<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Act of 1934
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<S> <C>
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use by the Commission Only (as permitted
by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/X/ Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or
Rule 14a-12
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<S> <C>
STREAMLINE.COM, INC.
- --------------------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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Payment of Filing Fee (Check the appropriate box):
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<S> <C> <C>
/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rule 14a-6(i)(1) and
0-11.
1. Title of each class of securities to which transaction
applies:
COMMON STOCK, PAR VALUE $.01 PER SHARE
------------------------------------------------------------
2. Aggregate number of securities to which transaction applies:
UP TO 4,330,433 SHARES OF COMMON STOCK, BASED ON CURRENT
CAPITALIZATION
OF ACQUIRED COMPANY
------------------------------------------------------------
3. Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how
it was determined):
$12.4065, ESTIMATED BASED ON THE AVERAGE OF THE HIGH AND LOW
PRICES OF THE REGISTRANT'S COMMON STOCK REPORTED BY THE
NASDAQ NATIONAL MARKET ON DECEMBER 1, 1999
------------------------------------------------------------
4. Proposed maximum aggregate value of transaction:
$53,725,517
------------------------------------------------------------
5. Total fee paid:
$10,746
------------------------------------------------------------
/X/ Fee paid previously with preliminary materials
Check box if any part of the fee is offset as provided by
/ / Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the form or schedule
and the date of its filing.
1. Amount Previously Paid:
------------------------------------------------------------
2. Form, Schedule or Registration Statement No.:
------------------------------------------------------------
3. Filing Party:
------------------------------------------------------------
4. Date Filed:
------------------------------------------------------------
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<PAGE>
STREAMLINE.COM, INC.
27 DARTMOUTH STREET
WESTWOOD, MA 02090
------------------------
December 13, 1999
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders of
Streamline.com, Inc. to be held at the principal offices of Streamline, 27
Dartmouth Street, Westwood, MA 02090, on January 5, 2000, at 10:00 a.m., local
time.
The Notice of Meeting and the Proxy Statement/Private Placement Memorandum
that follow describe the business to be considered and acted upon by the
shareholders at the meeting.
The board of directors of Streamline encourages your participation in
Streamline's shareholder voting process and, to that end, solicits your proxy.
You may give your proxy by completing, dating and signing the accompanying proxy
card and returning it promptly in the enclosed envelope. You are urged to do so
even if you plan to attend the meeting.
Sincerely,
/s/ Timothy A. DeMello
Timothy A. DeMello
CHAIRMAN OF THE BOARD
<PAGE>
STREAMLINE.COM, INC.
27 DARTMOUTH STREET
WESTWOOD, MA 02090
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 5, 2000
TO THE SHAREHOLDERS OF STREAMLINE.COM, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of
Streamline.com, Inc. will be held at 10:00 a.m., local time, on January 5, 2000,
at Streamline's principal offices at 27 Dartmouth Street, Westwood, MA 02090:
1. To approve the Agreement and Plan of Merger and Reorganization, dated as
of October 18, 1999, among Streamline, Streamsub, Inc., Beacon Home
Direct, Inc. d/b/a Scotty's Home Market, referred to in this proxy statement and
private placement memorandum as Scotty's and certain other parties. As a result
of the merger, each share of the common stock of Scotty's, assuming conversion
of preferred stock of Scotty's into common stock, other than shares as to which
dissenters' rights have been perfected or fractional shares, will be converted
into the right to receive 0.4000 shares of the common stock of Streamline,
subject to adjustment as described in the merger agreement. Additionally,
options and warrants to acquire Scotty's common stock, after adjustment to
reflect this exchange ratio, will become exercisable for Streamline common
stock. Under the terms of the merger agreement, the effective time of the merger
could occur as late as March 31, 2000.
2. To approve an increase in the number of shares of Streamline common
stock authorized for issuance under Streamline's 1993 Employee Stock Option
Plan, as amended, from 2,500,000 to 3,000,000.
3. To consider such other matters as may properly come before the special
meeting and any adjournments or postponements thereof.
Only shareholders of record at the close of business on November 26, 1999
are entitled to notice of and to vote at the special meeting and any adjournment
or postponement thereof.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Timothy A. DeMello
Timothy A. DeMello,
CHAIRMAN OF THE BOARD
Westwood, MA
December 13, 1999
IMPORTANT
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON.
HOWEVER, TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING YOU ARE URGED TO
COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE
IN THE POSTAGE-PREPAID ENVELOPE ENCLOSED FOR THAT PURPOSE. YOU MAY REVOKE YOUR
PROXY IN THE MANNER DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT/PRIVATE
PLACEMENT MEMORANDUM AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE SPECIAL
MEETING. ANY SHAREHOLDER ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON EVEN
IF HE OR SHE HAS RETURNED A PROXY CARD.
<PAGE>
PROXY STATEMENT / PRIVATE PLACEMENT MEMORANDUM
SPECIAL MEETING OF SHAREHOLDERS
OF STREAMLINE.COM, INC.
TO BE HELD ON JANUARY 5, 2000
------------------------
This Proxy Statement/Private Placement Memorandum is being furnished to the
shareholders of Streamline, Inc., a Delaware corporation, in connection with the
solicitation of proxies by the board of directors of Streamline for use at the
special meeting of shareholders of Streamline to be held on January 5, 2000,
10:00 a.m. local time, at Streamline's principal offices at 27 Dartmouth Street,
Westwood, Massachusetts 02090.
At the Streamline special meeting, holders of shares of Streamline common
stock will vote upon a proposal to approve the Agreement and Plan of Merger and
Reorganization, dated as of October 18, 1999, by and between Streamline, Beacon
Home Direct, Inc. d/b/a Scotty's Home Market, Streamsub, Inc., a wholly owned
subsidiary of Streamline, and certain other parties. Scotty's will be the
surviving corporation in the merger. A copy of the merger agreement is attached
to this proxy statement and private placement memorandum as Exhibit A and
incorporated in this proxy statement and private placement memorandum by
reference. At the Streamline special meeting, Streamline's shareholders will
also vote upon a proposal to increase the number of shares issuable under
Streamline's 1993 Employee Option Plan from 2,500,000 to 3,000,000. The
affirmative vote of the holders of not less than a majority of the shares of
Streamline common stock present, in person or by proxy, at the Streamline
special meeting is required to approve the merger agreement and to approve the
proposed amendment to Streamline's 1993 Employee Option Plan.
This proxy statement and private placement memorandum also constitutes the
Private Placement Memorandum to be delivered to Scotty's shareholders to assist
them in their determination of whether to vote to approve the merger agreement
and the merger. All information concerning Streamline contained in this proxy
statement and private placement memorandum has been furnished by Streamline, and
all information concerning Scotty's contained in this proxy statement and
private placement memorandum has been furnished by Scotty's.
In the merger, each share of Scotty's common stock, assuming conversion of
preferred stock of Scotty's into common stock, other than shares as to which
dissenters' rights have been perfected, fractional shares or any shares held in
treasury, will be converted into the right to receive 0.4000 shares of
Streamline common stock, subject to adjustment as described elsewhere in this
proxy statement and private placement memorandum. As of November 26, 1999, there
were approximately 9,313,413 outstanding shares of Scotty's common stock,
assuming the conversion of Scotty's preferred stock, and options and warrants to
acquire approximately 1,512,670 additional shares of Scotty's common stock. As a
result of the merger, assuming no adjustment to the 0.4000 exchange ratio,
approximately 3,725,365 shares of Streamline common stock will be issued to
holders of Scotty's common stock and approximately 605,068 will be reserved for
issuance upon the exercise of Scotty's warrants and options. If the merger had
occurred on the date of this proxy statement and private placement memorandum,
based on the average closing price of a share of Streamline common stock during
the period between November 26, 1999 and December 9, 1999 of $11.88, each share
of Scotty's common stock would have been converted into the shares of Streamline
common stock, which, based on the last reported sale price of a share of
Streamline common stock on December 10, 1999 of $11.56, would be the equivalent
of $4.61 per share of Scotty's common stock. A description of the terms of the
merger is set forth in this proxy statement and private placement memorandum.
For a discussion of certain significant risk factors relating to the merger,
see "RISK FACTORS," beginning on page 15.
<PAGE>
The enclosed proxy is solicited by Streamline's board of directors for use
at the Streamline special meeting and at any adjournments or postponements
thereof. The cost of soliciting proxies by mail, telephone, telegraph or in
person will be borne by Streamline. In addition to solicitation by mail,
Streamline will reimburse brokerage houses and other nominees for their expenses
incurred in sending proxies and proxy material to the beneficial owners of
shares held by them.
You may revoke your proxy at any time prior to its use by giving written
notice to the secretary of Streamline, by executing a revised proxy at a later
date or by attending the Streamline special meeting and voting in person.
Proxies in the form enclosed, unless previously revoked, will be voted at the
Streamline special meeting in accordance with the specifications made by you on
the proxy or, in the absence of such specifications, in favor of the proposals
set forth thereon, and, with respect to any other business which may properly
come before the meeting, in the discretion of the named proxies. If, in a proxy
submitted on your behalf by a person acting solely in a representative capacity,
the proxy is marked clearly to indicate that the shares represented thereby are
not being voted with respect to one or more proposals, then your proxy will not
be counted as present at the meeting with respect to such proposals. Proxies
submitted with abstentions as to one or more proposals will be counted as
present for purposes of establishing a quorum for such proposals.
All holders of record of Streamline common stock at the close of business on
November 26, 1999, will be eligible to vote at the meeting. Each share is
entitled to one vote. As of November 26, 1999, there were 18,373,796 shares of
Streamline common stock issued and outstanding. The presence, in person or by
proxy, of a majority of the issued and outstanding shares of Streamline common
stock will constitute a quorum for the transaction of business at the Streamline
special meeting. This proxy statement and private placement memorandum and the
enclosed proxy are first being mailed or given to Streamline's shareholders on
or about December 15, 1999.
The date of this proxy statement and private placement memorandum is
December 13, 1999.
------------------------
The above matters are discussed in detail in this proxy statement and
private placement memorandum. The proposed merger is a complex transaction. Both
Streamline shareholders and Scotty's shareholders are strongly urged to read and
consider carefully this proxy statement and private placement memorandum in its
entirety, particularly the matters referred to under "Risk Factors."
2
<PAGE>
The Streamline common stock to be issued in the merger is subject to
restrictions on transferability and resale and may not be transferred or resold
except as permitted by registration or exemption from the Securities Act of
1933, as amended, and applicable state securities laws. Scotty's shareholders
should be aware that they may be required to bear the financial risks of this
investment for an indefinite period of time.
------------------------
In making an investment decision Scotty's shareholders must rely on their
own examination of Streamline and the terms of the merger, including the merits
and risks involved. The securities to be issued in the merger have not been
approved or disapproved by the Securities and Exchange Commission or any state
securities commission nor has the SEC or any state securities commission passed
upon the accuracy or adequacy of this proxy statement and private placement
memorandum. Any representation to the contrary is a criminal offense.
------------------------
The Streamline common stock to be issued in the merger may be issued or sold
in reliance on Paragraph (13) of Code Section 10-5-9 of the Georgia Securities
Act of 1973, and, if so, may not be sold or transferred except in a transaction
which is exempt under such act or according to an effective registration under
such act. Any Scotty's shareholder located in Georgia should contact
Streamline's corporate secretary at 27 Dartmouth Street, Westwood, Massachusetts
02090, 781-407-1900, with any questions regarding this matter.
------------------------
No person is authorized by Streamline or Scotty's to give any information or
to make any representation, other than those contained in this proxy statement
and private placement memorandum, in connection with the offering of Streamline
common stock to the Scotty's shareholders according to the merger and, if given
or made, such information or representations should not be relied upon as having
been authorized. This proxy statement and private placement memorandum does not
constitute an offer to sell, or a solicitation of an offer to purchase,
Streamline common stock to any Scotty's shareholder in any jurisdiction in which
such offering may not lawfully be made.
------------------------
ADDITIONAL INFORMATION
Streamline files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You can read our
SEC filings over the Internet at the SEC's website at http://www.sec.gov. You
may also read and copy any document we file with the SEC at its public reference
facilities at 450 Fifth Street, N.W., Washington, D.C. 20549; Seven World Trade
Center, Suite 1300, New York, New York 10048; and Citicorp Center 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may also obtain
copies of these documents at prescribed rates by writing to the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference facilities.
3
<PAGE>
TABLE OF CONTENTS
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SUMMARY..................................................... 1
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL
DATA...................................................... 9
Streamline Selected Historical Financial Data............. 10
Scotty's Selected Historical Financial Data............... 11
Streamline and Scotty's Unaudited Pro Forma Condensed
Combined Financial Data................................. 12
Comparative Historical and Unaudited Pro Forma Per Share
Data.................................................... 13
MARKET PRICE AND DIVIDEND DATA.............................. 14
RISK FACTORS................................................ 15
STREAMLINE'S BUSINESS....................................... 25
Overview.................................................. 25
Industry Background....................................... 25
The Streamline Solution................................... 27
Streamline's Strategy..................................... 30
Details of the Streamline Process......................... 32
Expansion Strategy and Market Selection................... 34
Relationships with Consumer Packaged Goods Companies...... 36
Other Alliances........................................... 36
Customers and Customer Acquisition........................ 37
Customer Service.......................................... 38
Technology................................................ 38
Competition............................................... 39
Intellectual Property..................................... 39
Employees................................................. 39
Facilities................................................ 40
Legal Proceedings......................................... 40
STREAMLINE'S MANAGEMENT..................................... 41
Directors and Executive Officers.......................... 41
Board of Directors........................................ 43
Committees of the Board of Directors...................... 43
Director Compensation..................................... 43
Compensation Committee Interlocks and Insider
Participation........................................... 43
Employment Agreements..................................... 44
Executive Compensation.................................... 44
Stock Option Grants....................................... 45
Option Exercises and Holdings............................. 45
Stock Option Plans........................................ 46
STREAMLINE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
STATEMENTS AND RESULTS OF OPERATIONS...................... 48
SCOTTY'S BUSINESS........................................... 57
Overview.................................................. 57
Industry.................................................. 57
Scotty's Strategy......................................... 58
Scotty's Delivery Channels................................ 59
Competition............................................... 60
Intellectual Property..................................... 60
Employees................................................. 60
Facilities................................................ 61
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i
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Legal Proceedings......................................... 61
SCOTTY'S MANAGEMENT......................................... 62
SCOTTY'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
STATEMENTS AND RESULTS OF OPERATIONS...................... 63
OPERATION OF SCOTTY'S AFTER THE MERGER...................... 70
STREAMLINE AND SCOTTY'S UNAUDITED AND PRO FORMA COMBINING
FINANCIAL STATEMENTS...................................... 71
PRINCIPAL SHAREHOLDERS OF STREAMLINE........................ 79
THE SPECIAL MEETING......................................... 81
General................................................... 81
Matters to Be Considered.................................. 81
Record Date; Voting at the Streamline special meeting;
Votes Required.......................................... 81
Proxies................................................... 82
Solicitation of Proxies................................... 82
PROPOSAL 1--APPROVAL OF THE MERGER AGREEMENT................ 83
THE MERGER.................................................. 83
General................................................... 83
Background of the Merger.................................. 83
Streamline's Reasons for the Merger....................... 85
Scotty's Reasons for the Merger........................... 85
Recommendation of the Streamline Board.................... 86
Certain Federal Income Tax Consequences................... 86
Interest of Certain Persons in the Merger................. 88
CERTAIN PROVISIONS OF THE MERGER AGREEMENT.................. 89
Effective Time............................................ 89
Effects of the Merger..................................... 89
Exchange of Stock Certificates............................ 90
Fractional Shares......................................... 90
Purchase Price Adjustment................................. 90
Regulatory Approval....................................... 91
Dissenters' Rights........................................ 91
Registration of Shares.................................... 91
Representations and Warranties............................ 91
Conduct of Business Pending the Merger.................... 93
Additional Agreements..................................... 93
No Solicitation of Transactions........................... 94
Pooling-of-Interests Accounting Treatment................. 94
Conditions to Consummation of the Merger.................. 94
Indemnification; Escrow of Shares......................... 95
Escrow Agreement.......................................... 96
Termination............................................... 97
Termination Fee........................................... 97
Amendment and Waiver...................................... 97
COMPARISONS OF SHAREHOLDER RIGHTS........................... 98
General................................................... 98
Size and Classification of the Board of Directors......... 98
Removal of Directors...................................... 98
Shareholder Vote Required for Certain Transactions........ 99
Special Meetings of Shareholders.......................... 101
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Provisions of the Delaware General Corporation Law and the
Illinois Business Corporation Act Affecting Business
Combinations............................................ 101
Dissenters' Rights........................................ 102
COMMON STOCK MARKET AND DIVIDEND POLICY..................... 103
PROPOSAL 2--APPROVAL OF AMENDMENT TO STREAMLINE'S 1993
EMPLOYEE OPTION PLAN...................................... 104
SHAREHOLDER PROPOSALS....................................... 106
STREAMLINE.COM, INC. INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS................................................ F-1
BEACON HOME DIRECT, INC. INDEX TO FINANCIAL STATEMENTS...... F-26
EXHIBITS.................................................... A-1
A Agreement and Plan of Merger and Reorganization......... A-1
B Escrow Agreement........................................ B-1
</TABLE>
This Proxy Statement/Private Placement Memorandum contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including, but not limited
to, (i) statements about the adequacy of Streamline's and Scotty's cash, cash
equivalents, other capital resources, interest income, and costs associated with
expansion, (ii) statements relating to the consummation of the merger and the
integration and combined operations of Streamline and Scotty's, and
(iii) statements identified or qualified by words such as "likely," "will,"
"suggests," "may," "would," "could," "should," "expects," "anticipates,"
"estimates," "plans," "projects," "believes," or similar expressions (and
variants of such words or expressions). The forward-looking statements contained
in this proxy statement and private placement memorandum represent Streamline's
and Scotty's judgment as of the date of this proxy statement and private
placement, and Streamline and Scotty's caution readers not to place undue
reliance on these statements. Readers are cautioned that forward-looking
statements are inherently uncertain. Actual performance and results of
operations may differ materially from those projected or suggested in the
forward-looking statements due to certain risks and uncertainties, including,
but not limited to, the risks and uncertainties described or discussed below
under the heading "Risk Factors."
iii
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/PRIVATE PLACEMENT MEMORANDUM AND THE EXHIBITS HERETO. YOU
ARE URGED TO READ CAREFULLY THIS PROXY STATEMENT AND PRIVATE PLACEMENT
MEMORANDUM AND THE EXHIBITS IN THEIR ENTIRETY.
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THE COMPANIES
STREAMLINE.COM, INC. Streamline.com, Inc. was incorporated in Delaware in 1993.
27 DARTMOUTH STREET Its principal offices are located at 27 Dartmouth Street,
WESTWOOD, MA 02090 Westwood, MA 02090, (781) 407-1900, and its website is
www.streamline.com.
Streamline simplifies the lives of busy suburban families by
providing Internet-based ordering and home delivery of a
wide range of consumer goods and services such as groceries,
household goods, health and beauty care items, dry cleaning,
video rentals and film processing. The typical Streamline
customer is a dual income household with at least one child
and access to the Internet. Streamline also provide consumer
packaged goods companies insight into consumer Internet
purchasing behavior to help facilitate the development of
their Internet merchandising capabilities and to broaden
other research and marketing programs.
BEACON HOME DIRECT, INC., Beacon Home Direct, Inc. was incorporated on November 23,
D/B/A SCOTTY'S HOME MARKET 1994 and acquired substantially all of the assets of
1150 HEATHER COURT Scotty's Home Delivery, Inc. in 1995. The principal offices
LAKE ZURICH, IL 60047 of Scotty's are located at 1150 Heather Court, Lake Zurich,
Illinois 60047, and its website is
www.scottyshomemarket.com.
Scotty's provides groceries, personal care and household
products and related services, such as meal planning,
directly to its customers' homes at prices comparable to
grocery stores. Currently, Scotty's serves customers
primarily in the northern and western suburbs of Chicago,
which region comprises approximately 30% of the total
households in metropolitan Chicago.
OPERATION OF SCOTTY'S AFTER THE Following the merger, Scotty's will operate under the name
MERGER Streamline and will continue to provide unattended home
delivery of groceries and related products to customers in
the Chicago area.
THE SPECIAL MEETING OF SHAREHOLDERS
GENERAL The Streamline special meeting is scheduled to be held on
January 5, 2000, at 10:00 a.m. local time, at Streamline's
principal offices at 27 Dartmouth Street, Westwood, MA
02090.
MATTERS TO BE CONSIDERED At the Streamline special meeting, holders of Streamline
common stock will consider and vote upon:
- a proposal to approve the merger agreement
- a proposal to amend Streamline's 1993 Employee Option Plan
to increase the number of shares issuable according to
options granted thereunder from 2,500,000 to 3,000,000
- such other matters incidental to the merger as may
properly be brought before the Streamline special meeting or
any adjournments or postponements of this Streamline
special meeting.
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RECOMMENDATION OF THE STREAMLINE Streamline's board of directors has determined that the
BOARD terms of the merger agreement are fair to, and in the best
interests of, Streamline and its shareholders. Accordingly,
the board of directors has unanimously approved the merger
agreement and the proposed amendment to increase the number
of shares issuable under Streamline's 1993 Employee Option
Plan, and recommends that the shareholders of Streamline
vote FOR approval of each of these matters. Streamline's
board of directors' recommendation is based on a number of
factors described in this PROXY STATEMENT AND PRIVATE
PLACEMENT MEMORANDUM.
