on a quarterly basis within thirty (30) days of the end of the
quarter in which such amounts were generated by MP.
4.4 Alternative Revenue Streams. In the event MP or any of its affiliates (a)
---------------------------
receives or desires to receive, directly or indirectly, any compensation in
connection with the Affiliated MP Site other than Transaction Revenues or
Advertising Revenues (an "Alternative Revenue Stream"), or (b) desires to
materially alter its current business model (e.g.: a change to an Auction
Format or Retail Club) (an "Alternative Business Model") MP will promptly
inform AOL in writing, and the Parties will negotiate in good faith
regarding whether MP will be allowed to (i) market products producing such
Alternative Revenue Stream through the Affiliated MP Site or (ii) create an
Alternative Business Model, and if so, the equitable portion of revenues
from such Alternative Revenue Stream or Alternative Business Model (if
applicable) that will be shared with AOL (in no event less than the
percentage of Transaction Revenues to be paid to AOL pursuant to this
Section 4). In the event the Parties cannot in good faith reach agreement
regarding such Alternative Revenue Stream or Alternative Business Model
within ten (10) days of AOL's request to negotiate, the Parties shall
mutually agree to submit such dispute to the Management Committee for
resolution in the manner set forth in Section 7 hereof.
4.5 Wired Payments; Late Payments. All payments required under this Section 4
-----------------------------
will be paid in immediately available, non-refundable funds wired to AOL's
account. If (i) the amounts owed pursuant to Section 4.1 are not paid
within five (5) business days of the date when such amounts are due and
payable or (ii) the amounts owed pursuant to Sections 4.2, 4.3 and 4.4 are
not paid within fifteen (15) days of the date when such amounts are due and
payable, then in addition to its other remedies hereunder, AOL shall have
the right to immediately terminate this Agreement. Notwithstanding the
foregoing, after such time as AOL shall have received the payments required
pursuant to Section 4.1.1 (iii) hereof, if the remaining amounts owed
pursuant to Section 4.1 are not paid within [XXXXXXX] business days of the
date when such amounts are due and payable, then MP shall have an
additional [XXXXXXX] days within which to make such payment (the
"Additional Payment Period"). If after such time payment shall not have
been received by AOL, then in addition to its other remedies hereunder, AOL
shall have the right to
6
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immediately terminate this Agreement. MP shall only be
entitled to one Additional Payment Period hereunder; In the
event that MP requires more than one Additional Payment
Period, AOL shall have the right to immediately terminate this
Agreement in addition to any other remedies it may possess
hereunder. All amounts owed hereunder not paid when due and
payable will bear interest from the date such amounts are due
and payable at the prime rate listed in the Wall Street
Journal at such time.
4.6 Auditing Rights. MP will maintain complete, clear and accurate
---------------
records of all expenses, revenues and fees in connection with
the performance of this Agreement. For the sole purpose of
ensuring compliance with this Agreement, AOL will have the
right, at its expense, to direct an independent certified
public accounting firm to conduct a reasonable and necessary
inspection of portions of the books and records of MP which
are relevant to MP's performance pursuant to this Agreement;
provided, however, that AOL shall not have the right to
-------- -------
perform more than two (2) such audits in any given calendar
year. Any such audit may be conducted after twenty (20)
business days prior written notice.
4.7 Taxes. MP will collect and pay and indemnify and hold AOL
-----
harmless from, any sales, use, excise, import or export value
added or similar tax or duty not based on AOL's net income,
including any penalties and interest, as well as any costs
associated with the collection or withholding thereof,
including attorneys' fees.
4.8 Reports; Customer Data.
----------------------
4.8.1 Sales Reports. MP will provide AOL with a monthly
-------------
report in a reasonable AOL designated format,
detailing the following activity in such month (and
any other information mutually agreed upon by the
Parties or reasonably required for measuring revenue
activity by MP through the Affiliated MP Site),
subject to MP's technical limitations: (i) summary
sales information by day (date, number of MP
Products, number of orders, total Transaction
Revenues); and (ii) detailed sales information (order
date/time stamp (if technically feasible), purchaser
name and screenname) (the information in clauses (i)
and (ii) are collectively referred to herein as
"Sales Reports"). AOL will be entitled to use the
Sales Reports in its business operations, subject to
the terms of this Agreement and provided that such
Sales Reports are not shared with the AOL Store for
the purpose of marketing products competitive with
the Exclusive Products. More generally, each payment
to be made by MP pursuant to this Section 4 will be
accompanied by a report containing information which
supports the payment, including information
identifying (i) gross Transaction Revenues and an
aggregate accounting of all items deducted or
excluded from gross Transaction Revenues to produce
Transaction Revenues, including, without limitation,
chargebacks and credits for returned or cancelled
goods or services (and, where possible, an
explanation of the type of reason therefor, e.g., bad
credit card information, poor customer service, etc.)
and (ii) any applicable Advertising Revenues.
4.8.2 Fraudulent Transactions. To the extent permitted by
-----------------------
applicable laws, MP will provide AOL with a report of
any fraudulent order, including the date, screenname
or email address and amount associated with such
order, promptly following MP obtaining knowledge that
the order is, in fact, fraudulent. AOL shall
cooperate with MP in tracking any fraudulent orders.
5 WARRANTS
--------
5.1 Grant of Warrants. Subject to the receipt by MP of shareholder
-----------------
approval, MP hereby grants to AOL warrants (the "Warrants")
representing the right for a ten-year period to purchase [xxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]
shares of MP common stock, with no par value (the "Common
Stock"), at a price
7
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per share equal to the lessor of [XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
xxxxxxxx] (the "Exercise Price"). Provided, however, that in connection
with clause (i) above, if no Financing Event occurs by March 1, 1998, AOL
shall receive the lowest price paid by any investor or group of investors
in the next subsequent financing event occurring on or prior to December
31, 1998.
5.2 Vesting of Warrants. The Warrants granted hereunder shall vest as follows:
-------------------
(i) [XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX] shares on
the Effective Date;
(ii) [XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX] shares
immediately [XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXX] and
(iii) [XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX] shares at
the earliest of such time as MP shall have generated either [XXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX]
5.3 Terms and Conditions. AOL shall receive shares of Common Stock upon
--------------------
exercise of the Warrants granted hereunder. Additionally, six months after
the effective date of the the initial public offering of securities of MP
pursuant to an effective registration statement under the Securities Act of
1993, as amended, AOL shall be entitled to receive [XXXXXXXXX] demand
registration rights, one of which may, at AOL's option, be on Form S-1 and
piggyback registration rights in connection with any shares of stock
received upon exercise of the Warrants. All such registration rights shall
be subject to customary market stand-off and underwriter cutback
provisions. Notwithstanding anything to the contrary contained herein, in
the event MP shall grant registration rights to any investor in the
Financing Event immediately subsequent to the Effective Date that are more
favorable, in any respect, than those granted to AOL hereunder, then MP
shall provide AOL with those right(s) that are more favorable than the
rights of AOL.
5.4 Anti-Dilution Rights. On the date hereof AOL shall have weighted average
--------------------
anti-dilution protection rights in the event that MP issues any shares of
Common Stock or any security convertible into or exchangeable for Common
Stock to any person or entity and the consideration per share is less than
the Exercise Price. Notwithstanding the foregoing, in the event, that MP
provides anti-dilution protection rights to any investor in the Financing
Event immediately subsequent to the Effective Date hereof that are more
favorable to such investor, in any respect, than the rights granted to AOL
pursuant to the first sentence of this Section 5.4, MP hereby agrees to
provide AOL with any and all such more favorable anti-dilution protection
rights. All rights granted in this Section 5.4 are supplementary and
additional to any other rights provided herein, including, without
limitation, the rights granted in Section 5.1 hereof.
5.5 Approval; Final Agreement
-------------------------
(a) The provisions of this Section 5 contain all of the principal and
essential terms and conditions of the Warrants granted to AOL hereunder,
and without limiting the foregoing, within thirty (30) days of the
execution hereof (the "Cutoff Date"), MP shall convene a meeting of its
shareholders and shall use its best efforts to authorize the grant of
Warrants made to AOL hereunder and upon receipt of the requisite approvals,
MP shall
8
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issue the Warrants granted hereunder and will enter into a
Common Stock Warrant Purchase Agreement which will document
the grant of Warrants hereby made by MP to AOL.
(b) MP hereby acknowledges and agrees that, in the event of a
breach of the provisions of this Section 5.4, AOL would be
irreparably harmed and it would be impossible for AOL to
determine the amount of damages that would result from such
breach, and that accordingly, any remedy at law for any such
breach or threatened breach thereof, would be inadequate,
Accordingly, MP agrees that if the Cutoff Date shall have
occurred and (i) MP shall not have convened a meeting of its
shareholders or (ii) MP shall have received shareholder
approval but the Warrants shall not have been issued to AOL,
the provisions of this Section 5.4 may be specifically
enforced through equitable and injunctive relief in addition
to any other applicable rights or remedies AOL may have, from
any court of competent jurisdiction. MP hereby waives the
claim or defense that a remedy at law would be adequate in
respect to this provision, and agrees to have this Section 5.4
specifically enforced against MP without the necessity of
posting bond or other security, and consents to the entry of
injunctive relief enjoining or restraining any breach or
threatened breach of this Section 5.4.
(c) In the event that MP shall not have obtained shareholder
approval for the grant of Warrants made to AOL hereunder by
the Cutoff Date, then in addition to its other remedies
hereunder, AOL shall have the right to immediately terminate
this Agreement.
6 TERM: RENEWAL: TERMINATION.
--------------------------
6.1 Term. Unless earlier terminated as set forth herein, the
----
initial term of this Agreement will be fourteen (14) months
from the Effective Date (the "Initial Term"). The Initial Term
and either the AOL Renewal Term or the MP Renewal Term, as the
case may be, shall be referred to herein as the "Term".
