<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1998
REGISTRATION NO. 333-55819
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CYBERIAN OUTPOST, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 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. [_]
---------------
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 JULY 30, 1998
4,000,000 SHARES
LOGO
COMMON STOCK
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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
$13.00 and $15.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The Common
Stock has been 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 $1,050,000, payable by the Company.
(3) The Company and the Company's principal stockholder (the "Principal
Stockholder") have granted to the Underwriters a 30-day option to purchase
up to 564,286 and 35,714 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 the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively, and the Principal Stockholder will
receive aggregate net proceeds of $ . The Company will not receive any of
the proceeds from the sale of shares by the Principal Stockholder. 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 effected on July 8, 1998 (the
"Reincorporation"), (ii) reflects the adoption of a new Certificate of
Incorporation of the Company in connection with the Reincorporation that, among
other things, increased the number of authorized shares of Common Stock and
Preferred Stock to 50,000,000 and 10,000,000 shares, respectively, (iii)
reflects a 3-for-1 stock split effected in the form of a dividend of two shares
for each share of the Company's Common Stock on July 8, 1998, (iv) reflects the
amendment of the Company's Bylaws upon the consummation of this Offering, (v)
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 11,336,847 shares of Common Stock
upon the consummation of this Offering (the "Preferred Stock Conversion"), (vi)
reflects the termination of certain contingent warrants to purchase 1,246,556
shares of Common Stock upon consummation of this Offering and (vii) 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-only retailer of computer
hardware, software and peripheral products to the consumer and small
office/home office marketplace. With more than 130,000 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 alliances with Internet content providers and portal
sites such as 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
increased from $1.9 million for the year ended February 29, 1996 to $22.7
million for the year ended February 28, 1998 ("fiscal 1998"). In the quarter
ending May 31, 1998, net sales totaled $11.6 million, which represented a $7.7
million increase over the quarter ending May 31, 1997. During the last four
consecutive fiscal quarters, the Company's quarterly net sales have increased
from $4.6 million to $6.1 million, $8.1 million and $11.6 million,
respectively. Of the more than 124,000 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 an average order size of approximately $250 and 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 domestic 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
3
<PAGE>
online consumer market for computer products is estimated to reach
approximately $10.5 billion in the United States alone, compared to estimated
domestic online markets for travel, books and music of $8.6 billion, $2.2
billion and $1.2 billion, respectively.
The Company believes that, as an Internet-only 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 of products
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 130,000 hardware, software and peripheral
SKUs. The Company purchases all of these products from distributors or
directly from vendors.
Global customer base. Through the global reach of the Internet, 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 Web 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 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.
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-only 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. The Company's
4
<PAGE>
strategic alliances generally provide for the Company to be the most
prominent computer retailer on certain of the sites of these providers
with the exclusive right to place computer banner advertisements and
integrated links to the Cyberian Outpost Web site on certain computer-
related pages.
Exploit international market opportunities. Cyberian Outpost believes
that the Web offers a unique opportunity for online retailers, who are
not encumbered by historically inefficient international 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.
Promote repeat purchases. The Company's strategy is to build customer
loyalty and thereby 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 seeks to leverage 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 on March 6, 1995
and was reincorporated in Delaware on July 8, 1998. The Company's principal
offices are located at 27 North Main Street, Kent, Connecticut 06757, and its
telephone number is 860-927-2050. Information contained on the Company's Web
site will not be deemed to be a part of this Prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company...... 4,000,000 shares
Common Stock to be outstanding after this 22,017,133 shares (1)
Offering................................
Use of proceeds.......................... The Company intends to use
approximately $5.0 million of the
net proceeds for capital
expenditures associated with
technology and systems upgrades and
expansion of the Company's
headquarters location. The balance
of the net proceeds will be used for
working capital and general
corporate purposes, including the
payment of sales and marketing
expenses, including payments
associated with strategic alliances.
Nasdaq National Market Symbol............ COOL
</TABLE>
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(1) Excludes 1,824,000 and 2,359,794 shares of Common Stock reserved for
issuance upon the exercise of stock options and warrants, respectively,
outstanding on May 31, 1998, at weighted average exercise prices of $1.95
and $2.29 per share, respectively. Also excludes an aggregate of 2,485,200
shares of Common Stock issuable upon the exercise of stock options granted
to employees after May 31, 1998, at the initial public offering price.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
PERIOD FROM MARCH THREE MONTHS
6, 1995 (DATE OF YEARS ENDED FEBRUARY 28, ENDED MAY 31,
INCEPTION) THROUGH -------------------------- ---------------
FEBRUARY 29, 1996 1997 1998 1997 1998
------------------ ------------ ------------ ------ -------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $1,852 $ 10,790 $ 22,681 $3,889 $11,562
Cost of sales........... 1,689 9,535 20,525 3,541 10,520
------ ------------ ------------ ------ -------
Gross profit.......... 163 1,255 2,156 348 1,042
Operating expenses:
Sales and marketing
(1).................. 218 1,407 5,943 468 4,009
General and
administrative....... 259 805 1,623 302 722
Technology and
development.......... 54 382 1,058 294 596
------ ------------ ------------ ------ -------
Total operating
expenses........... 531 2,594 8,624 1,064 5,327
------ ------------ ------------ ------ -------
Operating loss........ (368) (1,339) (6,468) (716) (4,285)
Other income (expense),
net (2)................ (4) 1 (624) (6) 129
------ ------------ ------------ ------ -------
Net loss.............. $ (372) $ (1,338) $ (7,092) $ (722) $(4,156)
====== ============ ============ ====== =======
Net loss applicable to
common
stockholders(3)...... $ (372) $ (1,338) $ (7,092) $ (722) $(4,632)
====== ============ ============ ====== =======
Basic and diluted net
loss per common share
(3).................... $(0.07) $ (0.22) $ (1.07) $(0.11) $ (0.69)
====== ============ ============ ====== =======
Weighted average basic
and diluted common
shares outstanding
(3).................... 5,244 6,145 6,633 6,494 6,680
====== ============ ============ ====== =======
OPERATING DATA:
Customers (4)........... 5,500 32,500 81,000 39,000 124,000
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1998
-----------------------------------
PRO FORMA AS
ACTUAL PRO FORMA (5) ADJUSTED (6)
------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 8,510 $ 8,510 $ 59,540
Working capital............................ 11,400 11,400 62,430
Total assets............................... 17,371 17,371 68,401
Redeemable convertible preferred stock..... 20,125 -- --
Total stockholders' (deficit) equity....... (6,908) 13,217 64,247
</TABLE>
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(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 and net loss applicable to
common stockholders.
(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) Adjusted to reflect the Preferred Stock Conversion.
(6) Adjusted to give effect to the sale of the Common Stock in this Offering at
an assumed initial public offering price of $14.00 per share and the
application of the estimated net proceeds therefrom.
6
<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.
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 continue to increase its customer base
at its current growth rate or be able to maintain its existing customer base,
or that the Company will otherwise 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 May
31, 1998 had an accumulated deficit of approximately $13.0 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
continue 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. Further, sales within the
computer industry are substantially affected by new product releases from
manufacturers. Historically, such releases tend to maintain or increase
overall sales revenues. Therefore, a lack of or delay in new product releases
by manufacturers can negatively impact the Company's 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 consequence of which could have a material adverse effect on
the Company's business, prospects, financial condition and results of
operations. See "Business--Competition."
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
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<PAGE>
operating results include, among others, (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 vendors, strategic
partners and 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 to 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. The Company expects capital and operating
expenditures to increase over the next several years as the Company seeks to
expand its business through investments in marketing and promotion, Web site
development and technology and operating infrastructure development. 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
acceptable to the Company. To the extent that the Company raises additional
capital by issuing equity securities, ownership dilution to existing
shareholders will result. In the event that adequate funds are not available,
the Company's business, prospects, 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
quickly and inexpensively. In addition, the computer products retail industry
as a whole is intensely competitive. The Company currently or potentially
competes with a variety of companies such as (i) traditional computer
retailers including CompUSA and MicroCenter, (ii) mail-order retailers
including CDW, MicroWarehouse, Insight, PC Connection and Creative Computers,
(iii) Internet-only computer retailers including Egghead.com, software.net and
BuyComp.com, (iv) 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
that 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 that 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.
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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's business, prospects, financial condition and results
of operations. 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."
Risks Associated with International Sales. A key component of the Company's
strategy is to expand its sales in foreign markets. International sales, which
are denominated in U.S. dollars, accounted for approximately 36% of the
Company's revenues in fiscal 1998. The Company anticipates that it will expend
significant financial and management resources to expand its international
marketing program through (i) strategic alliances with major Internet content
and portal sites, (ii) Web-based marketing and promotional campaigns, (iii)
linking and affiliate programs with targeted Web sites and (iv) personalized
direct marketing programs designed to generate repeat sales from existing
customers. If the revenues generated by these marketing programs are
insufficient to offset the expense of establishing and maintaining such
programs, the Company's business, prospects, financial condition and results
of operations could be materially adversely affected. There can be no
assurance that the Company will be able to maintain or expand its sales in
foreign markets.
The Company's international sales are subject to certain risks not inherent
in its domestic sales, including political and economic instability in foreign
markets, restrictive trade policies of foreign governments, local economic
conditions in foreign markets, potentially adverse tax consequences and the
burdens on customers of complying with a variety of applicable laws. All of
such factors may suppress demand for the Company's services and the products.
The impact of such factors on the Company's business is inherently
unpredictable. There can be no assurance that such factors, particularly if
they occur in Japan, which accounted for approximately 10% of the Company's
revenues in fiscal 1998, or in any other country in which the Company has a
material amount of sales in the future, will not have a material adverse
effect upon the Company's revenues from international sales and, consequently,
the Company's business, prospects, 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; Dependence on Third-Party Provider. 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 Exodus Communications, Inc., 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 events could have a material adverse effect on the
Company's business, prospects, financial condition and results of operation.
See "Business--Technology and Systems."
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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 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. During a 22 day
period from January 26, 1998 until February 16, 1998, the Company's Web site
operated at a decreased performance level; some customers did not receive a
timely response from the system, and product searching was extremely slow.
This slowdown in service was due to a sudden increase in the level of traffic
to the site as a result of strategic alliances that had recently been put in
place. While the Company continually reviews and seeks to upgrade and expand
its transaction processing and order management systems in a timely and
effective manner, the Company could experience future systems overloads or
failures. In addition, there can be no assurance that the Company will be able
to integrate smoothly any newly developed or purchased modules with its
existing systems or prevent unauthorized access to Company data. Any inability
to do so could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. See "Business--
Technology and Systems."
Dependence on Outside Fulfillment House; Risk of Failure of Fulfillment
System. 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 events could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations. See "Business--Warehousing and Fulfillment."
Risk of Inadequate Insurance Coverage and Disaster Recovery Plans. The
Company's fulfillment systems and operations, as well as its computer and
communications hardware system, are vulnerable to damage or interruption from
fire, flood, power loss, telecommunications failure, break-ins, earthquake and
similar events. The Company does not carry sufficient business interruption
insurance to compensate it for losses that may occur, nor does it have formal
disaster recovery plans. Losses and liabilities arising from uninsured or
underinsured events could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations. See
"Business--Technology and Systems" and "--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
continued growth in the Company's customer base or 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 June 30, 1998, the
Company expanded from two full-time employees to 87 full-time and 11 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, Vice
President of Worldwide Marketing and Vice President and General
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Merchandise Manager, and the Company's executive management has no prior
experience managing public companies. 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 site operators 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 maintains key
person life insurance on the life of Mr. Peck in the amount of $2.0 million.
The Company has also entered into employment agreements with Mr. Peck, as well
as the Company's Executive Vice President and Chief Financial Officer, Chief
Technology Officer and Vice President and General Merchandise Manager. 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, prospects, financial condition and results
of operations. The Company's future success also depends 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, integrate
or retain sufficiently qualified personnel. The failure to attract and retain
the necessary technical, managerial, editorial, merchandising, marketing and
customer service personnel could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
See "Business--Employees" and "Management."
Dependence on Continued Growth of Online Commerce. Since all of the
Company's business is generated from its Web site, the Company's future
revenues and any future profits are dependent upon the willingness of
consumers to accept the Internet as an effective medium of commerce. The
Company is especially dependent upon the long-term acceptance of online
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
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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, prospects, financial
condition and results of operations would be materially adversely affected.
Rapid Technological Change. To remain competitive, the Company must continue
to enhance and improve the responsiveness, functionality and features of its
Web site. The online commerce industry in which the Company operates, 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, the Company's business, prospects, 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 approximately 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 the Company to source sufficient
quantities of merchandise on acceptable commercial terms could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations. See "Business--Warehousing and Fulfillment."
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 the 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 business,
prospects, 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. Further, even if the Company is able to continue to prevent the
compromise of its security systems, if the security systems of other retailers
in the online commerce industry were compromised or perceived to be
ineffective, the Company's business, prospects, financial condition and
results of operations could be materially adversely affected.
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
12
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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 commercial banking and
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. To date, losses due to credit card fraud incurred by the Company
have not been material. 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's business, prospects, financial condition and results of operations.
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.
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 or omit to 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. The
Company is not aware of any material infringements of its trademarks and
proprietary rights. However, 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.
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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 domestic and foreign laws and regulations covering
issues such as user privacy, pricing, content, copyrights, distribution and
characteristics and quality of products and services may be enacted. For
instance, although current U.S. laws limiting the export of encryption
software do not materially affect the Company since the Company only sells 15
SKUs affected by these laws, the enactment of laws in the future that limit or
prohibit the export of products sold by the Company could have a material
adverse effect on the Company's business, financial condition and results of
operations. 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 domestic and foreign laws or regulations may
decrease the growth in use 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 domestic and foreign 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, prospects, 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 within such states. 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, prospects, 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 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, prospects, 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
Operations--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
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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, voting
together as a single class, shall be required for the stockholders to adopt,
amend or repeal any provision of the Bylaws of the Company; (ii) following the
closing of this Offering, stockholders of the Company may not take any action
by written consent without a meeting; (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 Bylaw 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 22,017,133 shares of Common Stock
outstanding, assuming no exercise of options or warrants and assuming no
exercise of the Underwriters' over-allotment option. Of these outstanding
shares of Common Stock, the 4,000,000 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 18,017,133 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, 17,282,650 shares of Common Stock and holders of options and
warrants to purchase 4,110,774 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
15
<PAGE>
be immediately eligible for resale, subject to the requirements of Rule 144.
Immediately following the completion of this Offering, holders of 11,336,847
shares of Common Stock and warrants to purchase 2,359,794 shares of Common
Stock will be entitled to certain registration rights. However, pursuant to
the lockup agreements, 10,940,634 of these shares of Common Stock and warrants
to purchase 1,074,774 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 4,965,000 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 such 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.