VOTE REQUIRED; SUPPORT/VOTING The affirmative vote of the holders of not less than a
AGREEMENTS majority of the shares of Streamline common stock present,
in person or by proxy, at the Streamline special meeting is
required to approve the merger agreement and to approve the
proposed amendment to Streamline's 1993 Employee Option
Plan. As a result, abstentions and failures to vote will
have the practical effect of voting against proposals.
Broker nonvotes will have no effect on the voting.
Shareholders of Streamline who hold in the aggregate
approximately 56.5% of the outstanding shares of Streamline
common stock as of the record date have signed
support/voting agreements in which they have agreed to vote
in favor of the proposals. Additionally, holders of
approximately 98.5% of the outstanding shares of Scotty's
common stock and 100% of the outstanding shares of Scotty's
preferred stock have signed support/ voting agreements in
which they have offered to vote in favor of the merger.
VOTING OF PROXIES Shares of Streamline common stock represented by properly
executed proxies received prior to the vote at the
Streamline special meeting and that have not been revoked
will be voted in accordance with the instructions indicated
thereon. If no instructions are indicated, such proxies will
be voted FOR approval of the merger agreement, FOR approval
of the proposed amendment to Streamline's 1993 Employee
Option Plan, and in the discretion of the proxy holder as to
any other matter that may properly come before the
Streamline special meeting.
REVOCABILITY OF PROXIES A Streamline shareholder who has given a proxy may revoke
such proxy at any time prior to its exercise at the
Streamline special meeting by:
- giving written notice of revocation bearing a later date
than the proxy to the secretary of Streamline
- properly submitting to Streamline a duly executed proxy
relating to the same shares bearing a later date
- attending the Streamline special meeting and voting in
person.
Attendance at the Streamline special meeting will not in and
of itself revoke a proxy. All written notices of revocation
and other communications with respect to revocation of
proxies by Streamline shareholders should be addressed as
follows:
Streamline.com, Inc.
27 Dartmouth Street
Westwood, MA 02090
Attention: Secretary
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or hand-delivered to the secretary of Streamline before the
vote is taken at the Streamline special meeting.
SOLICITATION OF PROXIES In addition to solicitation of proxies by mail, the
directors, officers and employees of Streamline may solicit
proxies from shareholders personally or by telephone,
facsimile or other electronic transmission. Streamline's
directors, officers and employees will not be compensated
for proxy solicitation but may be reimbursed for reasonable
out-of-pocket expenses. Arrangements will also be made with
brokerage houses and other custodians, nominees and
fiduciaries for forwarding proxy solicitation materials to
beneficial owners of shares held of record by such persons,
and Streamline will reimburse such custodians, nominees and
fiduciaries for their reasonable out-of-pocket expenses with
this forwarding the proxy solicitation materials.
RECORD DATE; SHARES ENTITLED TO VOTE The close of business on November 26, 1999, has been fixed
as the record date for determining holders of shares of
Streamline common stock entitled to notice of and to vote at
the Streamline special meeting. As of the record date,
18,373,796 shares of Streamline common stock were
outstanding and held of record by approximately 182 holders.
QUORUM The presence, in person or by proxy, of holders of a
majority of the outstanding shares of Streamline common
stock entitled to vote at the Streamline special meeting is
necessary to constitute a quorum for the transaction of
business at the special meeting. The Streamline special
meeting may be adjourned if a quorum is not present to
obtain additional proxies or votes or for any other purpose,
and, at any subsequent reconvening of the Streamline special
meeting, all proxies will be voted in the same manner as
such proxies would have been voted at the original convening
of the Streamline special meeting, except for any proxies
that have been revoked or withdrawn prior to the reconvened
special meeting, regardless of whether they may have been
voted on the same or any other matter at a previous meeting.
THE MERGER At the effective time of the merger, Streamsub, Inc., a
wholly owned subsidiary of Streamline, will be merged with
and into Scotty's, with Scotty's to be the surviving
corporation. The merger agreement is attached as Exhibit A
to this proxy statement and private placement memorandum and
is incorporated herein by reference.
STREAMLINE'S REASONS FOR THE MERGER Streamline's board of directors has determined that the
merger is fair to, and in the best interests of, Streamline.
The board of directors approved the merger because it
believed the merger would provide Streamline with
- continued growth in a changing consumer direct market
- an economically favorable means of entering into the
Chicago market
- cost savings through the consolidation and integration of
the two companies
- a higher value in the public capital market
- national recognition allowing it to compete with other
consumer direct companies
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<S> <C>
SCOTTY'S REASONS FOR THE MERGER Scotty's board of directors has determined that the merger
is fair to, and in the best interests of, Scotty's. The
board of directors approved the merger because it believed
the merger would provide Scotty's with
- an acquiring company with comparable business and
management philosophies
- an opportunity to provide shareholders with liquidity and
comparable returns on their investment with less risk
- ability to participate in the national roll-out of the
combined companies' business model
ISSUANCE OF STREAMLINE COMMON STOCK As a result of the merger, each share of Scotty's common
stock (assuming the conversion into common stock of each
share of Scotty's preferred stock), other than shares as to
which dissenters' rights have been perfected or fractional
shares, will be converted into the right to receive 0.4000
shares of the common stock of Streamline, subject to
adjustment as described in the merger agreement and
elsewhere in this proxy statement and private placement
memorandum. The number of shares of Streamline common stock
issued with respect to each share of Scotty's common stock
is referred to in this proxy statement and private placement
memorandum as the exchange ratio.
Additionally, stock options and warrants to purchase
Scotty's common stock will be exercisable for Streamline
common stock, with the number of shares and exercise prices
being adjusted to reflect the exchange ratio.
The exchange ratio will be increased or decreased, as
appropriate, in connection with any reorganization,
recapitalization, reclassification, stock dividend, stock
split, reverse stock split or other similar change in
Streamline's capitalization.
As of November 26, 1999, there were approximately 9,313,413
outstanding shares of Scotty's common stock, assuming the
conversion of Scotty's preferred stock, and options and
warrants to acquire approximately 1,507,670 additional
shares of Scotty's common stock. As a result of the merger,
assuming no adjustment to the 0.4000 exchange ratio,
approximately 3,725,365 shares of Streamline common stock
will be issued to holders of Scotty's common stock and
approximately 603,068 will be reserved for issuance upon the
exercise of Scotty's warrants and options.
If the merger had occurred on the date of this proxy
statement and private placement memorandum, based on the
average closing price of a share of Streamline common stock
during the period between November 26, 1999 and December 9,
1999 of $11.88, each share of Scotty's common stock would
have been converted into the shares of Streamline common
stock, which, based on the last reported sale price of a
share of Streamline common stock on December 10, 1999 of
$11.56, would be the equivalent of $4.61 per share of
Scotty's common stock. A description of the terms of the
merger is set forth in this proxy statement and private
placement memorandum.
PURCHASE PRICE ADJUSTMENT The total number of shares to be issued by Streamline
through the merger will be reduced
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
- in the event that proceeds to Scotty's of the pending
sale-leaseback of Scotty's new facility is less than
$1,300,000, by the amount of the deficiency divided by the
average closing price described above
- by $200,000 divided by the average closing price described
above
ESCROWED SHARES Promptly following the closing of the merger, Streamline
will issue to each Scotty's shareholder an unregistered
certificate representing approximately 90% of the number of
shares of Streamline common stock issued to the shareholder
as a result of the merger. A certificate representing the
remaining 10% of the shares issued to the shareholder will
be deposited into escrow as partial security for any
indemnification obligations of the shareholder under the
merger agreement. The escrow will continue until the
expiration of the indemnification period described below,
unless a claim is pending under the escrow at that time.
However, any Scotty's shareholder who has not become party
to the merger agreement will receive promptly following the
closing of the merger an unregistered certificate
representing 100% of the number of shares of Streamline
common stock issued to the shareholder as a result of the
merger.
INDEMNIFICATION Streamline has agreed to indemnify Scotty's, its
shareholders, and certain related persons from and against
any losses suffered by them arising out of any breaches of
the representations, warranties, covenants and other
agreements made by Streamline in the merger agreement or
other related documents. Scotty's shareholders have agreed
severally to indemnify Streamline, Streamsub, Inc., and
certain related persons from and against any losses suffered
by the indemnified parties arising in connection with:
- breaches of the representations, warranties, covenants and
other agreements made by Scotty's in the merger agreement or
other related documents
- certain governmental actions that might be brought prior
to the date the new facility is in operation, if such
governmental action is instituted prior to the closing of
the merger.
Scotty's shareholders have also agreed severally to provide
indemnification for any losses arising out of any breaches
of their individual representations, warranties, covenants
and other agreements in the merger agreement or other
related documents.
Except in specified instances, no party will be entitled to
indemnification until the aggregate losses suffered by the
indemnified parties exceed $300,000, at which point the
indemnified parties will be entitled to full indemnification
for all such losses in excess of that amount.
Except with respect to certain tax-related liabilities,
which survive until the expiration of the applicable statute
of limitations, the indemnification obligations will
terminate on the earlier of:
- October 18, 2000
- the date of effectiveness of the registration statement
filed to register the shares issued in connection with the
merger
- the date which is nine (9) months after the closing of the
merger, if Streamline has failed to file the registration
statement mentioned above by that date
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
- the date on which Streamline's independent accountants
deliver their audit report on Streamline's financial
statements as at the end of the fiscal year of Streamline
during which the effective time of the merger occurs and
for the annual fiscal period then ended
Other than with respect to fraud, Scotty's shareholders will
be liable under their indemnification obligations for no
more than 50% of the value of the shares of Streamline
common stock issued in the merger, valued at the closing
sale price of Streamline's common stock on the last trading
day prior to the closing date of the merger. Scotty's
shareholders will be permitted to pay any indemnification
obligations with cash, by surrendering shares of Streamline
common stock, or through a combination of these payment
methods.
ESCROW AGREEMENT At the closing of the merger, Streamline, State Street Bank
and Trust Company, and William C. Steinmetz, as
representative of Scotty's shareholders, will enter into the
Escrow Agreement attached as Exhibit B to this proxy
statement and private placement memorandum. In the merger
agreement, Scotty's shareholders have appointed William C.
Steinmetz as their representative and have granted him the
authority to take the actions on their behalf in connection
with indemnification claims and matters relating to the
escrow.
REGISTRATION OF SHARES The shares of Streamline common stock to be issued to the
Scotty's shareholders in connection with the merger will be
unregistered and, therefore, cannot be publicly traded
unless registered with the Securities and Exchange
Commission or sold under an exemption from the SEC's
registration requirements. Streamline has agreed to file a
registration statement covering these shares as promptly as
practicable following the date on which Streamline becomes
eligible to use a short-form registration statement or, if
earlier, nine months after the closing of the merger.
INTERESTS OF CERTAIN PERSONS IN THE In considering whether to approve the merger agreement, you
MERGER should be aware that Nordstrom, Inc. beneficially owns 43.1%
of the outstanding capital stock of Scotty's, assuming the
conversion of Scotty's preferred stock and the exercise of a
warrant. Nordstrom also beneficially owns 32.3% of
Streamline's outstanding common stock. J. Daniel Nordstrom,
Co-President of Nordstrom, Inc., is a director of Streamline
and Darren Jackson, Vice President of Strategic Planning of
Nordstrom, Inc., is a director of Scotty's. Accordingly,
Nordstrom, Inc. has interests in the merger that are in
addition to the interests of Streamline shareholders
generally. Streamline's board of directors was aware of
these interests, and considered them, among other matters,
when approving the merger agreement. Scotty's shareholders
should also be aware that Streamline has agreed to take
steps to maintain directors and officers liability insurance
for Scotty's current directors and officers for a period of
at least two years from the closing of the merger.
CONDITIONS TO CONSUMMATION OF THE The obligations of Scotty's and Streamline to consummate the
MERGER merger are subject to various conditions, including
obtaining the requisite approval of Streamline shareholders
and Scotty's shareholders.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
TERMINATION The merger agreement may be terminated at any time prior to
the effective time of the merger by mutual consent of
Streamline and Scotty's, or by either party if
- the effective time shall not have occurred on or before
March 31, 2000
- there exists any order, injunction or other binding legal
restraint or prohibition preventing the consummation of the
merger for a period of more than 20 consecutive days
- the other party has breached any representation, warranty
or agreement in the merger agreement that has not been cured
within 15 days after notice to the breaching party
TERMINATION FEES AND EXPENSES Scotty's will be required to pay Streamline a $500,000 fee
if the merger agreement is terminated and it is determined
that, at any time between September 17, 1999 and January 15,
2000, Scotty's or any of its shareholders negotiated,
solicited, discussed or entered into any agreement or
understanding related to the issuance, sale, or transfer of
capital stock, with certain permitted exceptions, or assets
of Scotty's, other than in the ordinary course of business,
or any merger or other business combination of Scotty's.
REGULATORY APPROVALS Given the number of shares of Streamline common stock to be
acquired by Nordstrom, Inc. as a result of the merger, on
November 18, 1999, Streamline and Nordstrom each filed
notification and report forms under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 with the Federal Trade
Commission and the Antitrust Division of the Department of
Justice. The expiration or earlier termination of the
waiting period under the act is a condition to the closing
of the merger.
DISSENTING SHAREHOLDERS' RIGHTS If the merger is consummated, and subject to any agreement
to the contrary between Scotty's and the current holders of
its common stock, holders of Scotty's common stock who have
properly exercised dissenters' rights in connection with the
merger under the Illinois Business Corporation Act of 1983
will have the right to receive such consideration as may be
determined to be due them according to the laws of the State
of Illinois.
EFFECTIVE TIME The effective time of the merger will occur as soon as
practicable after the requisite approvals of Streamline's
shareholders and Scotty's shareholders have been obtained
and all other conditions to the merger have been satisfied
or waived. The effective time will occur upon the date of
the filing of articles of merger with the Secretary of State
of the State of Illinois and the issuance of a certificate
of merger by the Secretary of State of the State of Illinois
and the filing of a certificate of merger with the Secretary
of State of the State of Delaware.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
ACCOUNTING TREATMENT The merger is expected to be accounted for using the
pooling-of-interests method of accounting according to
Opinion No. 16 of the Accounting Principles Board. Under the
merger agreement Streamline is not required to close the
merger unless it receives a letter from
PricewaterhouseCoopers LLP, independent accountants to
Streamline, concurring with Streamline's opinion that the
merger will qualify for pooling-of-interests accounting
treatment, or Streamline waives the condition. The
pooling-of-interests method of accounting assumes that
combining companies have been merged from inception.
Consequently, the historical financial statements for
periods prior to consummation of the merger are restated as
though the companies had been combined. Under the merger
agreement, neither Streamline nor Scotty's shall, directly
or indirectly, take any action which would potentially
prevent the treatment of the merger as a
pooling-of-interests for accounting purposes.
CERTAIN FEDERAL INCOME TAX The merger is intended to qualify for federal income tax
CONSEQUENCES purposes as a "tax-free reorganization" so that no gain or
loss would be recognized by Scotty's shareholders on the
exchange of their Scotty's common stock for Streamline
common stock, except in respect of cash received instead of
fractional shares and cash received by dissenting
shareholders, and no gain or loss would be recognized by
Streamline or Scotty's. Under the merger agreement, neither
Streamline nor Scotty's is obligated to consummate the
merger unless Scotty's has received a reasonably
satisfactory opinion of counsel to the effect that the
merger will constitute a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as
amended or both parties have waived the opinion condition.
MANAGEMENT
DIRECTORS In accordance with the merger agreement, at the effective
time, the directors of Streamsub shall become the directors
of Scotty's, each to hold office in accordance with Scotty's
Articles of Incorporation and By-Laws then in effect.
Additionally, upon the consummation of the merger, Chris
Sang, Chief Operating Officer and Chief Financial Officer of
Scotty's, will be appointed to fill an existing vacancy in
Streamline's board of directors.
OFFICERS Upon the closing of the merger, Scott DeGraeve, President of
Scotty's, will become Streamline's Vice President--General
Manager of Chicago Market, and Chris Sang will continue to
be an officer of Scotty's to oversee the establishment of
Scotty's new fulfillment center, which is currently under
development.
RISK FACTORS SHAREHOLDERS OF STREAMLINE SHOULD CAREFULLY EVALUATE THE
MATTERS SET FORTH UNDER "RISK FACTORS."
</TABLE>
8
<PAGE>
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
The following selected historical financial data of Streamline for each of
the fiscal years ended December 31, 1996, 1997 and 1998 has been derived from
Streamline's audited consolidated financial statements and notes thereto,
included elsewhere in this proxy statement and private placement memorandum. The
selected financial data for the fiscal years ended December 31, 1994 and 1995
has been derived from Streamline's audited consolidated financial statements,
not appearing elsewhere in this proxy statement and private placement
memorandum. The following selected historical financial data of Scotty's for
each of the fiscal years ended December 31, 1997 and 1998 has been derived from
the audited financial statements of Scotty's included elsewhere in this proxy
statement and private placement memorandum. The selected financial data for the
fiscal year ended December 31, 1996 has been derived from unaudited financial
statements of Scotty's, included elsewhere in this proxy statement and private
placement memorandum. The selected financial data for Scotty's for the fiscal
years ended December 31, 1994 and 1995 has been derived from unaudited internal
financial statements, not appearing elsewhere in this proxy statement and
private placement memorandum. The financial information for the years ended 1994
and 1995 also includes the financial activity of Scotty's Home Delivery, Inc.,
the predecessor operating business.
The Streamline and Scotty's historical financial data as of and for the
interim periods presented below has not been audited and has been prepared on
the same basis as the historical data derived from the audited financial
statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of financial position and results of operations of the respective
companies as of such dates and for such periods. The operating results for the
interim periods presented are not necessarily indicative of the results to be
expected for any other interim period or the full year. You should read this
data along with the Streamline and Scotty's Financial Statements and related
Notes and with Management's Discussion and Analysis of Financial Condition and
Results of Operations appearing elsewhere in this prospectus.
The selected pro forma combined financial data is derived from the unaudited
pro forma combined financial statements appearing elsewhere herein, which give
effect to the merger as a pooling of interests, and should be read in
conjunction with such pro forma statements and notes thereto.
The pro forma combined financial data is presented for illustrative purposes
only and is not necessarily indicative of the operating results or financial
position that would have been achieved if the merger had been consummated as of
the beginning of the periods presented, nor is it necessarily indicative of the
future operating results or financial position of Streamline and Scotty's. The
pro forma combined financial data does not included adjustments to conform the
accounting policies of Scotty's to those followed by Streamline. The nature and
extent of such adjustments if any, will be based upon further analysis and are
not expected to be material.
9
<PAGE>
STREAMLINE SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, OCTOBER 2,
--------------------------------------------------------- ------------- ----------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- ------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue.................. $29 $134 $922 $2,634 $6,946 $4,528 $10,242
Loss from operations..... (630) (1,030) (1,889) (8,500) (10,437) (7,363) (13,221)
Loss attributable to
common stockholders
before extraordinary
item................... (623) (1,050) (2,049) (8,471) (10,958) (7,720) (13,188)
Net loss attributable to
common stockholders.... (623) (1,050) (2,049) (8,471) (11,702) (8,464) (13,188)
Loss per common share
before extraordinary
item................... $(0.23) $(0.34) $(0.62) $(2.47) $(3.11) $(2.21) $(1.39)
Net loss per common
share.................. $(0.23) $(0.34) $(0.62) $(2.47) $(3.32) $(2.42) $(1.39)
Shares used in computing
basic and diluted net
loss per common
share.................. 2,748,042 3,046,127 3,284,625 3,424,035 3,522,458 3,497,875 9,493,994
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 2,
---------------------------------------------------- -----------
1994 1995 1996 1997 1998 1999 (1)
-------- -------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).... $ 56 $(365) $ 978 $ 330 $12,062 $40,616
Total assets................. 162 289 3,618 7,897 20,066 56,115
Capital lease obligations,
net of current portion..... -- 64 325 334 381 752
Redeemable convertible
preferred stock............ - - 5,203 14,000 37,186 --
Stockholders' equity
(deficit).................. 101 (186) (2,179) (8,398) (18,593) 51,133
</TABLE>
- ------------------------
(1) In June 1999, the Company completed an initial public offering of its common
stock. A total of 4,998,482 shares of the Company's common stock were sold
at a price of $10.00 per share, including the exercise of the underwriter's
over-allotment option in July 1999, generating gross offering proceeds of
approximately $50.0 million. After deducting $5.0 million in underwriting
discounts and approximately in other related expenses, the net proceeds to
the Company were approximately $45.0 million. Concurrent with the initial
public offering, all of the shares of Series A, Series B, Series C and
Series D redeemable convertible preferred stock and accrued dividends on the
Series D preferred stock were converted into 9,673,109 shares of
Streamline's common stock.