6.2 Renewal.
-------
6.2.1 One-Year Extension by AOL. In the event MP shall have
-------------------------
generated [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx] in Target
Revenues during the Initial Term (the "Target
Amount"), AOL may at its option extend the Agreement
for an additional year (an "AOL Renewal Term") by
providing MP with written notice thereof no later
than the later of (i) November 15, 1998 or (ii)
fifteen (15) days after MP shall have generated the
Target Amount (the "Put Notice"). During any such AOL
Renewal Term, MP shall pay to AOL a guaranteed
payment of [xxxxxxxxxxxxxxxxx payable as follows: [x
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxx] In the event that an equity
financing is consummated by MP prior to the
expiration of the Initial Term yielding aggregate
proceeds to MP of at least [xxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxx] the foregoing payments schedule
shall no longer be in effect, and MP shall make the
following payment on an accelerated schedule :[xxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxx]
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6.2.2 One-Year Extension by MP. In the event that (i) MP shall not have
------------------------
generated the Target Amount or (ii) AOL shall have elected not to
renew this Agreement pursuant to the terms of Section 6.2.1, MP may,
no later than September 15, 1998, notify AOL in writing that MP
desires to renew this Agreement for one (1) additional year (the "MP
Renewal Term"). During the MP Renewal Term, MP shall pay to AOL a
guaranteed payment of [XXXXXXXXXXXXXXXXXXXXXXXX] payable as follows:
[XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX]
6.3 Termination for Breach. Except as expressly provided elsewhere in this
-----------------------
Agreement, either Party may terminate this Agreement at any time in the
event of a material breach of the Agreement by the other Party which
remains uncured after thirty (30) days written notice thereof to the other
Party (or such shorter period as may be specified elsewhere in this
Agreement); provided that, AOL will not be required to provide notice to MP
in connection with MP's failure to make any payment to AOL required
hereunder. Notwithstanding the foregoing, in the event of a material
breach of a provision that expressly requires action to be completed within
an express period shorter than 30 days, either Party may terminate this
Agreement if the breach remains uncured after written notice thereof to the
other Party. In the event that MP terminates this Agreement in accordance
with the terms and conditions of this Section 6.3 due to a material breach
of AOL of the terms of this Agreement, provided that MP shall have paid all
amounts then due and owing pursuant to Section 4.1, 4.2 and 4.3 hereof, MP
shall no longer owe any amounts due under Sections 4.1, 4.2 or 4.3.
6.4 Termination for Bankruptcy/Insolvency. Either Party may terminate this
-------------------------------------
Agreement immediately following written notice to the other Party if the
other Party (i) ceases to do business in the normal course, (ii) becomes or
is declared insolvent or bankrupt, (iii) is the subject of any proceeding
related to its liquidation or insolvency (whether voluntary or involuntary)
which is not dismissed within ninety (90) calender days or (iv) makes an
assignment for the breach of creditors.
6.5 Termination on Change of Control. In the event of a Change of Control of MP
--------------------------------
resulting in control of MP by an Interactive Service other than AOL, AOL
may terminate this Agreement by providing to MP thirty (30) days prior
written notice of such intent to terminate.
6.6 Expiration of Term. Upon the termination of this Agreement by AOL, pursuant
------------------
to Section 6.3, or the expiration of the Initial Term, the AOL Renewal Term
or the MP Renewal Term. AOL shall have the right for successive one year
periods (each a "Renewal Term") to promote one or more "pointers" or links
from the AOL Network to any MP Interactive Site selling products
substantially similar to the MP products (the "Link"); provided that (i)
AOL shall have the right to use MP's tradenames, trademarks and service
marks in connection with the Link and (ii) MP shall not be required to
perform the
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cross promotional obligations required hereunder.
6.6.1 Payments. In connection with the foregoing, MP shall
--------
make the following payments to AOL:
(a) an amount equal to [xxxxxxxxxxxx] of all revenues
derived from the sale of products in the MP
Interactive Site which are attributable to the Link
(the "MP Interactive Transaction Revenues") during
the first Renewal Term:
(b) an amount equal to the greater of (i)[xxxxxxxxx]
of all MP Interactive Transaction Revenues and (ii)
the standard percentage of revenues paid to other
vendors of MP during the second Renewal Term: and
(c) a percentage of MP Interactive Transaction
Revenues that is no less than the standard percentage
of revenues paid to other vendors of MP at all times
after the second Renewal Term.
6.6.2 Exclusivity. AOL shall have the right to maintain the
-----------
exclusivity provisions of Section 3.1 hereof during
any Renewal Term (the "Exclusivity Right"); provided,
however, that the Exclusivity Right shall be
exercisable by AOL for an aggregate period not to
exceed two Renewal Terms. In the event that AOL
exercises the Exclusivity Right during any Renewal
Term, notwithstanding the provisions of Section
6.6(ii), MP shall continue to perform the cross
promotional obligations required hereunder.
7 MANAGEMENT COMMITTEE/ARBITRATION. If the Parties are unable to resolve
--------------------------------
any dispute, controversy or claim arising under this Agreement
(excluding any disputes relaxing to intellectual property rights or
confidentiality) (each a "Dispute"), such Dispute shall be submitted
to the Management Committee for resolution. If the Management
Committee is unable to resolve the Dispute within ten (10) business
days after submission to them, the Dispute shall be solely and finally
settled by arbitration in Washington, D.C. under the auspices of the
American Arbitration Association; provided that the Federal Rules of
Evidence shall apply to any such Dispute and, subject to the
arbitrators' discretion to limit the time for and scope of discovery,
the Federal Rules of Civil Procedure shall apply with respect to
discovery; and provided further that, consistent with the parties'
desire to avoid delays and unnecessary expense, any Dispute arising
from any provision of the Agreement which expressly or implicitly
provides for the parties to reach mutual agreement as to certain terms
therein shall not be submitted to arbitration but shall be resolved in
good faith by the Management Committee. The arbitrator may enter a
default decision against any Party who fails to participate in the
arbitration proceedings. For purposes herein, the "Management
Committee" shall mean a committee made up of two (2) senior executives
from each of the Parties for the purpose of resolving Disputes under
this Section and generally overseeing the relationship between the
Parties contemplated by this Agreement. Notwithstanding the foregoing,
during the resolution of any Dispute, the Parties hereto shall
continue to make all payments required hereunder.
8 STANDARD TERMS. The Standard Online Commerce Terms & Conditions set
--------------
forth in Exhibit F attached hereto and Standard Legal Terms &
Conditions set forth on Exhibit G attached hereto are each hereby made
a part of this Agreement.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
Effective Date.
AMERICA ONLINE, INC. CYBERIAN OUTPOST, INC.
By: /s/ David M Colburn By: /s/ Darryl Peck
-------------------------------- --------------------------------
Print Name: David M. Colburn Print Name: Darryl Peck
----------------------- -----------------------
Title: Sr. Vice President Title: President/CEO
---------------------------- ----------------------------
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EXHIBIT A
Placement/Promotion Plan
------------------------
AOL Networks Placement and Integration
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
# Screen Item Frequency
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMPUTING CHANNEL PLACEMENT
- ---------------------------------------------------------------------------------------
1 Channel Main Bottom Feature Product 50% Non-exclusive
Promotion screen
- ---------------------------------------------------------------------------------------
2 Channel Main Rotated Banner 11% Non-exclusive
screen
- ---------------------------------------------------------------------------------------
3 Superstore Main* 1 Promotion Box Permanent Exclusive screen
- ---------------------------------------------------------------------------------------
4 Superstore Main* Product Search for Hardware Permanent Exclusive screen
and Mail Order Software
- ---------------------------------------------------------------------------------------
5 Superstore Exclusive Integration in Permanent Exclusive screen
Hardware Hardware Categories
Category* List Box
- ---------------------------------------------------------------------------------------
6 Superstore Feature Product Promotion- 15 rotations/mth Exclusive screen
Hardware
Category*
- ---------------------------------------------------------------------------------------
7 Superstore Shared Integration in Permanent Non-exclusive
Software Software Categories
Category* List Box
- ---------------------------------------------------------------------------------------
8 Superstore Feature Product Promotion- 15 rotations/mth Non-exclusive
Software 50% of total
Category*
- ---------------------------------------------------------------------------------------
9 Companies List Box Listing Permanent Non-exclusive
- ---------------------------------------------------------------------------------------
10 Companies Banner-Rotated between 11% Non-exclusive
nine sponsors
- ---------------------------------------------------------------------------------------
11 Buyer's Guide Name Integration and Permanent Exclusive screen
Banner
- ---------------------------------------------------------------------------------------
12 Buyer's Guide Bottom Feature Product 50% Exclusive screen
Button
- ---------------------------------------------------------------------------------------
13 Miscellaneous Banners Non-exclusive
Channel
- ---------------------------------------------------------------------------------------
14 Weekly Byte- Article links Permanent Exclusive screen
Channel
Newsletter
- ---------------------------------------------------------------------------------------
SHOPPING CHANNEL PLACEMENT
- ---------------------------------------------------------------------------------------
15 Computer Anchor Permanent Non-exclusive
- ---------------------------------------------------------------------------------------
</TABLE>
13
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- --------------------------------------------------------------------------------
Software
Department
- --------------------------------------------------------------------------------
16 Computing Anchor Permanent Non-exclusive
Hardware
Department
- --------------------------------------------------------------------------------
* Computer Superstore is presently being redesigned. The actual item design is
subject to change.
AOL.COM Placement and Integration
- --------------------------------------------------------------------------------
# Area Item Frequency
- --------------------------------------------------------------------------------
AOL Netfind Timesavers Placement
- --------------------------------------------------------------------------------
1 Buy a Computer Shortcut Permanent Non-exclusive
- Main
- --------------------------------------------------------------------------------
2 Home & Family Recipes/Financial Planning Permanent Non-exclusive
- Main Software Store, listing &
review
- --------------------------------------------------------------------------------
3 Your Health - Health/Research Software Permanent Non-exclusive
Main Store, listing & review
- --------------------------------------------------------------------------------
4 Reference Source Research, Software Store, Permanent Non-exclusive
- Main listing & review
- --------------------------------------------------------------------------------
Net channels Placement
- --------------------------------------------------------------------------------
5 Computing Main Shortcut Permanent Non-exclusive
- --------------------------------------------------------------------------------
6 Computing Main Listing & Review Pointer Permanent Non-exclusive
- --------------------------------------------------------------------------------
Keywords
--------
The Affiliated MP Site will be accessible from the AOL Network through the
use of the keyword "Outpost", "Cyberian" and "Cyberian Outpost" (or such
other keyword as AOL may assign to MP in the case of a name change;
provided, however, that such keyword (i) shall at all times be subject to
availability and (ii) shall be a "non-generic" trademark of MP).
14
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EXHIBIT B
Definitions
-----------
The following definitions will apply to this Agreement:
Additional MP Channel. Any other distribution channel (e.g., an interactive
- ---------------------
Service other than AOL) through which MP makes available an offering comparable
in nature to the Affiliated MP Site.
Advertising Revenues. Aggregate amounts collected plus the fair market value of
- --------------------
any other compensation received (such as barter advertising) by MP, or its
agents, arising from the license or sale of advertisements, promotions, links or
sponsorships ("Advertisements") that appear within any pages of the Affiliated
MP Site or on any screens or forms preceding, framing or otherwise directly
associated with the Affiliated MP Site, less applicable Advertising Sales
Commissions and (b) any co-op marketing fees, or any similar fees collected by
MP from vendors for (i) "shelf space" in any MP Interactive Site linked to from
the AOL Network or (ii) direct marketing efforts directed at any AOL Member or
AOL User.