The trading price of the Common Stock is likely to be highly volatile and
could be subject to wide fluctuations in response to factors such as actual or
anticipated variations in quarterly operating results, announcements of
technological innovations, new sales formats or new products or services by
the Company or its competitors, changes in financial estimates by securities
analysts, conditions or trends in the Internet and online commerce industries,
changes in the market valuations of other Internet, online service or retail
companies, announcements by the Company of significant acquisitions, strategic
partnerships, joint ventures or capital commitments, additions or departures
of key personnel, sales of Common Stock and other events or factors, many of
which are beyond the Company's control. In addition, the stock market in
general, and the Nasdaq National Market and the market for Internet-related
and technology companies in particular, has experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of such companies. The trading prices of many technology
companies' stocks are at or near historical highs and reflect price earnings
ratios substantially above historical levels. There can be no assurance that
these trading prices and price earnings ratios will be sustained. These broad
market and industry factors may materially and adversely affect the market
price of the Common Stock, regardless of the Company's operating performance.
In the past, following periods of volatility in the market price of a
company's securities, securities class-action litigation has often been
instituted against such company. Such litigation, if instituted, could result
in substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
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."
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 4,000,000 shares of Common
Stock offered hereby, assuming an initial public offering price of $14.00 per
share, are estimated to be $51,030,000 ($58,377,004 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 option is exercised in full, the
Company will not receive any proceeds from the sale of the Principal
Stockholder's portion of the 600,000 shares of Common Stock subject to the
over-allotment option that will be sold by the 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 marketplace. The Company intends to use approximately $5.0
million of the net proceeds of this Offering for capital expenditures
associated with technology and systems upgrades and expansion of the Company's
headquarters location. The Company has no specific plan for use of the
remaining proceeds and expects to use such proceeds for working capital and
general corporate purposes including the payment of sales and marketing
expenses, such as payments associated with strategic alliances. 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
"Risk Factors--Broad Discretion of Management as to Use of Proceeds" and
"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 May
31, 1998 (i) on an actual basis, (ii) on a pro forma basis to give effect to
the Preferred Stock Conversion and the Reincorporation and (iii) on a pro
forma basis as adjusted to reflect the sale by the Company of 4,000,000 shares
of Common Stock offered hereby, at an assumed initial public offering price of
$14.00 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>
MAY 31, 1998
------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- ------- -----------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C> <C>
Current portion of capital lease obligations.... $ 144 $ 144 $ 144
======== ======= =======
Capital lease obligations, excluding current
portion........................................ $ 175 $ 175 $ 175
-------- ------- -------
Redeemable Series C Convertible Preferred Stock,
$.01 par value, 3,000,000 shares authorized,
2,770,125 shares issued and outstanding actual;
no shares issued and outstanding pro forma and
pro forma as adjusted.......................... 20,125 -- --
-------- ------- -------
Stockholders' equity (deficit)(1):
Preferred Stock, $.01 par value, 10,000,000
shares authorized, 682,738 Series A
Convertible shares and 326,086 Series B
Convertible shares issued and outstanding
actual; 10,000,000 shares authorized, no
shares issued and outstanding pro forma and
pro forma as adjusted........................ 3,364 -- --
Common Stock, $.01 par value, 50,000,000
shares authorized, 6,680,286 shares issued
and outstanding actual; 50,000,000 shares
authorized, 18,017,133 shares issued and
outstanding pro forma, 22,017,133 shares
issued and outstanding pro forma as
adjusted..................................... 67 180 220
Additional paid-in capital...................... 2,619 25,995 76,985
Accumulated deficit............................. (12,958) (12,958) (12,958)
-------- ------- -------
Total stockholders' equity (deficit)........ (6,908) 13,217 64,247
-------- ------- -------
Total capitalization...................... $ 13,392 $13,392 $64,422
======== ======= =======
</TABLE>
- --------
(1) Excludes 1,824,000 and 2,359,794 shares of Common Stock reserved for
issuance upon the exercise of stock options and warrants, respectively,
outstanding on May 31, 1998, at weighted average exercise prices of $1.95
and $2.29 per share, respectively. Also excludes an aggregate of 2,485,200
shares of Common Stock issuable upon the exercise of stock options granted
to employees after May 31, 1998, at the initial public offering price.
18
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of May 31, 1998,
assuming the Preferred Stock Conversion had been completed as of such date,
was approximately $13.2 million or $0.73 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 4,000,000 shares of Common Stock by the Company in this
Offering at an assumed initial public offering price of $14.00 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 May 31,
1998 would have been approximately $64.2 million, or $2.92 per share. This
represents an immediate increase in pro forma net tangible book value of $2.19
per share to existing stockholders and an immediate dilution in pro forma net
tangible book value of $11.08 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................ $14.00
------
Pro forma net tangible book value per share before this
Offering.................................................... $0.73
Increase per share attributable to new investors............. 2.19
-----
Pro forma net tangible book value per share after this
Offering...................................................... 2.92
------
Dilution per share to new investors (1)........................ $11.08
======
</TABLE>
- --------
(1) If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value after this Offering would be approximately
$3.17 per share, resulting in dilution to new investors in this Offering
of $10.83 per share. See "Underwriting."
The following table sets forth on a pro forma basis as of May 31, 1998,
assuming the Preferred Stock Conversion 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 $14.00 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.......... 18,017,133 81.8% $26,619,904 32.2% $ 1.48
New investors.................. 4,000,000 18.2 56,000,000 67.8 14.00
---------- ----- ----------- -----
Total........................ 22,017,133 100.0% $82,619,904 100.0%
========== ===== =========== =====
</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 for the three months ended May 31, 1997 and 1998 were derived
from unaudited financial statements of the Company. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position and results of
operations have been included in such unaudited financial statements. Such
results may not be indicative of the results expected for a full year.
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 YEARS ENDED THREE MONTHS ENDED
6, 1995 (DATE OF FEBRUARY 28, MAY 31,
INCEPTION) THROUGH ---------------- -------------------
FEBRUARY 29, 1996 1997 1998 1997 1998
------------------ ------- ------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net sales............... $1,852 $10,790 $22,681 $ 3,889 $ 11,562
Cost of sales........... 1,689 9,535 20,525 3,541 10,520
------ ------- ------- -------- ---------
Gross profit........... 163 1,255 2,156 348 1,042
Operating expenses:
Sales and marketing
(1)................... 218 1,407 5,943 468 4,009
General and
administrative........ 259 805 1,623 302 722
Technology and
development........... 54 382 1,058 294 596
------ ------- ------- -------- ---------
Total operating
expenses.............. 531 2,594 8,624 1,064 5,327
------ ------- ------- -------- ---------
Operating loss......... (368) (1,339) (6,468) (716) (4,285)
Other income (expense),
net (2)................ (4) 1 (624) (6) 129
------ ------- ------- -------- ---------
Net loss............... $ (372) $(1,338) $(7,092) $ (722) $ (4,156)
====== ======= ======= ======== =========
Net loss applicable to
common
stockholders(3)....... $ (372) $(1,338) $(7,092) $ (722) $ (4,632)
====== ======= ======= ======== =========
Basic and diluted net
loss per common share
(3).................... $(0.07) $ (0.22) $ (1.07) $ (0.11) $ (0.69)
====== ======= ======= ======== =========
Weighted average basic
and diluted common
shares
outstanding (3)........ 5,244 6,145 6,633 6,494 6,680
====== ======= ======= ======== =========
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31, 1998
FEBRUARY 29, ---------------- ---------------------
1996 1997 1998 ACTUAL PRO FORMA(4)
---- ---- ---- ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............. $ 119 $ 41 $ 7,325 $ 8,510 $ 8,510
Working capital
(deficit)............... (182) (1,336) 824 11,400 11,400
Total assets............. 525 755 10,940 17,371 17,371
Capital lease
obligations, excluding
current portion......... -- 23 136 175 175
Redeemable convertible
preferred stock......... -- -- 5,991 20,125 --
Total stockholders'
(deficit) equity........ (33) (1,161) (3,671) (6,908) 13,217
</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 and net loss applicable to
common stockholders.
(4) Adjusted to reflect the Preferred Stock Conversion.
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-only retailer of computer
hardware, software and peripheral products to the consumer and small
office/home office marketplace. With more than 130,000 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").
In the quarter ending May 31, 1998, net sales totaled $11.6 million, which
represented a $7.7 million increase over the quarter ending May 31, 1997.
During the last four consecutive fiscal quarters, the Company's quarterly net
sales have increased from $4.6 million to $6.1 million, $8.1 million and $11.6
million, respectively. Of the more than 124,000 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 an average order size of approximately $250
and 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 sales and
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 Internet content providers
and portal sites such as America Online, Lycos-Bertelsmann, StarMedia, c|net,
InfoSpace, Excite, WebCrawler, theglobe.com and MetaCrawler.
In fiscal 1998 and the quarter ended May 31, 1998, revenues from
international sources represented approximately 36% and 20% of net sales,
respectively. 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 the first quarter of fiscal 1999, the Company had an
accumulated deficit of $13.0 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
21
<PAGE>
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 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 6, 1995 YEARS ENDED THREE MONTHS ENDED
(DATE OF INCEPTION) FEBRUARY 28, MAY 31,
THROUGH --------------- ---------------------
FEBRUARY 29, 1996 1997 1998 1997 1998
------------------- ------ ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........... 91.2 88.4 90.5 91.1 91.0
----- ------ ------ --------- ---------
Gross profit.......... 8.8 11.6 9.5 8.9 9.0
Operating expenses:
Sales and marketing... 11.8 13.0 26.2 12.0 34.7
General and
administrative....... 14.0 7.5 7.1 7.8 6.2
Technology and
development.......... 2.9 3.5 4.7 7.5 5.2
----- ------ ------ --------- ---------
Total operating
expenses........... 28.7 24.0 38.0 27.3 46.1
----- ------ ------ --------- ---------
Operating loss........ (19.9) (12.4) (28.5) (18.4) (37.1)
Other income (expense),
net.................... (0.2) -- (2.8) (0.2) 1.2
----- ------ ------ --------- ---------
Net loss.............. (20.1)% (12.4)% (31.3)% (18.6)% (35.9)%
===== ====== ====== ========= =========
</TABLE>
QUARTER ENDED MAY 31, 1998 COMPARED TO THE QUARTER ENDED MAY 31, 1997
Net Sales: Net sales are comprised of product sales, net of returns and
allowances, and advertising revenue derived from hardware manufacturers and
software publishers that pay for promotional placements on the Company's Web
site. Product sales are comprised of computer hardware, software and
peripherals. Net sales increased by $7.7 million from $3.9 million in the
quarter ending May 31, 1997 to $11.6 million in the quarter ending May 31,
1998. This increase in net sales was primarily a result of increases in the
Company's customer base and repeat purchases from existing customers. Although
international sales increased by 28% in absolute dollars to $2.3 million in
the quarter ended May 31, 1998 from $1.8 million in the quarter ended May 31,
1997, international sales decreased as a percentage of net sales from
approximately 46% of sales in the first quarter of fiscal 1998 to
approximately 20% in the first quarter of fiscal 1999. The Company believes
that this percentage
22
<PAGE>
decrease was primarily a result of the growth of its domestic customer base
due to the Company's focus on the development and implementation of certain
domestic marketing programs during fiscal 1998. The Company intends to use a
portion of the proceeds of this Offering during fiscal 1999, to expand its
international marketing program and its international customer base. There can
be no assurance that the Company's proposed investment in its international
marketing program will result in increased international sales. Advertising
revenues were not material in the quarters ended May 31, 1997 and 1998.
Cost of Sales: Cost of sales consists of the cost of the merchandise sold by
the Company. Cost of sales increased $7.0 million from $3.5 million during the
quarter ended May 31, 1997 to $10.5 million in the quarter ended May 31, 1998.
This increase was primarily the result of an increase in product sales volume.
The Company's gross profit increased by $694,000 from $348,000 for the quarter
ended May 31, 1997 to $1.0 million for the quarter ended May 31, 1998 as a
result of the Company's growth in revenues. As a percentage of net sales, the
Company's gross margin was 8.9% and 9.0% for the quarters ended May 31, 1997
and May 31, 1998, respectively.
Sales and Marketing: Sales and marketing expense consists primarily of fees
paid to strategic partners, advertising and promotion costs, sales, marketing
and customer service personnel and related expenditures, as well as direct
selling expenses. Sales and marketing expenses increased by $3.5 million from
$468,000 for the quarter ended May 31, 1997 to $4.0 million for the quarter
ended May 31, 1998. As a percentage of net sales, sales and marketing expense
increased from 12.0% in the first quarter of fiscal 1998 to 34.7% in the first
quarter of fiscal 1999. The increase was primarily a result of increased costs
of approximately $1.5 million associated with fixed monthly advertising and
placement fees paid to strategic partners, $407,000 in increased warehouse,
shipping and related costs, $670,000 of increased advertising and promotion
costs related to building brand recognition and increasing sales, and $507,000
of additional customer service and general merchandising staffing to support
and enhance the growth in sales. The Company intends to continue 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, marketing and merchandising
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 $420,000 from $302,000 in the quarter
ended May 31, 1997 to $722,000 in the quarter ended May 31, 1998. The dollar
increase in general and administrative expense was due to increases in both
executive and administrative personnel, office expenses associated with such
personnel, depreciation and professional fees. As a percentage of net sales,
general and administrative expense decreased from 7.8% in the quarter ended
May 31, 1997 to 6.2% in the quarter ended May 31, 1998. This percentage
decrease was due to the Company's ability to increase revenue without a
commensurate increase in corporate expenses. The Company anticipates that
general and administrative expense will continue to 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 $302,000 from $294,000 in the quarter ended
May 31, 1997 to $596,000 in the quarter ended May 31, 1998. The dollar
increase in technology and development expense 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 and
enhancements required to support the growth in visitors to the Company's Web
site. As a percentage of net sales, technology and development expense
decreased from 7.5% for the quarter ended May 31, 1997 to 5.2% in the quarter
ended May 31, 1998. The Company anticipates that technology and development
expense will increase in fiscal 1999 in absolute dollars due to growth in
staffing and systems support.
23
<PAGE>
Other Income (Expense), Net: Other income (expense), net consists of
interest expense attributable to short-term loans and leases offset by
interest income earned by the Company on short-term investments and overnight
investments of its cash balances in money market accounts. Other income
(expense), net increased from an expense of $6,000 in the quarter ended May
31, 1997 to an income of $129,000 in the quarter ended May 31, 1998. This
change was primarily a result of interest income from short-term investment of
the Company's cash balances resulting from the Company's sale of shares of its
Redeemable Series C Convertible Preferred Stock.
Net Loss: As a result of the foregoing factors, the Company incurred a net
loss of $4.2 million in the quarter ended May 31, 1998 compared to a net loss
of $722,000 in the quarter ended May 31, 1997.
YEAR ENDED FEBRUARY 28, 1998 COMPARED TO THE YEAR ENDED FEBRUARY 28, 1997
Net Sales: 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 increases in the Company's customer base and repeat purchases from
existing customers. Although international sales increased in absolute dollars
to $8.2 million in fiscal 1998 from $5.1 million in 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. Advertising revenues were not material in fiscal
1997 or fiscal 1998.
Cost of Sales: 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 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 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 of approximately $2.0 million associated with fixed monthly
advertising and placement fees paid to strategic partners, $468,000 of
increased warehouse, shipping and related costs, $821,000 in increased
advertising and promotional costs incurred to build brand recognition and
$880,000 of increases in sales and customer service staffing to support the
growth in sales.
General and Administrative: General and administrative expense increased by
$818,000 from $805,000 in fiscal 1997 to $1.6 million in fiscal 1998. This
dollar increase 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.