10
<PAGE>
SCOTTY'S SELECTED HISTORICAL FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ----------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenue.............. $1,483 $1,689 $2,568 $3,880 $5,582 $3,933 $5,328
Loss from
operations......... (79) (268) (741) (1,924) (3,676) (2,060) (4,525)
Net loss attributable
to common
stockholders....... (120) (294) (733) (1,940) (3,760) (2,104) (4,834)
Net loss per common
share.............. $(120.00) $(0.15) $(0.26) $(0.50) $(0.77) $(0.45) $(0.89)
Shares used in
computing basic and
diluted net loss
per common share... 1,000 2,000,000 2,832,493 3,860,285 4,895,264 4,712,891 5,442,384
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
----------- ----------- -------- -------- -------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Working capital
(deficit).......... $ 62 $ 237 $ 469 $ (756) $6,833 $(2,813)
Total assets......... 196 805 1,484 1,039 8,549 8,995
Capital lease
obligations, net of
current portion.... -- -- 61 39 109 1,077
Redeemable
convertible
preferred stock.... -- -- -- -- 9,414 9,789
Stockholders' equity
(deficit).......... (505) 685 1,152 (61) 7,536 3,505
</TABLE>
- ------------------------
(1) Beacon Home Direct, Inc. was incorporated on November 23, 1994 and began
doing business as Scotty's Home Markets in August 1995, when it acquired the
operating business of Scotty's Home Delivery, Inc. The financial information
above for 1994 and 1995 includes the financial activity of Scotty's Home
Deliver, Inc. prior to the acquisition by Beacon Home Direct, Inc. This
information has been presented in this format to present the ongoing
operating activities of these entities.
11
<PAGE>
STREAMLINE AND SCOTTY'S
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, OCTOBER 2,
--------------------------------- ------------- ----------
1996 1997 1998 1998 1999
--------- --------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.............................. $3,490 $6,514 $12,528 $8,461 $15,570
Loss from operations................. (2,630) (10,424) (14,113) (9,423) (17,746)
Loss attributable to common
stockholders before extraordinary
item............................... (2,782) (10,411) (14,600) (9,824) (17,647)
Net loss attributable to common
stockholders....................... (2,782) (10,411) (15,344) (10,568) (17,647)
Loss per common share before
extraordinary item................. $(0.63) $(2.10) $(2.50) $(1.83) $(1.34)
Net loss per common share............ $(0.63) $(2.10) $(2.63) $(1.96) $(1.34)
Shares used in computing basic and
diluted net loss per common
share.............................. 4,417,622 4,968,149 5,837,558 5,383,031 13,186,099
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 2,
------------------------------ ----------
1996 1997 1998 1999
-------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................... $ 1,447 $ (426) $18,895 $37,804
Total assets............................................ 5,102 8,936 28,615 65,110
Capital lease obligations, net of current portion....... 386 373 490 1,829
Redeemable convertible preferred stock.................. 5,203 14,000 37,186 --
Stockholders' equity (deficit).......................... (1,027) (8,459) (11,057) 54,638
</TABLE>
- ------------------------
(1) See "Unaudited Pro Forma Condensed Combining Financial Statements."
12
<PAGE>
COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA
The following table sets forth (1) historical net loss per common share and
historical book value per share data of Streamline; (2) historical net loss per
common share and historical book value per share data of Scotty's;
(3) unaudited pro forma combined net loss per common share and unaudited pro
forma book value per share data of Streamline after giving effect to the merger
on a pooling of interests basis; and (4) unaudited equivalent pro forma combined
net income per share and unaudited equivalent pro forma combined book value per
share data is based on the Exchange Ratio of .4000 of a share of Streamline
common stock for each share of Scotty's common stock. See "Certain Provisions of
the Merger Agreement--Effects of the Merger--Conversion of Scotty's Common
Stock." The information in the table should be read in conjunction with the
audited financial statements of Streamline and Scotty's and the notes thereto
included elsewhere in this proxy statement and private placement memorandum. The
unaudited pro forma combined financial data is not necessarily indicative of the
net loss per common share or book value per share that would have been achieved
had the merger been consummated as of the beginning of the periods presented and
should not be construed as representative of such amounts for any future dates
or periods.
<TABLE>
<CAPTION>
HISTORICAL
--------------------- PRO FORMA EQUIVALENT
STREAMLINE SCOTTY'S COMBINED PRO FORMA COMBINED (3)
---------- -------- ----------- ----------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss per common share:
For the year ended December 31 (2):
1998........................................ $(3.32) $(0.77) $(2.63) $(1.05)
1997........................................ (2.47) (0.50) (2.10) (0.84)
1996........................................ (0.62) (0.26) (0.63) (0.25)
For the nine months ended (2):
September 30, 1998.......................... $(2.42) $(0.45) $(1.96) $(0.78)
October 2, 1999............................. (1.39) (0.89) (1.34) (0.54)
Book value per share at (1)(2):
December 31, 1998......................... $(5.07) $ 1.38 $(1.50) $(0.60)
October 2, 1999........................... 2.78 0.63 2.47 0.99
</TABLE>
- ------------------------
(1) Historical book value per share is computed by dividing stockholders' equity
by the number of shares of common stock outstanding at the end of each
period. Pro forma combined book value per share is computed by dividing pro
forma stockholders' equity, including the effect of pro forma adjustments,
by the pro forma number of shares of Scotty's common stock which would have
been outstanding had the merger been consummated as of each balance sheet
date.
(2) Streamline and Scotty's anticipate that the combined company will incur
merger-related expenses totaling approximately $1.25 million. Such expenses
include legal and accounting expenses and other transaction costs. These
costs are expected to be charged to the operations of Streamline in the
quarter in which the merger is consummated. The effects of these costs have
not been reflected in any of the financial data above.
(3) The equivalent pro forma combined per share amounts are calculated by
multiplying the pro forma combined per share amounts by the Exchange Ratio
of .4000 of a share of Streamline common stock for each share of Scotty's
common stock.
13
<PAGE>
MARKET PRICE AND DIVIDEND DATA
The following tables set forth, for the second quarter ended June 30, 1999,
the third quarter ended October 2, 1999, and the fourth quarter through
December 10, 1999, the high and low last reported sale prices per share of
Streamline common stock, as reported on the Nasdaq National Market. Since
June 18, 1999, Streamline common stock has been quoted on the Nasdaq National
Market under the symbol "SLNE."
<TABLE>
<CAPTION>
STREAMLINE
COMMON STOCK
-------------------
QUARTER HIGH LOW
- ------- -------- --------
<S> <C> <C>
Ended June 30, 1999......................................... $ 8.19 $7.38
Ended October 2, 1999....................................... $13.19 $6.56
Through December 10, 1999................................... $12.82 $6.50
</TABLE>
On October 18, 1999, the last full trading day preceding the public
announcement of the execution of the merger agreement, the last reported sale
price per share of Streamline common stock was $6.88. Scotty's shareholders are
urged to obtain current market quotations for shares of Streamline common stock.
As of the close of business on November 26, 1999, there were approximately
182 holders of record of Streamline common stock.
There is no established trading market for Scotty's common or preferred
stock.
Streamline currently intends to retain earnings, and not pay dividends, for
the continued development and expansion of its business. If the merger is not
consummated, Scotty's also intends to retain earnings, and not pay dividends,
for the continued development and expansion of its business.
14
<PAGE>
RISK FACTORS
Scotty's shareholders should carefully consider the risks described below
before deciding whether to approve the merger and, as a result, receive shares
of Streamline common stock. Streamline's shareholders should carefully review
these risks as well. For purposes of this "Risk Factors" section, the pronouns
"we" and "our" refer to Streamline.
The risks and uncertainties described below are not the only ones facing
Streamline. Additional risks and uncertainties that we do not presently know
about or that we currently believe are immaterial may also adversely impact
Streamline's business. Additionally, as an early-stage company in the same
industry, Scotty's faces similar risks and uncertainties. If any of the
following risks actually occur to Streamline or Scotty's, that company's
business, financial condition and results of operations would likely suffer. In
such case, with respect to Streamline, the trading price of Streamline's common
stock could fall, and you may lose all or part of the value of your investment
in Streamline common stock.
This proxy statement and private placement memorandum contains
forward-looking statements based on Streamline's current expectations,
assumptions, estimates and projections about Streamline, Scotty's and their
industry that involve risks and uncertainties. These forward-looking statements
are usually accompanied by words such as "believe," "anticipate," "plan,"
"seek," "expect," "intend" and similar expressions. The companies' actual
results may differ materially from the results discussed in the forward-looking
statements because of factors such as the risk factors discussed below.
Streamline undertakes no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
WE HAVE A LIMITED OPERATING HISTORY
Although we were founded in 1993, most of our revenue growth has occurred
over the past two and one half years. Accordingly, we have a limited operating
history on which to base an evaluation of our business and prospects. Our
prospects are subject to the risks and uncertainties frequently encountered by
companies in the early stages of development, particularly companies in new and
rapidly evolving markets such as the consumer direct industry. These risks
include, but are not limited to, the lack of widespread acceptance of the
Internet as a means for purchasing products and services and difficulty in
managing our growth. We cannot be certain that we will successfully address
these risks. The failure to do so could have a material adverse effect on our
business, financial condition and results of operations.
Our extremely limited operating history and the uncertain nature of the
markets in which we compete make the prediction of future results of operations
difficult or impossible. Therefore, our recent revenue growth may not indicate
the rate of revenue growth, if any, that we can expect in the future.
WE HAVE EXPERIENCED A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES
We have never achieved profitability and, since inception, have incurred
significant net operating losses. At October 2, 1999, we had an accumulated
deficit of $36.1 million. We expect to continue to incur losses for the
foreseeable future both at our existing consumer resource center and as a result
of substantial expenditures associated with our planned expansion. We also
expect to increase our operating expenses significantly as we expand our sales
and marketing operations and continue to develop our customer service
infrastructure. To the extent that increased revenues do not promptly result
from these expenditures, our business, financial condition and results of
operations could be materially and adversely affected.
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WE HAVE NOT SIGNIFICANTLY TESTED OUR ABILITY TO EXECUTE OUR EXPANSION STRATEGY
A critical part of our business strategy is the expansion of our operations
into new regional markets and within existing markets. Historically, we operated
only one facility in one regional market. Although we began operations in a
second facility in October 1999, we have little experience operating outside of
the Boston area or managing multiple facilities. Our ability to expand
successfully will depend on a number of factors in each targeted regional
market, many of which are beyond our control. These factors include:
- acceptance of our product and service offerings
- identification and availability of appropriate and affordable sites for
our facilities
- management of facility construction and development timing and costs
- ability to develop relationships with local and regional product and
service providers
- customer acquisition costs
- hiring and training of qualified personnel
- competition
- establishment of adequate management and information systems and financial
controls
- ability to profitably manage our growth
We cannot be sure that facilities in any new market will have operating results
similar to those of our current facilities. In particular, until October 1999,
our operations were located solely in the Boston metropolitan area which an
industry study cites as an early adopter of consumer direct services and as
having demographic characteristics that are favorable for the acceptance of the
consumer direct industry.
Our ability to expand successfully and to manage our growth will also
require us to expand our operational, managerial and technical capabilities,
while maintaining a high level of quality and service at all times. Our failure
to effectively implement our expansion strategy would have a material adverse
effect on our business, financial condition and results of operations.
WE MAY HAVE DIFFICULTY RAISING ADDITIONAL CAPITAL
We will need additional financing over time, the amount and timing of which
will depend on a number of factors, including:
- the pace of our planned expansion into new markets
- our financial performance and results
- general market and economic conditions
We cannot be sure that we will be able to secure additional financing on
acceptable terms. Holders of any future debt instruments or preferred stock that
we may issue would have rights senior to those of the holders of our common
stock, and any future issuance of common stock would result in the dilution of
shareholders' equity interests.
WE RELY ON THE GROWTH OF E-COMMERCE AND THE INFRASTRUCTURE OF THE INTERNET
A majority of our customers place their orders over the Internet, and we
expect the percentage of customers who order our products and services via the
Internet to grow. Our future revenue and profit, if any, substantially depend on
the widespread acceptance and use of the Internet. However, the growth of the
Internet as a commercial medium may be sporadic for a number of reasons,
including potentially
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<PAGE>
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. If speed,
quality or usage demands placed on the Internet continue to increase, the
infrastructure for the Internet may not be able to support these demands. In
addition, growth of the Internet could be delayed as a result of the pace of
development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased governmental
regulation. Changes in or insufficient availability of communications services
to support the Internet also could result in slower response times and adversely
affect Internet usage generally and affect Streamline's services in particular.
Our future financial condition will be materially adversely affected if:
- use of the Internet does not continue to grow or grows more slowly than
expected
- the infrastructure for the Internet does not effectively support any
increased usage that may occur
- the Internet does not continue to grow in importance as a commercial
marketplace
Any change in the required Internet infrastructure, standards or protocols may
require us to incur substantial expenditures in order to adapt our services to
these changing or emerging technologies, which could have a material adverse
effect on our business, financial condition and results of operations.
INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND FOR OUR PRODUCTS AND
SERVICES
The market for our products and services is extremely competitive. We
currently or potentially compete with several types of companies, including:
- traditional grocery stores, such as supermarkets and independent grocery
stores, warehouse clubs, drug stores and convenience stores, some of which
fulfill orders received by telephone, fax or the Internet
- various suppliers of other goods and services, including national and
regional chains and independently owned operations, such as dry cleaners,
video rental stores, prepared meal providers, bottled water delivery
companies, pet supply stores and photo labs
- various on-line providers of groceries and other products and services,
such as Peapod, Inc., Hannaford Bros. Cos.' HomeRuns, ShopLink
Incorporated, HomeGrocer.com, Inc., Beacon Home Direct, Inc. d/b/a
Scotty's Home Market, Net Grocer Inc. and Webvan Group, Inc., some of
which are affiliated with large national and regional chains such as
Hannaford Bros. Co. and Stop & Shop Supermarket Co.
- other consumer direct or catalog retailers selling products or services
similar to those sold by Streamline
Many of our competitors are larger and have substantially greater resources than
we do. In addition, we believe that competition will intensify as more companies
offer competitive products and services through the consumer direct channel.
Streamline believes that the main competitive factors in our market are:
- range, quality and availability of products and services
- convenience, reliability and professionalism of delivery
- ease of ordering
- level and accessibility of information regarding products
- quality of customer service
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<PAGE>
- price
- general brand awareness
If any of our competitors surpass us or are perceived to have surpassed us with
respect to one or more of these factors, we may lose potential customers to
these competitors.
We must also compete to retain our existing customers. We aggressively
market our service to reduce customer attrition and increase the size and
frequency of customers' orders. However, there can be no assurance that these
marketing initiatives will be successful. High rates of customer attrition could
materially and adversely affect our business, financial condition and results of
operations.
WE DEPEND ON CUSTOMER ACCEPTANCE OF DIRECT, UNATTENDED DELIVERY OF GOODS AND
SERVICES
We accept orders for products and services and then deliver them directly
into our customers' garages or another secure location on their property without
requiring that they be present at the time of delivery. Market acceptance of
home delivery of products and services remains uncertain, in part because of the
real or perceived risk of increased exposure to theft and other criminal
activity by delivery personnel or others who may obtain access to the customer's
private property. Streamline's success will depend to a substantial extent on
the willingness of consumers to increase their use of direct delivery of
products and to allow us to enter their property to make unattended deliveries.
The failure of either of these circumstances to occur could materially and
adversely affect our business, financial condition and results of operations.
DIFFICULTY DEVELOPING OUR BRAND WOULD LIMIT OUR ABILITY TO EXPAND OUR CUSTOMER
BASE AND RESULT IN INCREASED CUSTOMER ACQUISITION COSTS
We believe that establishing and maintaining brand identity is a critical
aspect of attracting and expanding our customer base. The importance of brand
recognition will increase with heightened local, regional and national
competition. Promotion and enhancement of our brand will depend largely on our
success in continuing to provide high quality products and services. If
customers do not perceive our product and service offerings to be comprehensive
and of high quality, or if we introduce new services or enter into new business
ventures that customers do not favorably receive, we will risk harming our
brand. If we fail to provide high quality goods and services or otherwise
promote and maintain our brand, or if we incur excessive expenses in an attempt
to promote and maintain our brand, our business, financial condition and results
of operations could be materially and adversely affected.
WE DEPEND SIGNIFICANTLY ON OUR SUPPLIERS TO MEET CUSTOMER DEMAND
We purchase the products and services that we offer from national, regional
and local suppliers. We intend to seek additional suppliers and will rely on
such relationships to allow us to expand the products and services we offer to
our customers. While we currently have favorable working relationships with our
suppliers, we cannot be sure that these relationships will continue in the
future. Additionally, we have no commitments from our suppliers that guarantee
the availability or pricing of products or services. If any product shortages
were to arise, suppliers may choose to allocate products to other retailers. If
any of these relationships were to terminate or expire, we could have difficulty
replacing the supply source in a timely manner. Additionally, if any of our
suppliers were to experience disruptions to their business, such as labor
disputes, supply shortages or distribution problems, or if they were to allocate
products and services ordered by Streamline to their other customers, we might
not be able to satisfactorily fulfill our customers' orders, which could
materially and adversely affect our business, financial condition and results of
operations.
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OUR QUARTERLY OPERATING RESULTS FLUCTUATE BASED ON SEASONAL AND OTHER FACTORS
We may experience significant fluctuations in future quarterly operating
results from a number of factors, including:
- the timing and nature of expansion efforts in both new and existing
markets and related expenses
- the introduction of new products or services and customer response to
those introductions
- seasonal trends, such as lower ordering during family vacations
- changes in pricing policies or service offerings
- our ability to establish and expand recognition of the Streamline brand
- our ability to attract new customers and retain existing customers
- our ability to manage inventory and fulfillment operations
- our ability to sustain or improve cost of revenue
- changes in the level of marketing and other operating expenses to support
future growth
- competitive factors
- general economic conditions
Consequently, quarterly revenue and operating results have varied in the
past and may fluctuate significantly in the future. Streamline believes that
period-to-period comparisons of results will not necessarily be meaningful and
you should not rely on them as an indication of future performance. Furthermore,
due to the foregoing factors, among others, it is likely that our future
quarterly operating results will not meet the expectations of securities
analysts or investors from time to time, which may adversely affect the price of
the common stock.
WE DEPEND ON OUR MARKETING AND PROMOTIONAL RELATIONSHIPS FOR ADDITIONAL REVENUE
We derive a portion of our revenue through marketing and promotional
relationships with consumer packaged goods companies, and we intend to continue
to enter into similar relationships with other business partners. If we are
unable to continue promoting Streamline to these companies as an effective means
of conducting marketing and promotional efforts, we could experience a
significant decrease in revenue and our business, financial condition and
results of operations could be materially and adversely affected.
COMPETITORS COULD LICENSE OR REPLICATE OUR TECHNOLOGY SYSTEMS
Although we have directed considerable time and expense toward developing
several of the systems that we use in operating our business, such as our CD-ROM
ordering application, we do not own a copyright or other rights that would
preclude competitors from either licensing systems or portions of systems
substantially similar or identical to ours or using our systems as a model for
developing their own. Therefore, our competitors may be able to take advantage
of the time and effort that we expended in developing these systems.
DIFFICULTY IN IMPLEMENTING OUR NEW WEB-BASED ORDERING SYSTEM COULD LEAD TO
SIGNIFICANT EXPENDITURES`
We are currently implementing a new web-based ordering system, MySAP.com,
which should provide enhanced functionality over our current system. In the
event that we are unsuccessful in implementing this system on schedule, we would
be required to incur material costs in the enhancement and support of our
current system as we roll out our business to new markets.
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DISRUPTIONS IN OUR TECHNICAL SYSTEMS COULD HARM OUR BUSINESS
Streamline's ability to successfully receive, fill and deliver orders and
our ability to provide high-quality customer service largely depend on the
operation of our technical systems. These systems could be vulnerable to, among
other factors, disruptions caused by system failures, power losses,
communication problems, natural disasters, break-ins and similar problems.
Further, weaknesses in communications media, such as the Internet, may
compromise the security of confidential electronic information exchanged with
customers. Any system interruptions that result in the unavailability of our
website or reduced order fulfillment performance would reduce customer
satisfaction and decrease the volume of goods sold and the attractiveness of our
product and service offerings. To date, we have not experienced material
disruption of service. However, there can be no assurance that such problems
will not occur in the future.
WE DEPEND ON OUR KEY PERSONNEL AND QUALIFIED FUTURE HIRES TO IMPLEMENT OUR
EXPANSION STRATEGY
Our success will depend on the efforts and abilities of our senior
management and key employees, particularly Timothy A. DeMello, our founder,
Chairman and Chief Executive Officer. We do not have employment contracts with
most of our key personnel. If we cannot retain existing key managers and employ
additional qualified senior managers, our business, financial condition and
results of operations could be materially and adversely affected. Furthermore,
future expansion of our operations will require us to attract, train and retain
substantial numbers of new personnel. The metropolitan markets into which we may
wish to expand may have very competitive labor markets. Additionally, as we
expand in new and existing markets, we may experience labor disputes or union
organization attempts. These factors could increase our operating expenses. If
we are unable to recruit or retain a sufficient number of qualified employees,
or the costs of compensation or employee benefits increase substantially, our
business, financial condition and results of operations could be materially and
adversely affected.
OUR INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE
E-commerce is characterized by rapidly changing technology. To remain
competitive, we must continue to enhance and improve the responsiveness and
functionality of our software and systems. Our future success will depend upon
our ability to keep pace with technological developments. The development of new
services and the enhancement of existing services entails significant
technological risks. We may not successfully:
- maintain and improve our software and systems
- effectively use new technologies
- adapt our services to emerging industry standards
- develop, introduce and market service enhancements or new services
If we are unable, for technical or other reasons, to develop and introduce new
services or enhancements of existing services in a timely manner in response to
changing market conditions or customer requirements, or if new services do not
achieve market acceptance, our business, financial condition and results of
operations could be materially and adversely affected.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Streamline's success and ability to compete substantially depend upon our
proprietary systems and technology. We rely on trademark and trade secret laws
to protect our proprietary rights. Streamline has been granted service mark
registrations for the marks STREAMLINE, WE BRING IT ALL HOME and DRO and has
pending registration applications for the marks DON'T RUN OUT and SIMPLE SOURCE.