Advertising Sales Commission. (i) Actual amounts paid as commission to third
- ----------------------------
party agencies in connection with the sale of the Advertisement or (ii) 15%, in
the event the Party has sold the Advertisement directly and will not be
deducting any third party agency commissions.
Affiliated MP Site. The specific area to be promoted and distributed by AOL
- ------------------
hereunder through which MP can market and complete transactions regarding the MP
Products.
AOL Interactive Site. Any Interactive Site which is managed, maintained, owned
- --------------------
or controlled by AOL or its agents.
AOL Look and Feel. The elements of graphics, design, organization,
- -----------------
presentation, layout, user interface, navigation and stylistic convention
(including the digital implementations thereof) which are generally associated
with interactive Sites within the AOL Service or AOL.com.
AOL Member. Any authorized user of the AOL Network, including any sub-accounts
- ----------
using the AOL Network under an authorized master account.
AOL Network. (i) The AOL Service, (ii) AOL.com and (iii) any other product or
- -----------
service owned, operated, distributed or authorized to be distributed by or
through AOL or its affiliates worldwide (and including those properties excluded
from the definitions of the AOL Service or AOL.com).
AOL Purchaser. Any person or entity who enters the Affiliated MP Site, and
- -------------
purchases an MP Product or any other products or services sold therein.
AOL Service. The U.S. version of the America Online(R) brand service,
- -----------
specifically excluding (a) AOL.com or any other AOL Interactive Site, (b) the
International versions of the AOL Service (e.g., AOL Japan), (c) "Driveway,"
"NetFind," "AOL Instant Messenger" or any similar product or service offered by
or through the U.S. version of the America Online(R) brand service, (d) "Digital
Cities," "WorldPlay," "Entertainment Asylum," the "HUB," or any similar
"sub-service" offered by or through the U.S. version of the America Online(R)
brand service, (e) any yellow pages, white pages, classifieds or other search,
directory, or review services or Content offered by or through the U.S. version
of the America Online(R) brand service, (f) any AOL product or service delivered
primarily through a broadband distribution platform (including a television
platform), (g) any co-branded or private table branded version of the AOL
service and (h) any programming or content area offered by or through the U.S.
version of the America Online(R) brand service over which AOL does not exercise
complete or substantially complete operational control (e.g., third-party
Content areas, any Interactive Site containing "members.aol.com" as part of its
URL).
15
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AOL User. Any user of the AOL Service or AOL.com.
- --------
AOL.com. AOL's primary Internet-based Interactive Site marketed under the
- -------
"AOL.COM" brand, specifically excluding (a) the AOL Service, (b) any
international versions of AOL.com. (c) "Driveway," "NetFind," "AOL Instant
Messager" or any similar product or service offered by or through such site or
any other AOL Interactive Site, (d) "Digital Cities," "WorldPlay,"
"Entertainment Asylum," "the Hub,"or any similar "sub-service" offered by or
through such site or any other AOL Interactive Site, (e) any yellow pages, white
pages, classifieds or other search or directory services offered by or through
such site or any other AOL Interactive Site and (f) any programming or content
area offered by or through such site or any other AOL Interactive Site over
which AOL does not exercise complete or substantially complete operational
control (e.g., third-party Content areas, any Interactive Site containing
"members.aol.com" as part of its URL).
Change of Control. (a) The consummation of a reorganization, merger or
- ----------------
consolidation or sale or other disposition of substantially all of the assets of
a party; or (b) the acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended) of beneficial ownership (within the meaning of Rule 13-d promulgated
under such Act) of more than 50% of either (i) the then outstanding shares of
common stock of such party; or (ii) the combined voting power of the then
outstanding voting securities of such party entitled to vote generally in the
election of directors. Notwithstanding the foregoing, the initial public
offering of securities of MP pursuant to an effective registration statement
under the Securities Act of 1933, as amended, shall not be considered a Change
of Control.
Confidential Information. Any information relating to or disclosed in the
- ------------------------
course of the Agreement, which is or should be reasonably understood to be
confidential or proprietary to the disclosing Party, including, but not limited
to, the material terms of this Agreement, information about AOL Members, AOL
Users, AOL Purchasers and MP customers, technical processes and formulas, source
codes, product designs, sales, cost and other unpublished financial information,
product and business plans, projections, and marketing data. "Confidential
Information" will not include information (a) already lawfully known to or
independently developed by the receiving Party, (b) disclosed in published
materials, (c) generally known to the public, or (d) lawfully obtained from any
third party.
Content. Information, materials, features, products, advertisements,
- -------
promotions, links, pointers and software, including any modifications, upgrades,
updates, enhancements and related documentation.
Exclusive Screens. The specific promotional areas or portions thereof, of the
- -----------------
AOL Service and AOL.com wherein which AOL will promote the Exclusive Products as
described in Exhibit A.
Impression. User exposure to the page containing the applicable Promotion, as
- ----------
such exposure may be reasonably determined and measured by AOL in accordance
with its standard methodologies and protocols.
Interactive Service. Any entity that offers online or Internet connectivity (or
- -------------------
any successor form of connectivity), aggregates and/or distributes a broad
selection of third-party interactive Content, or provides interactive
navigational services (including, without limitation, any online service
providers, Internet service providers, WebTV, @Home or other broadband
providers, search or directly providers, "push" product providers such as the
Pointcast Netcash Network or providers of interactive navigational environments
such as Microsoft's proposed "Active Desktop").
Interactive Site. Any interactive site or area, including, by way of example
- ----------------
and without limitation, (i) an MP site on the World Wide Web portion of the
Internet or (ii) a channel or area delivered through a "push" product such as
the Pointcast Network or interactive environment such as Microsoft's proposed
"Active Desktop."
Licensed Content. All Content offered through the Affiliated MP Site pursuant
- ----------------
to this Agreement or otherwise provided to AOL by MP for related purposes (e.g.,
Promotions, AOL "slideshows", etc.).
16
<PAGE>
including in each case, any modifications, upgrades, updates, enhancements, and
related documentation.
MP Interactive Site. Any Interactive Site (other than the Affiliated MP Site)
- -------------------
which is managed, maintained, owned and controlled by MP or its agents.
MP Product. Any product, good or service which MP (or others acting on its
- ----------
behalf or as distributors) offers, sells, provides, distributes or licenses to
AOL Users directly or indirectly through (i) the Affiliated MP Site (including
through any Interactive Site linked thereto) and which are listed on Exhibit D-1
to the Agreement, (ii) any other electronic means related to an AOL User's visit
to the Affiliated MP Site (e.g., e-mail offers following user registration), or
(iii) an "offline" means (e.g., toll-free number) for receiving orders related
to specific offers within the Affiliated MP Site requiring purchasers to
reference a specific promotional identifier or tracking code.
Target Revenues. The sum of (a) MP Revenues and (b) [XXX] of the gross revenues
- ---------------
generated by user of any MP Interactive Site with and AOL.com address of URL,
excluding any revenues generated by individuals listed on Exhibit D-2 attached
hereto.
Transaction Revenues. Aggregate amounts paid by AOL Purchasers in connection
- --------------------
with the sale, licensing, distribution or provision of any MP Products,
including, in each case, service charges, and excluding, in each case, amounts
collected for sales or use taxes or duties.
17
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EXHIBIT C
MP Cross-Promotion
------------------
Online
- ------
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
in an MP Interactive Site, MP shall also provide a Promotional Presence to AOL
in such MP Interactive Site linking to such areas of the AOL Network as
determined by AOL and to the extent that MP provides promotional information
about the products of any other Interactive Service. MP shall provide a
prominent "Try AOL" feature where users can obtain promotional information about
AOL products and services and, at AOL's option, download or order AOL's then-
current version of client software for the AOL Service or software for any other
AOL products or services (e.g., AOL's Instant Messenger service) on terms and
conditions (including, without limitation, scope, purpose, amount, prominence or
regularity) that are no less favorable than the terms and conditions provided to
such other Interactive Service. To the extent that MP shall undertake any of the
foregoing promotions with respect to AOL, MP shall also promote AOL as its
preferred Interactive Service.
Offline
- -------
MP shall promote AOL in MP's television, radio and print advertisements and in
any publications, programs, features or other forms of media over which MP
exercises at least partial editorial control, including, without limitation, the
following:
. Specific references or mentions (verbally where possible) of the Affiliated
MP Site's availability through American Online(R) immediately following any
reference to any MP Interactive Site; and
. Prominent promotion of the AOL "keyword" for the Affiliated MP Site whenever
it mentions the "URL(s)" for the MP Interactive Site.
Member Acquisition Programs
- ---------------------------
The Parties shall negotiate, in good faith, various AOL member acquisition
programs, including, without limitation, the bundling of AOL software with
products (i.e.: computer hardware, peripheral and packaged software) shipped by
MP to existing MP customers who are not members of AOL./2/
- ------------------
/1/ AOL will pay MP a one-time standard bounty for each person who registers for
the AOL Network using MP's special identifier for this promotion and
subsequently pays AOL monthly usage fees across at least three billing cycles
for the use of the AOL Network. Note that if this promotion is delivered through
Microsoft's Active Desktop or any other "push" product (an "Operating System"),
such feature will link users directly to AOL software within the Operating
System or direct users without Internet access to any AOL application setup
program within the Operating System (all subject to any standard policies of the
Operating System).
/2/ AOL will pay MP a one-time standard bounty for each person who registers for
the AOL Network using MP's special identifier for this promotion and
subsequently pays AOL monthly usage fees across at least three billing cycles
for the use of the AOL Network.
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EXHIBIT D-1
Description of MP Products and Other Content
--------------------------------------------
The products sold on MP's primary website at http://www.cyberianoutpost.com as
of the Effective Date hereof (e.g., CPU's, laptops, notebook computers,
monitors, mouses, disk drives, modems, keyboards, printers, computer manuals,
computer books and such comparable, additional computer hardware products
directly related to the use of a CPU, software, speakers, video game consoles,
joysticks, electronic organizers (or other Windows CE devices), calculators,
pagers and a limited selection of other similar electronic products, and
accessories). To the extent that MP offers, or intends to offer, any products
which in any way conflicts with any of AOL's existing exclusively arrangements
(including, without limitation, books). MP and AOL shall mutually agree upon (i)
whether such products will be sold in the Affiliated MP Site, and (ii) the
manner in which such products will be sold. To the extent that MP offers, or
intends to offer, any products which in any way conflicts with any of AOL's
existing exclusivity arrangements (including, without limitation, books), MP and
AOL shall mutually agree upon (i) whether such products will be sold in the
Affiliated MP Site, and (ii) the manner in which such products will be sold.