Technology and Development: 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.
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
24
<PAGE>
primarily a result of an increase in interest expense related to the
amortization of the original issue discount in connection with the bridge
loan.
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
increases in the Company's customer base and repeat purchases from existing
customers. 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. Advertising revenues were not material in fiscal 1996 or 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 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 of $306,000 incurred to build
brand recognition, increases in sales and customer service staffing of
$458,000 to support the growth in sales and warehouse, shipping and related
costs of $160,000.
General and Administrative: General and administrative expense increased by
$546,000 from $259,000 in fiscal 1996 to $805,000 in fiscal 1997. This dollar
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.
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.
25
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statements of operations
data for the eight quarters ended May 31, 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 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)
AUG. 31, NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30, FEB. 28, MAY 31,
1996 1996 1997 1997 1997 1997 1998 1998
-------- -------- -------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $2,362 $2,784 $3,866 $3,889 $4,622 $ 6,093 $ 8,077 $11,562
Cost of sales........... 2,062 2,481 3,442 3,541 4,146 5,420 7,418 10,520
------ ------ ------ ------ ------ ------- ------- -------
Gross profit........... 300 303 424 348 476 673 659 1,042
Operating expenses:
Sales and marketing.... 340 392 394 468 760 1,145 3,570 4,009
General and
administrative........ 199 241 237 302 438 373 510 722
Technology and
development........... 48 177 125 294 122 226 416 596
------ ------ ------ ------ ------ ------- ------- -------
Total operating
expenses............ 587 810 756 1,064 1,320 1,744 4,496 5,327
------ ------ ------ ------ ------ ------- ------- -------
Operating loss......... (287) (507) (332) (716) (844) (1,071) (3,837) (4,285)
Other income (expense),
net.................... 5 -- (3) (6) 6 (3) (621) 129
------ ------ ------ ------ ------ ------- ------- -------
Net loss............... $ (282) $ (507) $ (335) $ (722) $ (838) $(1,074) $(4,458) $(4,156)
====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES FOR THREE MONTHS ENDED
----------------------------------------------------------------------------
AUG. 31, NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30, FEB. 28, MAY 31,
1996 1996 1997 1997 1997 1997 1998 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........... 87.3 89.1 89.0 91.1 89.7 89.0 91.8 91.0
----- ----- ----- ----- ----- ----- ----- -----
Gross profit........... 12.7 10.9 11.0 8.9 10.3 11.0 8.2 9.0
Operating expenses:
Sales and marketing.... 14.4 14.1 10.2 12.0 16.4 18.8 44.2 34.7
General and
administrative........ 8.4 8.7 6.1 7.8 9.5 6.1 6.3 6.2
Technology and
development........... 2.0 6.4 3.2 7.5 2.6 3.7 5.2 5.2
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............ 24.8 29.2 19.5 27.3 28.5 28.6 55.7 46.1
----- ----- ----- ----- ----- ----- ----- -----
Operating loss......... (12.1) (18.3) (8.5) (18.4) (18.2) (17.6) (47.5) (37.1)
Other income (expense),
net.................... 0.2 -- (0.1) (0.2) 0.2 (0.1) (7.7) 1.2
----- ----- ----- ----- ----- ----- ----- -----
Net loss............... (11.9)% (18.3)% (8.6)% (18.6)% (18.0)% (17.7)% (55.2)% (35.9)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Due to the Company's operating strategy, the Company has generally operated
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 inventory is sourced on a just-in-time basis from
the Company's suppliers for immediate delivery to the Company's warehouse. The
Company regularly "cross docks" (i.e., receives products from third party
vendors and distributors and ships those same products out to customers the
same day) and therefore is able to ship non-inventoried products to customers
typically within two to three days. The Company typically pays these vendors
15 to 30 days after it has sold the products. To date, the Company has not
experienced any delays in order fulfillment that have had a material impact on
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.
26
<PAGE>
Since inception, Cyberian Outpost has financed its operations primarily
through private sales of Common Stock and Preferred Stock. The Company relied
upon Section 4(2) of the Securities Act, or Regulation D promulgated
thereunder, for its exemption from registration for these sales. Through May
31, 1998, these private financings totaled $23.0 million and included $19.6
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.
The Company used $10.6 million in cash to fund operations during the quarter
ending May 31, 1998. 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 $360,000 in cash for investing activities in the quarter
ending May 31, 1998. 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 $12.2 million in cash from financing activities in the
quarter ending May 31, 1998 and $11.6 million, $146,000 and $264,000 in cash
from financing activities in fiscal 1998, 1997 and 1996, respectively. In the
quarter ending May 31, 1998, financing activities included $13.7 million from
the sale of shares of Redeemable Series C Convertible Preferred Stock. 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 shares of
Redeemable Series C Convertible Preferred Stock, net proceeds of $2.1 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 $4.4 million to date in fiscal 1999. The
remaining $200,000 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. Each impression, or page view, represents a person who views a
Cyberian Outpost branded link on another service or Web site. Much like
traditional advertising, which is designed to place a brand name in front of
as many potential customers as possible through television ads, billboards, or
print ads, the goal of Internet-based advertising is to create as many branded
impressions as possible. The Company believes that contracting for impressions
in large quantities allows the Company to maximize brand awareness.
As of May 31, 1998, the Company had $8.5 million in cash and cash
equivalents. As of that date, the Company's material capital commitments
consisted of $319,000 in obligations outstanding under capital leases. The
Company plans to expend approximately $1.0 million in fiscal 1999 in
conjunction with the expansion of the Company's headquarters.
On July 7, 1998, the Company entered into a $2.0 million "flooring" credit
agreement with Deutsche Financial Services Corporation ("DFS") pursuant to
which DFS may, at its option, extend credit to the Company from time to time
to purchase inventory from DFS approved vendors or for other purposes. Under
this agreement the Company can purchase inventory from certain vendors and
elect to have these vendors invoice DFS instead of the Company. DFS pays this
invoice and in turn bills the Company on a periodic basis throughout the
month.
27
<PAGE>
If the Company pays this note within 30 days, it pays no interest. If the note
remains outstanding after 30 days, the Company must pay a .25% fee and
interest accrues at a variable rate based on the prime rate plus 2.5%. If the
note remains outstanding after 181 days, interest begins to accrue at the
prime rate plus 6.5%. The Company currently has no outstanding balance under
this facility. The credit agreement is secured by all of the Company's assets
and the pledge of a $500,000 certificate of deposit.
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 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, prospects, 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.
28
<PAGE>
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 adoption of this SOP is not
expected to have a material impact on the Company's financial position or
results of operations.
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. The adoption of this SOP is expected to have no impact on the
Company's financial position or results of operations.
29
<PAGE>
BUSINESS
Cyberian Outpost is a leading global Internet-only retailer of computer
hardware, software and peripheral products to the consumer and small
office/home office marketplace, as principally measured by revenue and Web
site traffic. With more than 130,000 SKUs, including 115,000 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 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 alliances with Internet content providers and portal sites such as
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
increased from $1.9 million for the year ended February 29, 1996 to $22.7
million for the year ended February 28, 1998. In the quarter ending May 31,
1998, net sales totaled $11.6 million, which represented a $7.7 million
increase over the quarter ending May 31, 1997. During the last four
consecutive fiscal quarters, the Company's quarterly net sales have increased
from $4.6 million to $6.1 million, $8.1 million and $11.6 million,
respectively. Of the more than 124,000 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 an average order size of approximately $250 and 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 per year 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 domestic 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 consumer market for
computer products is estimated to reach approximately $10.5 billion in the
United States alone, compared to estimated domestic online markets 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 market for
computer hardware alone (excluding peripherals) will grow from approximately
$50 billion in 1997 to approximately $80 billion per year in 2001.
30
<PAGE>
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
retailing 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 able to
expand quickly 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 up to 50,000 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 Company believes that 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 intends to
leverage its Web site, content, marketing and technology over a growing global
customer 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 of products 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 130,000 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, packaged software for both home and office use, games
and utilities. These products are produced
31
<PAGE>
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. Through the global reach of the Internet, 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 Web 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-only 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's
online store features a wide variety of games and gaming accessories, a full
complement of
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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
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 retail 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 Internet portal sites build brand
recognition, increase market share and attract customers to the Company.
Accordingly, the Company recently has entered into strategic 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
(French, Spanish, German, Italian, Dutch, Portuguese, Japanese, Chinese and
Korean) 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 targeted 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 seeks to leverage the unique efficiencies of the Internet, such as the
ability to make changes in merchandising and content in real-time and at low
cost, 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
also intends to use such technology to lower transaction costs and improve the
customer's on-line shopping 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 permanently displayed.
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 buying." 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 Company's 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 to link the Company's Web site to reviews
of thousands of the Company's products in order to enable the Company's
customers to make more informed purchasing decisions. 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 Translations. 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 generated 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 seeks to utilize 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 strategic 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 site traffic and
customers. These strategic alliances generally provide for the Company to be
the most prominent computer retailer on certain of the Web sites of these
providers with the exclusive right to place computer banner advertisements and
integrated links to the Cyberian Outpost Web site on certain computer related
pages. The alliances generally require the Company to pay either up-front or
periodic fees and payments based upon a percentage of the net revenue
generated through the alliance. The agreements are typically entered into for
an initial term of one year with the Company having a 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 it several
key benefits, including (i) enhancing awareness of the Cyberian Outpost brand
and extending the Company's 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. On December 1, 1997, the Company entered into an
agreement with America Online establishing the Company as the exclusive
third-party computer hardware and peripherals retailer in
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America Online's Computer Superstore. AOL has also agreed to promote the
Company as a hardware, software and peripherals retailer in other key
areas of the America Online service, including the Buyer's Guide and
Shopping Channel, on a non-exclusive basis. The Company also has a
significant presence on www.aol.com, AOL's primary Web site. Further, AOL
is required to deliver a certain minimum number of impressions to
Cyberian Outpost during the term of the agreement. The Company is
obligated to pay $5.0 million to AOL during the 14-month term of this
agreement, $4.8 million of which has been paid to date. In addition, the
Company is required to share a small portion of its AOL-derived revenue
with AOL, and the Company also granted a warrant to AOL. The Company has
agreed to: provide a comprehensive offering of its products and content
through AOL; offer products that are competitive in price; and manage,
operate and support such products and content. The agreement is renewable
at the option of either the Company or AOL upon satisfaction of certain
conditions. Upon renewal, the Company is obligated to pay AOL additional
fees and an additional portion of the warrant granted to AOL becomes
exercisable. AOL may terminate the agreement in the event of a material
breach or the Company's failure to deliver satisfactory products or
content.
. LYCOS-BERTELSMANN. On March 25, 1998, the Company entered into an
agreement with Lycos-Bertelsmann, a leading European operator of Web
sites. Pursuant to the agreement, the Company is the premier computer
retailer in the "Shopping" area and the exclusive online computer
hardware and software retailer in all other areas of the Lycos-
Bertelsmann Web sites. Lycos-Bertelsmann is required to deliver a certain
minimum number of impressions over the one-year term of the agreement.
The Company is obligated to pay both an initial fee and monthly fees. In
addition, the Company is obligated to share a small portion of its Lycos-
Bertelsmann derived revenue with Lycos-Bertelsmann once such revenue
exceeds a specified amount.
. STARMEDIA. On July 16, 1998, the Company entered into an agreement with
StarMedia, a proprietary on-line service for Latin America. Pursuant to
the agreement the Company is the premier broad-based reseller of new PC
computer hardware, software and peripherals in the StarMedia Network.
StarMedia is required to deliver a certain minimum number of impressions
to Cyberian Outpost during the one-year term of the agreement. StarMedia
may terminate the agreement at any time if it receives a certain number
of customer complaints regarding the Company for two consecutive months.
In addition to paying both an initial fee and monthly fees, the Company
is required to share a small portion of its StarMedia-derived revenue
with StarMedia once such revenue exceeds a specified amount.
. C|NET. On January 26, 1998, the Company entered into an agreement with
c|net, an operator of Web sites that are estimated to have had over nine
million visitors in March 1998 alone. Pursuant to the agreement, c|net
will provide the Company with banner advertisements and links on certain
of c|net's Web sites. Pursuant to the agreement, the Company will be
prominently featured throughout the c|net Web sites and is one of only
three computer retailers featured on any c|net site. c|net is required to
deliver a certain minimum number of impressions to the Company during the
one-year term of the agreement. The Company is obligated to pay c|net
monthly fees and is required to share a small portion of its c|net-
derived revenue with c|net. Either party may terminate the agreement upon
30 days notice at any time after the first three months of the term.
. INFOSPACE. On January 6, 1998, the Company entered into an agreement to
be featured on InfoSpace, a Web directory site with approximately 6.5
million visitors per month. InfoSpace is obligated to provide links to
the Company's Web site in various locations throughout its site including
its E-shopping site. InfoSpace is also required to deliver a certain
minimum number of impressions to Cyberian Outpost during each month of
the one-year term. The Company is required to pay monthly fees and is
obligated to share a small portion of its InfoSpace-derived revenue once
such revenue exceeds a specified amount in any given month. Beginning six
months after commencement of the agreement, either party may terminate
the agreement at any time.
. EXCITE AND WEBCRAWLER. On December 4, 1997, the Company entered into an
agreement with Excite giving it featured placement on the Excite Network
and Webcrawler Shopping Channel main pages, as well as targeted
promotions in various locations throughout these Web sites. Excite is
required to deliver
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a certain minimum number of impressions to the Company during the one-
year term of the agreement. The Company is obligated to pay a one-time
sponsorship fee at the commencement of the agreement and an annual fee in
equal monthly installments. In addition, the Company is obligated to
share a small portion of its Excite Network-derived revenues with Excite.
. THEGLOBE.COM. On May 21, 1998, the Company entered into an agreement with
theglobe.com, a leading usenet (bulletin board) posting site with
approximately 1.3 million members. Pursuant to the agreement, the Company
will be the exclusive retailer of computer products in theglobe.com's
Marketplace. theglobe.com is required to deliver a certain minimum number
of impressions to the Company during each month of the six-month term of
the agreement. The Company is obligated to pay monthly fees to
theglobe.com, and the parties have agreed to negotiate for possible
additional revenue sharing to be paid to theglobe.com beginning three
months after the commencement of the agreement. The agreement will
continue after the initial six month term until terminated by either
party upon 60 days notice.
. METACRAWLER. On May 6, 1998, the Company renewed its agreement with
go2net to be the exclusive computer products retailer on go2net's
MetaCrawler home page. go2net is required to deliver a certain minimum
number of impressions to the Company during each month of the three month
term of the agreement. The Company is obligated to pay monthly fees to
go2net. go2net may terminate the agreement at any time.
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
Word of Net Promotions (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, less any returns. Cyberian
Outpost currently has 300 registered affiliates with over 500 unique domains
displaying the Company's logos and 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. In order to join the Outpost Affiliate Network, prospective affiliates
complete an automated application form online that is generally approved
within 48 hours by a member of the Company's staff. The Company promotes the
program via links on its Web page and through LinkShare, its affiliate
marketing partner. In fiscal 1998, no single affiliate accounted for more than
1% of the Company's net sales. These agreements are terminable at will by
either party.