Additionally, legal standards relating to the protection of intellectual
property rights in Internet-related industries are
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uncertain and still evolving. As a result, the future viability or value of our
intellectual property rights, as well as those of other companies that conduct
business over the Internet, is unknown. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our
service or obtain and use information that we regard as proprietary. Policing
unauthorized use of our proprietary rights is difficult. In addition, litigation
may be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or trademarks or to determine the validity and scope
of the proprietary rights of others. Litigation might result in substantial
costs and diversion of resources and management attention. Any infringement or
misappropriation of our proprietary rights and the related costs of enforcing
those rights could have a material adverse effect on our business, financial
condition and results of operations.
WE MAY INFRINGE UPON OTHER PARTIES' PROPRIETARY RIGHTS
Our business activities may infringe upon the proprietary rights of others
and other parties may assert infringement claims against us, including claims
that arise from directly or indirectly providing hyperlink text links to
websites operated by third parties. Moreover, from time to time, third parties
may allege infringement by us or our strategic partners on their trademarks,
service marks and other intellectual property rights. Such claims and any
resultant litigation could subject us to significant liability for damages,
might result in invalidation of our proprietary rights and, even if not
meritorious, could result in substantial costs and diversion of resources and
management attention and have a material adverse effect on our business,
financial condition and results of operations.
ALL OF OUR SYSTEMS MAY NOT BE YEAR 2000 COMPLIANT
Many computer systems and other equipment with embedded control chips or
microprocessors use only two digits to represent the year, and could fail or
make miscalculations due to interpreting a date including "00" to mean 1900
rather than 2000. We are currently undergoing efforts to ensure that our
critical business systems will not fail or make miscalculations as a result of
the Year 2000 date change. Although we believe that the Year 2000 date change
will not adversely affect most of our internally developed and licensed
information technology, including our financial systems and accounting software,
we cannot assure you that the production systems of many of our strategic
business partners or suppliers will not be adversely affected. In addition, we
cannot be sure that we will not have to spend significantly more than we
currently anticipate on remediation efforts for our critical systems, or that
implementation of any contingency plans we develop to deal with problems
resulting from the Year 2000 date change will successfully avoid or alleviate
this problem. Any such failures could have a material adverse effect on our
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
WE DEPEND ON PRODUCT INFORMATION SUPPLIED BY THIRD PARTIES
We currently purchase and license from third parties graphical and textual
product information that we incorporate into our website and CD-ROM application.
We cannot assure you that third-party information of this type will continue to
be available to us on commercially reasonable terms, if at all. Any failure to
obtain this type of information in the future could significantly reduce the
appeal of our Internet-based ordering systems and could adversely affect our
business, financial condition and results of operations.
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WE MAY CONTRACT WITH OTHER COMPANIES TO PROVIDE BUSINESS SERVICES TO US
In the future, we may seek to contract with other companies to perform some
of the operational functions currently performed by our personnel. Should we
choose to outsource any of these activities, we would rely on these other
companies to assist us in operating portions of our business. If any of these
outsourcing relationships were to terminate, expire or experience disruptions,
we could have difficulty replacing these services in a timely manner.
Additionally, any such companies might not perform to our standards of
timeliness, quality and accuracy. As a result, we might not be able to
satisfactorily deliver our customers' orders, which could materially and
adversely affect our business, financial condition and results of operations.
E-COMMERCE SECURITY BREACHES COULD HARM US
The expansion and continued viability of e-commerce and related Internet
communications depends on secure transmission of confidential information. We
rely on encryption and authentication technology to effect secure transmission
of confidential information. Advances in computer capabilities, new discoveries
in the field of cryptography or other developments could result in a compromise
of the codes we use to protect customer transaction data. Any such compromise of
our security could have a material adverse effect on our business, financial
condition and results of operations. Concerns over the security of e-commerce
transactions and individual privacy may also inhibit the growth of the Internet
and other on-line services generally, especially as a means of conducting
commercial transactions.
WE FACE POTENTIAL PRODUCT LIABILITY CLAIMS
We cannot assure you that the products that we deliver will be free from
contaminants. Grocery and other related products occasionally contain
contaminants due to inherent defects in the products or improper handling. If
any of these products cause harm to any of our customers, we could be subject to
product liability lawsuits. If we are found liable under a product liability
claim, or even if we are not found liable but are required to defend ourselves
against such a claim, our customers may substantially reduce or even curtail
ordering products and services from us, which could have a material adverse
effect on our business, financial condition and results of operations.
WE COULD BE AFFECTED BY GOVERNMENT REGULATION OF THE INTERNET AND LEGAL
UNCERTAINTIES RELATING TO E-COMMERCE
Currently, few laws or regulations directly apply to commerce on or access
to the Internet and we are not subject to direct government regulation, other
than regulations applicable to businesses generally and food related businesses
in particular. However, a number of legislative and regulatory proposals
relating to e-commerce are under consideration by federal, state, local and
foreign governments and, as a result, a number of laws or regulations may be
adopted with respect to Internet user privacy, taxation, pricing, quality of
products and services, intellectual property ownership and consumer protection
generally. There is also uncertainty as to how existing laws in a number of
areas will be interpreted to apply to the Internet. The additional burdens
imposed by the adoption of new laws or the application of existing laws to the
Internet may decrease the growth in the use of the Internet, which could in turn
decrease the demand for our services, increase our costs of doing business or
otherwise have a material adverse effect on our business, financial condition
and results of operations.
WE WILL CONTINUE TO BE CONTROLLED BY OUR THREE LARGEST SHAREHOLDERS AND THEY
WILL BE ABLE TO EFFECT IMPORTANT CORPORATE ACTIONS WITHOUT THE APPROVAL OF
OTHER SHAREHOLDERS
As of November 26, 1999, our three largest shareholders beneficially owned
approximately 55.5% of our outstanding common stock. After the merger, these
shareholders will continue to beneficially
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own approximately 54.5% of our outstanding common stock. See "Principal
Shareholders." As a result, these shareholders, acting together, are able to
control the outcome of many matters submitted for shareholder action, including:
- electing members to our board of directors
- approving significant change-in-control transactions
- determining the amount and timing of dividends paid to themselves and to
our public shareholders
- otherwise controlling our management and operations
OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE IN THE FUTURE
The market for shares in newly public Internet-related companies is subject
to extreme price and volume fluctuations. These broad fluctuations may
materially and adversely affect the market price of our common stock. Our shares
have traded at prices between $6.56 and $13.19 per share in the first several
months of public trading. The price of our shares may continue to be volatile in
the future, and may be affected by a number of factors, including:
- actual or anticipated fluctuations in our operating results
- changes in investors' and securities analysts' expectations as to our
future financial performance or changes in financial estimates of
securities analysts
- announcement of new products or product enhancements by us or our
competitors
- technological innovations by us or our competitors
- the operating and stock price performance of comparable companies
PROVISIONS OF OUR GOVERNING DOCUMENTS AND DELAWARE LAW COULD DISCOURAGE
ACQUISITION PROPOSALS OR DELAY A CHANGE IN CONTROL OF STREAMLINE
Our certificate of incorporation and by-laws contain anti-takeover
provisions, including those listed below, that could make it more difficult for
a third party to acquire control of us, even if that change in control would be
beneficial to shareholders:
- our board of directors has the authority to issue common stock and
preferred stock and to determine the price, rights and preferences of any
new series of preferred stock without shareholder approval
- our board of directors is divided into three classes, each serving
three-year terms
- supermajority voting is required to amend key provisions of our
certificate of incorporation and by-laws
- there are limitations on who can call special meetings of shareholders
- shareholders may not take action by written consent
- advance notice is required for nominations of directors and for
shareholder proposals
In addition, provisions of Delaware law and our stock option plans may also
discourage, delay or prevent a change of control of Streamline or unsolicited
acquisition proposals.
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FUTURE SALES BY OUR EXISTING SHAREHOLDERS COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK
Sales of our common stock in the public market could adversely affect the
market price of our common stock. Of the 18,373,796 shares that were outstanding
as of November 26, 1999,
- approximately 13,000,000 additional shares may be sold on December 15,
1999, after the expiration of lock-up agreements and
- approximately 1,200,000 additional shares issuable upon the exercise of
stock options and warrants a may be sold on December 15, 1999, after the
expiration of lock-up agreements
SCOTTY'S FACES MOST OF THE SAME RISKS AND UNCERTAINTIES THAT FACE STREAMLINE.
As similarly situated companies in the same industry, Scotty's is subject to
most of the same risks and uncertainties facing Streamline, including those that
relate to early-stage companies and to the developing consumer direct industry.
Additionally, Scotty's shareholders and Streamline's shareholders should be
particularly aware that:
- Scotty's has a limited operating history and, accordingly, there is
limited information on which to evaluate Scotty's business prospects
- Scotty's has experienced a history of losses and anticipates future losses
for the foreseeable future
- in the near future, Scotty's plans to roll out a new, highly automated
fulfillment center, which has not yet been completed and, accordingly, has
not yet been tested operationally
- competitors may provide more attractive product and service offerings
within Scotty's area of operations, which could result in decreased demand
for Scotty's products and services
- Scotty's depends on its suppliers to provide the products and services
that it sells to its customers and would be unable to operate its business
if key supply relationships were to terminate and satisfactory alternative
arrangements could not readily be made
- Scotty's depends on its key personnel and qualified future hires and will
be unable to carry on its business if it cannot attract and retain
sufficiently qualified employees
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STREAMLINE'S BUSINESS
OVERVIEW
We simplify the lives of busy suburban families by providing them with
Internet-based ordering of goods and services, coupled with direct-to-the-home
delivery. We significantly shorten and simplify the traditional shopping needs
of our customers who increasingly demand time-saving lifestyle solutions. We
deliver our products and services to each customer through a single weekly
delivery. Products that we purchase at wholesale prices directly from
wholesalers, distributors and manufacturers and sell to our customers at retail
prices include:
<TABLE>
<S> <C>
- - brand-name groceries - fresh baked goods
- - quality meats and seafood - freshly prepared meals
- - fresh produce - health and beauty care products
- - dairy products, including gourmet - cleaning supplies and other
cheeses household items
- - sliced-to-order deli products - specialty pet food and supplies
- - organic foods - fresh flowers
- - frozen foods - stationery supplies and postage
stamps
- - kosher foods - seasonal items, including firewood,
charcoal and holiday products
</TABLE>
In addition, we offer a wide range of related services, such as:
<TABLE>
<S> <C>
- - dry cleaning pick-up and delivery - package pick-up and delivery
- - clothing alteration and repair - bottle and can redemption
- - video and video game rental - shoe repair
- - film processing and supplies - food and clothing drives
- - bottled water and cooler delivery
</TABLE>
Our product and service offerings, combined with the frequency of ordering
and delivery, provide us the opportunity to develop long-term relationships with
customers.
INDUSTRY BACKGROUND
Consumer direct companies deliver groceries and other consumer products and
services, which consumers have ordered over the Internet or by telephone or fax,
directly to their homes. In a 1996 study, Andersen Consulting estimated that the
U.S. consumer direct market could generate approximately $60 billion in annual
sales in 2007. Several converging trends are driving this growth:
- demographic trends supporting the growth of the consumer direct industry
- growth of the Internet and e-commerce
- limitations of the traditional physical store model
DEMOGRAPHIC TRENDS SUPPORTING THE GROWTH OF THE CONSUMER DIRECT INDUSTRY
NFO Worldwide, Inc. analyzed a group of consumer direct users and profiled
such users as having the following characteristics, among others:
- 61% are dual income households
- 75% have at least one child under 18
- 88% use personal computers
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- 40% use time-saving services such as house cleaning services
- 75% use time-saving devices such as mobile phones
NFO and Andersen Consulting separately report that perceived time-saving is
one of the primary benefits driving usage of consumer direct channels. Andersen
Consulting has additionally found that consumer direct companies excel at
meeting the following needs of the busy consumer:
- simplicity
- more effective use of time
- pricing accuracy
- product quality
- minimal physical effort
GROWTH OF THE INTERNET AND E-COMMERCE
The Internet has become an increasingly significant global medium for
consumer commerce and now provides a powerful and efficient means for consumers
to order products and services. International Data Corporation estimates that
21 million U.S. households had Internet access in 1997 and expects this number
to grow to over 67 million by the end of 2002.
Growth in Internet usage among consumers has been fueled by a number of
factors, including:
- increased awareness of the Internet among consumers
- a large and increasing number of personal computers at home
- growing e-commerce activity due to increasing availability of information
and services on the Internet
- more readily available access to the Internet due to the proliferation of
service providers
- advances in the performance and speed of personal computers and modems
- improvements in network systems and infrastructure, including increased
bandwidth
- reduced security risks in conducting commercial transactions via the
Internet
The Internet is also dramatically affecting the manner in which companies
distribute goods and services. Specifically, the Internet allows consumer direct
companies to:
- reach a large national and local audience from a central location
- process business with reduced infrastructure investment and overhead
costs, along with greater economies of scale
- provide consumers with a broad selection of products and services,
increased information and enhanced convenience
As a result of both increased consumer Internet use and this increasing
selection of products and services, a growing number of consumers are
transacting business on the Internet, including buying groceries and other
consumer products. IDC estimates that in 1997 over 36% of Internet users
purchased consumer goods or services over the Internet and that 50% of Internet
users will make on-line purchases in 2002. IDC also estimates that consumer
purchases of goods and services over the Internet will increase from
$4.3 billion in 1997 to $54.3 billion in 2002. Jupiter Communications estimates
that consumers spent approximately $65 million in 1997 over the Internet on
grocery and health and beauty products, and that this market will increase to
approximately $4.7 billion by 2002.
26
<PAGE>
This estimated penetration still represents less than one percent of the total
dollars expended in 1997 on grocery and health and beauty products through
traditional U.S. retail channels.
LIMITATIONS OF THE TRADITIONAL PHYSICAL STORE MODEL
LIMITED ABILITY TO MEET THE NEEDS OF BUSY CONSUMERS. Consumers are
increasingly time constrained. The increase in dual income families limits the
time available for routine activities, such as shopping, cooking and cleaning.
According to the U.S. Bureau of Labor Statistics, the number of dual income
households totaled 28.5 million in 1998, representing approximately 27.8% of the
total number of households in 1998 as reported by the U.S. Bureau of the Census.
According to Andersen Consulting, the typical consumer visits the supermarket
twice per week and each trip takes an average of 47 minutes excluding the time
required for driving to and from the store, parking, and loading and unloading
packages. The weekly time burden is even greater when one considers time spent
on other chores, such as picking up dry cleaning, returning videos and mailing
packages. According to the Food Marketing Institute, people with full time jobs
complete 50% of their shopping during the weekend.
ECONOMIC CONSTRAINTS. Traditional physical store models face significant
economic limitations due to costs associated with real estate, construction,
store set-up, inventory, and other fixed assets. According to the FMI, 7% of a
traditional grocery store's operating costs in 1997 were related to real estate
rental costs. Traditional physical store models also have high ongoing expenses
relating to personnel. As measured by the FMI, a traditional grocery store's
labor costs in 1997 typically represented 57% of its operating costs. In
addition, traditional physical stores are limited in their ability to track
critical customer purchasing and preference information and, therefore, cannot
predict customer demand with great accuracy. ACNielsen Corporation has found
that only 55% of customers participate in scannable card programs. Therefore,
these programs do not provide complete consumer purchase data. Consequently,
traditional physical stores, especially grocery stores, must carry more
inventory and, therefore, build or lease more space to warehouse and display
this inventory and employ more people to service this larger space. The average
supermarket currently stocks over 30,000 items and has grown from 31,000 square
feet to 39,260 between 1990 and 1997.
Consumers are increasingly seeking a shopping solution which helps them to
save time while providing quality goods and services. Consumer direct companies
are using the Internet to satisfy this need while traditional physical stores
face fundamental constraints that limit their ability to meet these demands.
THE STREAMLINE SOLUTION
We have created a lifestyle solution for today's busy suburban family by
providing an efficient means of purchasing and receiving groceries and other
related products and services. We supply consumers with a simple, informative
and enjoyable Internet-based shopping experience by offering a targeted,
necessity-based range of products and services enhanced by weekly unattended
home delivery.
The principal benefits to our customers include:
- convenience and simplicity
- time savings
- access to detailed information about products and services
- competitive pricing
- personalized care and service
27
<PAGE>
Through key relationships with premier national, regional and local business
partners, we aggregate a wide range of products and services for our customers,
including:
<TABLE>
<CAPTION>
1997 ESTIMATED SAMPLE OF GEOGRAPHIC SCOPE
U.S. SALES STREAMLINE'S OF PARTNER'S
PRODUCT AND SERVICE (IN BILLIONS) PRODUCT AND SERVICE PROVIDERS OPERATIONS
- ------------------- -------------- ------------------------------ ----------------
<S> <C> <C> <C>
Groceries, dry and $475 SuperValu Operations, Inc. National
perishable..................
Health and Beauty Care........ 49(1) Millbrook Corporation National
Prepared Meals................ 29 Legal Sea Foods, Inc. Regional Local
S.E. Olson's Uptown Gourmet
Specialty Pet Food and 11(1) Iams Company National
Supplies.................... Ralston Purina Company National
Video and Video Game Rentals.. 10 BlockBuster Videos, Inc. National
Dry Cleaning.................. 6(2) Zoots -- The Cleaner Cleaners Local
Bottled Water and Cooler
Delivery.................... 4 Poland Spring Corporation Regional
</TABLE>
- ------------------------
(1) Estimated 1998 annual sales.
(2) Estimated 1996 annual sales.
We estimate that our process allows customers to complete an entire order in
20 to 30 minutes per week from the comfort of their homes, thereby reducing
their need to make frequent trips to multiple traditional stores. NFO has
conducted research which concludes that 94% of Streamline customers consider us
to be their primary provider of groceries and other household goods and
services.
OUR VIRTUAL AND PHYSICAL CHANNELS
To deliver superior value to the consumer, Streamline has built two
dedicated pipelines direct to the home: a virtual channel using the Internet and
a physical channel using our direct delivery system.
OUR VIRTUAL CHANNEL
Our virtual channel, which refers to the ongoing two-way exchange of
information through the Internet between our customers and us, is a central
element of the Streamline experience. Because our customers order frequently, we
use the ordering process as a way to gather and distribute information about the
products and services we provide. From the comfort of their homes, customers can
use our Internet-based ordering system to browse weekly specials, review and
compare product nutritional information and place orders. The Internet-based
ordering system also provides us a direct line of communication to our customers
and serves as an efficient means of collecting data on their ordering habits and
preferences. Currently, over 85% of our customers order via the Internet, and we
plan to migrate exclusively to Internet-based ordering.
28
<PAGE>
<TABLE>
<CAPTION>
CUSTOMER USES STREAMLINE USES
- ------------- ---------------------------------------------
<S> <C>
- - ordering products and services - collecting data on customer purchasing
behavior
- - browsing offerings by category and - promoting new products and services
searching for
particular items - alerting customers to special offers and
other
- - customizing a PERSONAL SHOPPING LIST of - time-sensitive information
frequently ordered items - conducting market research
- - customizing a DON'T RUN OUT list to - responding to customer inquiries
automatically reorder items on a preset
schedule
- - providing feedback on customer service and
products and services
- - downloading and analyzing details of past
purchases
</TABLE>
Streamline's virtual channel enables us to create and manage high-value,
sustainable and long-term customer relationships. On average, we receive weekly
feedback from over 35% of our customers. We routinely collect and analyze
customer feedback and satisfaction levels to continually improve customer
satisfaction. We use this information to more efficiently serve the customer by
refining our understanding of the customer's product preferences, cross-category
purchasing behavior, attitudes and lifestyle.
Our virtual channel also creates a unique opportunity to market on a
one-to-one basis to a highly specific and demographically attractive group of
consumers and to encourage increased spending through our channel. Our virtual
channel can be used to deliver interactive, information-rich multimedia messages
targeted specifically to the consumer. We also promote our virtual channel to
consumer packaged goods companies and other strategic partners as a means of
delivering targeted marketing programs, including Internet advertising and
sampling programs. Historically, consumer packaged goods companies have garnered
much of their market information through traditional grocery store purchase
data. Streamline, however, can more comprehensively track purchasing data and
can provide consumer packaged goods companies with information on the
effectiveness of their marketing programs, without ever disclosing an individual
customer's personal information.
OUR PHYSICAL CHANNEL
We have created our own efficient, direct-to-the-customer distribution
channel comprised of:
- THE CONSUMER RESOURCE CENTER. Streamline's model consumer resource center
is a strategically located, multi-temperature zone, warehouse-based,
dedicated fulfillment center of approximately 100,000 square feet that is
designed to serve approximately 10,000 customers within a 15 to 20 mile
radius.
- STREAMLINE'S DELIVERY FLEET. Streamline's uniformed drivers, or field
service representatives, deliver goods and services in leased refrigerated
trucks bearing Streamline's logo. Within these vehicles, secure containers
separate different types of products and services to ensure quality during
transport.
- THE STREAMLINE BOX. The Streamline box is a refrigerator/freezer with a
compact storage unit that is located in a secure area at the customer's
home, such as in a garage. The Streamline Box allows us to maintain the
separation of different types of products within proper temperature zones
even after delivery.