19
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EXHIBIT D-2
Pre-Existing AOL Member Customers of MP
---------------------------------------
Copy on file with AOL's counsel
20
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EXHIBIT E
Operating Standards
-------------------
1. General. MP shall comply with all terms set forth in this Exhibit E within
-------
ninety (90) days of the Effective Date and for the remainder of the Term. The
Affiliated MP Site (including the MP Products and other Content contained
therein) will be in the top ten (10) in computer hardware and peripherals
industry, as determined by each of the following methods: (a) based on a
cross-section of third-party reviewers who are recognized authorities in such
industry and (b) with respect to all material quality averages or standards in
such industry, including each of the following: (i) pricing of MP Products, (ii)
scope and selection of MP Products, (iii) quality of MP Products, (iv) customer
service and fulfillment associated with the marketing and sale of MP Products
and (v) ease of use. In addition, the Affiliated MP Site will, with respect to
each of the measures listed above, be competitive in all respects with that
which is offered by any MP Competitors.
2. Hosting; Capacity. MP will provide all computer servers, routers, switches
-----------------
and associated hardware in an amount reasonably necessary to meet anticipated
traffic demands, adequate power supply (including generator back-up) and HVAC,
adequate insurance, adequate service contracts and all necessary equipment
racks, floor space, network cabling and power distribution to support the
Affiliated MP Site. In the event MP fails to satisfy this requirement AOL will
have the right (in addition to any other remedies available to AOL hereunder) to
regulate the Promotions to the extent necessary to minimize user delays until
such time as MP corrects its infrastructure deficiencies.
3. Speed; Accessibility. MP will ensure that the performance and availability
-------------------
of the Affiliated MP Site (a) is monitored on a continuous, 24/7 basis and (b)
remains competitive in all material respects with the performance and
availability of other similar sites based on similar form technology. MP will
ensure that (a) the functionality and feature within the Affiliated MP Site are
optimized for the client software then in use by AOL Users; and (b) the
Affiliated MP Site is designed and populated in a manner that minimized delays
when AOL Users attempt to access such site.
4. User Interface. MP will maintain a graphical user interface within the
--------------
Affiliated MP Site that is competitive in all material respects with interfaces
of other similar sites based on similar technology. AOL reserves the right to
conduct focus group testing to assess compliance herewith.
5. Service Level Response. MP agrees to provide the following service levels in
----------------------
response to problems with or improvements to the Affiliated MP Site:
* For material functions of software that are or have become substantially
inoperable, MP will provide a bug fix or workaround within two (2) business
days after the first report of such error.
* For functions of the software that are impaired or otherwise fail to operate
in accordance with agreed upon specifications, MP will provide a bug fix or
workaround within three (3) business days after the first report of such
error.
* For errors disabling any certain non-essential functions, MP will provide a
bug fix or workaround within sixty (60) days after the first report of such
error.
* For all other errors, MP will address these requests on a case-by-case basis
as soon as reasonably feasible.
6. Monitoring. AOL Network Operations Center will work with a MP designated
----------
technical contact in the event of any performance malfunction or other
emergency related to the Affiliated MP Site and will either assist or work in
parallel with MP's contact using MP tools and procedures, as applicable. The
Parties will develop a process to monitor performance and member behavior with
respect to access, capacity, security and related issues both during normal
operations and during special promotions/events.
7. Telecommunications. The Parties agree to explore encryption methodology to
------------------
secure data communications between the Parties' data centers. The network
between the Parties will be configured such that no single component failure
will significantly impact AOL Users. The network will be sized such that no
single line runs at more than 70% average utilization for a 5-minute peak in a
daily period.
8. Security Review. MP and AOL will work together to perform an initial
---------------
security review of, and to perform tests of, the MP system, network, and service
security in order to evaluate the security risks and provide recommendations to
MP, including periodic follow-up reviews as reasonably required by MP or AOL. MP
will fix any security risks or breaches of security as may be identified by
AOL's Operations Security. Specific services to be performed on behalf of AOL's
Operations Security team will be as determined by AOL in its sole discretion.
9. Technical Performance. MP will perform the following technical obligations
---------------------
(and any updates thereto provided by AOL from time to time):
* MP will design the Affiliated MP Site to support the Windows version of the
Microsoft Internet Explorer 4.0 browser, and make commercially reasonable
efforts to support all other AOL browsers listed at:
"http://webmaster.info.aol.com/BrowTable.html."
* MP will configure the server from which it serves the site to examine the HTTP
User-Agent field in order to identify the "AOL Member-Agents" listed at:
"http://webmaster.info.aol.com/Brow2Text.html."
* MP will design its site to support HTTP 1.0 or later protocol as defined in
RFC 1945 (available at "http://ds.intemic.net/rfc/rfc1945.text") and to adhere
to AOL's parameters for refreshing cached information listed at
"http://webmaster.info.aol.com/CacheText.html."
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EXHIBIT F
Standard Online Commerce Terms & Conditions
-------------------------------------------
1 AOL Network Distribution. MP will not authorize or permit any third party to
------------------------
distribute or promote the MP Products or any MP Interactive Site through the AOL
Network absent AOL's prior written approval. The Promotions and any other
promotion or advertisement purchased from or provided by AOL will link only to
the Affiliated MP Site.
2 Provision of Other Content. In the event that AOL notifies MP that (i) as
---------------------------
reasonably determined by AOL, any Content within the Affiliated MP Site
violates AOL's then-standard Terms of Service (as set forth on the America
Online(R) brand service), the terms of this Agreement or any other standard,
written AOL policy or (ii) AOL reasonably objects to the inclusion of any
Content within the Affiliated MP Site (other than any specific items of Content
which may be expressly identified in this Agreement), then MP will take
commercially reasonable steps to block access by AOL Users to such Content using
MP's then-available technology. In the event that MP cannot, through its
commercially reasonable efforts, block access by AOL Users to the Content in
question, then MP will provide AOL written notice of such fact. AOL may then, at
its option, restrict access from the AOL Network to the Content in question
using technology available to AOL. MP will cooperate with AOL's reasonable
requests to the extent AOL elects to implement any such access restrictions.
3 Contests. MP will take all steps necessary to ensure that any contest,
--------
sweepstakes or similar promotion conducted or promoted through the Affiliated MP
Site (a "Contest") complies with all applicable federal, state and local laws
and regulations
4 Navigational Icons. Subject to the prior consent of MP, which consent will
------------------
not be unreasonably withheld, AOL will be entitled to establish navigational
icons, links and pointers connecting the Affiliated MP Site (or portions
thereof) with either consent areas on or outside of the AOL Network.
5 Disclaimers. Upon AOL's request, MP agrees to include within the Affiliated
-----------
MP Site a product disclaimer (the specific term and substance to be mutually
agreed upon by the Parties) indicating that transactions are solely between MP
and AOL Users purchasing MP Products from MP.
6 AOL Look and Feel. MP acknowledges and agrees that AOL will own all right,
-----------------
title and interest in and to the elements of graphics, design, organization,
presentation, layout, user interface, navigation and stylistic convention
(including the digital implementations thereof) which are generally associated
with online areas contained within the AOL Network ("the AOL Look and Feel"),
subject to MP's ownership rights in any MP trademarks or copyrighted material
within the Affiliated MP Site.
7 Management of the Affiliated MP Site. MP will manage, review, create, edit,
------------------------------------
update and otherwise manage all MP Products available on or through the
Affiliated MP Site, in a timely and professional manner and in accordance with
the terms of this Agreement. MP will ensure that each Affiliated MP Site is
current, accurate and well-organized at all times. MP warrants that the MP
Products and other Content contained therein will not infringe on or violate any
copyright, trademark, U.S. patent or any other third party right, including
without limitation, any music performance or other music-related rights; (ii)
will not violate AOL's then-applicable Terms of Service; and (iii) will not
violate any applicable law or regulation, including those relating to contests,
sweepstakes or similar promotions. Additionally, MP represents and warrants that
it owns or has a valid license to all rights to any Licensed Content used in
AOL "slideshow" or other formats ??????? elements such as graphics, animation
and sound, free and clear of all encumbrances and without violating the rights
of any other person or entity. MP also warrants that a reasonable basis exists
for all MP Product performance or comparison claims appearing through the
Affiliated MP Site. AOL will have no obligations with respect to the MP Products
available on or through the Affiliated MP Site, including, but not limited to,
any duty to review or monitor any such MP Products.
8 Duty to Inform. MP will promptly inform AOL of any information related to
--------------
the MP Products of Affiliated MP Site which could reasonably lead to a claim,
demand, or liability of or against AOL and/or its affiliates by any third party.
9 Customer Service. It is the sole responsibility of MP to provide customer
----------------
service to persons or entities purchasing MP Products through the AOL Network
("Customers"), MP will bear full responsibility for all customer service,
including without limitation, order processing, billing, fulfillment, shipment,
collection and other customer service associated with any MP Products offered,
sold or licensed through the Affiliated MP Site, and AOL will have no
obligations whatsoever with respect thereto. MP will receive all emails from
Customers via a computer available to MP's customer service staff and generally
respond to such emails within one business day of receipt. MP will receive all
orders electronically and generally process all orders within one business day
of receipt, provided MP Products ordered are not advance order items. MP will
ensure that all orders of MP Products are received, processed, fulfilled and
delivered on a timely and professional basis. MP will make all commercially
reasonable efforts to have its vendors and/or manufacturers offer AOL Users who
purchase MP Products through the Affiliated MP Site a money back satisfaction
guarantee. To the extent that MP is unable to offer a money back satisfaction
guarantee, MP shall inform all AOL Users who purchase MP Products that such a
guarantee is not available. MP will bear all responsibility for compliance with
federal, state and local laws in the event that MP Products are out of stock or
are no longer available at the time an order is received. MP will also comply
with the requirements of any federal, state or local consumer protection or
disclosure law. Payment for MP Products will be collected by MP directly from
customers. MP's order fulfillment operations will be subject to AOL's reasonable
review.