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,
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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, hardware
manufacturers 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 that
is leased and managed by an unaffiliated third-party fulfillment company. In
addition to warehousing services, the manager of the warehouse also provides
order fulfillment services for the Company. The 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.
This arrangement has enabled the Company to add seven hours to its shipping
day, deliver Friday orders on Saturday and lower its expected warehousing and
shipping costs. The Company regularly "cross docks" (i.e., receives products
from third party vendors and distributors and ships those same products out to
customers the same day) and therefore is able to ship non-inventoried products
to customers typically within two to three days.
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 products 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. See "Risk Factors--Reliance in Certain Vendors" and "--Dependence
on Outside Fulfillment House; Risk of Failure of Fulfillment System."
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 contained in a
variety of proprietary programs. A portion of these are written in PERL, a
well known and widely
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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.
In response to capacity concerns, in fiscal 1998 the Company increased the
number of Web servers from five to 13 and installed one considerably more
powerful server for database functions. The Company also reengineered the
software code for the search engine and the product display engine. Since the
last quarter of fiscal 1998, the Company has rolled out six additional large
servers and believes that it now has adequate capacity for traffic increases.
See "Risk Factors--Risk of System Failure; Dependence on Third-Party Provider"
and "--Risk of Capacity Constraints; Reliance on Internally Developed
Systems."
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 and BuyComp.com, (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.
40
<PAGE>
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 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 June 30, 1998, the Company had 87 full-time and 11 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.
41
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, their ages as of July
28, 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
Louise R. Cooper................. 51 Vice President of Worldwide Marketing
Larry Berk....................... 44 Vice President and General Merchandise
Manager
Philip J. Rello.................. 37 Vice President of Sales
Charles H. Jackson, IV (1)....... 49 Director
Michael Murray (1)(2)............ 36 Director
William C. Mulligan (1).......... 44 Director
David Yarnell (2)................ 43 Director
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit 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 held several positions, including
Principal, with Arthur Young (now Ernst & Young LLP) 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, 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.
Ms. Cooper joined the Company as Vice President of Worldwide Marketing on
July 13, 1998. From April 1997 until July 1998, she was Vice President,
Marketing Director at Strategic Interactive Group, a subsidiary of Bronner
Slosberg Humphrey, a direct marketing agency, where she was responsible for
the development and execution of strategic Internet initiatives for IBM's
customer base of key and large accounts. From 1993 until April 1997, Ms.
Cooper held several executive positions at Prodigy Services Company, a
consumer online interactive service, including Vice President, OEM Sales. At
Prodigy she was responsible for developing strategic partnerships. From 1995
until 1997 Ms. Cooper held the position of Vice President, Electronic Commerce
and Marketing Services and oversaw Prodigy's entire electronic commerce
initiative.
42
<PAGE>
Mr. Berk has served as Vice President and General Merchandise Manager for
Cyberian Outpost since May 1998. From November 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 August 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.
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
June 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."
43
<PAGE>
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.
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 (the "Named Executive Officer"). No other
executive officers of the Company earned greater than $100,000 in the fiscal
year ended February 28, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
- --------------------------- ---------- ---------
<S> <C> <C>
Darryl Peck............................................... $ 139,385 $ 11,100
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
On June 2, 1998, the Company 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. Each executive is eligible to participate
in any bonus and employee benefit plans provided by the Company for senior
executives. Mr. Peck is also provided a $1.0 million term life insurance
policy. 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 (each, a
"Company Termination"), Mr. Peck will receive a lump-sum payment equal to two
years' base salary plus any earned but unpaid bonus for the prior fiscal year.
In the event of a Company Termination, other than as a result of the Company's
non-renewal of the agreement at the end of the two-year term, Ms. Vick will
receive a lump sum payment equal to the greater of one year's base salary or
the amount of base salary otherwise payable in the remainder of such two-year
term. In the event of the Company's non-renewal of the agreement at the end of
the two-year term, Ms. Vick will receive one year's base salary plus any
earned but unpaid bonus for the prior fiscal year. Both executives are also
entitled to the continuation of certain benefits following a Company
Termination. The Employment Agreements provide for option grants to Mr. Peck
and Ms. Vick covering 1,200,000 shares and 300,000 shares, respectively. The
options were granted effective July 7, 1998, and will be exercisable at the
initial public offering price. One-fifth of such options will become
exercisable on July 7, 1999, and the remainder will vest in 48 equal monthly
installments thereafter. 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 years' base salary plus any earned but unpaid bonus for
the prior fiscal year, 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 also contain a
one year post termination non-compete and non-solicitation provision on the
part of each executive.
44
<PAGE>
STOCK PLANS
1998 Employee, Director and Consultant Stock Plan
The Company's 1998 Employee, Director and Consultant Stock Plan was approved
by the Company's Board of Directors in June 1998 and by its stockholders in
July 1998 (the "Stock Plan"). The Stock Plan authorizes the grant of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), nonqualified stock options and stock grants
("stock awards"). As of July 28, 1998, a total of 3,186,000 shares of Common
Stock have been reserved for issuance under the Stock Plan, and no shares had
been issued pursuant to stock awards granted under the Stock Plan, 2,485,200
shares were subject to outstanding options and 700,800 shares were available
for future grant.
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 July 28, 1998, an aggregate of 1,779,000 shares of Common Stock
has been reserved for issuance under the Incentive Stock Plans. As of July 28,
1998, no shares had been issued upon the exercise of stock options granted
under the Incentive Stock Plans, 1,779,000 shares were subject to outstanding
options and no 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 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."
45
<PAGE>
The 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. Such limitation of liability and indemnification may not apply to
liabilities arising under the Federal securities laws and does not affect the
availability of equitable remedies.
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.
46
<PAGE>
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. 117,647 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, as described below. 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 at a price of $3.40 per share.
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 at a price of $4.60 per share. 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 at a
price of $7.96 per share. 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 at a price of $7.96 per share.
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 at a price of $7.96 per
share. Winfield Capital Corp., a five-percent beneficial stockholder of the
Company, purchased 125,000 shares of the Redeemable Series C Convertible
Preferred Stock at a price of $7.96 per share.
Upon consummation of the Offering, pursuant to the Preferred Stock
Conversion, each outstanding share of Series A Convertible Preferred Stock,
Series B Convertible Preferred Stock and Redeemable Series C Preferred Stock
will be converted into three shares of Common Stock.
OTHER RELATED PARTY TRANSACTIONS
In November 1995, Charles H. Jackson, IV, purchased 600,000 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 117,647 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, exercisable as of February 27, 1998, to purchase 376,884 shares of
the Company's Common Stock at $2.65 per share. The shares of Common Stock to
be issued upon exercise of this warrant will not be registered under the
Securities Act. However, Winfield Capital Corp. will have certain registration
rights with respect to these shares. See "Description of Capital Stock--
Registration Rights."
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of Common Stock as of July 28, 1998, and as
adjusted to reflect the sale of shares offered hereby, by (i) each director of
the Company, (ii) the Named Executive Officer, (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.
<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)......................................... 4,433,042 24.6% 20.1%
Katherine N. Vick (4).................................. 79,689 * *
Charles H. Jackson, IV (5)............................. 839,703 4.7% 3.8%
Michael Murray(6)...................................... 441,177 2.4% 2.0%
William C. Mulligan (7)................................ 1,500,000 8.3% 6.8%
David Yarnell (8)...................................... 1,125,000 6.2% 5.1%
All current directors and executive officers as a group
(10 persons) (9)...................................... 8,506,811 46.8% 38.4%
FIVE PERCENT STOCKHOLDERS
Winfield Capital Corp. (10)............................ 1,707,344 9.3% 7.6%
237 Mamaroneck Avenue
White Plains, New York 10605
Primus Funds (7)....................................... 1,500,000 8.3% 6.8%
c/o Primus Venture Partners IV, Inc.
5900 Landerbrook Drive, Suite 200
Cleveland, Ohio 44124
Brand Equity Ventures I, L.P. (11)..................... 1,125,000 6.2% 5.1%
Three Pickwick Plaza
Greenwich, Connecticut 06830
T. Rowe Price Threshold Fund III, L.P.................. 1,125,000 6.2% 5.1%
100 East Pratt Street
Baltimore, Maryland 21202
Connecticut Innovations, Incorporated.................. 926,470 5.1% 4.2%
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 July 28, 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. Except as indicated in
footnotes to this table, the Company believes that the stockholders named
in this table have sole voting and investment power with respect to all
shares of Common Stock shown to be beneficially owned by them based on
information provided to the Company by such stockholders.
(2) Percentage of ownership is based on 18,017,133 shares of Common Stock
outstanding on July 28, 1998 and 22,017,133 shares of Common Stock
outstanding after the completion of this Offering and assumes the
Preferred Stock Conversion.
(3) Includes 185,100 shares of Common Stock held by a limited partnership for
the benefit of Mr. Peck's children. Mr. Peck is the general partner of the
limited partnership and has sole voting and investment
48
<PAGE>
power with respect to these shares. Does not include an additional
1,200,000 shares subject to options which are not currently exercisable.
If the Underwriters exercise the over-allotment option to purchase up to
35,714 shares from Mr. Peck in full, Mr. Peck will beneficially own
4,397,328 shares of Common Stock, or 19.4% of the outstanding Common
Stock, after this Offering. Mr. Peck, the only selling stockholder in the
Offering, will only sell shares if the Underwriters' over-allotment option
is exercised.
(4) Includes 67,200 shares of Common Stock subject to currently exercisable
options held by Ms. Vick. Does not include an additional 763,800 shares
subject to options which are not currently exercisable.
(5) Consists of 839,703 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 and share voting and investment power with respect
to these shares of Common Stock. Excludes 105,738 shares of Common Stock
held by a trust for the benefit of Mr. Jackson's children. Mr. Jackson
disclaims beneficial ownership of the shares of Common Stock owned by this
trust.
(6) Consists of 441,177 shares of Common Stock owned by Broderbund. Mr. Murray
is the General Manager of Broderbund. Broderbund has sole voting and
investment power with respect to these shares, and Mr. Murray expressly
disclaims beneficial ownership of such shares.
(7) Consists of 1,440,000 shares of Common Stock owned by Primus Capital Fund
IV Limited Partnership ("PCF IV") and 60,000 shares of Common Stock owned
by Primus Executive Fund Limited Partnership ("PEF"). Mr. Mulligan is a
Director of Primus Venture Partners IV, Inc. ("Primus"). Primus is the
sole general partner of Primus Venture Partners IV Limited Partnership
("PVP IV") and PVP IV is the sole general partner of each of PCF IV and
PEF. Mr. Mulligan shares voting and investment power with respect to such
shares with five other Directors of Primus. Mr. Mulligan expressly
disclaims beneficial ownership of such shares, except to the extent of his
pecuniary interest therein.
(8) Consists of 1,125,000 shares of Common Stock owned by Brand Equity
Ventures I, L.P. ("Brand"). Mr. Yarnell is a General Partner of Brand.
Brand Equity Partners I, LLC, the general partner of Brand, has sole
voting and investment power with respect to these shares, and Mr. Yarnell
expressly disclaims ownership of such shares.
(9) Includes 37,200 shares of Common Stock subject to currently exercisable
options held by Michael R. Starkenburg, 30,000 shares of Common Stock
subject to currently exercisable options held by Larry Berk, 6,000 shares
of Common Stock subject to currently exercisable options held by Philip J.
Rello and 15,000 shares of Common Stock subject to currently exercisable
options held by Louise R. Cooper. See also footnotes 3 through 8 above.
(10) Includes 375,000 shares of Common Stock subject to a currently
exercisable warrant.
(11) Brand Equity Partners I, LLC, the general partner of Brand, has sole
voting and investment power with respect to these shares.
49
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists 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 22,017,133 shares of Common Stock
and no shares of Preferred Stock outstanding. As of July 28, 1998, there were
18,017,133 shares of Common Stock outstanding, held of record by 112
stockholders. In addition, as of July 28, 1998 there were outstanding options
to purchase 4,264,200 shares of Common Stock and warrants to purchase
2,359,794 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 into an aggregate of 11,336,847 shares of Common Stock
pursuant to the Preferred Stock Conversion. The Preferred Stock so converted
will be retired and may not be reissued. See Notes 4, 5 and 10(a) of Notes to
the Consolidated Financial Statements.
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 July 28, 1998, there were outstanding warrants to purchase 2,359,794
shares of Common Stock held by six investors. Advest, Inc., a former placement
agent for the Company, holds a warrant, exercisable as of July 18, 1996 to
purchase 180,000 shares of Common Stock at an exercise price of $.0041 per
share. This warrant will expire on July 18, 2001. Pennsylvania Merchant Group,
Ltd. ("PMG"), the Company's Series A Convertible Preferred Stock placement
agent, and Richard Liebman, Senior Vice President of Corporate Finance of PMG,
hold warrants to purchase an aggregate of 217,899 and 43,579 shares of Common
Stock, respectively. These warrants, exercisable as of May 30, 1997 and July
28, 1997, respectively, at an exercise price of $1.13 per share, will expire
on May 30, 2002. Winfield Capital Corp. was granted a warrant to purchase
376,884 shares of Common Stock in connection with a $2.0 million bridge loan
granted to the Company. This warrant, which was
50
<PAGE>
exercisable as of January 13, 1998, has an exercise price of $2.65 per share
and expires on February 27, 2003. On December 1, 1997, the Company granted a
warrant to AOL to purchase 1,067,121 shares of Common Stock at $2.65 per share
in connection with a strategic marketing agreement entered into between the
Company and AOL. One-third of the shares underlying this warrant were
immediately exercisable. One-third of the shares will become exercisable if
the marketing agreement is renewed and one-third of the shares will become
exercisable if certain revenue targets are reached by the Company. The warrant
will expire on December 1, 2007. Pursuant to an engagement letter signed by
the Company in November 1997 in connection with the Redeemable Series C
Convertible Preferred Stock financing, on February 27, 1998, March 13, 1998,
March 15, 1998 and March 27, 1998 BT Alex. Brown Incorporated, the placement
agent, was granted warrants to purchase 157,000 shares, 246,150 shares, 69,750
shares and 911 shares of Common Stock, respectively, at an exercise price of
$2.67 per share. Each of the warrants will expire on the fifth anniversary of
the grant date thereof. 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 1,246,556
shares of Common Stock will terminate.
REGISTRATION RIGHTS
Following this Offering, the holders of 11,336,847 shares of Common Stock
and of warrants to purchase a total of 1,705,483 shares of Common Stock will
have certain rights to cause the Company to register those shares under the
Securities Act beginning between three and six months after the closing date
of this Offering. These holders currently hold 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
11,336,847 shares of Common Stock and warrants to purchase 1,705,483 shares of
Common Stock, along with the holders of warrants to purchase 654,311 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. 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
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<PAGE>
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.
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 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 of the stockholders 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, voting
together as a single class, 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% 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. Such 70% vote is also
required for any amendment to, or repeal of, the Company's Bylaws by the
stockholders. 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
52
<PAGE>
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 the director's fiduciary
duties as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or 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.
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 American Stock
Transfer & Trust Company. The transfer agent's telephone number is (212) 936-
5100.