29
<PAGE>
<TABLE>
<CAPTION>
CUSTOMER USES STREAMLINE USES
- ------------- ---------------------------------------------
<S> <C>
aggregating multiple shopping trips lowering facility operating costs
avoiding crowded stores optimizing fleet utilization and time per
stop
eliminating stress of waiting for a delivery promoting a weekly shopping pattern
person
maintaining chill chain for product quality increasing order size and frequency
providing additional storage space providing back haul capability that allows
for an expanded product offering
</TABLE>
The Streamline solution also addresses some of the limitations of the
traditional physical store model:
REDUCED REAL ESTATE, LABOR AND ADMINISTRATIVE EXPENSES. Streamline's model
consumer resource center is located in an industrial setting, as opposed to a
more expensive location, such as a strip mall or other retail location typical
of a traditional physical store. Additionally, our facilities do not require
display cases, cash registers, customer parking lots or other space-consuming
elements associated with the traditional physical store. We further reduce real
estate, labor and administrative expenses by consolidating goods and services
within a single operation, thereby eliminating much of the overhead that would
otherwise be required to provide similar products and services through separate
grocery stores, dry cleaners, video stores, pet supply stores, and other similar
stores.
MORE EFFECTIVE INVENTORY MANAGEMENT. Streamline has aggregated a targeted
offering of products and services which promote purchasing in high frequency
because of their consumable, renewable or disposable nature. By focusing on busy
suburban families, Streamline is able to tailor our assortment of products and
services so as to meet customer demand while reducing the number of
stock-keeping units, or SKUs, that we provide. Currently, we maintain
approximately 10,000 of the SKUs most commonly ordered by busy suburban
families, as opposed to a typical grocery store's offering of 30,000 SKUs. Our
targeted SKU assortment allows us to reduce inventory carrying costs, lower
operating costs, more accurately forecast demand and provide customers with a
more efficient ordering process.
MORE EFFECTIVE CUSTOMER INTERACTION. Customers place their orders by one of two
Internet-based ordering methods, a website or a CD-ROM application developed
with Intel Productions, or by telephone or fax. The Internet-based ordering
technology used by the majority of our customers allows Streamline to deliver
product information rapidly and conveniently while removing the need to
physically display products in a costly and inefficient manner. In addition to
saving customers from having to visit a number of different traditional physical
stores, we also provide our customers with a more efficient method of
purchasing.
STREAMLINE'S STRATEGY
Streamline's objective is to become the leading national consumer direct
supplier of groceries and other related products and services to busy suburban
families. We intend to achieve this objective through the following principal
strategies:
EXPAND NATIONALLY BY REPLICATING OUR BUSINESS MODEL. Streamline seeks to expand
our business by establishing consumer resource centers in selected markets
across the country. We estimate that the top 20 markets in the U.S. provide
access to approximately 40% of the population. Eventually, we intend to serve
busy suburban families in nearly all of these markets by establishing local
operations based on our existing model of offering weekly unattended deliveries
from a consumer resource center.
30
<PAGE>
Our strategy is to be among the first consumer direct provider of groceries
and other related products and services in many of our target markets, which we
believe will provide us an opportunity to obtain as customers a considerable
portion of the busy suburban families in those areas. As we expand, we intend to
focus on increasing our brand recognition through targeted promotional and
marketing programs, individually and with existing and future strategic
partners. We expect that the increased brand awareness will accelerate our
customer acquisition rate as we enter new markets and expand within existing
markets.
In October 1999, we entered into our second market, in the Washington, D.C.
area, announced the signing of a definitive agreement to acquire Scotty's in our
third market, the Chicago area and announced the fourth major market of our
national expansion plan, Northern New Jersey. We are also scouting locations in
additional target markets. Additionally, we will consider opportunities to
acquire or invest in products, services or technologies complementary to our
business if any such opportunities arise. Except for the Scotty's merger, we
have no present understandings, commitments or agreements with respect to any
acquisitions or investments, and none are planned or under negotiation. See
"Business--Expansion Strategy and Market Selection."
DEVELOP AND STRENGTHEN OUR CUSTOMER ACQUISITION CAPABILITIES. The ability to
rapidly acquire customers while maintaining service quality is essential to
achieving and maintaining consumer resource center profitability as we implement
our expansion plans. Our strategy is to supplement our existing customer
acquisition programs by forming relationships with strategic partners with whom
we will be able to engage in joint marketing and other directed sales efforts.
We plan to implement and continue to develop a variety of co-marketing programs
that make use of Nordstrom's brand loyalty, existing customer relationships and
presence in many of our target markets. The goal of these programs, coupled with
our current advertising and customer referral programs, is to reduce our
customer acquisition costs and facilitate rapid customer acquisition in new and
existing markets.
INCREASE REVENUE PER CUSTOMER. We seek to increase the average size of our
customers' weekly orders by fulfilling a greater portion of their needs. Our
strategy is to increase penetration of the existing products and services we
offer and to introduce new product and service offerings. Streamline's
technology allows us to track customer purchasing data, both individually and in
the aggregate, to determine the types of products and services that a busy
suburban family is most likely to appreciate. We expect to use this data to help
us determine which new products and services should be added to our offerings
and whether to provide them directly or through strategic relationships with
other companies. By increasing the size and scope of our offerings, we seek to
expand our role as an aggregator and to capture the economic benefits associated
with providing products and services through a single consolidated operation,
rather than through a traditional multiple store format. Additionally, by
maintaining a high level of customer satisfaction with our offerings, we expect
that customers will increasingly use Streamline as the primary supplier of many
of the products and services they require.
MAINTAIN AND DEVELOP RELATIONSHIPS WITH CONSUMER PACKAGED GOODS COMPANIES,
E-COMMERCE COMPANIES AND STRATEGIC INVESTORS. The spending habits of our
customers and the level of interaction that they have with us, both via the
Internet and through our physical channel, makes us an effective conduit for
accessing a customer base that is attractive to other providers of goods and
services. Consumer packaged goods companies compensate Streamline for the
opportunity to gain insight into consumer purchase behavior and to conduct
merchandising programs, such as Internet advertising and new product testing
with targeted demographic groups. Additionally, we provide direct links to
websites maintained by select e-commerce companies offering items that may be of
interest to busy suburban families. We have also established business
relationships with several of our investors, such as:
- developing our CD-ROM application with Intel Corporation
- entering into lease financing arrangements with General Electric Capital
Corporation
31
<PAGE>
- developing marketing opportunities, which are not governed by a written
contract, with Nordstrom, Inc.
We intend to continue to maintain strong relationships with our existing
strategic investors and to seek out additional business opportunities.
MAXIMIZE OPERATIONAL EFFICIENCY. Our consumer resource center, located in an
industrial setting, allows us to create efficient operational processes. For
example, we use customer purchasing data to maximize the efficiency of our
internal operations. By understanding the ordering patterns of our customers, we
are better able to capture and forecast real demand for our products and
services, which enables us to maintain lower inventory levels and decrease
inventory carrying costs. Additionally, our unattended delivery system, through
which we deliver orders to our customers at a fixed delivery time, allows us to
maximize fleet utilization and create routing efficiencies. We are in the
process of implementing route planning software to gain further efficiencies in
our physical channel. As we expand our operations, our strategy is to centralize
many functions such as customer acquisition, Internet-based order taking,
customer service and general administrative functions and to consider
outsourcing other functions in order to lower overall operating expenses and
reduce operating risks.
DETAILS OF THE STREAMLINE PROCESS
Our process focuses on the ordering and delivery of quality goods and
services to the busy suburban family in a simple and efficient manner:
INITIAL CUSTOMER INSTALLATION. A Streamline representative visits each new
customer's home to install a Streamline box, consisting of a
refrigerator-freezer, for perishable and frozen items, and a shelving unit, used
for delivery and pick-up of dry goods, dry cleaning, video rentals and other
products. The Streamline box is located in the customer's garage or in another
secure location that does not give access to the interior of the customer's
home. Access to these secure locations is obtained through a keypad entry system
provided, installed and maintained by Streamline.
TAKING THE ORDER. Customers can place and modify their orders via the Internet,
or by telephone or fax, until 11:00 p.m. the evening before their scheduled
delivery day. Currently more than 85% of our customers order via the Internet
due to the convenience and broader functionality offered through an on-line
experience. We plan to migrate to exclusively Internet-based ordering due to the
accuracy and cost efficiencies gained by using such technology.
We provide each customer with an on-line personal shopping list. This list
of approximately 200 items is tailored to each customer and represents a
substantial majority of the items included in a typical weekly order.
Alternatively, the customer can simply select from any of the other products and
services we offer. A customer can add or delete items from the personal shopping
list at any time through our website or CD-ROM application. A customer can also
be prompted to order through our DON'T RUN OUT program which allows the customer
to automatically order items on a pre-defined cycle. For example, a customer can
indicate once through this program and have a half-gallon of milk delivered
every week or a five-pack of razor blades delivered every six weeks.
We have designed the website and CD-ROM application to be intuitive, fun and
easy to use. Customers can easily locate products by using the SHOP function
which categorizes products into groups, such as BAKERY, PET FOOD or PAPER GOODS,
or by using a robust, key-word search capability to locate items without knowing
full product descriptions. The customer shopping experience is further enhanced
by an interactive marketing capability in our CD-ROM application which allows
targeted and relevant advertising and immediate ordering of goods and services.
For example, when ordering a BlockBuster Video, an interactive promotion may ask
if the customer would like to order popcorn; with a click, we add popcorn to
that week's order.
32
<PAGE>
ASSEMBLING THE ORDER AT THE CONSUMER RESOURCE CENTER. Streamline's model
consumer resource center is outlined below.
THE CONSUMER RESOURCE CENTER
Operations within the consumer resource center include:
- receiving, quality-checking and stocking of products
- preparing and picking customer orders and placing them in appropriate
containers
- loading the delivery fleet
- providing back haul services, such as video tape returns, dry cleaning,
film processing, shoe repair and bottle and can redemption
We receive inventory on a frequent basis to ensure availability and
freshness. Additionally, quality assurance personnel examine each perishable
item prior to order fulfillment to ensure that we provide only top-quality goods
to our customers. We also maintain quality and improve picking efficiency by
segregating products into a number of different areas in the consumer resource
center based on product characteristics, such as perishability, fragility,
temperature zone, odor and purchase frequency. Refrigerated and frozen goods are
maintained at appropriate temperatures, while household items, such as soap and
cleaning supplies, and service items, such as dry cleaning, are kept separate
from food items.
Since orders are received until 11:00 p.m. for delivery the next day, order
picking takes place overnight. We optimize the picking process by employing
traditional logistical techniques, such as segregating fast-and slow-moving
items. To maximize efficiency, our employees pick multiple customer orders at
one time, aided by a hand-held computerized device that directs them to pick
orders in the most efficient pattern while maintaining accuracy through bar
coding. Once the order is picked and consolidated in each customer's delivery
bins, we stage it for delivery in the morning. At that point, we assemble each
customer's grocery products with other items to be delivered, including products
that we receive each morning such as fresh baked goods and prepared meals.
ORDER FULFILLMENT AND DELIVERY. Once we have filled, assembled and staged
customer orders at the consumer resource center, we place them in refrigerated
trucks specially designed to ensure quality during delivery. Customers receive
their orders on a weekly schedule on a fixed day at any time from 9:00 a.m. to
6:00 p.m. As a result, the delivery system allows for geographic concentration,
better load balancing and optimized route efficiency. To maintain proper
temperature and to properly separate incompatible items, such as a carton of
eggs and a frozen turkey, we separate our products and services in delivery
containers designated for certain types of items, including:
<TABLE>
<CAPTION>
TYPE OF CONTAINER SAMPLE CONTENTS
- ----------------- ---------------
<S> <C>
bins for frozen products..................... ice cream and frozen vegetables
bins for refrigerated items.................. prepared meals, fresh meats, seafood and
dairy products
bins for ambient temperature food products... baked goods, canned goods and other dry
groceries
bins for ambient temperature non-food cleansers, detergents and health and beauty
products................................... products
hanging bags or boxes........................ dry cleaning
flower boxes................................. fresh flowers
individual items............................. bottled water and other bulk items
</TABLE>
33
<PAGE>
By using a refrigerated truck and multi-temperature storage unit in the
customer's home, Streamline maintains the temperature integrity of a customer's
order better than if the customer purchased from a traditional retail store that
is, refrigerated and frozen products are kept cool during the delivery process,
as opposed to being subject to differing temperature zones.
Our field service representatives are trained to bring quality customer
service direct to the home. Streamline's field service representatives are
uniformed and bonded and deliver to the customers in trucks that prominently
display our logo. Additionally, the Streamline box is equipped with a message
pad to facilitate communication between the customer and our field service
representative.
The Streamline box is combined with a weekly delivery cycle to provide an
in-home connection with the customer and allow back haul to enable Streamline to
expand its product offering to include renewable items such as dry cleaning and
video rentals. Streamline has also used its back haul capability to promote
community awareness through programs such as clothing and food drives to benefit
local organizations.
EXPANSION STRATEGY AND MARKET SELECTION
We intend to expand our business by establishing consumer resource centers
in selected markets across the country. We expect that we will be able to
centralize most of our operations, including order processing, customer service,
customer acquisition and general management and administration, in our corporate
headquarters, located in Westwood, Massachusetts. Our model consumer resource
center will require an estimated 150 to 200 individuals, comprised of local
personnel to support our physical channel, along with a small management staff.
Our strategy is to have consumer resource centers in nearly all of what we
have identified as the top 20 markets in the U.S. for our service.
34
<PAGE>
TOP 20 U.S. MARKETS
<TABLE>
<CAPTION>
NUMBER
METROPOLITAN AREA OF HOUSEHOLDS
- ----------------- -------------
(IN MILLIONS)
<S> <C>
New York/New Jersey......................................... 7.0
Los Angeles................................................. 5.2
Chicago..................................................... 3.2
Philadelphia................................................ 2.7
San Francisco............................................... 2.5
Boston...................................................... 2.2
Washington, D.C............................................. 2.0
Dallas...................................................... 2.0
Detroit..................................................... 1.9
Houston..................................................... 1.7
Atlanta..................................................... 1.6
Seattle..................................................... 1.6
Cleveland................................................... 1.5
Minneapolis................................................. 1.5
Tampa/St. Petersburg........................................ 1.4
Miami....................................................... 1.4
Denver...................................................... 1.2
Sacramento.................................................. 1.1
Baltimore................................................... 1.0
Charlotte................................................... 0.8
Source: The Lifestyle Market Analyst, 1999.
</TABLE>
In assessing our expansion plans, we consider several factors in determining
the attractiveness of each target market, such as:
- number of households
- number of households with at least one child
- median income of households
- number of homeowners
- personal computer and Internet use
- strategic partnering opportunities
In October 1999 we opened our second market, in the Washington, D.C. area,
announced the signing of a definitive agreement to acquire Scotty's in our third
market, the Chicago area and announced the fourth major market of our national
expansion plan, Northern New Jersey. In addition, Streamline plans to open
consumer resource centers in new markets across the U.S. while simultaneously
expanding in existing markets with additional centers. Specifically, we plan to
open two to three additional facilities in 2000 with an additional three to five
facilities becoming operational in 2001.
The number of consumer resource centers actually opened, as well as their
locations, will vary depending on a number of factors, including:
- regional acceptance of our products and services
- the availability of appropriate and affordable sites for our facilities
35
<PAGE>
- managing construction and obtaining local permits
- our ability to develop relationships with local and regional suppliers
- our ability to hire and train qualified personnel
- general economic and financial conditions
RELATIONSHIPS WITH CONSUMER PACKAGED GOODS COMPANIES
Streamline's business model has allowed us to develop strategic
relationships with a number of leading consumer packaged goods companies. These
companies compensate Streamline for the opportunity to gain insight into
consumer purchase behavior and to conduct on-line merchandising programs.
Additionally, since we deliver products to our customers with high frequency,
our physical channel provides an opportunity for consumer packaged goods
companies to conduct focused market research within particular demographic
groups consistent with the busy suburban family.
To strengthen our relationships with consumer packaged goods companies,
Streamline developed and sponsors the Consumer Learning Center, an on-site
research center designed to further develop the best thinking on consumer
behavior in the emerging consumer direct industry. Through the Consumer Learning
Center we work with each participant to:
- conduct quarterly research with a proprietary panel of consumers, located
throughout the U.S., who are selected because of their frequent use of
consumer direct services
- design, implement, and assess the effectiveness of marketing promotions at
Streamline
- solicit rich, qualitative feedback from Streamline customers through
quarterly focus groups
In addition to conducting research on the consumer direct industry,
Streamline provides Consumer Learning Center participants marketing and
promotional opportunities. Participants in the Consumer Learning Center pay
Streamline a membership fee.
Consumer Learning Center participants include the following:
<TABLE>
<S> <C>
Campbell Soup Company Nestle USA, Inc.
General Mills, Inc. The Pillsbury Company
The Gillette Company The Procter & Gamble Company
Kimberly-Clark Corporation Ralston Purina Company
Kraft Foods, Inc. Sargento Foods Inc.
McNeil Consumer Products Company, a Warner-Lambert Company
division of Johnson & Johnson
Nabisco Inc.
</TABLE>
OTHER ALLIANCES
We have recently formed alliances with e-commerce companies to expand our
product and service offerings. These alliances are primarily hyperlink
agreements that require these companies to pay us a percentage of the revenue
generated from purchases by our customers who connect to their websites directly
from www.streamline.com. Although we have not yet generated significant revenue
through these alliances, we believe that they will provide us with several key
benefits, including:
- generating additional revenue
- assisting in the building of our customer base
- enhancing awareness and expansion of the Streamline brand
36
<PAGE>
Streamline has alliances in place with the following:
<TABLE>
<CAPTION>
AFFILIATE SITES PRODUCTS SUPPLIED
- --------------- -----------------
<S> <C>
barnesandnoble.com................... books
enews.com............................ magazines
eToys.com............................ toys
Nordstrom.com........................ clothing
Outpost.com.......................... computer software and hardware
proflowers.com....................... flowers
send.com............................. gifts
REI.com.............................. outdoor and camping merchandise
</TABLE>
CUSTOMERS AND CUSTOMER ACQUISITION
Our target customers are busy suburban families, particularly dual-income
households having at least one child in the home and access to the Internet,
which we believe represent the top consuming households for our products and
services. These households have significant purchasing power, high levels of
education, sizable amounts of discretionary income, and are comfortable using
technology. We believe they are the most valuable consumer segment in the
consumer direct channel in terms of potential profitability and willingness to
pay for time-saving alternatives. Approximately 85% of our current customer
households have at least one child in the home. During 1998, our average
customer placed approximately 40 orders and the average product and service
revenue per invoice was $102.
Currently, we generate leads primarily through direct mail campaigns, local
advertising and referrals. To better target our ideal customer, our advertising
and direct mailings focus on families and emphasize the time savings and
convenience provided by our service. We believe that we generate a significant
portion of our leads through referrals from existing customers. We have found
that our customers tend to refer potential customers from the same demographic
group that is, busy suburban families. Moreover, customer referrals lower our
customer acquisition costs. For these reasons, we actively encourage customer
referrals by offering incentives for each new customer directed to us.
The following chart provides information with respect to the ten towns in
the greater Boston area in which we have achieved greatest market penetration,
as of October 31, 1999:
<TABLE>
<CAPTION>
1990 PERCENTAGE
AVERAGE HOUSEHOLD APPROXIMATE OF HOUSEHOLDS
TOWN INCOME(1) NUMBER OF HOUSEHOLDS(2) SERVED BY STREAMLINE
- ---- ----------------- ----------------------- --------------------
<S> <C> <C> <C>
Weston................................ $95,134 3,400 7.4%
Dover................................. 91,376 1,800 7.0
Sherborn.............................. 93,925 1,500 4.9
Wayland............................... 72,057 4,400 4.4
Westwood.............................. 58,559 4,800 4.3
Medfield.............................. 66,084 3,800 3.7
Wellesley............................. 79,111 8,700 3.4
Sudbury............................... 79,092 5,400 3.4
Sharon................................ 61,692 6,200 2.6
Milton................................ 53,130 8,500 2.1
</TABLE>
- ------------------------
(1) Source: 1990 U.S. Census.
(2) Source: U.S. Postal Service.
We focus on developing relationships with strategic partners with whom we
will be able to engage in joint marketing and other directed sales efforts in an
attempt to reduce our customer acquisition
37
<PAGE>
costs. For example, in connection with the opening of our facility in the
Washington, D.C. area, we worked with Nordstrom, Inc., as well as other area
partners to determine ways to inform their existing busy suburban family
customers of Streamline's services. Although we have no formal agreement with
Nordstrom, Inc., we plan to implement and continue to develop a variety of
co-marketing programs that make use of Nordstrom's brand loyalty, existing
customer relationships and presence in many of our target markets. For example,
Nordstrom, Inc. has physical stores in 14 of the top 20 U.S. markets, and
distributes 60 million catalogs per year across all major markets in the U.S.
They also have a sizable in-store sales force and a significant e-commerce
initiative located at www.nordstrom.com.
CUSTOMER SERVICE
We have created a number of relationship management systems designed to
encourage feedback and promote issue resolution. We also maintain a
comprehensive customer service database that enables us to deliver personalized
customer service and to efficiently track customer requests for new products and
services.
Our customer service team is cross-trained and encouraged to address all
customer comments and inquiries, which we receive via the Internet, by telephone
and fax, and by messages left on Streamline boxes for our field representatives.
Each customer comment or inquiry, whether positive, negative or neutral, is
stored and categorized in our customer service database. We attempt to resolve
issues and answer questions at the first point of contact between us and the
customer, and in any event within 24 hours of initial contact.