10 Frequency Work. In the event that MP requests AOL's production assistance in
--------------
connection with (i) ongoing programming and maintenance related to the
Affiliated MP Site, (ii) a redesign of or addition to the Affiliated MP Site
e.g., a change to an existing screen format or construction of a new custom
form, (iii) production to satisfy work performance by a third party provider or
(iv) any other type of production work, MP will work with AOL to
22
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develop a detailed production plan for the requested production assistance (the
"Production Plan"). Following receipt of the final Production Plan, AOL will
notify MP of (i) AOL's availability to perform the requested production work,
(ii) the proposed fee or fee structure for the requested production and
maintenance work and (iii) the estimated development schedule for such work. To
the extent the Parties reach agreement regarding implementation of agreed-upon
Production Plan, such agreement will be reflected in a separate work order
signed by the Parties. To the extent MP elects to retain a third party provider
to perform any such production work, work produced by such third party provider
must generally conform to AOL's production Standards & Practices (a copy of
which will be supplied by AOL to MP upon request). The specific production
resources which AOL allocates to any production work to be performed on behalf
of MP will be as determined by AOL in its sole discretion.
11. Overhead Accounts. To the extent AOL has granted MP any overhead accounts
-----------------
on the AOL Service, MP will be responsible for the actions taken under or
through its overhead accounts, which actions are subject to AOL's applicable
Terms of Service and for any surcharges, including, without limitation, all
premium charges, transaction charges, and any applicable communication
surcharges incurred by any overhead Account issued to MP, but MP will not be
liable for charges incurred by any overhead account relating to AOL's standard
monthly usage fees and standard hourly charges, which charges AOL will bear.
Upon the termination of this Agreement, all overhead accounts, related screen
names and any associated usage credits or similar rights, will automatically
terminate. AOL will have no liability for loss of any data or content related
to the proper termination of any overhead account.
12. AOL User Communications. To the extent MP sends any form of communications
-----------------------
to AOL Users, MP will promote the Affiliated MP Site as the location at which to
purchase Products (as compared to any more general or other site or location).
In addition, MP will not encourage AOL Users to take any action inconsistent
with the scope and purpose of this Agreement, including without limitation, the
following actions: (a) using Content other than the Licensed Content;
(b) bookmarking of Interactive Sites other than the Affiliated MP Site;
(c) using Interactive Sites other than those covered by the revenue-sharing
provisions herein; (d) changing the default home page on the AOL browser; or
(e) using any Interactive Service other than AOL.
13. Merchant Certification Program. MP will participate in any generally
------------------------------
applicable "Certified Merchant" program operated by AOL or its authorized agents
or contractors. Such program may require merchant participants on an ongoing
basis to meet certain reasonable standards relating to provision of electronic
commerce through the AOL Network (including, as a minimum, use of 40-bit SSL
encryption and if requested by AOL, 128-bit encryption) and may also require the
payment of certain reasonable certification fees to the applicable entity
operating the program. Each Certified Merchant in good standing will be
entitled to place on its affiliated Interactive Site an AOL designed and
approved button promoting the merchants status as an AOL Certified Merchant.
23
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EXHIBIT G
Standard Legal Terms and Conditions
-----------------------------------
Promotional Materials/Press Releases. Each Party will submit to the other
- ------------------------------------
Party, for its prior written approval, which will not be unreasonably withheld
or delayed, any marketing, advertising, press releases, and all other
promotional materials related to the Affiliated MP Site and/or referencing the
other Party and/or its trade names, trademarks, and service marks (the
"Materials"); provided, however, that either Party's use of screen shots of the
Affiliated MP Site for promotional purposes will not require the approval of the
other Party so long as American Online(R) is clearly identified as the source of
such screen shots. Each Party will solicit and reasonably consider the views of
all the other Party in designing and implementing such Materials. Once
approved, the Materials may be used by a Party and its affiliates for the
purpose of promoting the Affiliated MP Site and the content contained therein
and reused for such purpose until such approval is withdrawn with reasonable
prior notice. In the event such approval is withdrawn, existing inventories of
Materials may be depleted. Notwithstanding the foregoing, either Party may
issue press releases and other disclosures as required by law or as reasonably
advised by legal counsel without the consent of the other Party and in such
event, prompt notice thereof will be provided to the other Party.
2 License. MP hereby grants AOL a non-exclusive worldwide license to market,
-------
license, distribute, reproduce, display, perform, transmit and promote the
Licensed Content (or any portion thereof) through such areas or features of the
AOL Network as AOL deems appropriate and in accordance with the terms of this
Agreement. MP acknowledges and agrees that the foregoing license permits AOL to
distribute portions of the Licensed Content in synchronism or timed relation
with visual materials prepared by MP or AOL (e.g., as part of an AOL
"slideshow"). In addition, AOL Users will have the right to access and use the
Affiliated MP Site.
3 Trademark License. In designing and implementing the Materials and subject
-----------------
to the other provisions contained herein, MP will be entitled to use the
following trade names, trademarks, and service marks of AOL: the "America
Online(R)" brand service, "AOL(TM) service/software and AOL's triangle logo: and
AOL and its affiliates will be entitled to use the trade names, trademarks, and
service marks of MP (collectively, together with the AOL marks listed above, the
"Marks"); provided that each Party; (i) does not create a unitary composite mark
involving a Mark of the other Party without the prior written approval of such
other Party; and (ii) displays symbols and notices clearly and sufficiently
indicating the trademark status and ownership of the other Party's Marks in
accordance with applicable trademark law and practice.
4. Ownership of Trademarks. Each Party acknowledges the ownership of the
-----------------------
other Party in the Marks of the other Party and agrees that all use of the other
Party's Marks will inure to the benefit, and be on behalf, of the other Party.
Each Party acknowledges that its utilization of the other Party's Marks will not
create in it, nor will it represent it has, any right, title, or interest in or
to such Marks other than the licenses expressly granted herein. Each Party
agrees not to do anything contesting or impairing the trademark rights of the
other Party.
5. Quality Standards. Each Party agrees that the nature and quality of its
-----------------
products and services supplied in connection with the other Party's Marks will
conform to quality standards set by the other Party. Each Party agrees to
supply the other Party, upon request, with a reasonable number of samples of any
Materials publicly disseminated by such Party which utilize the other Party's
Marks. Each Party will comply with all applicable laws, regulations, and
customs and obtain any required government approvals pertaining to use of the
other Party's marks.
6 Infringement Proceedings. Each Party agrees to promptly notify the other
------------------------
Party of any unauthorized use of the other Party's Marks of which it has actual
knowledge. Each Party will have the sole right and discretion to bring
proceedings alleging infringement of its Marks or unfair competition related
thereto; provided, however, that each Party agrees to provide the other Party
with its reasonable cooperation and assistance with respect to any such
infringement proceedings.
7 Representations and Warranties. Each Party represents and warrants to the
------------------------------
other Party that (i) such Party has the full corporate right, power and
authority to enter into this Agreement and to perform the acts required of it
hereunder; (ii) the execution of this Agreement by such Party, and the
performance by such Party of its obligations and duties hereunder, do not and
will not violate any agreement to which such Party is a party or by which it is
otherwise bound; (iii) when executed and delivered by such Party, this Agreement
will constitute the legal, valid and binding obligation of such Party,
enforceable against such Party in accordance with its terms; and (iv) such Party
acknowledges that the other Party makes no representations, warranties or
agreements related to the subject matter hereof that are not expressly provided
for in this Agreement. MP hereby represents and warrants that it possesses all
authorizations, approvals, consents, licenses, permits, certificates or other
rights and permissions necessary to sell the MP Products.
8 Confidentiality. Each Party acknowledges that Confidential Information may
---------------
be disclosed to the other Party during the course of this Agreement. Each Party
agrees that it will take reasonable steps, at least substantially equivalent to
the steps it takes to protect its own proprietary information, during the term
of this Agreement, and for a period of three years following expiration or
termination of this Agreement, to prevent the duplication or disclosure of
Confidential Information of the other Party, other than by or to its employees
or agents who must have access to such Confidential Information to perform such
Party's obligations hereunder, who will each agree to comply with this section.
Notwithstanding the foregoing, either Party may issue a press release or other
disclosure containing Confidential Information without the consent of the other
Party, to the extent such disclosure is required by law, rule, regulation or
government or court order. In such event, the disclosing Party will provide at
least five (5) business days prior written notice of such proposed disclosure to
the other Party. Further, in the event such disclosure is required of either
Party under the laws, rules or regulations of the Securities and Exchange
Commission or any other applicable governing body, such Party will (i) redact
mutually agreed upon portions of this Agreement to the fullest extent permitted
under applicable laws, rules and regulations and
<PAGE>
Confidential
(ii) submit a request to such governing body that such portions and other
provisions of this Agreement receive confidential treatment under the laws,
rules and regulations of the Securities and Exchange Commission or otherwise be
held in the strictest confidence to the fullest extent permitted under the laws,
rules or regulations of any other applicable governing body. Notwithstanding
anything to the contrary contained herein, AOL agrees that MP may disclose to
prospective investors of MP the existence of this Agreement, a mutually
acceptable summary of the general terms of this Agreement, and information
concerning the terms of the Warrants issuable to AOL pursuant to this Agreement
provided, however, that MP shall take reasonable steps, at least substantially
equivalent to the steps it takes to protect its own proprietary information, to
protect the information provided to any such prospective investors.
9 Limitation of Liability; Disclaimer Indemnification.
---------------------------------------------------
9.1 Liability. UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE TO THE OTHER
---------
PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES
(EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES),
ARISING FROM BREACH OF THE AGREEMENT, THE SALE OF MP PRODUCTS, THE FRAUDULENT
PURCHASE OF MP PRODUCTS, THE USE OR INABILITY TO USE THE AOL NETWORK, THE AOL
SERVICE, AOLCOM OR THE AFFILIATED MP SITE, OR ARISING FROM ANY OTHER PROVISION
OF THIS AGREEMENT, SUCH AS, BUT NOT LIMITED TO, LOSS OF REVENUE OR ANTICIPATED
PROFITS OR LOST BUSINESS ("COLLECTIVELY, "DISCLAIMED DAMAGES"); PROVIDED THAT
EACH PARTY WILL REMAIN LIABLE TO THE OTHER PARTY TO THE EXTENT ANY DISCLAIMED
DAMAGES ARE CLAIMED BY A THIRD PARTY AND ARE SUBJECT TO INDEMNIFICATION PURSUANT
TO SECTION 9.3. EXCEPT AS PROVIDED IN SECTION 9.3, NEITHER PARTY WILL BE LIABLE
TO THE OTHER PARTY FOR MORE THAN THE AMOUNTS PAYABLE HEREUNDER IN THE YEAR IN
WHICH ANY DISCLAIMED DAMAGES FOR WHICH INDEMNIFICATION IS SOUGHT ARISES OR
ACCRUES; PROVIDED THAT EACH PARTY WILL REMAIN LIABLE FOR THE AGGREGATE AMOUNT OF
ANY PAYMENT OBLIGATIONS OWED TO THE OTHER PARTY PURSUANT TO SECTION 4.