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<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 the 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 22,017,133
shares of Common Stock outstanding (excluding 4,264,200 and 2,359,794 shares
reserved for issuance upon the exercise of outstanding stock options and
warrants, respectively) (22,581,419 shares of Common Stock outstanding if the
Underwriters' over-allotment option is exercised in full). Of these shares,
the 4,000,000 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 18,017,133 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, except pursuant to
exemptions from such registration including, among others, the exemption
provided by Rule 144. Of the restricted securities, 965,592 shares are
eligible for sale in the public market immediately after this Offering
pursuant to Rule 144(k) under the Securities Act ("Rule 144(k)"). A total of
8,661,848 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), no
restricted shares will be eligible for sale in the public market immediately
after this Offering, 536,597 restricted shares (excluding 4,264,200 and
2,359,794 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 220,171 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 July 28, 1998, the
Company has granted options covering 4,264,200 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.
The executive officers and directors and certain other existing stockholders
of the Company, who beneficially own in the aggregate 17,282,650 shares of
Common Stock and holders of options and warrants to purchase 4,110,774. shares
of Common Stock, have agreed that they will not, without the prior written
consent
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<PAGE>
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 11,336,847 shares of Common
Stock and warrants to purchase 1,705,483 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 10,940,634 shares
of Common Stock and warrants to purchase 1,074,774 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."
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<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 Chief Executive Officer,
President and principal stockholder, 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 564,286 and 35,714 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. Mr. Peck, the only selling stockholder in the Offering, will only
sell shares if this option is exercised by the Underwriters. 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 4,000,000, and the Company and Mr. Peck will be obligated, pursuant
to the option, to sell such shares to the Underwriters. If the Underwriters
exercise this option but not in full, the shares to be sold by Mr. Peck
pursuant to such option will be purchased by the Underwriters prior to any
shares to be sold by the Company pursuant to such option. 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 4,000,000
shares are being offered.
The Underwriting Agreement contains covenants of indemnity and contribution
between the Underwriters and the Company and Mr. Peck regarding certain
liabilities, including liabilities under the Securities Act.
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<PAGE>
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 Underwriter 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 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 17,269,530 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 474,311 shares of Common Stock at an
exercise price of $2.67 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.
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<PAGE>
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 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.
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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, and May 31,
1998 (unaudited)......................................................... F-3
Consolidated Statements of Operations for the period from March 6, 1995
(date of inception) through February 29, 1996, for the years ended
February 28, 1997 and 1998, and for the three months ended May 31, 1997
(unaudited) and 1998 (unaudited)......................................... 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, for the years ended February 28, 1997 and 1998, and
for the three months ended May 31, 1997 (unaudited) and 1998
(unaudited).............................................................. F-5
Consolidated Statements of Cash Flows for the period from March 6, 1995
(date of inception) through February 29, 1996, for the years ended
February 28, 1997 and 1998, and for the three months ended May 31, 1997
(unaudited) and 1998 (unaudited)......................................... 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, except for note 10(d),
which is as of July 8, 1998
F-2
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
CONVERSION
OF
CONVERTIBLE
FEBRUARY 28, PREFERRED
------------------------ MAY 31, STOCK
1997 1998 1998 MAY 31, 1998
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 40,970 $ 7,325,317 $ 8,510,062
Accounts receivable,
less allowance for
doubtful accounts of
$4,000 in 1997 and
$47,000 in 1998...... 197,779 474,340 709,369
Inventories........... 313,932 1,410,545 3,190,111
Prepaid expenses and
other current assets
..................... 3,175 98,079 2,969,451
----------- ----------- ------------
Total current
assets............. 555,856 9,308,281 15,378,993
----------- ----------- ------------
Property and
equipment, net
(note 2)........... 198,729 1,611,463 1,962,852
Other assets............ -- 19,776 29,164
----------- ----------- ------------
Total assets........ $ 754,585 $10,939,520 $ 17,371,009
=========== =========== ============
LIABILITIES AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable (note
3)................... $ 200,000 $ 2,750,000 $ --
Current portion of
capital lease
obligations (note
7(c))................ 10,836 107,983 144,319
Accounts payable...... 1,544,701 3,420,590 2,658,672
Accrued expenses
(notes 2 and 7(a))... 136,675 2,205,771 1,176,087
----------- ----------- ------------
Total current
liabilities........ 1,892,212 8,484,344 3,979,078
----------- ----------- ------------
Capital lease
obligations, excluding
current portion (note
7(c)).................. 22,938 135,517 174,580
----------- ----------- ------------
Total liabilities... 1,915,150 8,619,861 4,153,658
----------- ----------- ------------
Commitments (note 7)
Redeemable Series C
convertible preferred
stock, no par value,
875,000 and 2,770,125
shares issued and
outstanding at February
28, 1998 and May 31,
1998, respectively
(liquidation value of
$7,000,000 and
$22,161,000 at February
28, 1998 and May 31,
1998, respectively)
(notes 5 and 10)....... -- 5,990,758 20,124,780 $ --
Stockholders' (deficit)
equity (notes 4, 6 and
10):
Preferred stock, $.01
par value, 10,000,000
shares authorized,
682,738 Series A
Convertible shares
(liquidation value of
$2,321,309) issued and
outstanding at February
28, 1998 and May 31,
1998, and 163,043 and
326,087 Series B
Convertible Shares
(liquidation value of
$750,000 and
$1,500,000) issued and
outstanding at February
28, 1998 and May 31,
1998, respectively -- 2,613,776 3,363,776 --
Common stock, $.01 par
value, 50,000,000
shares authorized,
6,451,648 shares issued
and outstanding at
February 28, 1997 and
6,680,286 shares issued
and outstanding at
February 28, 1998 and
May 31, 1998;
18,017,133 shares
issued and outstanding
pro forma.............. 64,516 66,803 66,803 180,171
Additional paid-in
capital................ 484,763 2,449,995 2,619,499 25,994,687
Accumulated deficit..... (1,709,844) (8,801,673) (12,957,507) (12,957,507)
----------- ----------- ------------ ------------
Total stockholders'
(deficit) equity... (1,160,565) (3,671,099) (6,907,429) $ 13,217,351
----------- ----------- ------------ ============
Total liabilities
and stockholders'
deficit ........... $ 754,585 $10,939,520 $ 17,371,009
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 6, 1995
(DATED THREE MONTHS ENDED
INCEPTION) YEAR ENDED FEBRUARY 28, MAY 31,
THROUGH ------------------------ -----------------------
FEBRUARY 29, 1996 1997 1998 1997 1998
----------------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $1,851,793 $10,790,054 $22,681,043 $3,888,958 $11,561,529
Cost of sales........... 1,688,455 9,535,116 20,525,034 3,540,575 10,519,824
---------- ----------- ----------- ---------- -----------
Gross profit.......... 163,338 1,254,938 2,156,009 348,383 1,041,705
Operating expenses:
Sales and marketing
(note 7(a)).......... 217,675 1,407,218 5,942,565 468,601 4,008,824
General and
administrative....... 258,853 804,711 1,623,113 301,966 722,230
Technology and
development.......... 54,402 381,960 1,057,893 293,851 595,802
---------- ----------- ----------- ---------- -----------
Total operating
expenses........... 530,930 2,593,889 8,623,571 1,064,418 5,326,856
---------- ----------- ----------- ---------- -----------
Operating loss........ (367,592) (1,338,951) (6,467,562) (716,035) (4,285,151)
---------- ----------- ----------- ---------- -----------
Other income (expense):
Interest expense (note
3)................... (1,535) (4,126) (657,743) (7,241) (25,983)
Other, net............ (2,396) 4,756 33,476 1,471 155,300
---------- ----------- ----------- ---------- -----------
Other income
(expense), net..... (3,931) 630 (624,267) (5,770) 129,317
---------- ----------- ----------- ---------- -----------
Net loss.............. $ (371,523) $(1,338,321) $(7,091,829) $ (721,805) $(4,155,834)
========== =========== =========== ========== ===========
Net loss applicable to
common stockholders
(note 1(l)).......... $ (371,523) $(1,338,321) $(7,091,829) $ (721,805) $(4,631,880)
========== =========== =========== ========== ===========
Basic and diluted net
loss per common share.. $ (0.07) $ (0.22) $ (1.07) $ (0.11) $ (0.69)
========== =========== =========== ========== ===========
Weighted average basic
and diluted common
shares outstanding..... 5,243,766 6,144,774 6,633,282 6,493,938 6,680,286
========== =========== =========== ========== ===========
</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
<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............ -- -- -- -- 5,430,000 $ 54,300 $ 174,430 -- $ 228,730
Issuance of common
stock awards to
employees........ -- -- -- -- 210,000 2,100 47,900 -- 50,000
Issuance of common
stock for
services
rendered......... -- -- -- -- 360,000 3,600 56,400 -- 60,000
Net loss.......... -- -- -- -- -- -- -- $ (371,523) (371,523)
--------- ----------- --------- ---------- --------- -------- ---------- ------------ -----------
Balance, February
29, 1996......... -- -- -- -- 6,000,000 60,000 278,730 (371,523) (32,793)
Value of warrants
issued for
services
rendered......... -- -- -- -- -- -- 60,000 -- 60,000
Issuance of common
stock awards to
employees........ -- -- -- -- 418,582 4,186 135,341 -- 139,527
Issuance of common
stock for
services
rendered......... -- -- -- -- 33,066 330 10,692 -- 11,022
Net loss.......... -- -- -- -- -- -- -- (1,338,321) (1,338,321)
--------- ----------- --------- ---------- --------- -------- ---------- ------------ -----------
Balance, February
28, 1997......... -- -- -- -- 6,451,648 64,516 484,763 (1,709,844) (1,160,565)
Issuance of common
stock awards to
employees........ -- -- -- -- 216,149 2,162 242,806 -- 244,968
Issuance of common
stock for
services
rendered......... -- -- -- -- 12,489 125 14,029 -- 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 6,680,286 66,803 2,449,995 (8,801,673) (3,671,099)
Sales of Series C
Redeemable
Convertible
Preferred Stock,
net of expenses
and value of
warrants issued
(unaudited)...... 1,895,125 13,657,976 -- -- -- -- -- -- --
Warrants issued in
connection with
Series C
Redeemable
Convertible
Preferred Stock
(unaudited)...... -- -- -- -- -- -- 474,035 -- 474,035
Contingent stock
purchase warrants
issued in
connection with
Series C
Redeemable
Convertible
Preferred Stock
(unaudited)...... -- -- -- -- -- -- 71,015 -- 71,015
Conversion of
Debenture to
Series B
Convertible
Preferred Stock
(unaudited)...... -- -- 163,044 750,000 -- -- -- -- 750,000
Issuance of stock
options
(unaudited)...... -- -- -- -- -- -- 100,500 -- 100,500
Accretion on
Redeemable Series
C Convertible
Preferred Stock
(unaudited)...... -- 120,460 -- -- -- -- (120,460) -- (120,460)
Dividends on
Redeemable Series
C Convertible
Preferred Stock
(unaudited)...... -- 355,586 -- -- -- -- (355,586) -- (355,586)
Net loss
(unaudited)...... -- -- -- -- -- -- -- (4,155,834) (4,155,834)
--------- ----------- --------- ---------- --------- -------- ---------- ------------ -----------
Balance, May 31,
1998
(unaudited)...... 2,770,125 $20,124,780 1,008,825 $3,363,776 6,680,286 $ 66,803 $2,619,499 $(12,957,507) $(6,907,429)
========= =========== ========= ========== ========= ======== ========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
MARCH 6, 1995 YEAR ENDED ENDED
(DATE OF INCEPTION) FEBRUARY 28, MAY 31,
THROUGH ------------------------ -----------------------
FEBRUARY 29, 1996 1997 1998 1997 1998
------------------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(371,523) $(1,338,321) $(7,091,829) $(721,805) $(4,155,834)
Adjustments to
reconcile net loss to
net cash provided
(used) by operating
activities:
Depreciation and
amortization......... 26,528 94,795 145,233 27,170 128,984
Amortization of
original issue
discount on bridge
financing............ -- -- 567,563 -- --
Issuance of common
stock for services
rendered............. 60,000 11,022 14,154 14,154 --
Issuance of common
stock awards to
employees............ 50,000 139,527 244,968 244,968 --
Issuance of common
stock warrants....... -- 60,000 703,897 -- --
Issuance of common
stock options to
employee............. -- -- -- -- 100,500
Provision for doubtful
accounts ............ 18,013 (14,304) 69,000 5,545 19,978
Loss on disposal of
property and
equipment............ 2,396 -- 1,510 -- --
(Increase) decrease in
operating assets:
Accounts receivable.. (42,301) (159,187) (345,561) 24,136 (255,007)
Inventories.......... (230,656) (83,276) (1,096,613) (126,318) (1,779,566)
Prepaid expenses and
other assets........ (4,675) 1,500 (114,680) -- (2,880,760)
Increase (decrease) in
operating
liabilities:
Accounts payable..... 437,335 1,107,366 1,875,889 419,096 (761,918)
Accrued expenses..... 85,053 51,622 2,069,096 21,965 (1,029,684)
--------- ----------- ----------- ---------- -----------
Net cash provided
(used) by operating
activities......... 30,170 (129,256) (2,957,373) (91,089) (10,613,307)
--------- ----------- ----------- ---------- -----------
Cash flows from
investing activities:
Purchases of property
and equipment........ (174,910) (94,904) (1,321,792) (27,212) (359,926)
Proceeds from the sale
of property and
equipment............ -- -- 500 -- --
--------- ----------- ----------- ---------- -----------
Net cash used by
investing
activities......... (174,910) (94,904) (1,321,292) (27,212) (359,926)
--------- ----------- ----------- ---------- -----------
Cash flows from
financing activities:
Proceeds from
borrowings of notes
payable.............. 35,000 200,000 2,632,437 500,000 --
Repayment of notes
payable.............. -- (35,000) (150,000) (200,000) (2,000,000)
Repayment of capital
lease obligations.... -- (18,860) (28,459) (3,795) (45,048)
Proceeds from issuance
of preferred stock... -- -- 2,113,776 895,267 --
Proceeds from issuance
of redeemable
preferred stock...... -- -- 5,990,758 -- 13,657,976
Proceeds from issuance
of common stock
warrants............. -- -- 1,004,500 155,754 545,050
Proceeds from issuance
of common stock...... 228,730 -- -- -- --
--------- ----------- ----------- ---------- -----------
Net cash provided by
financing
activities......... 263,730 146,140 11,563,012 1,347,226 12,157,978
--------- ----------- ----------- ---------- -----------
Net increase (decrease)
in cash and cash
equivalents........... 118,990 (78,020) 7,284,347 1,228,925 1,184,745
Cash and cash
equivalents at
beginning of period... -- 118,990 40,970 40,970 7,325,317
--------- ----------- ----------- ---------- -----------
Cash and cash
equivalents at end of
period................ $ 118,990 $ 40,970 $ 7,325,317 $1,269,895 $ 8,510,062
========= =========== =========== ========== ===========
</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 three-month period ended May 31, 1998, the Company (i) increased
the Redeemable Series C Convertible Preferred Stock and decreased additional
paid-in capital by $476,046 to record accumulated dividends of $355,586 and
accretion of $120,460 on the Redeemable Series C Convertible Preferred Stock,
(ii) acquired office equipment by incurring capital lease obligations of
$120,447, and (iii) converted the $750,000 debenture into 163,043 shares of
Series B Convertible Preferred Stock.