TECHNOLOGY
Streamline employs both proprietary and commercially available licensed
technologies to integrate our various systems, including order-taking, inventory
control, warehouse management and customer service.
Streamline offers its customers two options for ordering via the Internet.
Customers can visit our website at www.streamline.com to review product and
service offerings, to revise their personal shopping list and DON'T RUN OUT
selections, and to place or revise their orders. The website offers high-quality
graphical representations of, and textual information regarding, our products
and services. The website also provides a two-way communication channel between
us and our customers.
In addition to our website, we have recently introduced a hybrid
CD-ROM/Internet application in order to deliver customers a graphic ordering
system designed to alleviate the bandwidth constraints experienced by many
Internet users. The CD-ROM is the result of over 18 months of development
efforts involving Streamline and Intel Corporation, with input and assistance
from consumer packaged goods companies. The CD-ROM provides a graphical
interface that is even more robust than that of our website. Among the
enhancements included in the CD-ROM application are the ability to:
- provide a side by side comparison of multiple products
- watch a cooking demonstration with audio
- receive pop-up ordering suggestions, such as the opportunity to buy hot
fudge topping while purchasing ice cream.
Streamline's systems and technology are continually reviewed, updated and
supported by in-house technicians, system administrators and outside consultants
and systems integration specialists.
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<PAGE>
COMPETITION
Both the retail industry and the consumer direct industry are highly
competitive. Streamline currently or potentially competes with several types of
companies, including:
- traditional retail stores, including grocery stores, warehouse clubs, drug
stores and convenience stores, some of which fulfill orders received by
telephone, fax or the Internet
- various suppliers of other goods and services, both chains and
independently owned operations, such as dry cleaners, video rental stores,
prepared meal providers, bottled water delivery operations, pet supply
stores and photo labs
- various on-line providers of groceries and other products and services,
such as Peapod, Inc., Hannaford Bros. Cos.' HomeRuns, ShopLink
Incorporated, HomeGrocer.com, Inc., Beacon Home Direct, Inc. d/b/a
Scotty's Home Market, Net Grocer Inc. and Webvan Group, Inc.
- other consumer direct or catalog retailers of products or services
Streamline believes that the main competitive factors in our market are:
- range, quality and availability of products and services
- convenience, reliability and professionalism of delivery
- ease of ordering
- level and accessibility of information regarding products
- quality and responsiveness of customer service
- price
- general brand awareness
Many of our competitors are larger and have substantially greater resources
than we do. In addition, we believe that competition among consumer direct
suppliers of groceries and other products and services will continue to
intensify as new on-line suppliers and traditional retailers recognize the
potential of the consumer direct channel.
INTELLECTUAL PROPERTY
Streamline regards its copyrights, service marks, trademarks, trade dress,
trade secrets and similar intellectual property as critical to its success and
relies on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, clients, partners
and others to protect its proprietary rights. Streamline pursues the
registration of its trademarks and service marks in the U.S. and has applied for
the registration of several of its trademarks and service marks. Streamline has
been granted service mark registrations for the marks STREAMLINE, WE BRING IT
ALL HOME, and DRO and has pending registration applications for the marks DON'T
RUN OUT and SIMPLE SOURCE. Streamline has not sought trademark, service mark or
copyright protection outside of the U.S. Accordingly, satisfactory intellectual
property protection may not be available in each country where Streamline may
offer its products and services in the future.
EMPLOYEES
As of November 1, 1999, Streamline had approximately 230 full-time and
part-time employees, working in corporate, selling, general and administrative
functions and in merchandise processing, picking and delivery. Of these
employees, approximately 204 were located in our suburban Boston consumer
resource center and corporate headquarters, and approximately 26 were located in
our Washington, D.C. area facility. Streamline also employs a limited number of
independent contractors
39
<PAGE>
and temporary employees on a periodic basis. None of Streamline's employees are
represented by a labor union and Streamline considers its labor relations to be
good.
FACILITIES
Streamline is headquartered in Westwood, Massachusetts, where we lease
approximately 67,000 square feet of commercial space under a term lease that
expires on October 31, 2000, subject to a five-year renewal at Streamline's
option. These facilities are used for executive office space, including sales
and marketing and finance and administration, and for the operation of our
initial consumer resource center. We also maintain a facility in Gaithersburg,
Maryland where we lease an aggregate of approximately 93,000 square feet of
commercial space under a term lease that expires on October 1, 2007 with respect
to 56,000 square feet and on July 22, 2009 with respect to 37,000 square feet.
We believe that our current facility will be adequate to meet our current needs
in the Boston area through the end of 2000, although additional premises may be
required prior to that time to support current growth expectations. We expect
that our facility in the Washington, D.C. area will be adequate to meet our
needs for the foreseeable future. Additionally, in October 1999, Streamline
signed a lease for a 102,000 square foot build-to-suit distribution facility in
Carlstadt, New Jersey, which is expected to be completed and ready for occupancy
in the second quarter of 2000.
LEGAL PROCEEDINGS
Streamline is not a party to any material legal proceedings.
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<PAGE>
STREAMLINE'S MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Streamline are as follows.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Timothy A. DeMello 40 Chairman and Chief Executive Officer
Edward Albertian 46 President and Chief Operating Officer
J. Gregory Ambro Senior Vice President and Chief Financial
47 Officer
Terence W. Toran 51 Chief Development Officer
John Cagno 40 Vice President, Information Technology
Lauren A. Farrell 32 Vice President, Finance
William P. Paul 52 Vice President, Merchandising
Mary E. Wadlinger 40 Vice President, Customer Quality
Mark A. Cohn 42 Director
John P. Fitzsimons 54 Director
Thomas O. Jones 55 Director
J. Daniel Nordstrom 37 Director
Faith B. Popcorn 56 Director
</TABLE>
TIMOTHY A. DEMELLO is the founder, Chairman and Chief Executive Officer of
Streamline. Prior to launching Streamline in 1993, Mr. DeMello was founder,
President and Chief Executive Officer of Replica Corporation. Previously,
Mr. DeMello served as Vice President of L.F. Rothschild, Unterberg, Towbin from
1985 to 1987 and as Vice President of Kidder Peabody & Company from 1981 to
1985. Mr. DeMello received a Bachelor of Science degree in business from Babson
College and currently sits on its Board of Trustees. Mr. DeMello also sits on
the Board of Trustees for the Pan-Mass Challenge, a charitable foundation that
raises money for cancer research.
EDWARD ALBERTIAN has been President and Chief Operating Officer of
Streamline since September 1999. From 1995 to September 1999, Mr. Albertian
served as Chief Operating Officer of the Star Markets Company, a premier
regional food retailer in New England. Prior to joining Star Markets,
Mr. Albertian spent nine years as Senior Vice President of Eastern Operations at
Staples, Inc., a national office supply superstore. Mr. Albertain received a
Bachelors degree from the University of Miami and a Masters of Business
Administration from Northeastern University.
J. GREGORY AMBRO joined Streamline in December 1999 as Senior Vice President
and Chief Financial Officer. From March 1996 to November 1999, Mr. Ambro served
as Senior Vice President to Finance and Administration and Chief Financial
Officer of Harris Teeter, Inc. a wholly-owned subsidiary of Ruddick Corporation.
Harris Teeter is one of the southeast's leading upscale super market chains,
operating 149 stores and generating revenue of over $2 billion. From March 1991
to February 1996, Mr. Ambro held the several senior financial positions at
Marshalls, a national off-priced apparel retailer then owned by the Melville
Corporation, including: Vice President of Real Estate, Vice President of Control
and Vice President and Chief Financial Officer. Mr. Ambro was also Vice
President of Control for Kaufman's, a division of the May Department Stores.
Mr. Ambro received his Bachelor's Degree and MBA from the University of
Cincinnati.
TERENCE W. TORAN became Streamline's Chief Development Officer in May 1999
after serving as interim Chief Financial Officer since March 1999. From 1997
until joining Streamline, he served as Vice President, Development of Carematrix
Corp., a retirement living company. From 1996 to 1997, Mr. Toran was a principal
of Nassau Advisors, a management consulting and development firm which he
co-founded. From 1986 to 1996, he served in a number of capacities for Marriott
International, Inc., most recently as Senior Vice President, Finance and Market
Development--Food Services Division.
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<PAGE>
While at Marriott he also served as the Vice President, Finance and
Development--Retirement Living Division where he was responsible for the
national rollout of over 100 facilities. He also directed and controlled the
annual development plan for lodging and restaurant units. Mr. Toran received a
Masters of Business Administration from Amos Tuck School at Dartmouth College
and a Bachelor of Science degree in chemical engineering from Princeton
University.
JOHN CAGNO has served as Vice President, Information Technology since
January 1999. From August 1996 to January 1999, Mr. Cagno was Vice President,
Information Services at Brookstone Company, Inc. He also served as Director,
Retail Information Systems at Reebok International Ltd. from January 1995 to
August 1996. From January 1994 to January 1995, Mr. Cagno was Director,
Information Systems at Nature Food Centre.
LAUREN A. FARRELL joined Streamline as Controller in May 1996, became an
Associate Vice President in December 1998, and became Vice President, Finance in
July 1999. From December 1994 to May 1996, she was Financial Reporting Manager
at Saga International Holidays, Ltd., a direct marketing company in the travel
industry. Ms. Farrell was with American Auto Auction, Inc. as Controller from
October 1992 to December 1994 and previous to that assignment, she was a tax
consultant with Arthur Andersen. Ms. Farrell received a Bachelor of Science
degree from Bentley College. She is a certified public accountant.
WILLIAM P. PAUL has been Streamline's Vice President of Merchandising since
October 1999. From 1995 to October 1999, Mr. Paul was Vice President of
Merchandising of Star Markets Company. Prior to joining Star Markets, Mr. Paul
spent eight years as Vice President of Merchandising of Staples, Inc. Mr. Paul
received a Bachelors degree from Merrimack College and a Masters of Business
Administration from Boston University.
MARY E. WADLINGER joined Streamline in January 1997 as Director of
Operations and has served as Vice President, Customer Quality since May 1997.
From August 1989 until June 1996, Ms. Wadlinger was the Director of Process
Improvement at Melville Corporation, where she managed strategic re-engineering
efforts in customer service, merchandise allocation, logistics and store
operations for Marshall's, CVS Pharmacy and Kay-Bee Toys. Ms. Wadlinger received
her Bachelor of Science degree in finance from the University of Maine at Orono.
MARK A. COHN has served as a director of Streamline since June 1993.
Mr. Cohn founded Damark International, Inc. and has been its Chief Executive
Officer since 1986.
JOHN P. FITZSIMONS has served as a director of Streamline since September
1998. Mr. Fitzsimons has been Senior Vice President, Director of Equities of
Reliance Insurance Company since February 1999. Prior to his current position,
he served as Vice President of Reliance Insurance Company from 1990 through 1994
and as Vice President, Director of Equities from 1994 to February 1999.
THOMAS O. JONES has served as a director since January 1998. He was Chief
Information Officer of Streamline from March 1997 to December 1997. He has also
been President and CEO of Elm Square Technologies, Inc. since January 1994.
Mr. Jones was a Senior Lecturer at Harvard Business School from November 1991 to
June 1995 and at MIT Sloan School from September 1998 to December 1998.
J. DANIEL NORDSTROM has served as a director of Streamline since
September 1998. In 1995, Mr. Nordstrom was appointed Co-President of
Nordstrom, Inc., where he oversees the Direct Sales Division which he launched
in 1993. Previously, he served in several capacities at Nordstrom, Inc.
Mr. Nordstrom received his Masters of Business Administration degree from the
University of Washington in 1989.
FAITH B. POPCORN has served as a director of Streamline since June 1997.
Ms. Popcorn founded BrainReserve, Inc., a marketing consultancy company, in
January 1974 and has been its chairman since that time.
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<PAGE>
BOARD OF DIRECTORS
Streamline's charter and by-laws provide that the size of Streamline's board
of directors shall be determined by resolution of the board of directors.
The board of directors is divided into three classes, with the members of
the respective classes serving for staggered three-year terms. The first class
consists of Mr. Fitzsimons and Ms. Popcorn, the second of Mr. Jones, and the
third of Mr. Cohn, Mr. DeMello and Mr. Nordstrom, with the initial terms of the
directors in these classes expiring upon the election and qualification of the
directors at the 2000, 2001 and 2002 annual meetings of stockholders,
respectively. At each annual meeting of stockholders, directors will be
re-elected or elected for full three-year terms.
Messrs. Fitzsimons and Nordstrom were nominated and elected as directors by
the holders of Streamline's preferred stock in accordance with provisions of
Streamline's charter that terminated upon the closing of Streamline's initial
public offering. They will remain as directors until they resign or the
stockholders elect their replacements.
Streamline's executive officers are appointed by the board of directors and
serve until their successors have been duly elected and qualified. There are no
family relationships among any of Streamline's executive officers or directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The compensation committee consists of Mr. Cohn, Mr. Nordstrom and
Ms. Popcorn. The compensation committee reviews and evaluates the salaries,
supplemental compensation and benefits of Streamline's officers, reviews general
policy matters relating to compensation and benefits of Streamline's employees
and makes recommendations concerning these matters to the board of directors.
The compensation committee is also authorized to administer Streamline's stock
option and stock purchase plans.
Since the recent resignation of Thomas Crowley as a director, the audit
committee consists solely of Mr. Fitzsimons. One or more additional directors
are expected to be elected to the audit committee in the near future. The audit
committee reviews with Streamline's independent accountants the scope and timing
of its audit services, the accountants' report on Streamline's financial
statements following completion of their audit and Streamline's policies and
procedures with respect to internal accounting and financial controls. In
addition, the audit committee will make annual recommendations to the board of
directors for the appointment of independent accountants for the ensuing year.
DIRECTOR COMPENSATION
Directors of Streamline have not received compensation for their services as
directors. However, non-employee directors are reimbursed for travel expenses.
Streamline maintains directors' and officers' liability insurance and
Streamline's by-laws provide for mandatory indemnification of directors and
officers to the fullest extent permitted by Delaware law. In addition, the
charter limits the liability of directors to us or Streamline's stockholders for
breaches of the directors' fiduciary duties to the fullest extent permitted by
Delaware law. Under Streamline's director stock option plan, at the discretion
of the board of directors, non-employee directors are eligible to receive
options to purchase shares of common stock at the fair market value on the date
of grant. Currently, Mr. Cohn has an option to purchase 12,500 shares of common
stock at an exercise price of $1.50 per share and Ms. Popcorn has an option to
purchase 12,500 shares of common stock at an exercise price of $2.04 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee is currently comprised of Mr. Cohn,
Mr. Nordstrom and Ms. Popcorn. No member of the compensation committee has been
an employee of Streamline. No executive officer of Streamline serves as a member
of the board of directors or compensation
43
<PAGE>
committee of any other entity that has one or more executive officers serving as
a member of Streamline's board of directors or compensation committee.
EMPLOYMENT AGREEMENTS
Streamline has an employment agreement with Mr. DeMello, dated as of
April 9, 1999, providing for Mr. DeMello to be employed as Streamline's Chief
Executive Officer. Under the terms of the employment agreement, Mr. DeMello is
to be paid a base annual salary of $200,000, subject to increase from time to
time by the board of directors, and is eligible to receive an annual bonus at
the discretion of the board of directors which is not to exceed 50% of his then
current base salary. Mr. DeMello is also entitled to life insurance, health
insurance and other employee fringe benefits to the extent that Streamline makes
benefits of this type available to Streamline's other executive officers. Under
the employment agreement, upon the closing of Streamline's initial public
offering Mr. DeMello received stock options to purchase 250,000 shares of common
stock at an exercise price of $10.00 per share, the initial public offering
price of Streamline's common stock. These stock options become exercisable at
the rate of 20% per year over five years. If Streamline terminates
Mr. DeMello's employment without cause or if he resigns for good reason,
Streamline must continue to pay his base salary and benefits for a period of two
years and any stock options and restricted stock that he may have at the time
will become immediately exercisable and fully vested.
Streamline also has an employment agreement, dated as of July 1, 1996, with
Mr. Britt, a former executive officer of Streamline who ceased to be an employee
of Streamline in the fourth quarter of 1999. Under the terms of the employment
agreement, Mr. Britt was paid a base annual salary of not less than $100,000,
subject to increase from time to time by the board of directors following and
based on annual reviews of Mr. Britt's performance. The employment agreement
also contains non-competition and non-solicitation provisions that are intended
to survive the termination of employment for a period of 24 months.
With the exception of Mr. DeMello, none of Streamline's current executive
officers have an employment contract with Streamline and each of such officers
serves at the discretion of the board of directors. All of Streamline's
executive officers and key employees have signed non-disclosure agreements and
non-competition and non-solicitation agreements that extend for two years after
employment termination.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
of Streamline's chief executive officer and the three other most highly
compensated executive officers whose total salary and bonus exceeded $100,000
for the year ended December 31, 1998.
SUMMARY COMPENSATION TABLE FOR 1998
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
------------------- -------------------
SECURITIES
NAME AND PRINCIPAL POSITION(S) SALARY BONUS UNDERLYING OPTIONS
- ------------------------------ -------- -------- -------------------
<S> <C> <C> <C>
Timothy A. DeMello...................................... $157,385 -- --
Chairman and Chief Executive Officer
David K. Blakelock (1).................................. 109,908 $1,800 --
Vice President, Operations
Frank F. Britt (1)...................................... 109,908 -- --
Vice President, Marketing and Merchandising
Mary E. Wadlinger....................................... 102,442 1,800 35,000
Vice President, Customer Quality
</TABLE>
- ------------------------
(1) Messrs. Blakelock and Britt ceased to be employees of Streamline in the
fourth quarter of 1999.
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<PAGE>
STOCK OPTION GRANTS
The following table contains information concerning the grants of options to
purchase common stock made in the year ended December 31, 1998 to each of the
officers named in the Summary Compensation Table. Stock options are generally
granted at 100% of the fair value of the common stock as determined by the board
of directors on the date of grant.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------- POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED TO EXERCISE OR OPTION TERM(2)
OPTIONS EMPLOYEES IN FISCAL BASE PRICE EXPIRATION -----------------------
NAME GRANTED(1) YEAR PER SHARE DATE 5% 10%
- ---- -------------- ------------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Timothy A. DeMello..... -- -- -- -- -- --
David K. Blakelock
(3).................. -- -- -- -- -- --
Frank F. Britt (3)..... -- -- -- -- -- --
Mary E. Wadlinger...... 35,000 29.23% $7.00 1/1/08 $325,113 $662,810
</TABLE>
- ------------------------
(1) Shares underlying options generally vest over a three-year period. See
"Management Stock Option Plans."
(2) Assumes appreciation in the independently appraised value of the common
stock of 5% and 10% per year over the ten-year option period as mandated by
the rules and regulations of the Securities and Exchange Commission, and
does not represent Streamline's estimate or projection of the future value
of the common stock. The actual value realized may be greater or less than
the potential realizable values set forth in the table.
(3) Messrs. Blakelock and Britt ceased to be employees of Streamline in the
fourth quarter of 1999.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning option holdings for
the year ended December 31, 1998 with respect to each of the officers named in
the Summary Compensation table.
1998 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END AT YEAR-END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Timothy A. DeMello
David K. Blakelock (2)......................... 100,000 12,500 $820,000 $102,500
Frank F. Britt (2)............................. 50,000 37,500 398,000 298,500
Mary E. Wadlinger.............................. 16,666 33,334 74,798 149,601
</TABLE>
- ------------------------
(1) Value is determined by subtracting the exercise price from the initial
offering price of the common stock, multiplied by the number of shares
underlying the options.
(2) Messrs. Blakelock and Britt ceased to be employees of Streamline in the
fourth quarter of 1999.
In the year ended December 31, 1998 none of the officers named in the Summary
Compensation Table exercised any options.
45
<PAGE>
STOCK OPTION PLANS
1993 EMPLOYEE OPTION PLAN
In June 1993, Streamline's board of directors and stockholders approved
Streamline's 1993 employee option plan, which provides for the grant of
incentive stock options and nonqualified stock options to employees, including
officers and employee directors, consultants and advisors. A proposal to
increase the number of shares issuable under the employee option plan and a more
detailed description of the plan appear under Proposal 2 of this proxy statement
and private placement memorandum.
1993 DIRECTOR OPTION PLAN
In June 1993, Streamline's board of directors and stockholders approved
the1993 director option plan which provides for the grant of nonqualified stock
options to directors of Streamline who are not also employees of Streamline.
Options are granted under the director option plan at the discretion of the
board of directors at an exercise price equal to the fair market value of the
common stock on the date of grant, and have a term of five years.
In the event of a consolidation, merger or sale of all or substantially all
of the assets of Streamline in which outstanding shares of common stock are
exchanged for securities, cash or other property of any other corporation or
business entity or in the event of a liquidation of Streamline, the board of
directors of Streamline, or the board of directors of any corporation assuming
the obligations of Streamline, may, in its discretion, provide that outstanding
options under the director option plan be:
- assumed, or equivalent options substituted, by the acquiring or succeeding
corporation, or an affiliate thereof
- exercised within a specified period of time, at the end of which period
the options will terminate
- terminated in exchange for a cash payment
- exercised in full immediately prior to such event
A maximum of 400,000 shares have been authorized for issuance pursuant to
the director option plan. As of November 26, 1999, 62,500 shares had been issued
upon exercise of options granted under the director option plan and options for
25,000 shares were outstanding.