9.2 No Additional Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
------------------------
NEITHER PARTY MAKES ANY, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS ANY
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE AOL NETWORK,
THE AOL SERVICE, AOLCOM OR THE AFFILIATED MP SITE, INCLUDING ANY IMPLIED
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED
WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE, WITHOUT
LIMITING THE GENERALITY OF THE FOREGOING, AOL SPECIFICALLY DISCLAIMS ANY
WARRANTY REGARDING THE PROFITABILITY OF THE AFFILIATED MP SITE.
9.3 Indemnity. Either Party will defend, indemnify, save and hold harmless the
---------
other Party and the officers, directors, agents, affiliates, distributors,
franchisees and employees of the other Party from any and all third party
claims, demands, liabilities, costs or expenses, including reasonable attorneys
fees ("Liabilities"), resulting from the indemnifying Party's material breach of
any duty, representation, or warranty of this Agreement, except where
Liabilities result from the gross negligence or knowing and willful misconduct
of the other Party.
9.4 Claims. Each Party agrees to (i) promptly notify the other Party in
------
writing of any indemnifiable claim and give the other Party the opportunity to
defend or negotiate a settlement of any such claim at such other Party's
expense, and (ii) cooperate fully with the other Party, at that other Party's
expense, in defending or settling such claim. AOL reserves the right, at its
own expense, to assume the exclusive defense and control of any matter otherwise
subject to indemnification by MP hereunder, and in such event, MP will have no
further obligation to provide indemnification for such matter hereunder.
9.5 Acknowledgment. AOL and MP each acknowledges that the provisions of this
--------------
Agreement were negotiated to reflect an informed, voluntary allocation between
them of all risks (both known and unknown) associated with the transactions
contemplated hereunder. The limitations and disclaimers related to warranties
and liability contained in this Agreement are intended to limit the
circumstances and extent of liability. The provisions of this Section 9 will be
enforceable independent of any severable from any other enforceable or
unenforceable provision of this Agreement.
10 Solicitation of AOL Users. During the term of this Agreement, and for the
-------------------------
two-year period following the expiration or termination of this Agreement,
neither MP nor its agents will use the AOL Network to (i) solicit, or
participate in the solicitation of AOL Users when that solicitation is for the
benefit of any entity (including MP) which could reasonably be construed to be
or become in competition with AOL or (ii) promote any services which could
reasonably be construed to be in competition with AOL including but not limited
to, services available through the internet. In addition, MP may not send AOL
Users e-mail communications promoting MP's Products through the AOL Network
without a "Prior Business Relationship." For purposes of this Agreement, a
"Prior Business Relationship" will mean that the AOL User has either (i) engaged
in a transaction with MP through the AOL Network or (ii) voluntarily provided
information to MP through a contest, registration, or other communication, which
included notice to the AOL User that the information provided by the AOL User
could result in an e-mail being sent to that AOL User by MP or its agents. A
Prior Business Relationship does not exist by virtue of an AOL User's visit to
an Affiliated MP Site (absent the elements above). More generally, MP will be
subject to any standard policies regarding e-mail distribution through the AOL
Network which AOL may implement.
11 Collection of User Information. MP is prohibited from collecting AOL
------------------------------
Member screennames or AOL User email addresses from public or private areas of
the AOL Network, except as specifically provided below. MP will ensure that any
survey, questionnaire or other means of collecting AOL Member screennames or AOL
User email addresses, names, addresses or other identifying information ("User
information"), including, without limitation, requests directed to specific AOL
Member screennames or AOL User email addresses and automated methods of
collecting such information (an "Information Request") complies with (i) all
applicable laws and regulations and (ii) any privacy policies which have been
issued by AOL ??????? during the Term (the "AOL Privacy Policies"). Each
Information Request will clearly and conspicuously specify to the AOL Users at
issued the purpose for which User
25
<PAGE>
Confidential
information collected through the Information Request will be used (the
"Specified Purpose").
12 Use of User Information. MP will restrict use of the User Information
-----------------------
collected through an Information Request to the Specified Purpose. In no event
will MP (i) provide User Information to any third party (except to the extent
specifically (a) permitted under the AOL Privacy Policies or (b) authorized by
the members in question), (ii) rent, sell or barter User Information, (iii)
identify, promote or otherwise disclose such User Information in a manner that
identifies AOL Users as end-users of the AOL Service, AOL.com or the AOL
Network or (iv) otherwise use any User Information in contravention of Section
11 above. Notwithstanding the foregoing, in the case of AOL Members who purchase
MP Products from MP, MP will be entitled to use User Information from such AOL
Members as part of MP's aggregate list of Customers; provided that MP's use does
not in any way identify, promote or otherwise disclose such User Information in
a manner that identifies such AOL Members as end-users of the AOL Service.
AOL.com or the AOL Network. In addition, MP will not use any User Information
for any purpose (including any Specified Purpose) not directly related to the
business purpose of the Affiliated MP Site.
13 Excuse. Neither Party will be liable for, or be considered in breach of or
------
default under this Agreement on account of, any delay or failure to perform as
required by this Agreement as a result of any causes or conditions which are
beyond such Party's reasonable control and which such Party is unable to
overcome by the exercise of reasonable diligence.
14 Independent Contractors. The Parties to this Agreement are independent
-----------------------
contractors. Neither Party is an agent, representative or partner of the other
Party. Neither Party will have any right, power or authority to enter into any
agreement for or on behalf or, or incur any obligation or liability of, or to
otherwise bind, the other Party. This Agreement will not be interpreted or
construed to create an association, agency, joint venture or partnership between
the Parties or to impose any liability attributable to such a relationship upon
either Party.
15 Notice. Any notice, approval, request, authorization, direction or other
------
communication under this Agreement will be given in writing and will be deemed
to have been delivered and given for all purposes on the delivery date if
delivered by electronic mail on the AOL Network or (i) on the delivery date if
delivered personally to the Party to whom the same is directed: (ii) one
business day after deposit with a commercial overnight carrier, with written
verification of receipt, or (iii) five business days after the mailing date,
whether or not actually received, if sent by U.S. mail, return receipt
requested, postage and charges prepaid, or any other means of rapid mail
delivery for which a receipt is available, to the person(s) specified below at
the address of the Party set forth in the first paragraph of this Agreement.
16 No Waiver. The failure of either Party to insist upon or enforce strict
---------
performance by the other Party or any provision of this Agreement or to exercise
any right under this Agreement will not be construed as a waiver or
relinquishment to any extent of such Party's right to assert or rely upon any
such provision or right in that or any other instance; rather, the same will be
and remain in full force and effect.
17 Return of Information. Upon the expiration or termination of this
---------------------
Agreement, each Party will, upon the written request of the other Party, return
or destroy (at the option of the Party receiving the request) all confidential
information, documents, manuals and other materials specified the other Party.
18 Survival. Sections 9 through 12 of this Exhibit G, will survive the
--------
completion, expiration, termination or cancellation of this Agreement.
19 Entire Agreement. This Agreement sets forth the entire agreement and
----------------
supersedes any and all prior agreements of the Parties with respect to the
transactions set forth herein. Neither Party will be bound by, and each Party
specifically objects to, any term, condition or other provision which is
different from or in addition to the provisions of this Agreement (whether or
not it would materially alter this Agreement) and which is proffered by the
other Party in any correspondence or other document, unless the Party to be
bound thereby specifically agrees to such provision in writing.
20 Amendment. No change, amendment or modification of any provision of this
---------
Agreement will be valid unless set forth in a written instrument signed by the
Party subject to enforcement of such amendment by an executive of at least the
same standing to the executive who signed the Agreement.
21 Further Assurances. Each Party will take such action (including, but not
------------------
limited to, the execution, acknowledgment and delivery of documents) as may
reasonably be requested by any other Party for the implementation or continuing
performance of this Agreement.
22 Assignment. MP will not assign this Agreement or any right, interest or
----------
benefit under this Agreement without the prior written consent of AOL. Subject
to the foregoing, this Agreement will be fully binding upon, inure to the
benefit of and be enforceable by the Parties hereto and their respective
successors and assigns.
23 Construction; Severability. In the event that any provision of this
--------------------------
Agreement conflicts with the law under which this Agreement is to be construed
or if any such provision is held invalid by a court with jurisdiction over the
Parties to this Agreement, (i) such provision will be deemed to be restated to
reflect as nearly as possible the original intentions of the Parties in
accordance with applicable law, and (ii) the remaining terms, provisions,
covenants and restrictions of this Agreement will remain in full force and
affect.
24 Remedies. Except where otherwise specified, the rights and remedies granted
--------
to a Party under this Agreement are cumulative and in addition to, and not in
lieu of, any other rights or remedies which the Party may possess at law or in
equity; provided that, in connection with any dispute hereunder, MP will not be
entitled to offset any amounts that it claims to be due and payable from AOL
against amounts otherwise payable by MP to AOL.
25 Applicable Law, Jurisdiction. This Agreement will be interpreted, construed
----------------------------
and enforced in all respects in accordance with the laws of the Commonwealth of
Virginia except for its conflicts of laws principles. Each Party irrevocably
consents to the exclusive jurisdiction of the courts of the Commonwealth of
Virginia and the federal courts situated in the Commonwealth of Virginia, in
connection with any action to enforce the provisions of this Agreement, to
recover damages or other relief for breach or default under this Agreement, or
otherwise arising under or by reason of this Agreement.
26 Expert Controls. Both Parties will adhere to all applicable laws,
---------------
regulations and rules relating to the expert
26
<PAGE>
Confidential
of technical data and will not export or re-export any technical data, any
products received from the other Party or the direct product of such technical
data to any prescribed country listed in such applicable laws, regulations and
rules unless properly authorized.
27 Headings. The captions and headings used in this Agreement are
--------
inserted for convenience only and will not affect the meaning or interpretation
of this Agreement.
28 Counterparts. This Agreement may be executed in counterparts, each
------------
of which will be deemed an original and all of which together will constitute
one and the same document.
27
<PAGE>
Confidential
EXHIBIT H
MP COMPETITORS
[XXXXXX]
[XXXXXX]
[XXXXXX]
[XXXXXX]
[XXXXXX]
[XXXXXX]
[XXXXXX]
[XXXXXX]
[XXXXXX]
[XXXXXX]
[XXXXXX]
[XXXXXX]
[XXXXXX]
[XXXXXX]
[XXXXXX]
[XXXXXX]
[XXXXXX]
[XXXXXX]
[XXXXXX]
[XXXXXX]
Cyberian retains the right to add to this list from time to time as new
competitors enter the market subject to the prior approval of AOL, which
approval shall not be unreasonably withheld.