During the three-month period ended May 31, 1997, 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 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
(INFORMATION AS OF MAY 31, 1998 AND FOR THE THREE MONTHS ENDED MAY 31, 1998 IS
UNAUDITED)
(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 are comprised of product sales, net of returns and allowances, and
advertising revenue. Product sales are comprised of computer hardware,
software and peripherals and 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. Advertising revenue is
derived from hardware manufacturers and software publishers that pay for
promotional placements on the Company's Web site and is recognized ratably
over the period in which the Company is obligated to provide the advertising.
(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 Statement of Financial Accounting
Standards (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. For employee stock-based
awards, 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.
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued
based on the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable.
(l) Net Loss Per Common Share
The Company has presented net loss per share pursuant to 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)
Anti-dilutive potential common shares outstanding were 180,000 for the
period ended February 29, 1996, 180,000 and 9,807,206 for the years ended
February 28, 1997 and 1998, respectively, and 1,921,677 and 16,767,199 for the
three-month periods ended May 31, 1997 and 1998, respectively.
Net loss for the three-month period ended May 31, 1998 has been increased by
$476,046 to arrive at net loss applicable to common stockholders, to give
effect to $355,586 of dividends and $120,460 of accretion on the Redeemable
Series C Convertible Preferred Stock.
(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. See Note 10(d).
(n) Interim Financial Statements
The interim financial statements as of May 31, 1998, and for the three
months ended May 31, 1997 and 1998 are unaudited. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the financial position and results of
operations have been included in such unaudited financial statements. The
results of operations for the three months ended May 31, 1998 are not
necessarily indicative of the results to be expected for the entire year.
(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>
F-9
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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 376,884.42 shares of Common Stock at $2.6533 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.
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 10,000,000 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 5,800,000
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
three-for-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
three-for-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 three-for-one basis and has an aggregate liquidation
preference of
F-10
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$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 180,000 shares of
Common Stock at an exercise price of $.0041 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.
In May and July 1997, the Company issued warrants to purchase an aggregate
of 261,479.13 shares of Common Stock at an exercise price of $1.1333 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 1,067,121 shares
of Common Stock at an exercise price of $2.6533 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
355,707 shares, vested immediately, while the other two-thirds, or 711,414
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 376,884.42 shares
of Common Stock at an exercise price of $2.6533 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 157,500 shares of
Common Stock at an exercise price of $2.6667 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 393,750 shares of Common Stock at an exercise price of $3.3333 per
share. The contingent warrants shall only be exercisable upon the earlier of
(i) the completion by the Company of an initial public
F-11
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
(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 fiscal 1996. No options were granted by the
Company prior to fiscal 1998. 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 as all stock options have been granted with exercise
prices equal to or in excess of the fair market value of the Company's Common
Stock at the date of grant. 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 $ (1.07)
Pro forma $ (1.07)
Diluted loss per share As reported $ (1.07)
Pro forma $ (1.07)
</TABLE>
The weighted average fair value of options granted during 1998 was $0.59 per
share. 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 900,000 shares and for 1,620,000 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.
F-12
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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................................................... 1,719,000 $1.49
Exercised................................................. -- --
Terminated................................................ -- --
---------
Outstanding at end of year................................ 1,719,000 $1.49
=========
Exercisable at end of year................................ 75,000 $1.13
=========
Shares reserved at end of year............................ 801,000
=========
</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>
$1.13 to $1.53....... 1,564,500 9.8 $1.38 75,000 $1.13
$2.67................ 154,500 10.0 $2.67 -- --
--------- ------
$1.13 to $2.67....... 1,719,000 9.8 $1.49 75,000 $1.13
========= ======
</TABLE>
(c) Common Stock
During the period ended February 29, 1996, and during the years ended
February 28, 1997 and 1998, the Company issued 570,000, 451,647, and 228,639
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 ("Provider") on December 1, 1997 that established the Company
as the exclusive third-party computer hardware and peripherals reseller in
certain portions of the Provider's site. The Provider is required to deliver a
certain minimum number of impressions to the Company during the term of the
agreement. All advertising revenues generated under the agreement as a result
of advertising sold on the parties' co-branded Web site are to be shared
equally by the Company and the Internet content provider. No advertising
revenues were generated under this agreement for the year ended February 28,
1998.
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. In addition, the
F-13
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company is required to share a small proportion of its Provider-derived
revenue with the Provider. 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, representing the difference
between the cost of services received and payments made under the agreement
through February 28, 1998, is included in accrued expenses at February 28,
1998 in the accompanying consolidated balance sheet. Additional payments of
$4,000,000, $200,000, $200,000 and $200,000 are due on March 1, 1998, April 1,
1998, July 1, 1998 and October 1, 1998, respectively.
(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 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
--------
278,522
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>
F-14
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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.
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.
F-15
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) INTERNATIONAL SALES AND GEOGRAPHIC INFORMATION
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. Revenue by geographic area is summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 6, 1995
(DATE OF
INCEPTION) YEAR ENDED FEBRUARY 28,
THROUGH -----------------------
FEBRUARY 29, 1996 1997 1998
----------------- ----------- -----------
<S> <C> <C> <C>
North America...................... $ 853,679 $ 5,928,154 $14,833,799
Asia............................... 449,210 2,202,914 3,312,880
Europe............................. 407,208 1,773,733 2,941,026
Other.............................. 141,696 885,253 1,593,338
---------- ----------- -----------
$1,851,793 $10,790,054 $22,681,043
========== =========== ===========
</TABLE>
(10) SUBSEQUENT EVENTS
(a) Sale of Redeemable Preferred Stock
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 $13,657,976. 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 852,806.25 shares of
Common Stock at an exercise price of $3.3333 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 316,811.25 shares of Common Stock at an exercise
price of $2.6667 per share. The warrants expire in March 2003. Using the
Black-Scholes model, the 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.
(b) Stock Options
During May 1998, the Company granted 135,000 options under the 1998 Stock
Option Plan with a weighted average exercise price of $7.59 per share. Of the
total options granted, 30,000 were granted at an exercise price of $5.00 per
share and 105,000 were granted at an exercise price of $8.33 per share.
In June 1998, the Company's stockholders approved the 1998 Employee,
Director and Consultant Stock Plan which authorizes the grant of options for
up to 3,186,000 shares. In July 1998, the Company granted 2,102,700 shares
under this plan at an exercise price to be equal to the price that the
Company's Common Stock is sold in the proposed initial public offering.
(c) Operating Lease
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.
F-16
<PAGE>
CYBERIAN OUTPOST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(d) Recapitalization and Reincorporation
On July 8, 1998, the Company reincorporated in Delaware and adopted a new
Certificate of Incorporation that increased the number of authorized shares to
60,000,000, of which 50,000,000 shares were designated as Common Stock and
10,000,000 as Preferred Stock, both with par values of $.01. On July 8, 1998
the Company effected a 3-for-1 stock split in the form of a stock dividend.
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.
F-17
<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............................................................. 7
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................................................................. 30
Management............................................................... 42
Certain Transactions..................................................... 47
Principal Stockholders................................................... 48
Description of Capital Stock............................................. 50
Shares Eligible for Future Sale.......................................... 54
Underwriting............................................................. 56
Legal Matters............................................................ 58
Experts.................................................................. 58
Additional Information................................................... 58
Index to Consolidated 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,000,000 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............................................. $ 20,650
NASD Filing Fee.................................................. 7,500
Nasdaq Listing Fees.............................................. 95,000
Legal Fees and Expenses.......................................... 400,000
Blue Sky Fees and Expenses....................................... 5,000
Accounting Fees and Expenses..................................... 250,000
Printing and Engraving........................................... 175,000
Transfer Agent and Register Fees and Expenses.................... 2,000
Miscellaneous.................................................... 94,850
----------
TOTAL.......................................................... $1,050,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Restated 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 of
Incorporation 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 or
she had no reason to believe his or her 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 Tenth of the Certificate
of Incorporation eliminates the liability of a director to 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:
(a) Issuances of Capital Stock and Warrants
On December 1, 1995, the Company issued and sold 600,000 shares of its
Common Stock for an aggregate purchase price of $200,000 to a single investor
in a private placement.
On May 30, 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.
On May 30, 1997 and July 28, 1997, the Company issued and sold an aggregate
of 535,678 shares of its Series A Convertible Preferred Stock at a price per
share of $3.40 to 17 investors in a private placement for aggregate proceeds
of approximately $1.8 million.
During the period ended February 29, 1996, and during the years ended
February 28, 1997 and 1998, the Company issued 570,000, 451,647, and 228,639
shares of Common Stock to employees and consultants in exchange for services.
On October 31, 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 for aggregate proceeds of
$750,000.
On February 27, 1998, March 6, 1998, March 10, 1998, March 13, 1998, March
16, 1998 and March 27, 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 for aggregate
proceeds of approximately $22 million.
On March 23, 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.
On July 18, 1996, the Company issued a warrant to purchase 180,000 shares of
Common Stock at an exercise price of $.0041 per share to a placement agent.
On May 30, 1997 and July 28, 1997, the Company issued warrants to purchase
an aggregate of 261,478 shares of Common Stock at an exercise price of $1.13
per share to a placement agent in connection with the Series A Convertible
Preferred Stock financing.
On December 1, 1997, the Company issued warrants to purchase 1,067,121
shares of Common Stock at an exercise price of $2.65 per share in connection
with a marketing agreement.
On January 13, 1998, the Company issued warrants to purchase 376,884 shares
of Common Stock at an exercise price of $2.65 per share in connection with a
note payable.
II-2
<PAGE>
On February 27, 1998, March 13, 1998, March 15, 1998 and March 27, 1998, the
Company issued warrants to purchase an aggregate of 474,311 shares of Common
Stock at an exercise price of $2.67 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, on February 27, 1998, March 6, 1998, March 10, 1998, March 13,
1998, March 16, 1998 and March 27, 1998, the Company sold contingent stock
purchase warrants to the holders of the Redeemable Series C Convertible
Preferred Stock for the purchase of an aggregate of 1,246,556 shares of Common
Stock for a purchase price of $.0889 per warrant share for aggregate proceeds
of approximately $110,805. The contingent warrants are exercisable at an
exercise price of $3.33 per share.
(b) Certain Grants and Exercises of Stock Options
Pursuant to the 1997 Inventive Stock Plan, the 1998 Incentive Stock Plan and
the 1998 Employee, Director and Consultant Stock Plan (collectively, the
"Stock Plans"), the Company had as of July 28, 1998 issued options to purchase
an aggregate of 4,264,200 shares of Common Stock, of which options to purchase
an aggregate of 112,500 shares of Common Stock are exercisable, at a weighted
average exercise price of $ per share. As of July 28, 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 --Plan and Agreement of Merger.
@3.2 --Amended and Restated Certificate of Incorporation of the Registrant
(Connecticut).
@3.3 --Restated Certificate of Incorporation of the Registrant (Delaware).
@3.4 --Amended and Restated Bylaws of the Registrant (Connecticut).
@3.4.1 --Restated Bylaws of the Registrant (Delaware).
@3.5 --Form of Restated Bylaws of the Registrant (Delaware).
@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 2, 1998, between the Registrant and
Darryl Peck.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
@ 10.9 --Employment Agreement, dated June 2, 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.
+10.12 --Co-Marketing Agreement, dated July 16, 1998, by and between
StarMedia Network, Inc. and the Registrant.
@+10.13 --Promotion Agreement, dated January 26, 1998, by and between CNET,
Inc. and the Registrant.
@+10.14 --Merchant Integration Agreement, dated January 6, 1998, by and
between Infospace and the Registrant.
@+10.15 --Sponsorship Agreement, dated December 4, 1997, by and between
Excite, Inc. and the Registrant.
@+10.16 --Marketing Agreement, dated May 21, 1998, by and between
theglobe.com, Inc. and the Registrant.
@+10.17 --Renewal, dated May 8, 1998, to Advertising Agreement by and between
go2net and the Registrant.
@ 11.1 --Computation of Loss Per Share.
@ 21.1 --Subsidiaries of the Company.
23.1 --Consent and Report on Schedule 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.
@ 99.1 --Consent of Jupiter Communications
@ 99.2 --Consent of International Data Corporation
@ 99.3 --Consent of Word of Net Promotions
@ 99.4 --Consent of Louise R. Cooper
99.5 --Request for Withdrawal of Exhibit
</TABLE>
- --------
@ Previously filed.
* 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
Schedule II, Valuation of Qualifying Accounts
All other 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.
II-4
<PAGE>
(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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on
its behalf by the undersigned thereunto duly authorized, in Kent, Connecticut,
on July 30, 1998.
CYBERIAN OUTPOST, INC.
/s/ Darryl Peck
By: _________________________________
DARRYL PECK,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the 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 July 30, 1998
- ------------------------------------- Executive Officer
DARRYL PECK and Director
(Principal
executive officer)
* Executive Vice July 30, 1998
- ------------------------------------- President and
KATHERINE N. VICK Director (Principal
financial and
accounting officer)
* Director July 30, 1998
- -------------------------------------
CHARLES JACKSON
* Director July 30, 1998
- -------------------------------------
MICHAEL MURRAY
* Director July 30, 1998
- -------------------------------------
WILLIAM C. MULLIGAN
* Director July 30, 1998
- -------------------------------------
DAVID YARNELL
</TABLE>
*By executing his name hereto, Darryl Peck is signing this document on
behalf of the persons indicated above pursuant to powers of attorney duly
executed by such persons and filed with the Securities and Exchange
Commission.
/s/ Darryl Peck
By: _________________________________
DARRYL PECK
(ATTORNEY-IN-FACT)
II-6
<PAGE>
SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE
BEGINNING TO COST AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
March 6, 1995 (date of
inception) through
February 29, 1996......... $ -- $18,000 $ -- $18,000
Year ended February 28,
1997...................... $18,000 $ -- $(14,000) $ 4,000
Year ended February 28,
1998...................... $ 4,000 $69,000 $(26,000) $47,000
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
*1.1 --Form of Underwriting Agreement.
@3.1 --Plan and Agreement of Merger.
@3.2 --Amended and Restated Certificate of Incorporation of the
Registrant (Connecticut).
@3.3 --Restated Certificate of Incorporation of the Registrant
(Delaware).
@3.4 --Amended and Restated Bylaws of the Registrant (Connecticut).
@3.4.1 --Restated Bylaws of the Registrant (Delaware).
@3.5 --Form of Restated Bylaws of the Registrant (Delaware).
@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 2, 1998, between the
Registrant and Darryl Peck.
@ 10.9 --Employment Agreement, dated June 2, 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.
+10.12 --Co-Marketing Agreement, dated July 16, 1998, by and between
StarMedia Network, Inc. and the Registrant.
@+10.13 --Promotion Agreement, dated January 26, 1998, by and between
CNET, Inc. and the Registrant.
@+10.14 --Merchant Integration Agreement, dated January 6, 1998, by and
between Infospace and the Registrant.
@+10.15 --Sponsorship Agreement, dated December 4, 1997, by and between
Excite, Inc. and the Registrant.
@+10.16 --Marketing Agreement, dated May 21, 1998, by and between
theglobe.com, Inc. and the Registrant.