1999 EMPLOYEE STOCK PURCHASE PLAN
In April 1999, Streamline's board of directors and stockholders approved the
1999 employee stock purchase plan, which enables eligible employees to acquire
shares of Streamline's common stock through payroll deductions. Streamline's
employee stock purchase plan is intended to qualify as an employee stock
purchase plan under Section 423 of the Internal Revenue Code. Offerings under
the employee stock purchase plan start on January 1 and July 1 of each year and
end on June 30 and December 31 of each year. During each offering period, an
eligible employee may select a rate of payroll deduction of from 1% to 10% of
compensation, up to an aggregate of $12,500 in any offering period. The purchase
price for Streamline's common stock purchased under Streamline's employee stock
purchase plan is 85% of the lesser of the fair market value of the shares on the
first day or the last day of the offering period. An aggregate of 250,000 shares
of common stock have been reserved for issuance under the employee stock
purchase plan.
401(K) PLAN
Streamline has established a tax-qualified cash or deferred profit sharing
plan or 401(k) plan covering all of Streamline's eligible full-time employees.
Streamline adopted the 401(k) plan effective
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<PAGE>
January 1, 1997. Under the plan, participants may elect to contribute, through
salary reductions, up to 15% of their annual compensation subject to a statutory
maximum. Streamline does not currently provide additional matching contributions
under the 401(k) plan, but may do so in the future. The 401(k) plan is designed
to qualify under Section 401 of the Internal Revenue Code of 1986, as amended,
so that contributions by employees or by Streamline to the plan, and income
earned on plan contributions, are not taxable to employees until withdrawn from
the 401(k) plan, and so that contributions by Streamline, if any, will be
deductible by Streamline when made.
47
<PAGE>
STREAMLINE MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL STATEMENTS AND RESULTS OF OPERATIONS
OVERVIEW
Streamline simplifies the lives of busy suburban families by providing
Internet-based ordering and home delivery of a wide range of consumer goods and
services such as groceries, household goods, health and beauty care items, dry
cleaning, video rentals and film processing. Streamline's typical customer tends
to be a dual income household with at least one child and access to the
Internet. Streamline also provides consumer packaged goods companies insight
into consumer Internet purchasing behavior to help facilitate the development of
their Internet merchandising capabilities and to broaden other research and
marketing programs.
Streamline has grown rapidly, with revenue increasing to $6.9 million in
1998 from $922,000 in 1996. During this same period, Streamline's net loss
increased to $11.4 million in 1998 from $1.8 million in 1996. Streamline expects
to continue to incur losses as it increases expenditures in all areas of
operations in order to execute its business plan. In particular, Streamline
expect to incur costs related to:
- expanding into new markets
- increasing Streamline's sales and marketing efforts
- continuing Streamline's investment in technology
Due to Streamline's history of net operating losses, Streamline currently
pays no federal or state income tax. As of December 31, 1998, we had federal and
state net operating loss carry forwards of approximately $22.6 million and
$22.4 million, respectively. These net operating losses are available to offset
future income tax obligations unless federal or state tax law restrictions, such
as those related to an ownership change as defined in the Internal Revenue Code,
limit Streamline from doing so.
COMPONENTS OF REVENUE
Streamline has three primary sources of revenue. The majority of
Streamline's revenue is generated by the sale of consumer products and services
that Streamline aggregates in its fulfillment center and deliver to its
customers' homes on a weekly basis. Streamline charges its customers set retail
prices for the products and services it supplies. Streamline's product and
service revenue is comprised of the retail prices Streamline charges its
customers for these products and services. The wholesale prices Streamline pays
its distributors and suppliers for such products and services are included as a
cost of revenue. Streamline's customers also pay Streamline a monthly
subscription fee of $30 which Streamline prorates based on the week of
installation or discontinuance if services are provided for less than a full
month. In addition, Streamline receives advertising, research and marketing fees
through arrangements with consumer packaged goods companies and e-commerce
companies. Revenue from products and services is recognized upon delivery to the
customer; subscription fees are recognized monthly; and advertising, research
and marketing fees are recognized over the life of the applicable arrangement or
as services are performed.
RESULTS OF OPERATIONS
NINE MONTHS ENDED OCTOBER 2, 1999 AND SEPTEMBER 30, 1998
TOTAL REVENUE. Total revenue increased to $10.2 million in the nine months
ended October 2, 1999 from $4.5 million in the comparable period ended
September 30, 1998, an increase of 126.2%. This increase was primarily due to
the continuing expansion of Streamline's customer base, a corresponding increase
in subscription fees, and an increase in fees derived from advertising, research
and marketing.
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PRODUCT AND SERVICE REVENUE, NET. Sale of products and services, net of
returns increased to $8.7 million in the nine months ended October 2, 1999 from
$3.9 million in the comparable period ended September 30, 1998, an increase of
124%. The increase in revenue was the result of:
- an increase in Streamline's customer base to approximately 3,700 at
October 2, 1999 from approximately 1,500 at September 30, 1998
- an increase in the number of invoices for product and service revenue to
approximately 88,000 in the nine months ended October 2, 1999 from
approximately 39,000 in the comparable period ended September 30, 1998, an
increase of 125.6%
- an increase in the average product and service revenue per invoice to
approximately $99 in the nine months ended October 2, 1999 from
approximately $98 in the comparable period ended September 30, 1998
Product and service revenue, net as a percentage of total revenue decreased
to 84.8% in the nine months ended October 2, 1999 from 85.7% in the comparable
period ended October 2, 1999.
SUBSCRIPTION FEES. Revenue from subscription fees increased to $693,000 in
the nine months ended October 2, 1999 from $276,000 in the comparable period
ended September 30, 1998, an increase of 151.1%, due to Streamline's expanded
customer base. Subscription fees as a percentage of total revenue increased to
6.8% in the nine months ended October 2, 1999 from 6.1% in the comparable period
ended September 30, 1998.
ADVERTISING, RESEARCH AND MARKETING FEES. Advertising, research and
marketing fees increased to $855,000 in the nine months ended October 2, 1999
from $370,000 in the comparable period ended September 30, 1998, an increase of
131.1%. These fees as a percentage of total revenue increased to 8.4% in the
nine months ended October 2, 1999 from 8.2% in the comparable period ended
September 30, 1998. The increase in advertising, research and marketing fees is
primarily due to an increase in the number of consumer packaged goods companies
that became members of the Consumer Learning Center.
TOTAL OPERATING EXPENSES. Total operating expenses increased to
$23.5 million, or 229.1% of total revenues, in the nine months ended October 2,
1999 from $11.9 million, or 262.6% of total revenues, in the comparable period
ended September 30, 1998, an increase of 97.3%. The increase in operating
expenses is a result of an increase in order volume, expenses related to the
opening of Streamline's second facility in the Washington D.C. area, and an
increase in infrastructure and general and administrative costs incurred to
support Streamline's continued expansion. These costs decreased as a percentage
of total revenues due to achieving operational efficiencies and offsetting fixed
costs with higher order volumes.
COST OF REVENUE. The cost of revenue increased to $7.0 million, or 68.5% of
total revenues, in the nine months ended October 2, 1999 from $3.3million, or
72.1% of total revenues in the comparable period ended September 30, 1998, an
increase of 114.8%. The decline in cost of revenue as a percentage of total
revenues is primarily a result of improved purchasing in the product and service
category and a higher percentage of subscription fees as a percentage of total
revenue.
FULFILLMENT CENTER OPERATIONS. Expenses attributable to fulfillment center
operations increased to $6.0 million, or 58.4% of total revenue, in the nine
months ended October 2, 1999 from $2.9 million, or 64.1% of total revenue, in
the comparable period ended September 30, 1998, an increase of 106.1%, primarily
as a result of increased order volume, the opening of Streamline's second
facility in the Washington D.C. area and higher than anticipated costs resulting
from the Genco I outsourcing agreement.
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SALES AND MARKETING. Sales and marketing expenses increased to $2.6
million, or 25.3% of total revenue, for the nine months ended October 2, 1999
from $989,000, or 21.8% of total revenue, for the comparable period ended
September 30, 1998, an increase of 162.4%. This increase was due to additional
advertising and promotional activities undertaken to acquire new customers.
TECHNOLOGY SYSTEMS AND DEVELOPMENT. Expenses attributable to technology
systems and development increased to $2.8 million, or 27.4% of total revenue,
for the nine months ended October 2, 1999 from $1.9 million, or 42.8% of total
revenue, for the comparable period ended September 30, 1998, an increase of
45.0%, primarily due to the costs associated with maintaining, enhancing and
integrating Streamline's technology systems.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased to
$5.1 million, or 49.5% of total revenues, for the nine months ended October 2,
1999 from $2.8 million, or 61.8% of total revenues, for the comparable period
ended September 30, 1998, an increase of 81.1%, primarily due to the addition of
necessary infrastructure to support continued corporate growth and planned
expansion.
OTHER INCOME (EXPENSE), NET. Other income (expense), net increased to
income of $582,000 in the nine months ended October 2, 1999 from an expense of
$454,000 in the comparable period ended September 30, 1998 primarily due to
increased interest income from higher cash balances from Streamline's initial
public offering in June, and reduced interest costs associated with the pay down
of debt.
MINORITY INTEREST. At September 30, 1998, Streamline held a majority
interest in Streamline Mid-Atlantic, Inc. A portion of Streamline Mid-Atlantic's
net losses were allocated to the minority interest. In November of 1998,
Streamline acquired the remaining minority interest in Streamline Mid-Atlantic
and now reports its income or loss in Streamline's consolidated results of
operations.
EXTRAORDINARY LOSS. On September 18, 1998, Streamline redeemed all of its
outstanding discount notes at a price of $7.0 million, plus approximately
$334,000 of interest and $257,000 for a call premium with the proceeds from the
issuance of Streamline's Series D Preferred Stock. The redemption resulted in
Streamline recording an extraordinary loss on the extinguishment of debt of
approximately $744,000.
1998 COMPARED TO 1997
TOTAL REVENUE. Total revenue increased to $6.9 million in 1998 from
$2.6 million in 1997, an increase of 163.7%. This increase was primarily due to
an increase in total orders resulting from Streamline's expanded customer base.
PRODUCT AND SERVICE REVENUE, NET. Sales of products and related services,
net of returns increased to $6.0 million in 1998 from $1.8 million in 1997, an
increase of 232.0%. Product and service revenue, net as a percentage of total
revenue increased to 86.8% in 1998 from 68.9% in 1997. These increases were
principally due to:
- an increase in Streamline's customer base to approximately 2,000 at the
end of 1998 from approximately 900 at the end of 1997
- an increase of 122.2%, primarily due to Streamline's marketing efforts to
obtain new customers in the greater Boston market
- a related increase in the number of invoices for product and service
revenue to approximately 59,000 in 1998 from approximately 18,000 in 1997,
an increase of 231.6%
SUBSCRIPTION FEES. Revenue from subscription fees increased to $392,000 in
1998 from $99,000 in 1997, an increase of 297.3% due to an increase in
Streamline's customer base and the timing of these
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customer acquisitions. Subscription fees as a percentage of total revenue
increased to 5.6% in 1998 from 3.7% in 1997. These increases resulted from the
growth in Streamline's customer base.
ADVERTISING, RESEARCH AND MARKETING FEES. Fees from advertising, research
and marketing services decreased to $529,000 in 1998 from $721,000 in 1997, a
decrease of 26.6%. Advertising, research and marketing fees as a percentage of
total revenue decreased to 7.6% in 1998 from 27.4% in 1997. These decreases are
primarily due to a reduction in the average dollar amount paid by participants
resulting from shorter membership periods.
TOTAL OPERATING EXPENSES. Total operating expenses increased to
$17.4 million, or 250.3% of total revenue, in 1998 from $11.1 million, or 422.6%
of total revenue, in 1997, an increase of 56.1%, largely due to:
- increased fulfillment center operational costs
- increased expenses related to technology systems and development
- increased sales and marketing expenses incurred to increase Streamline's
customer base
- increased general and administrative expenses incurred to support
Streamline's growing operations
COST OF REVENUE. The cost of revenue increased to $5.0 million, or 71.9% of
total revenue, in 1998 from $2.1 million, or 79.6% of total revenue, in 1997, an
increase of 138.0%, due to the increased order size and number of customer
orders, offset by cost reductions associated with higher purchase volumes.
FULFILLMENT CENTER OPERATIONS. Expenses attributable to fulfillment center
operations increased to $4.0 million, or 57.8% of total revenue, in 1998 from
$2.8 million, or 105.1% of total revenue, in 1997, an increase of 44.9%, due to
the increase in customer order volume.
SALES AND MARKETING. Sales and marketing expenses increased to $1.5
million, or 21.3% of total revenue, in 1998 from $1.4 million, or 54.2% of total
revenue, in 1997, an increase of 3.6%. As a result of increased customer
referrals and the more effective utilization of marketing channels, sales and
marketing expenses decreased as a percentage of total revenue.
TECHNOLOGY SYSTEMS AND DEVELOPMENT. Expenses attributable to technology
systems and development increased to $3.0 million, or 43.2% of total revenue, in
1998 from $1.7 million, or 63.5% of total revenue, in 1997, an increase of
79.5%. Certain costs associated with Streamline's website, on-line ordering,
warehouse management and other enterprise systems were capitalized during 1997
and 1998 and are being amortized over the useful lives of the assets. In 1998
the increased expense is largely due to increased amortization of these
capitalized costs and costs associated with maintaining, enhancing and
integrating Streamline's technology systems.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased to
$3.9 million, or 56.1% of total revenue, in 1998 from $3.2 million, or 120.2% of
total revenue, in 1997, an increase of 23.1%, primarily due to the addition of
management and administrative staff to support Streamline's growth.
OTHER INCOME (EXPENSE), NET. Other expense, net increased to $330,000 in
1998 from $80,000 in 1997, an increase of 311.0%, largely due to a $518,000
increase in net interest expense resulting primarily from Streamline's issuance
of senior discount notes in 1998 offset by $182,000 of interest income
Streamline received primarily from investing the proceeds of debt and equity
financings completed during the year. Other expense in 1997 was largely due to
the losses incurred on the disposal of fixed assets.
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MINORITY INTEREST. The allocation of the net losses of Streamline's
subsidiary, Streamline Mid-Atlantic, Inc., to the minority interest decreased to
$139,000 in 1998 from $265,000 in 1997. In 1998, Streamline was allocated a
percentage of net losses in excess of its ownership percentage due to the
minority interest being allocated all of its allowable losses. In
November 1998, Streamline acquired the remaining minority interest and will
report 100% of the income or loss of this subsidiary in its results of
operations in future periods.
EXTRAORDINARY LOSS. Streamline incurred an extraordinary loss of $744,000
in 1998 due to the early extinguishment of the senior discount notes issued in
April 1998 and retired in September 1998. This loss included approximately
$257,000 for a call premium, and $452,000 for the unamortized discount value
associated with the warrants to purchase common stock issued in connection with
the senior discount notes and $35,000 for the issuance of common shares and
remaining deferred financing costs.
1997 Compared to 1996
TOTAL REVENUE. Total revenue increased to $2.6 million in 1997 from
$922,000 in 1996, an increase of 185.8%. This increase was due to an increase in
the number of customers and orders in 1997.
PRODUCT AND SERVICE REVENUE, NET. Sales of products and related services,
net of returns increased to $1.8 million in 1997 from $391,000 in 1996, an
increase of 364.4%. Net product and service revenue as a percentage of total
revenue increased to 68.9% in 1997 from 42.4% in 1996. Due to active marketing
efforts, Streamline increased its customer base to approximately 900 at the end
of 1997 from approximately 100 households in 1996. The increase in Streamline's
customer base resulted in a greater number of orders in 1997.
SUBSCRIPTION FEES. Subscription fees increased to $99,000 in 1997 from
$20,000 in 1996, an increase of 395.1% primarily as a result of an increase in
the number of customers to approximately 900 by the end of 1997 from a pilot
group of 100 in 1996. Subscription fees as a percentage of total revenue
increased to 3.7% in 1997 from 2.2% in 1996 due to this increase in Streamline's
customer base.
ADVERTISING, RESEARCH AND MARKETING FEES. Revenue from advertising,
research and marketing fees increased to $721,000 in 1997 from $511,000 in 1996,
an increase of 41.1%. These fees decreased, as a percentage of total revenue to
27.4% in 1997 from 55.4% in 1996. In 1997, Streamline began offering research
and marketing programs to consumer packaged goods companies, whereas, in 1996
the revenue from market research was a result of Streamline's non-recurring
participation in a third party research program while operating with
Streamline's initial test group of 100 customers.
TOTAL OPERATING EXPENSES. Total operating expenses increased to
$11.1 million, or 422.6% of total revenue, in 1997 from $2.8 million, or 305.0%
of total revenue, in 1996, an increase of 296.1%, due to:
- an increase in the number of customers and orders
- an increase in costs related to consumer resource operations due to the
completion of its first consumer resource center
- increased sales and marketing expenses related to the expansion
Streamline's customer base
- an increase in general and administrative expenses as a result of
increasing Streamline's infrastructure to support expanded operations
COST OF REVENUE. The cost of revenue increased to $2.1 million, or 79.6% of
total revenue, in 1997 from $391,000, or 42.4% of total revenue, in 1996, an
increase of 436.3%, due to the increase in customer orders and the increase in
costs associated with research and marketing programs.
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FULFILLMENT CENTER OPERATIONS. In 1996, Streamline completed construction
of its first facility in the greater Boston, Massachusetts area and began full
operations. Expenses attributable to fulfillment center operations increased to
$2.8 million, or 105.1% of total revenue, in 1997 from $916,000, or 99.4% of
total revenue, in 1996, an increase of 202.3%, as a result of increased labor
associated with processing a higher order volume.
SALES AND MARKETING. Sales and marketing increased to $1.4 million, or
54.2% of total revenue, in 1997 from $441,000, or 47.8% of total revenue, in
1996, an increase of 224.1%. Streamline incurred higher customer acquisition
expenses in 1997 because it ended its test phase and began actively marketing
its service to new customers. In 1997, Streamline also began general promotional
efforts.
TECHNOLOGY SYSTEMS AND DEVELOPMENT. Expenses attributable to technology
systems and development increased to $1.7 million, or 63.5% of total revenue, in
1997 from $78,000, or 8.5% of total revenue, in 1996, due to the development and
implementation of Streamline's website, on-line ordering, warehouse management
system and other enterprise systems in 1997.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased to
$3.2 million, or 120.2% of total revenue, in 1997 from $1.0 million, or 106.9%
of total revenue in 1996, an increase of 221.3% due to an increase in
administrative salaries and related benefits to support the growth in customers.
OTHER INCOME (EXPENSE), NET. Other expense, net of $80,000 in 1997 was
primarily due to the losses incurred on the disposal of fixed assets. Other
income, net of $43,000 in 1996 resulted primarily from the net interest income
Streamline received from investing the proceeds of equity financings completed
during the year offset by leasing and other financing expenses.
MINORITY INTEREST. In 1997, Streamline established a subsidiary, Streamline
Mid-Atlantic, Inc., which sold common stock to third parties and acquired
substantially all of the assets of Shopping Alternatives, Inc. in exchange for
shares of its common stock. These transactions created a minority interest in
Streamline's subsidiary, to which Streamline allocated approximately 45% of the
subsidiary's 1997 operating loss.
Liquidity and Capital Resources
At October 2, 1999, Streamline had cash, cash equivalents and marketable
securities of $43.0 million, which Streamline currently believes will be
sufficient to fund its planned expansion and working capital needs for at least
the next 12 months. Streamline expects that it will require additional capital
financing to support its further expansion.
Operating activities used cash of $9.0 million in the nine months ended
October 2, 1999, primarily due to the net loss incurred in the period. Investing
activities used cash of $5.4 million in the nine months ended October 2, 1999,
primarily due to the purchase of property and equipment to support the expansion
of Streamline's operations, and costs associated with purchased and capitalized
software for Streamline's customer ordering, warehouse management and financial
systems.
Financing activities provided cash of $44.8 million in the nine months ended
October 2, 1999, as compared to $23.2 million in the nine months ended
September 30, 1998. Net proceeds from Streamline's initial public offering
including the exercise of the underwriters' over-allotment, net of underwriting
discounts and offering expenses, were approximately $45.0 million. Prior to its
initial public offering, Streamline financed its operations and capital
requirements primarily through the sale of redeemable convertible preferred
stock and the issuance of senior discount notes.
Streamline expects to incur operating losses in 1999 from its existing
consumer resource center and from the facility opened in the greater Washington,
D.C. area in the fourth quarter of 1999. Additionally, on October 27, 1999,
Streamline entered into a lease agreement with Pro Logis for a 102,000 square
foot distribution facility in Carlstadt, NJ. Streamline expects to open this
facility in the
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second quarter of 2000, and incur approximately $4.0 million for costs
associated with leasehold improvements, equipment acquisitions and other asset
purchases related to this facility.
Streamline also expects to incur costs beyond 1999 in connection with its
acquisition of Beacon Home Direct d/b/a Scotty's Home Market, a grocery home
delivery company based in the Chicago, Illinois area. On October 18, 1999,
Streamline entered into a definitive agreement to acquire Scotty's. The
transaction, which is subject to shareholder and regulatory approval, and other
typical conditions is expected to be completed in early 2000 and to be accounted
for as a pooling of interests. Under the terms of the agreement, Streamline
expects to issue approximately 4.3 million shares to acquire all of the
outstanding shares and equity interests of Scotty's. We expect to incur losses
from this fulfillment center at least through 2000.
Additionally, Streamline plans to continue to enhance its technology by
upgrading or replacing its on-line ordering, warehouse management and customer
information systems. Streamline intends to finance these expenditures from
capital resources. Streamline also plans to open new facilities in 2000 and
beyond which may or may not have similar capital requirements due to size,
configuration, location and other local market conditions.