28
<PAGE>
[LETTERHEAD OF LYCOS-BERTELSMANN APPEARS HERE]
Exhibit 10.11
-------------
Cyberian Outpost, Inc. has ommitted from this Exhibit 10.11 portions of the
Agreement for which Cyberian Outpost, Inc. has requested confidential treatment
from the Securities and Exchange Commission. The portions of the Agreement for
which confidential treatment has been requested are marked with X's in brackets
and such confidential portions have been filed separately with the Securities
and Exchange Commission.
AGREEMENT
---------
This Agreement dated as of 25th March, 1998 (the "Agreement Date"), is made
by and between Lycos-Bertelsmann GmbH., a German Corporation with a principal
place of business at Carl-Bertelsmann-Strasse. 161L, Postfach 310, D-33311,
Gutersloh, Germany, ("Lycos-Bertelsmann"), and Cyberian Outpost, Inc. a US
company with a principal place of business at 27 North Main Street, PO Box 636,
Kent, Connecticut, USA ("Cyberian Outpost")
The effective date of this agreement is the 7th April 1998 and this
agreement runs through 6th April 1999
Recitals
--------
A. Lycos-Bertelsmann is the owner or licensee of certain Web services
(collectively, the "Lycos-Bertelsmann Services"), which are accessible through
the URLs www.lycos.co.uk, www.lycos.de, www.lycos.it, www.lycos.fr,
--------------- ------------ ------------ ------------
www.lycos.es, www.lycos.nl, (together with all localized adaptations operated
- ------------ ------------
by Lycos-Bertelsmann' subsidiaries, joint ventures and licensees around the
world, the "Lycos-Bertelsmann Site"):
B. Cyberian Outpost, Inc. The operator of a Web site accessible through
the URL www.outpost.com, (the Cyberian Outpost site) that provides an on-line
---------------
computer hardware and software retail service over the Internet.
C. Cyberian Outpost, Inc. desires to provide links from the
Lycos-Bertelsmann Site and/or various Lycos-Bertelsmann Services to a co-branded
version of the Cyberian Outpost Site in order to increase traffic to the
Cyberian Outpost site
NOW, THEREFORE, for good and valuable consideration, receipt and
sufficiency of which are hereby acknowledge, Lycos-Bertelsmann and Cyberian
Outpost, Inc. hereby agree as follows:
<PAGE>
Terms
-----
1/ Lycos-Bertelsmann' Obligations:
------------------------------
Lycos-Bertelsmann will provide a fixed permanent test link on the
European Home Pages, along the lines of "Click Here to buy
Hardware/Software" or "On-line Computer Store-click here", to be
prominently placed and agreed between the parties
Lycos-Bertelsmann will provide Cyberian Outpost with relevant KITI
words; e.g. PC.Drive.Software, Hardware, Peripherals etc. to be
provided by Cyberian Outpost [XX XXXXX XXXXXXX]
Fixed permanent .GIF test link in the "Technology WebGuide" linking to
the co-branded Cyberian site.
Fixed permanent .GIF text link in the "Shopping WebGuide" in each
country where that service exists and subsequently in new "Shopping
WebGuides" as they become available from time to time
2/ Cyberian Outpost, Inc.'s obligations:
-------------------------------------
A. Cyberian Outpost, Inc. will make a one off Exclusive License Fee
payment of [XXXXXXX] to Lycos-Bertelsmann GmbH & Co KG payable within
30 days of signature of this agreement, which represents [XXXXXXXXX]
per month of this agreement
B. Cyberian Outpost, Inc. will make further payments of [XXXXXX] at 30
day intervals, the first to be received 60 days from the signature of
this agreement, with subsequent payments due at 30 day intervals
thereafter and for the duration of the agreement, and to total
[XXXXXXXX]
C. Cyberian Outpost, Inc. will, in addition, pay to Lycos-Bertelsmann
[XX] of net revenue from sales generated at Cyberian Outpost from each
user session referred to Cyberian Outpost from the Lycos-Bertelsmann
links, as described in this document, once Cyberian Outpost has earned
back its monthly slotting fee of [XXXXXXX]. Thus, Cyberian Outpost
will pay Lycos-Bertelsmann [XX] of all net product sales that exceed
[XXXXXXXX] each month from user sessions coming directly to Cyberian
Outpost from Lycos-Bertelsmann links. (The figure of [XXXXXXXX]
represents earning back our slotting fee at the rate of [XX])
C. Cyberian Outpost will also provide:
Appropriate wording for Home Page text link
Appropriate KITI keywords and wording for the link out to the CYBERIAN
OUTPOST site from KITI searches [XXXXXXXXXXXXXX]
Appropriate runners to appear within the Technology WebGuide (Brand
Awareness and clik-thru generators)
<PAGE>
3/ Term and Exclusivity:
--------------------
The term ("Term") of this agreement shall commence on the Effective Date
and continue for one year unless terminated earlier as provided below
Cyberian Outpost is the exclusive On-line computer hardware and software
for the period of the agreement in all areas other than Shopping, where Cyberian
Outpost will be the Premiere Computer Retailer, defaulted as the front store in
the Computer areas of the Lycos-Bertelsmann "Shopping WebGuides".
This exclusivity to apply with regard to the companies outlined at Annex
A to this agreement
4/ Guaranteed Impressions:
----------------------
Lycos-Bertelsmann guarantee [xxxxxx] Impressions across their pan-European
sites over the period of the contract
5/ Marks: Lycos-Bertelsmann hereby grants to Cyberian Outpost the
-----
non-exclusive, non-transferable right to use the Lycos-Bertelsmann Marks solely
for the purposes of co-branding specified in this Agreement. Cyberian Outpost
hereby grants Lycos-Bertelsmann the non-exclusive, non-transferable right to use
the Cyberian Outpost Marks solely for the purposes specified in this Agreement.
Except as expressly stated herein, neither party shall make any other use of the
other party's marks. Upon request of either party, the other party shall provide
appropriate attribution of the use of the requesting party's marks. (E.g., "Go
Get It /R/ is a registered service mark of Lycos-Bertelsmann, Inc. All Rights
Reserved.").
6/ Representations and Warranties: Each party hereby represents and
------------------------------
warrants as follows:
a. Corporate Power. Such party is duly organized and
---------------
validly existing under the laws of the state of its incorporation and has full
corporate power and authority to enter into this Agreement and to carry out the
provisions hereof.
b. Due Authorization. Such party is duly authorized to
-----------------
execute and deliver this Agreement and to perform its obligations hereunder.
c. Binding Agreement. This Agreement is a legal and valid
-----------------
obligation binding upon it and enforceable with its terms. The execution,
delivery and performance of this Agreement by such party does not conflict with
any agreement, instrument or understanding, oral or written, to which it is a
party or by which it may be bound, nor violate any law or regulation of any
court, government body or administrative or other agency having jurisdiction
over it.
d. Intellectual Property Rights. Such party has the full
----------------------------
and exclusive right to grant or otherwise permit the other party to access the
Cyberian Outpost Site content and to use the trademarks, logos and trade names
as set forth on this Agreement, and that it is aware of no claims by any third
parties adverse to any of such property rights.
The representations and warranties and covenants in this Section 5 are
continuous in nature and shall be deemed to have been given by each party at
execution of this Agreement and at each stage of performance hereunder. These
representations, warranties and covenants shall survive termination or
expiration of this Agreement.
3
<PAGE>
7/ Limitation of Warranty. EXCEPT AS EXPRESSLY WARRANTED IN SECTION 5 ABOVE,
----------------------
EACH PARTY EXPRESSLY DISCLAIMS ANY FURTHER WARRANTIES, EITHER EXPRESS OR
IMPLIED, INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE.
8/ Indemnification.
---------------
a. Cyberian Outpost Indemnity. Cyberian Outpost will at all times
--------------------------
indemnify and hold harmless Lycos-Bertelsmann and its officers, directors,
shareholders, employees, accountants, attorneys, agents, successors and
assigns from and against any and all third party claims, damages,
liabilities, costs and expenses, including reasonable legal fees and
expenses, arising out of or related to any breach of any warranty,
representation, covenant or agreement made by Cyberian Outpost in this
Agreement. Lycos-Bertelsmann shall give Cyberian Outpost prompt written
notice of any claim, action or demand for which indemnity is claimed.
Cyberian Outpost shall have the right, but not the obligation, to control
the defense and/or settlement of any claim in which it is named as a party.
Lycos-Bertlesmann shall have the right to participate in any defense of a
claim by Cyberian Outpost with counsel of Lycos-Bertelsmann' choice at
Lycos-Bertlesmann' own expense. The foregoing indemnity is conditioned
upon: prompt written notice by Lycos-Bertelsmann to Cyberian Outpost of any
claim, action or demand for which indemnity is claimed; complete control of
the defense and settlement thereof by Cyberian Outpost; and such reasonable
cooperation by Lycos-Bertelsmann in the defense as Cyberian Outpost may
request.
b. Lycos-Bertelsmann Indemnity. Lycos-Bertelsmann will at all
---------------------------
times defend, indemnify and hold harmless Cyberian Outpost and its
officers, directors, shareholders, employees, accountants, attorneys,
agents, successors and assigns from and against any and all third party
claims, damages, liabilities, costs and expenses, including reasonable
legal fees and expenses, arising out of or related to any breach of any
warranty, representation, covenant or agreement made by Lycos-Bertelsmann
in this Agreement. Cyberian Outpost shall give Lycos-Bertelsmann prompt
written notice of any claim, action or demand for which indemnity is
claimed. Lycos-Bertelsmann shall have the right, but not the obligation, to
control the defense and/or settlement of any claim in which it is named as
a party. Cyberian Outpost shall have the right to participate in any
defense of a claim by Lycos-Bertelsmann with counsel defense of Cyberian
Outpost chose at its own expense. The foregoing indemnity is conditioned
upon; prompt written notice by Cyberian Outpost to Lycos-Bertlesmann of any
claim, action or demand for which indemnity is claimed; complete control of
the defense and settlement thereof by Lycos-Bertelsmann; and such
reasonable cooperation by Cyberian Outpost in the defense of Lycos-
Bertlesmann may request.
9/ Confidentiality Press Releases.