@+10.17 --Renewal, dated May 8, 1998, to Advertising Agreement by and
between go2net and the Registrant.
@ 11.1 --Computation of Loss Per Share.
@ 21.1 --Subsidiaries of the Company.
23.1 --Consent and Report on Schedule 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.
@ 99.1 --Consent of Jupiter Communications
@ 99.2 --Consent of International Data Corporation
@ 99.3 --Consent of Word of Net Promotions
@ 99.4 --Consent of Louise R. Cooper
99.5 --Request for Withdrawal of Exhibit
</TABLE>
- --------
@ Previously filed.
* To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<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
1
<PAGE>
Confidential
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
<PAGE>
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
3
<PAGE>
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 hardware and peripheral
equipment (i.e., CPU's, monitors, mouses, disk drives, modems,
keyboards, printers, and such comparable, additional computer
hardware products directly related to the use of a CPU as may
be mutually agreed upon by the Parties, but specifically
excluding, without limitation, such products as speakers,
video game consoles, joysticks, electronic organizers (or
other Windows CE devices) calculators, pagers and other
similar electronic products and accessories) ("Hardware
Products") 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
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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 five (5) business days of the
date when such amounts are due and payable, then MP shall have an
additional five (5) 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
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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 Three
Hundred Fifty Five Thousand Seven Hundred and Seven (355,707)
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 (i) the lowest price per share paid by any
investor or group of investors in any equity financing consummated by MP
which closes on or prior to March 1, 1998 (a "Financing Event"), or (ii)
eight dollars ($8.00) (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) One Hundred Eighteen Thousand Five Hundred Sixty Nine (118,569)
shares on the Effective Date;
(ii) One Hundred Eighteen Thousand Five Hundred Sixty Nine (118,569)
shares immediately upon the renewal of this Agreement pursuant to
Section 6.2 hereof; provided that if a Change of Control in MP shall
occur prior to the renewal of this Agreement, the Warrants provided
pursuant to this clause (ii) shall immediately vest upon such Change
of Control; and
(iii) One Hundred Eighteen Thousand Five Hundred Sixty Nine (118,569)
shares at the earliest of such time as MP shall have generated either
(i) Fifty Million Dollars (US $50,000,000) in Target Revenues during
the Initial Term or (ii) One Hundred Million Dollars ($100,000,000)
in Target Revenue during the Term.
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 Three (3) 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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Confidential
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>
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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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Confidential
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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Confidential
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
---------------------------------------
[XXXXXX]
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."
21
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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]
CDW (Computer Discount Warehouse)
[xxxxxx]
CompUSA
[xxxxxx]
Creative Computers
Egghead
[xxxxxx]
[xxxxxx]
[xxxxxx]
Insight
[xxxxxx]
MicroCenter
Micro Warehouse
[xxxxxx]
[xxxxxx]
PC Connection
[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]
CDW (Computer Discount Warehouse)
[xxxxxx]
CompUSA
[xxxxxx]
Creative Computer
Egghead
[xxxxxx]
[xxxxxx]
[xxxxxx]
Insight
[xxxxxx]
MicroCenter
Micro Warehouse
[xxxxxx]
[xxxxxx]
PC Connection
[xxxxxx]
[xxxxxx]
<PAGE>
Exhibit 10.12
Cyberian Outpost, Inc. has omitted from this Exhibit 10.12 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.
CO-MARKETING AGREEMENT ("Agreement"), dated as of July 16,1998, between
Cyberian Outpost, Inc ("Cyberian Outpost"), a Delaware corporation, having its
principal offices at 27 North Main Street, Kent, Connecticut 06757, and
StarMedia Network, Inc. ("StarMedia"), a Delaware corporation, having its
principal offices at 29 West 36th Street, New York, NY 10018.
WITNESSETH
WHEREAS, Cyberian Outpost owns and operates the Cyberian Outpost Website
(as defined in Section 1), through which it sells personal computers and related
hardware, software and peripherals; and
WHEREAS, StarMedia owns and operates the StarMedia Website (as defined in
Section 1); and
WHEREAS, Cyberian Outpost desires to market and promote the Cyberian
Outpost Website through advertising on the StarMedia Website and a direct link
from the StarMedia Website to the Cyberian Outpost Website; and
WHEREAS, StarMedia desires to market and promote the Cyberian Outpost
Website through advertising on the StarMedia Website and a direct link from the
StarMedia Website to the Cyberian Outpost Website.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
herein contained, the parties hereto do hereby agree as follows:
1. DEFINITIONS
For purposes of this Agreement, the following terms shall have the indicated
meanings:
"Activation Date" shall mean the earlier of(i) date on which Cyberian
---------------
Outpost directs StarMedia to activate the Link and (ii) the date 60 days
following the Effective Date.
<PAGE>
"Banners" shall mean run-of-network banner advertisements promoting the
-------
Cyberian Outpost Website, in which the Link is embedded.
"Buttons" shall mean buttons in which the Link is embedded.
-------
"Commissions" shall mean, with respect to any calendar quarter during the
-----------
Term, an amount equal to [XX] of Net StarMedia Customer Revenues.
"Cyberian Outpost Marks" shall mean the logos, tradenames, trademarks and
----------------------
service marks listed on Annex I attached hereto.
"Cyberian Outpost Website" shall mean a presence on the World Wide Web
------------------------
containing content in the Local Languages that is managed or administered by
Cyberian Outpost and/or is hosted by Cyberian Outpost, including without
limitation, the InterNIC-assigned domain name http://www.outpost.com/country/spa
and country/por and any other address which directs or may direct users to the
Local Language sections of the Cyberian Outpost site.
"Default" shall mean, with respect to either party, (i) any material breach
-------
by such party of any obligation for the payment of money set forth herein, which
breach has not been cured within three (3) business days following receipt of
notice thereof, or (ii) any material breach by such party of any obligation set
forth herein, other than as specified in clause (i) above, which breach has not
been cured within twenty (20) business days following receipt of notice thereof.
"Effective Date" shall mean July 16, 1998.
--------------
"Guaranteed Impressions" shall mean, with respect to the Banners and the
----------------------
Buttons, [XXXX] impressions per month, [XXX] of which shall be Banner
impressions.
"Link" shall mean a direct hypertext link from the StarMedia Website to the
----
Cyberian Outpost Website, which website will be viewed by users of the Link
through StarMedia's frameset.
"Local Languages" shall mean the Spanish and Portuguese languages.
---------------
"Net StarMedia Customer Revenues" shall mean, with respect to any calendar
-------------------------------
month, all revenues collected by Cyberian Outpost from StarMedia Customers
during such month, [XXXXXXXXXX].
"Newsletter" shall mean the English version of the quarterly newsletter
----------
authored by Cyberian Outpost.
"Optional Termination Payment" shall mean an amount equal to [XXX] of the
----------------------------
unpaid balance of the Sponsorship Fee as of the Termination Date following the
termination of this Agreement pursuant to Section 5.2.
<PAGE>
"Quarterly Commission Report" shall mean, with respect to any calendar
---------------------------
quarter, a detailed description of the revenues received by Cyberian Outpost
from StarMedia Customers during such quarter and a calculation of the
Commissions relating to such revenues.
"Sponsorship Fee" shall mean [XXXX].
---------------
"StarMedia Customers" shall mean all users who purchase any products or
---------
services from Cyberian Outpost [XXXXXX].
"StarMedia Marks" shall mean StarMedia's logos, tradenames, trademarks and
---------------
service marks, including, without limitation, StarMedia.
"StarMedia Website" shall mean the collection of limit documents accessible
-----------------
by the public via the Internet at the URL http://www.starmedia.com.
"Term" shall mean the term of this Agreement, which shall commence on the
----
Effective Date and end on the Termination Date.
"Termination Date" shall mean the earlier to occur of (i) the first
----------------
anniversary of the Activation Date, and (ii) the date of any termination of
this Agreement pursuant to Section 5.1 or 5.2.
"Usage Report" shall mean a report prepared by Cyberian Outpost that
------------
specifies the country of origin, chosen language, and other available
demographic information relating to, and the goods purchased by, each of the
StarMedia Customers.
2. CO-MARKETING OBLIGATIONS
------------------------
2.1. The Link. Commencing on the Activation Date, StarMedia will
--------
establish and maintain the Link. Cyberian Outpost will provide StarMedia with
the Universal Resource Locators necessary to establish the Link.
2.2 Marketing. Cyberian Outpost shall deliver to StarMedia appropriate
---------
artwork and logos constituting the Cyberian Outpost Marks, from which StarMedia
shall develop the Banners and the Buttons in such forms as StarMedia shall
reasonably determine will maximize the number of StarMedia Customers. StarMedia
shall, commencing on the Activation Date, place the Buttons in the following
locations within the StarMedia Website:
(a) on the homepage of the Digital Channel;
(b) within Informatica Hoy/Hoje, (i) on the ZD Homepage, in either
the upper right corner or below the "Mas Products" link, (ii) in
"Product Reviews" that reference a specific product, next to
those products offered by
<PAGE>
Cyberian Outpost and (iii) in the "Downloads" section, next to
product demos where the full product is offered by Cyberian
Outpost;
(c) within the Star Classifieds Channel, on top of the Computers,
Electronics and Software category homepage and on top of the
search results page in such category;
(d) in Pizarras/Quadro de Avisos, in the header of the Technology
bulletin board;
(e) in CopaMundial.com/CopaDoMundo.com, on the games pages;
(f) in StarMedia Shopping prominently placed in the shopping area;
and
(g) for at least three (3) months from the Activation Date, in the
What's New? section of the StarMedia Website homepage.
Should StarMedia change the layout of its Website in such a way that the Buttons
can not be placed as provided above, the Buttons will be guaranteed to be given
essentially the same placement within the StarMedia site as described above.
StarMedia shall provide to Cyberian Outpost not less than the Guaranteed
Impressions. Within twenty (20) days following the end of each calendar quarter
following the Effective Date, StarMedia shall deliver to Cyberian Outpost a
confirmation of the number of impressions received by the Banners and the
Buttons dining such quarterly period. Within twenty (20) days following the end
of (i) each of the first three months following the Effective Date, and (ii)
each calendar quarter thereafter, Cyberian Outpost shall deliver to StarMedia a
Usage Report covering such monthly or quarterly period, as the case may be.
2.3 Co-Marketing. StarMedia shall employ traditional co-branded marketing
------------
initiatives valued at not less than [XXX] of the Sponsorship Fees actually
received from Cyberian Outpost during the Term. This co-branded marketing will
be intended to introduce Cyberian Outpost to the Latin American marketplace as a
brand featured on the StarMedia site. Co-branded marketing initiatives may
include TV, newspaper, magazine and radio based advertising.
2.4. Targeted Marketing. StarMedia shall designate a point person to work
------------------
with Cyberian Outpost personnel to provide the following services: (i) the
translation into the Local Languages, [XXXXXX] of the Newsletter which Cyberian
Outpost delivers to its customer base via electronic mail and (ii) using
commercially reasonable efforts to measure the effectiveness of marketing
strategies employed pursuant to Sections 2.2 and 2.3. StarMedia may, in its sole
discretion, arrange for the translation into the Local Languages of product
reviews and other material provided by Cyberian Outpost, provided that if
StarMedia does elect to arrange for such translations, Cyberian Outpost agrees
that such translations shall be available only to users of the StarMedia
Website, and shall not be used or seen by users of the Cyberian Outpost Website
which have not utilized the Link.
<PAGE>
2.5. Trademarks. Cyberian Outpost hereby grants to StarMedia a non-
----------
exclusive non-transferable license to use the Cyberian Outpost Marks during the
Term solely in conjunction with the design, creation and display of the Banners
and Buttons as provided herein; provided, however, that StarMedia shall submit
-------
to Cyberian Outpost for its prior written approval the design of the Banners and
Buttons, which approval shall not be unreasonably withheld or delayed. StarMedia
acknowledges and agrees that (i) the Cyberian Outpost Marks will remain the
exclusive property of Cyberian Outpost, (ii) nothing in this Agreement shall
confer upon StarMedia any right of ownership in the Cyberian Outpost Marks, and
(iii) it shall not now or in the future contest the validity of the Cyberian
Outpost Marks. Cyberian Outpost acknowledges and agrees that: (x) the StarMedia
Marks are and shall remain the sole property of StarMedia (y) nothing in this
Agreement shall confer upon Cyberian Outpost any right of ownership in the
StarMedia Marks, and (z) it shall not now or in the future contest the validity
of the StarMedia Marks. StarMedia does not hereby grant a license or authorize
in any way whatsoever Cyberian Outpost to use StarMedia Marks, and any proposed
use of StarMedia Marks must be approved in writing by StarMedia prior to such
use.
2.6. Exclusivity. StarMedia agrees that during the Term it shall not
-----------
establish a direct link from the StarMedia Website to the website of any broad-
based reseller of new personal computers, related hardware, software and
peripherals listed on Annex II, provided, however, that in the event that
Cyberian Outpost does not have a competitive auction offering in the Local
Languages in development and being beta tested prior to October 1, 1998 and a
complete and fully functioning version of a competitive auction offering
available in the Local Languages prior to December 1, 1998, StarMedia may
establish a direct link to the website of any auction format reseller of new
personal computers, related hardware, software and peripherals.
2.7 Public Relations. Each party agrees to cooperate, when possible, for
----------------
all public relations events relating to the activation of the Link and the
placement of the Banners and Buttons.
2.8 Confidentiality. StarMedia and Cyberian Outpost agree that all
---------------
information (whether in writing, orally or in any other format) disclosed by
each of them to the other during the negotiation of this Agreement or to be
disclosed during the term of this Agreement, including but not limited to, all
of the information disclosed pursuant to Section 2.2 as well as business plans,
product ideas, marketing concepts, financial information and projections, shall
constitute "Confidential Information"; provided, however, Confidential
-------- -------
Information does not include Quarterly Commission Reports, information that is
or becomes publicly known through no wrongful act of either party (or any of its
employees), has been approved for release by written authorization of the
originating party, or has been disclosed pursuant to a requirement of a
government agency or of law. During the Term and at all times thereafter, the
party to whom Confidential Information has been imparted shall maintain such
information as confidential and shall not disclose or permit the same to be
disclosed to any person or entity. Each party shall use its best efforts to take
all reasonable steps to minimize the risks of disclosure of Confidential
Information. Each of the parties further agree that the unauthorized disclosure
by it of Confidential Information received from the other will cause irreparable
harm and significant injury to the other which may be difficult to ascertain.
Accordingly, each party agrees that the
<PAGE>
other shall be entitled to equitable relief, including, without limitation, an
immediate injunction enjoining any breach by it of this Section 2.8, in addition
to all other remedies available to such party at law or in equity. The parties
agree that this Section 2.8 shall survive the termination or expiration of this
Agreement.
3. FEES AND COMMISSIONS
--------------------
3.1. Sponsorship Fee. Cyberian Outpost shall pay to StarMedia the
---------------
Sponsorship Fee as follows: (i) [XXXXXXXX] payable on the Effective Date, and
(ii) the remainder payable in 11 equal monthly installments of [XXXXXXXX] on the
first business day of each calendar month thereafter. Notwithstanding anything
to the contrary contained herein, the Sponsorship Fee shall be payable to
StarMedia regardless of the termination of this Agreement, the parties agreeing
that this Section 3.1 shall survive the termination of this Agreement for any
cause, other than as a result of a Default by StarMedia or pursuant to Section
5.2. Upon any termination of this Agreement as a result of a Default by
StarMedia, any remaining monthly installments shall not be paid to StarMedia by
Cyberian Outpost; provided, however, StarMedia stall retain or be paid the
-------- -------
Sponsorship Fee previously received by, or owing to, StarMedia prior to the
Termination Date.