------------------------------
a. Non-Disclosure Agreement. The parties agree and acknowledge
------------------------
that, as a result of negotiating, entering into and performing
this Agreement, each party has and will have access to certain
of the other party's Confidential Information (as defined
below). Each party also understands and agrees that misuse
and/or disclosure of that information could adversely affect
the other party's business. Accordingly, the parties agree
that, during the Term of this Agreement and thereafter, each
party shall use and reproduce the other party's Confidential
Information only for purposes of this Agreement and only to the
extent necessary for such purpose and shall restrict
disclosure of the other party's Confidential Information to
its employees, consultants or independent contractors with a
need to know and shall not disclose the other party's
Confidential Information to any third party without the prior
written approval of the other party. Notwithstanding the
foregoing, it shall not be a breach of this Agreement for
either party to disclose Confidential Information of the other
party if required to do so under law or in a judicial or other
governmental investigation or proceeding, provided the other
party has been given prior notice and the disclosing party has
sought all available safeguards against widespread
dissemination prior to such disclosure.
<PAGE>
b. Confidential Information Defined. As used in this Agreement,
--------------------------------
the term "Confidential Information" refers to: (i) the terms and conditions of
this Agreement: (ii) each party's trade secrets, business plans, strategies,
methods and/or practices: and (iii) other information relating to either party
that is not generally known to the public, including information about either
party's personnel, products, customers, marketing strategies, services or future
business plans. Notwithstanding the foregoing, the term "Confidential
Information" specifically excludes (A) information that is now in public domain
or subsequently enters the public domain by publication or otherwise through no
action or fault of the other party; (B) information that is known to either
party without restriction, prior to receipt from the other party under this
Agreement, from its own independent sources a evidenced by such party's written
records, and which was not acquired, directly or indirectly, from the other
party: (C) information that either party receives from any third party
reasonably known by such receiving party to have a legal right to transmit such
information, and not under any obligation to keep such information confidential;
and (D) information independently developed by either party's employees provided
that either party can show that those same employees or agents had no access to
the Confidential Information received hereunder.
c. Press Releases. Lycos-Bertelsmann and Cyberian Outpost may
--------------
jointly prepare press releases concerning the existence of this Agreement and
the terms hereof. Otherwise, no public statements concerning the existence or
terms of this Agreement shall be made or released to any medium except with the
prior approval of Lycos-Bertelsmann and Cyberian Outpost or as acquired by law,
except where such information is already clearly in the public domain or the
subject of existing jointly approved press releases.
10/ Termination. Either party may terminate this Agreement if (a) the other
-----------
party files a petition for bankruptcy or is adjudicated bankrupt; (b) petition
in bankruptcy is filed against other party and such petition is not dismissed
within sixty (60) days of the filing date: (c) the other party becomes insolvent
or makes an assignment for the benefit of its creditors pursuant to any
bankruptcy law: (d) a receiver is appointed for the other party or its business:
(e) upon the occurrence of a material breach by the other party if such breach
within thirty (30) days after written notice is received by the breaching party
identifying the matter constituting the material breach; (f) upon thirty (30)
days written notice if the other party's service [or product], viewed as a
whole, ceases to be competitive with substantially similar services then being
offered by third parties. However, if within 120 days of the agreement date,
Lycos-Bertelsmann exercises the right to terminate the agreement under this
clause, 10/(f), Lycos-Bertelsmann must give 60 days notice to Cyberian Outpost
and agrees to waive any further payments from Cyberian Outpost. Equally, should
Cyberian Outpost exercise this clause. 10(f), then they shall give 60 days
notice to Lycos-Bertelsmann and remain liable for subsequent monthly guaranteed
payments falling due under the terms of this agreement within the 60 day notice
period: (g) by mutual consent of the parties
11/ Force Majeure. In the event that either party is prevented from
-------------
performing, or is unable to perform, any of its obligations under this Agreement
due to any cause beyond the reasonable control of the party invoking this
provision, the affected party's performance shall be excused and the time for
performance shall be extended for the period of delay or inability to perform
due to such occurrence.
12/ Relationship of Parties. Cyberian Outpost and Lycos-Bertelsmann are
-----------------------
independent contractors under this Agreement, and nothing herein shall be
construed to create a partnership, joint venture or agency relationship between
Cyberian Outpost and Lycos-Bertelsmann. Neither party has authority to enter
into agreements of any kind on behalf of the other.
13/ Assignment Binding Effect. Neither Lycos-Bertelsmann and Cyberian
-------------------------
Outpost may assign this Agreement or any other rights or delegate of its duties
under this Agreement without the prior written consent of the other.
5
<PAGE>
14/ Choice of Law and Forum. This Agreement, its interpretation,
-----------------------
performance or any breach thereof, shall be construed in accordance with, and
all questions with respect thereto shall be determined by, the laws of the
Commonwealth of Massachusetts applicable to contracts entered into and wholly to
be performed within said state. Cyberian Outpost hereby consents to the personal
jurisdiction of the Commonwealth of Massachusetts, acknowledges that venue is
proper in any state or Federal court in the Commonwealth of Massachusetts,
agrees that any action related to this Agreement must be brought in a state or
Federal court in the Commonwealth of Massachusetts, and waives any objection
Cyberian Outpost has or may have in the future with respect to any of the
foregoing.
15/ Good Faith. The parties agree to act in good faith with respect to
----------
each of this Agreement and any dispute that may arise related hereto.
16/ Additional Documents/Information. The parties agree to sign and/or
--------------------------------
provide such additional documents and/or information as may reasonably be
required to carry out the intent of this Agreement and to effectuate its
purposes.
17/ Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which shall be deemed top be an original, but all of which
together shall constitute one and the same instrument.
18/ No Waiver. The waiver by either party of a breach or a default of
---------
any provision of this Agreement by the other party shall not be construed as a
waiver of any succeeding breach of the same or any other provision, nor shall
any delay or omission on the part of either party to exercise or avail itself
of any right, power, or privilege that it has, or may have hereunder, operate as
a waiver of any right, power or privilege by such party.
19/ Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties hereto and their respective heirs,
successors and assigns.
20/ Severability. Each provision of this Agreement shall be severable
------------
from every other provision of this Agreement for the purpose of determining the
legal enforceability of any specific provision.
21/ Notices. All notice required to be given under this Agreement must
-------
be given in writing and delivered either in hand, by certified mail, return
receipt requested, postage pre-paid, or by Federal Express or other recognized
overnight delivery service, all delivery charges pre-paid, and addressed:
If to Lycos-Bertelsmann: Lycos-Bertelsmann-Bertelsmann
GmbH & Co KG
Carl-Bertelsmann-Strasse. 161L
Postfach 315. D-33311 Gutersloh.
Germany
Fax No.: (449) 5241 8061655
Attention: Controller
With a copy to : Managing Director
Lycos-Bertelsmann-Bertelsmann
GmbH & Co KG
18-21 Cavaye Place
London SW10 PG
Fax No: 0171 594 4444
6
<PAGE>
If to Cyberian Outpost:
With a copy to:
22/ Entire Agreement. This Agreement contains the entire understanding
----------------
of the parties hereto with respect to the transactions and matters contemplated
hereby, supersede all previous agreements between Lycos-Bertelsmann and Cyberian
Outpost concerning the subject matter, and cannot be amended except by writing
signed by both parties. No party hereto has relied on any statement,
representation or promise of any other party or with any other officer, agent,
employee or attorney for the other party in executing this Agreement except as
expressly stated herein.
23/ Limitations of Liability. UNDER NO CIRCUMSTANCES SHALL EITHER PARTY
------------------------
BE LIABLE TO THE OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR
EXEMPLARY DAMAGES (EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES), ARISING FROM ANY PROVISION OF THIS AGREEMENT (INCLUDING SUCH
DAMAGES INCURRED BY THIRD PARTIES), SUCH AS, BUT NOT LIMITED TO, LOSS OF REVENUE
OR ANTICIPATED PROFITS OR LOST BUSINESS. IN NO EVENT SHALL EITHER PARTY BE
LIABLE FOR DAMAGES IN EXCESS OF THE AMOUNT RECEIVED BY THE OTHER PARTY UNDER
THIS AGREEMENT, PROVIDED THAT THIS SECTION DOES NOT LIMIT EITHER PARTY'S
LIABILITY TO THE OTHER FOR (A) WILLFUL AND MALICIOUS MISCONDUCT; (B) DIRECT
DAMAGES TO REAL OR TANGIBLE PERSONAL PROPERTY; (C) BODILY INJURY OR DEATH CAUSED
BY NEGLIGENCE; OR (D) INDEMNIFICATION OBLIGATIONS HEREUNDER.
IN WITNESS WHEREOF, the parties have duly executed and delivered this Agreement
as of the ate set forth above.
Cyberian Outpost. Inc. Lycos-Bertelsmann-Bertelsmann
By: /s/ Darryl Peck By: /s/ Richard G. Spinks
----------------------------- -------------------------------
Name: Darryl Peck Name: Richard G. Spinks
Title: President & CEO Title: Business Development Director
Date: Date: 25/3/98
<PAGE>
ANNEX A
[xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx
xxxxxx]
<PAGE>
Exhibit 11.1
Cyberian Outpost, Inc. and Subsidary
Computation of Loss Per Share
For the period March 6, 1995 (date of inception) through February 29, 1996
and for the years ended February 28, 1997 and 1998
<TABLE>
<CAPTION>
Years ended
March 6,1995 (date February 28,
of inception) through -----------
February 29, 1996 1997 1998
--------------------- ---- ----
<S> <C> <C> <C>
(In thousands, except per share data)
Basic:
Net loss $ (372) $(1,338) $(7,092)
------- ------- -------
Basic weighted average shares outstanding 1,748 2,048 2,211
------- ------- -------
Basic loss per share $ (0.21) $ (0.65) $ (3.21)
------- ------- -------
Diluted:
Net loss $ (372) $(1,338) $(7,092)
------- ------- -------
Basic weighted average shares outstanding 1,748 2,048 2,211
Net effect of dilutive stock options and warrants
based on the treasury stock method - - -
------- ------- -------
Diluted weighted average shares outstanding 1,748 2,048 2,211
------- ------- -------
Diluted loss per share $ (0.21) $ (0.65) $ (3.21)
------- ------- -------
</TABLE>
<PAGE>
EXHIBIT 21.1
The subsidiaries of the Registrant are as follows:
1. Cyberian Merchant Solutions, Inc., a Connecticut corporation.
<PAGE>
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Boards of Directors
Cyberian Outpost, Inc. and Subsidiary:
We consent to the inclusion of our report dated April 24, 1998, with respect
to the consolidated balance sheets of Cyberian Outpost, Inc. and Subsidiary as
of February 28, 1997 and 1998, and the related consolidated statements of
operations, redeemable preferred stock and stockholders' deficit, and cash
flows for the period from March 6, 1995 (date of inception) through February
29, 1996, and for the years ended February 28, 1997 and 1998, which report
appears in this Registration Statement.
We consent to the reference to our firm under the heading "Experts" in this
Registration Statement.
KPMG Peat Mawrick LLP
Providence, Rhode Island
June 2, 1998