3.2. Commissions Cyberian Outpost shall pay to StarMedia the Commissions
-----------
owing for each calendar quarter, payable within 30 days of the last day of such
quarter provided, however, that the Commissions payable may be offset by an
-------- -------
amount equal to the installment of the Sponsorship Fee actually paid to
StarMedia in each quarter. Within thirty (30) days following the end of each
calendar quarter; Cyberian Outpost shall deliver to StarMedia a Quarterly
Commission Report with respect to such quarter, in the event of any refunds by
Cyberian Outpost to StarMedia Customers, for returned products or otherwise, of
amounts with respect to which Commissions have already been paid to StarMedia,
the amount of such Commissions shall be deducted from the next quarterly payment
of Commissions, or if no such payment is owing by Cyberian Outpost for the
following quarter, Cyberian Outpost may render a statement to StarMedia for such
amounts, which amounts shall be due and payable by StarMedia within thirty (30)
days following receipt of such statement. The parties agree that this Section
3.2 shall survive the termination of this Agreement with respect to any
Commissions accrued (including any revenues billed to StarMedia Customers but
not yet collected by Cyberian Outpost) and unpaid during the Term.
4. REPRESENTATIONS AND WARRANTIES
------------------------------
4.1. Representations and Warranties of StarMedia. StarMedia represents
-------------------------------------------
and warrants to Cyberian Outpost that (i) it has full power and authority, and
has taken all action necessary, to execute and deliver this Agreement and to
fulfill its obligations hereunder, (ii) the making and performance by it of this
Agreement does nor and will not violate any law or regulation applicable to it,
its certificate of incorporation, bylaws or other organizational documents or
any other agreement to which it is a party or by which it is bound, (iii) this
Agreement has been duly
<PAGE>
executed and delivered by it and constitutes its legal, valid and binding
obligations, enforceable against it in accordance with the respective terms
hereof (except to the extent that the enforceability thereof may be limited by
bankruptcy, insolvency or other similar laws of general applicability affecting
enforcement of creditors' rights generally) or by a court's discretion in
relation to equitable remedies), and (iv) all approvals, authorizations or other
actions by, or filings with, any governmental authority or other person or
entity necessary for the validity or enforceability of its obligations under
this Agreement have been obtained.
4.2. Representations and Warranties of Cyberian Outpost. Cyberian Outpost
--------------------------------------------------
represents and warrants to StarMedia that (i) it has full power and authority,
and has taken all action necessary, to execute and deliver this Agreement and to
fulfill its obligations hereunder, (ii) the making and performance by it of this
Agreement does not and will not violate any law or regulation applicable to it,
its certificate of incorporation, by-laws or other organizational documents or
any other agreement to which it is a party or by which it is bound, (iii) this
Agreement has been duly executed and delivered by it and constitutes its legal,
valid and binding obligations, enforceable against it in accordance with the
respective terms hereof (except to the extent that the enforceability thereof
may be limited by bankruptcy, insolvency or other similar laws of general
applicability affecting enforcement of creditors' rights generally, or by a
court's discretion in relation to equitable remedies), and (iv) all approvals,
authorizations or other actions by, or filings with, any governmental authority
or other person or entity necessary for the validity or enforceability of its
obligations under this Agreement have been obtained.
4.3 Disclaimer. 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 SUCH PARTY'S SITE
OR WEB PAGES, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR. PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR
COURSE OF PERFORMANCE. SPECIFICALLY, EACH PARTY ACKNOWLEDGES AND UNDERSTANDS
THAT THE OTHER MAY ENCOUNTER TECHNICAL OR OTHER DIFFICULTIES WHICH MAY
PERIODICALLY HINDER THE OPERATION OF THE LINK.
5. TERMINATION
-----------
5.1 Default. Either party may immediately terminate this Agreement in the
-------
event of a Default by the other party, upon written notice to such party,
without prejudice to any other rights it may have hereunder or at law.
5.2. Optional Termination. In the event that StarMedia receives 100 or
--------------------
more unique complaints from users in any one month period regarding their
experience with Cyberian Outpost or the Cyberian Outpost Website, StarMedia
shall notify Cyberian Outpost thereof within five business days following the
end of any such month. In the event that either (i) StarMedia has received at
least 100 unique complaints per month for two consecutive months, regarding
their
<PAGE>
experience with Cyberian Outpost or the Cyberian Outpost Website, and StarMedia
has provided Cyberian Outpost with such notification as is required in the
preceding sentence, or (ii) Cyberian Outpost ceases to be a broad-based reseller
of new personal computers, related hardware, software and peripherals, StarMedia
may terminate this Agreement at any time, upon written notice to Cyberian
Outpost. For purposes of this Section 5.2, a "complaint" shall not include any
complaint (i) regarding the fact that the product-specific pages within the
Cyberian Outpost Website are not in the Local Languages, or (ii) with regard to
matters as to which Cyberian Outpost has, prior to such complaint, conspicuously
posted a notification in the Local Languages on the Cyberian Outpost Website;
including, without limitation, the fact that certain products sold by Cyberian
Outpost may not be shipped to certain countries and that users in certain
countries may experience difficulties in receiving delivery of international
shipments. Notwithstanding anything to the contrary contained herein, upon any
termination of this Agreement pursuant to this Section 5.2, Cyberian Outpost
shall pay to StarMedia the Optional Termination Payment within three (3) days
following the Termination Date.
6. INDEMNIFICATION
---------------
6.1. StarMedia Indemnification. StarMedia shall indemnify, hold harmless
-------------------------
and defend Cyberian Outpost from and against any and all claims, liabilities,
losses, damages, expenses and costs (including, without limitation, legal fees
and costs) arising out of or relating to (i) StarMedia's breach of any of its
representations and warranties set forth herein, (ii) StarMedia's breach of any
of its obligations hereunder, (iii) the StarMedia Marks, or (iv) any negligence
or intentional wrongdoing of StarMedia, or any employee or agent thereof.
6.2 Cyberian Outpost Indemnification. Cyberian Outpost shall indemnify,
--------------------------------
hold harmless and defend StarMedia from and against any and all claims,
liabilities, losses, damages, expenses and costs (including, without limitation,
legal fees and costs) arising out of or relating to (i) Cyberian Outpost's
breach of any of its representations and warranties set forth herein, (ii)
Cyberian Outpost's breach of any of its obligations hereunder, (iii) any of the
products or services offered for sale on the Cyberian Outpost Website; (iv) the
Cyberian Outpost Website, (v) the Cyberian Outpost Marks, or (vi) any negligence
or intentional wrongdoing of Cyberian Outpost, or any employee or agent thereof.
7. GENERAL
-------
7.1 Review Rights. Cyberian Outpost shall retain complete, clear and
-------------
accurate records regarding the products and services purchased by StarMedia
Customers. StarMedia shall have the right, upon not less than ten (10) days
prior written notice to Cyberian Outpost and no more than twice during the Term,
to cause an independent Certified Public Accountant to inspect and review,
during Cyberian Outpost's normal business hours, all relevant records of
Cyberian Outpost and any of its affiliates upon which the Quarterly Commission
Reports and Commissions are based. The cost of any such review shall be paid by
StarMedia; provided, however, that if any such review shall reveal an
-------- -------
underreporting in excess of five percent (5%) in
<PAGE>
monies due to StarMedia from Cyberian Outpost, Cyberian Outpost shall promptly
pay to StarMedia (i) the cost of the review, (ii) the amount of any such
underpayment, and (iii) interest on the amount of any such underpayment equal to
11.5% per month from the date originally owing to StarMedia. The parties agree
that the provisions of this Section 7.1 shall survive the Termination Date,
provided that StarMedia may not commence a review after the date 90 days
following the Termination Date.
7.2 Notices. All notices and other communications between the parties
-------
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given upon receipt off and delivery; certified or registered mail,
return receipt requested; or telecopy transmission with confirmation of receipt;
addressed as follows, or to such other address as may be hereafter notified by
the parties:
StarMedia: StarMedia Network; Inc.
29 West 36th Street
New York, New York 10018
Attention: Steve Heller
Kevin Downey
Telecopy: (212) 631-9100
Cyberian Outpost: Cyberian Outpost, Inc.
27 North Main Street
Kent, Connecticut 06757
Attention:
Telecopy:
7.3 No Waiver; Cumulative Remedies. No failure or delay in the exercise,
------------------------------
by either party, of any right, remedy, power or privilege hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right, remedy, power or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy, power or privilege.
The rights, remedies, powers and privileges herein provided are cumulative and
not exclusive of any rights, remedies, powers and privileges provided by law.
7.4. Counterparts. This Agreement may be executed simultaneously in
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument. Transmission by telecopy
of an executed counterpart of this Agreement shall be deemed to constitute due
and sufficient delivery of such counterpart.
7.5. Severability. Any provision of this Agreement which is prohibited or
------------
unenforceable in any jurisdiction shall as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
<PAGE>
7.6. Governing Law. This Agreement shall be governed by and construed in
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accordance with the laws of the State of New York without reference to the
conflict of law principles thereof.
7.7. Jurisdiction. Any judicial proceeding brought with respect to this
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Agreement must be brought in a court of competent jurisdiction in the State of
New York located in the County of New York or in the United States District
Court of the Southern District of New York, and, by execution and delivery of
this Agreement, each party (i) accepts, generally and unconditionally, the
exclusive jurisdiction of such courts and any related appellate court, and
irrevocably agrees to be bound by any judgment rendered thereby in connection
with this Agreement, (ii) irrevocably waives any objection it may now or
hereafter have as to the venue of any such suit, action or proceeding brought in
such a court or that such court is an inconvenient forum and (iii) agrees that
service of process in any such action or proceeding may be effected (A) by
mailing a copy thereof by registered or certified mail (or any substantially
similar form of mail), postage prepaid, to its address set forth in Section 7.2
or (B) in any other manner permitted by law.
7.8. Headings. The section headings contained in this Agreement are for
--------
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
7.9. Entire Agreement. This Agreement, including the Annex hereto,
----------------
embodies the entire agreement and understanding of the parties hereto with
respect to the subject matter contained herein and supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
7.10. Amendments; Waivers; Binding Effect. Any amendments to, or waivers
-----------------------------------
of; this Agreement shall be in writing and signed by both parties or, in the
case of a waiver, by the party waiving compliance. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
7.11. Assignment. Neither party may assign this Agreement without the
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prior written consent of the other party, and any attempt by a party to assign
this Agreement without such consent shall be null and void; provided, however,
-------- -------
that either party shall be entitled to assign this Agreement without the other
party's prior written consent in connection with a merger of such party with or
into, or sale of all or substantially all of the assets of such party to, an
entity that is not a direct competitor of the other party.
7.12 No Agency. No agency, partnership, joint venture, or employment
---------
relationship shall be created or inferred by the existence or performance of
this Agreement, and neither party shall have any authority to bind the other in
any respect whatsoever.
7.13. Survival. In addition to those provisions herein which expressly
--------
survive the Termination Date, the fourth sentence of Section 12, the second
sentence of Section 2.4, the second and third sentences of Section 2.5, and
Sections 6.1, 6.2, 7.2, 7.3, 7.5, 7.6, 7.7, 7.8, 7.9. 7.13, and 7.15 shall also
survive the Termination Date.
<PAGE>
7.14. Force Majeure. Either party hereto shall be excused from any delay
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or failure in performance hereunder, except the payment of monies due and
payable hereunder, caused by reason of any occurrence or contingency beyond its
reasonable control, including, without limitation, acts of God, fires, floods,
wars, civil disturbance, sabotage, accidents or labor disputes. The obligations
and rights of the party so excused shall be extended on a day-to-day basis for
the period of time equal to that of the underlying cause of the delay.
7.15. Interpretation. All terms set forth in this Agreement and not
--------------
otherwise defined herein shall be construed to have meanings consistent with the
Internet, World Wide Web and telecommunications industry.
7.16 Limitation of Liability. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO
-----------------------
THE OTHER PARTY OR ANY OTHER PERSON OR ENTITY IN CONNECTION WITH THIS AGREEMENT
FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL OR RELIANCE DAMAGES (OR ANY LOSS OF
REVENUE, PROFITS, OR DATA), HOWEVER CAUSED, WHETHER FOR BREACH OF CONTRACT,
NEGLIGENCE OR UNDER ANY OTHER LEGAL THEORY, WHETHER FORESEEABLE OR NOT AND
WHETHER OR NOT THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGE, AND NOT WITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED
REMEDY. BOTH PARTIES AGREE THAT THESE LIMITATIONS OF LIABILITY ARE AGREED
ALLOCATIONS OF RISK AND ARE REFLECTED IN THE FEES AGREED UPON BY THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
CYBERIAN OUTPOST, INC. STARMEDIA NETWORK, INC.
By: /s/ Louise R. Cooper By: /s/ James Kern
--------------------- -----------------------------
Name: Louise R. Cooper Name: James Kern
Title: VP of Worldwide Marketing Title: VP, Sales
<PAGE>
ANNEX I
CYBERIAN OUTPOST MARKS
----------------------
Babbages
Bottom Line Distribution
Buy Comp
Buy Direct
CDW
Chumbo
CompUSA
Computer City
Creative Computers
Egghead
Electronics Boutique
Frys
Global Direct
Insight
Internet Shopping Network
Microcenter
Microwarehouse
Multiple Zones
NECX
PCConnection
PC/Mac Mall
<PAGE>
Software.net
Surplus Direct
Tiger Direct
<PAGE>
EXHIBIT 23.1
ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULE
The Boards of Directors
Cyberian Outpost, Inc. and Subsidiary:
The audits referred to in our report dated April 24, 1998, except for note
10(d), which is as of July 8, 1998, included the related financial statement
schedule 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, included in the Registration Statement. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We consent to the inclusion of our report dated April 24, 1998, except for
note 10(d), which is as of July 8, 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, and to the references to our firm under the headings
"Selected Consolidated Financial Data," and "Experts" in this Registration
Statement.
KPMG Peat Marwick LLP
Providence, Rhode Island
July 27, 1998
<PAGE>
July 28, 1998 Exhibit 99.5
Request for Withdrawal of Exhibit
---------------------------------
Pursuant to Rule 477 of the Securities Act of 1933, as amended, the
Registrant hereby requests withdrawal of the following Exhibit which was filed
with Amendment No. 1 to the Registration Statement on July 9, 1998:
10.12 Letter of Intent, dated May 27, 1998, by and between StarMedia
Network, Inc. and the Registrant.
The aforementioned Exhibit is being replaced by the following Exhibit which
was filed with Amendment No. 3 to the Registration Statement on July 30, 1998:
10.12 Co-Marketing Agreement, dated July 16, 1998, by and between
StarMedia Network, Inc. and the Registrant.
Cyberian Outpost, Inc.
/s/ Darryl Peck
------------------------------
By: Darryl Peck
Title: President