Pursuant to a letter agreement dated April 13, 1999, Nordstrom, Inc. agreed
to provide Streamline with financing of up to $10.0 million upon Streamline's
request. Nordstrom's commitment terminated upon the closing of Streamline's
initial public offering. Streamline issued Nordstrom a warrant to purchase
75,000 shares of common stock at an exercise price of $7.00 per share in
connection with this financing commitment. Streamline recorded deferred
financing costs of approximately $472,000 for the estimated fair value of the
warrant. The fair value was calculated using the Black-Scholes option pricing
model utilizing a common stock fair value of $10.00 per share, the offering
price of the common stock in Streamline's initial public offering. By letter
dated June 22, 1999, Nordstrom agreed to rescind all of its rights pursuant to
such warrant, effective as of the closing of Streamline's initial public
offering, resulting in Streamline reversing the remaining unamortized deferred
financing costs of approximately $387,000. During the nine months ended
October 2, 1999, Streamline recorded a non-cash financing charge of
approximately $85,000 for the amortization of the deferred financing costs
during the period prior to the termination of Nordstrom's financing commitment.
Streamline does not believe that inflation has had a material effect on
Streamline's operations.
MARKET RISK
To date, Streamline has not utilized derivative financial instruments or
derivative commodity instruments. Streamline invests its cash in high quality
(i.e.-A1/P1) short term commercial paper, money market funds and United States
government securities, which are subject to minimal credit and market risk, and
have no debt. Therefore, Streamline believes the market risks associated with
these financial instruments are immaterial.
ACQUISITIONS
In 1996, Streamline incorporated its subsidiary Streamline
Mid-Atlantic, Inc., for the purpose of acquiring substantially all of the assets
of Shopping Alternatives, Inc., a consumer direct company based in the
Washington, D.C. area. In 1997 Streamline Mid-Atlantic sold approximately 45% of
its common stock to third parties. In November 1998, Streamline acquired the
outstanding minority interest in Streamline Mid-Atlantic and it once again
became a wholly owned subsidiary. In connection with these transactions
Streamline recorded $1.3 million of goodwill which is being amortized on a
straight-line basis over a five-year term.
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YEAR 2000 COMPLIANCE
The Year 2000 problem stems from the fact that many currently installed
computer systems include software and hardware products that are unable to
distinguish 21st century dates from those in the 20th century. As a result,
computer software and hardware used by many companies and governmental agencies
may need to be upgraded to comply with Year 2000 requirements or risk system
failure or miscalculations causing disruptions to normal business activities.
STATE OF READINESS
Streamline has assessed the corporate systems and operations that it
believes could be affected by the Year 2000 problem, and has focused its Year
2000 review on three areas:
- internal information technology infrastructure
- third-party compliance
- non-information technology systems
INTERNAL INFORMATION TECHNOLOGY INFRASTRUCTURE. Because its consumer and
business systems are essential to its business, financial condition and results
of operations, Streamline assessed these systems prior to other less critical
information technology systems. Streamline uses the following information
technology for its internal infrastructure:
- website and Internet ordering systems
- main enterprise systems, such as those used for purchase orders,
invoicing, shipping, warehouse management and accounting
- individual workstations, including personal computers
- network systems
Streamline currently believes that all of its critical systems are Year 2000
compliant. Streamline has received written assurance from the vendors of its
website, ordering systems and main enterprise and financial systems that these
systems are Year 2000 compliant. Streamline has currently conducted Year 2000
compliance testing of its individual workstations and network systems and has
certified them as Year 2000 compliant. To date, Streamline has not discovered
Year 2000 problems in these internal systems.
THIRD-PARTY COMPLIANCE. Streamline's material third party business
relationships include:
- customers who order products and services via the Internet, telephone and
fax
- vendors and suppliers who provide the goods and services that Streamline
offers to its customers.
Streamline is unable to predict, and has not attempted to assess, the Year
2000 readiness of its customers or the systems they use to interact with
Streamline. Since Streamline's customers order its products and services via the
Internet or by telephone or fax, Streamline's operations would be materially
adversely affected if a significant number of customers were unable to use these
devices to place their orders.
Year 2000 disruptions in the systems or equipment used by Streamline's
suppliers could result in Streamline's being unable to obtain products and
services in a timely manner. Streamline developed a standard survey to help it
assess the Year 2000 readiness or its suppliers and has received confirmation of
their readiness from a majority of its suppliers.
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NON-INFORMATION TECHNOLOGY SYSTEMS. Some non-information technology systems
used in Streamline's business, such as HVAC and telephone systems, its truck
fleet and refrigeration and other equipment, may contain date-processing
embedded technology. The Year 2000 problem could cause failures in these assets
which could disrupt Streamline's operations. Streamline has assessed the Year
2000 problem with respect to these non-technology systems and believes it has
corrected all problems that have been identified.
COSTS
Streamline's Year 2000 assessment, remediation and testing activities have
been conducted by internal personnel, and Streamline has not recorded the amount
of employee time expended on these tasks. Accordingly, Streamline is unable to
determine the cost of employee time devoted to Year 2000 matters. Until
Streamline has further assessed the Year 2000 readiness of its internal systems
and those of third parties with whom Streamline does business, it will be unable
to estimate all of the costs that we may incur in its Year 2000 compliance
efforts. Streamline has funded and will continue to fund these activities
principally through cash flow.
MOST REASONABLE WORST CASE SCENARIO
It is possible that problems related to the Year 2000 could disrupt one or
more of the following systems:
- customer Internet-based ordering
- technology-driven order picking
- inventory replenishment
- credit card settlement
In each case, there is a low technology alternative available which would
allow Streamline to continue to run its business. However, most of the
alternatives would result in increased costs, reduced revenues or service
delays, which should increase Streamline's operating losses. Extended
disruptions may impact long term customer and supplier relationships further
impacting future profitability.
CONTINGENCY PLAN
Other than the short-term, low technology alternatives discussed above, to
date Streamline has not formulated contingency plans related to the failure of
its or a third-party's systems or equipment should they prove to not be Year
2000 compliant.
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SCOTTY'S BUSINESS
OVERVIEW
Scotty's offers its customers time savings, convenience and personalized
service through its consumer direct grocery delivery service. Customers place
orders for groceries and related products with Scotty's over the Internet or by
telephone or fax, and it delivers these products directly to customers' homes.
Scotty's serves customers primarily in Chicago's northern and western suburbs
from its Lake Zurich, Illinois fulfillment center.
Scotty's offers a wide range of products including:
<TABLE>
<S> <C>
- produce - bakery products
- wine, beer and spirits - "Meals Made Easy" heat-and-serve meals
- meat and seafood - beverages
- canned goods - cereal and other dry products
- dairy products - frozen products
- health and beauty products - pet care products
</TABLE>
Scotty's also offers its customers nutritional facts and helpful tips, such
as the best way to store produce, quick recipes for meat and seafood and
suggested food and wine pairings. Management believes that a key factor in
Scotty's ability to attract and retain customers is this type of broad service
orientation, driven by the enthusiasm and dedication of its employees.
INDUSTRY
GENERAL
The Internet has become a viable and meaningful marketplace for buying and
selling goods and services. With work schedules becoming increasingly demanding
and leisure time at a premium, more and more people are turning to the Internet
for their consumer needs. Internet transactions are typically faster, less
expensive and more convenient, all attractive features to a busy public. A
recent study conducted by the IntelliQuest Information Group, Inc. shows that
60% of Internet users shop on-line. Scotty's management believes that as
consumer time constraints increase and technological advances further simplify
online shopping, the number of consumers who turn to the efficiency and
convenience of purchasing groceries and other necessities over the Internet will
continue to grow.
In addition, management of Scotty's believes that its personalized,
consumer-direct model is more attractive than traditional grocery store
businesses because retailers have become less responsive to their customer's
needs and preferences, often choosing their inventory based on incentives paid
by manufacturers. Without the personalized service of the corner grocers of the
past, grocery shopping has become a burdensome task for many consumers.
THE SCOTTY'S SOLUTION
The Scotty's "solution" focuses on its customers, addressing their need for
convenience and customized solutions, while capitalizing on the explosive growth
in Internet use and other technological advances. By placing orders with
Scotty's over the Internet or by telephone or fax, customers are able to avoid
driving to the store and waiting in check-out lines. Scotty's customers can shop
at any time and generally spend less than 20 minutes to place an order, freeing
up valuable time for family activities, entertainment or work. Customer feedback
is also an integral part of the Scotty's solution, facilitating continuous
improvement in Scotty's personalized relationships with its customers and the
promotion of products such as Scotty's "Meals Made Easy" and other proprietary
products.
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Scotty's also provides attractive service enhancements such as up-to-date
product information, including product availability, pricing and promotions. In
addition, Scotty's database contains detailed nutritional information on grocery
products.
The primary benefits that Scotty's provides its customers include:
- convenience
- competitive pricing
- conservation of time
- customized solutions
- meal planning
- elimination of "impulse" grocery shopping
- higher quality products by minimizing handling and providing ideal
temperature control.
SCOTTY'S STRATEGY
THE "ELIMINATE THE STORE" OPERATING MODEL
"Eliminating the Store" involves controlling the merchandising and
fulfillment aspects of the business by removing the middle-man and using
dedicated fulfillment centers instead of shoppers and grocery chains. Because no
grocery stores are involved, operating costs are much lower and the leverage on
capital investments is much greater than those of grocery stores. The related
cost savings are substantial enough that, even after incurring delivery and
other incremental costs, this fully-developed operating model commands higher
margins than supermarkets or consumer direct companies providing fulfillment
from retail grocery stores. The centralized, controlled production environment
provided by a dedicated fulfillment center enables better inventory management,
minimal out-of-stock items and accurate order fulfillment. Also, the reliability
and usability of this model's service is substantially better in that the
availability of requested products can be confirmed on a real-time basis.
MARKETING AND PROMOTION
Scotty's marketing efforts have consisted primarily of the following:
- customer referrals
- Scotty's representative sales program
- coupon drops and direct mail advertising
- advertisements in local newspapers
Scotty's has been successful in its modest advertising efforts and has
maintained a customer acquisition cost of under $200 per new customer.
Word-of-mouth is an especially credible mode of advertising due to the inherent
level of interaction between the customer and Scotty's. As a result of the high
satisfaction level of Scotty's customers, nearly 40% of new customers have
historically resulted from personal referrals. Scotty's intends to significantly
increase its advertising efforts and service area once the new fulfillment
center and related systems are in place to support substantially more business.
Since 1996, Scotty's has seen positive growth in its Scotty's representative
sales program, which utilizes independent salespeople to generate contacts and
follow through with prospective customers. Scotty's representatives earn
commissions over a fixed time period based on sales to customers they acquire,
as well as sales to other customers that are subsequently referred to Scotty's
by these customers. Scotty's representatives also receive commissions when
implementing fundraisers with
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schools, churches, and other organizations. These fundraisers are designed such
that an organization receives a contribution based on a percentage of revenue
generated by the participating members.
SCOTTY'S DELIVERY CHANNELS
PLACING AN ORDER
Customers can sign-up for Scotty's services by opening an account on its
website or by calling a Scotty's customer service representative. Scotty's
customers place their orders over the Internet, or by telephone or fax, until
midnight the evening before their scheduled delivery day. Currently
approximately 50% of Scotty's customers order via the Internet.
Scotty's believes that an important step in developing a strong relationship
with each customer is the creation of a database, which contains a complete
history of each customer's orders, including product detail and quantities. A
master list is created for each customer, containing a complete record of
recently purchased items, and is delivered with every order for use in preparing
that customer's next order. This facilitates the ordering process as it removes
the burden of creating a new shopping list for each order. Special delivery and
payment instructions are also kept in each customer's files. These time-saving
measures are appealing to Scotty's customers because they help to minimize order
placement time.
THE FULFILLMENT CENTER AND PRODUCT DELIVERY
The fulfillment center currently has an inventory of approximately 7,500
different products, and is operated 24 hours a day by a staff of approximately
60 employees. Customer orders are delivered in temperature-controlled containers
to ensure quality and freshness. By preserving the "cold-chain" through
temperature-controlled coolers, Scotty's maintains the temperature integrity of
a customer's order better than if the customer purchased from a traditional
retail store. Dry products are delivered in custom-made, water-resistant boxes
and produce, refrigerated items and frozen items delivered in
temperature-controlled insulated coolers.
Scotty's provides customers with the added convenience of unattended
delivery so the customer need not be at home when the orders are delivered.
Instead, a dropping place at the customer's home is prearranged for the order
and the customer will either pay for the order with a credit card or prearrange
payment by check.
In January 2000, Scotty's plans to roll out a new 94,000 square foot, highly
automated fulfillment center. Through the use of sophisticated order fulfillment
systems and processes, management expects to achieve significant enhancements in
operating efficiency and quality of service.
INVENTORY
Scotty's receives inventory on a frequent basis from both local and national
producers to ensure availability and freshness. Additionally, quality assurance
personnel examine each perishable item prior to order fulfillment to ensure that
Scotty's provides only top-quality goods to its customers. Scotty's maintains
quality and improves selection efficiency by segregating products into a number
of different areas in the fulfillment center based on product characteristics,
such as perishability, fragility, temperature zone, chemical composition and
purchase frequency.
Scotty's guarantees the quality of all of its produce and other food
products and will refund a customer's money if not fully satisfied. Management
of Scotty's believes that this approach to customer satisfaction is important in
establishing a strong customer relationship.
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COMPETITION
Competition among consumer direct commerce companies is based on several
factors, including ease of use, reliability of service, product selection, price
and customer relations. Scotty's competes against numerous providers of grocery
products and services, including grocery stores and other grocery home delivery
services. Its main consumer direct competitor in the Chicago market is
Peapod, Inc., a publicly-traded grocery product provider based in Skokie,
Illinois. Scotty's management is also aware that Webvan Group Inc., a
publicly-traded grocery product provider based in San Francisco, California, has
plans to expand to additional locations in major cities in the United States,
which would most likely include Chicago.
Although management is not currently aware of any other consumer direct
grocery stores that intend to operate in Scotty's market areas, Scotty's
believes that competition will intensify if more grocery stores, online
marketing services and information services companies offer services in Scotty's
market areas. Some of these potential competitors may be larger and have
substantially greater resources than Scotty's.
INTELLECTUAL PROPERTY
Scotty's believes that its success and ability to compete is dependent upon
its proprietary systems and technology. Scotty's relies on a combination of
copyright, trademark and trade secret laws as well as confidentiality agreements
and other measures to establish and protect its proprietary rights. Scotty's
does not have any patents and has applied for the following trademarks:
- Beacon Home Market
- Scotty's Classic
- Scotty's Diner
- Scotty's Home Market
In addition, Scotty's intends to file a trademark registration for
"Groceries @ your door. .. .. without paying more." Scotty's has the following
websites, each of which are registered with Network Solutions, Inc.:
- scottysmkt.com
- scottyshomemarket.com
- scottysmarket.com
- beaconhomedirect.com
While Scotty's relies on trademark, trade secret and copyright laws to
protect its proprietary rights, Scotty's believes that the technical and
creative skills of its personnel, high-quality service standards, continued
development of its proprietary systems and technology, and brand name
recognition are more important to establish and maintain a leadership position
and strengthen its brand.
EMPLOYEES
As of November 15, 1999, Scotty's had 120 full-time and 8 part-time
employees, working in corporate, sales, general and administrative functions and
in merchandise processing and picking. Scotty's also employs a limited number of
independent contractors and temporary employees on a periodic basis. None of
Scotty's employees are represented by a labor union and Scotty's considers its
labor relations to be good.
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FACILITIES
Scotty's is headquartered in Lake Zurich, Illinois, where it leases
approximately 7,000 square feet of office space, under term lease agreements
which expire on January 14, 2000. Scotty's also maintains its fulfillment center
of approximately 12,250 square feet under a term lease that expires on
August 31, 2001.
In January 2000, Scotty's plans to roll out a new highly automated
fulfillment center in Lake Zurich. The new facility will contain a total of
approximately 94,000 square feet of space, with 74,000 square feet dedicated to
Scotty's fulfillment center and 20,000 square feet of office space. In
June 1999, Scotty's entered into an agreement whereby the new fulfillment
center, which is currently under construction, will be sold to a third party
(upon satisfaction of certain conditions detailed in the contract of sale) and
leased back to Scotty's for an initial term of 20 years. The sale price will be
$6.5 million.
LEGAL PROCEEDINGS
Scotty's is not a party to any material legal proceedings.
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SCOTTY'S MANAGEMENT
Set forth below is information concerning the background and experience of
the Directors and executive officers of Scotty's:
DAVID BEECKEN has served as a director of Scotty's since 1995. He has also
been a Principal of Healthcare Equity Partners, L.P., a venture capital firm,
since 1997. Prior to that, Mr. Beecken was a Senior Managing Director at
ABN-AMRO Incorporated, a leading international bank group, from 1993 to 1997.
Mr. Beecken is 53 years old.
SCOTT DEGRAEVE has served as President and a director of Scotty's since
1995. He founded the predecessor business which was acquired by Scotty's in 1995
and served as its President since 1991. In addition, from 1983 to 1995, he also
served in various business unit financial roles for Motorola, Inc., including
his most recent assignment as Group Controller for the cellular telephone
segment. Mr. DeGraeve is 43 years old.
PETER FRECHETTE has been a director of Scotty's since 1995. He has also been
Chief Executive Officer and Chairman of Patterson Dental Company, a dental
supply and equipment distributor, since 1985 and President of Patterson Dental
Company since 1982. Mr. Frechette is 62 years old.
DARREN JACKSON has been a director of Scotty's since 1998. He has also
served as Vice President of Strategic Planning of Nordstrom, Inc. since 1998.
Prior to joining Nordstrom, Inc., Mr. Jackson served as Chief Financial Officer
of Carson Pirie Scott & Co. since 1989. Mr. Jackson is 35 years old.
RICHARD PIGOTT has been a director of Scotty's since 1995. He has also been
a private investor and financial advisor to corporations regarding mergers,
acquisitions and other strategic issues since 1988. Mr. Pigott is 59 years old.
CHRIS SANG has been the Chief Financial Officer of Scotty's since 1997 and
became the Chief Operating Officer and a director of Scotty's in 1999. Prior to
that, he served as the Chief Financial Officer for Ulta(3), a specialty
retailer, since 1993. Mr. Sang is 41 years old.
WILLIAM STEINMETZ founded Scotty's in 1995 and has served as the Chairman of
the board of directors of Scotty's since that time. He has also served as the
Chief Executive Officer of Scotty's since mid-1999. Mr. Steinmetz also serves as
a Senior Managing Director in charge of North American Investment Banking
Operations of ABN-AMRO Incorporated. Prior to that, he served as head of the
Mergers and Acquisitions/Equity Advisory Group of First Chicago since 1989.
Mr. Steinmetz is 48 years old.
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SCOTTY'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL STATEMENTS AND RESULTS OF OPERATIONS
OVERVIEW
Scotty's offers its customers time savings, convenience and personalized
service through its consumer direct grocery delivery service. Customers place
orders for grocery and related products with Scotty's via telephone, facsimile
and personal computer, and Scotty's delivers these products directly to its
customers' homes. Scotty's serves customers primarily in Chicago's northern and
western suburbs from its Lake Zurich, Illinois fulfillment center.
Scotty's has grown rapidly, with revenue increasing to $5.6 million in 1998
from $2.6 million in 1996. During this same period, Scotty's net loss increased
to $3.6 million in 1998 from $733,000 in 1996. Scotty's expects to continue to
incur losses as it increases expenditures in all areas of operations in order to
execute its business plan. In particular, Scotty's expects to incur costs
related to expanding into new service areas in the metropolitan Chicago area,
opening its new, highly automated fulfillment center, increasing its sales and
marketing efforts and continuing its investment in technology.
Due to Scotty's history of net operating losses, it currently pays no
federal or state income tax. As of December 31, 1998, Scotty's had federal and
state net operating loss carry forwards of approximately $981,000. The net
operating loss expires in 2018. These net operating losses are available to
offset future income tax obligations unless federal or state tax law
restrictions, such as those related to an ownership change as defined in the
Internal Revenue Code, limit Scotty's from doing so.
COMPONENTS OF REVENUE
Scotty's has two primary sources of revenue. The majority of Scotty's
revenue is generated by the sale of grocery and related products that Scotty's
delivers to customers' homes when customer orders are received. Scotty's charges
customers set retail prices for the products sold. Product revenue is comprised
of the retail prices charged to customers for these products. The wholesale
prices that Scotty's pays its distributors and suppliers for such products are
included in cost of revenue. In some cases, customers also pay Scotty's a
delivery fee, which is based on the amount of the order, when the order is
received by Scotty's in relation to when the customer requests delivery and the
method by which the order is placed. Revenue from products and delivery fees are
recognized upon delivery to the customer.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
TOTAL REVENUE. Total revenue increased to $5.3 million in the nine months
ended September 30, 1999 from $3.9 million in the comparable period in 1998, an
increase of 35.5%. This increase was primarily due to the continuing expansion
of Scotty's customer base, the corresponding increase in customer orders, and an
increase in the average order size.
PRODUCT REVENUE, NET. Product revenue, net, is comprised of the retail
prices customers pay to Scotty's for the products sold, net of returns. Product
revenue increased to $5.2 million in the nine months ended September 30, 1999
from $3.8 million in the comparable period in 1998, an increase of 36.3%. The
increase in revenue was the result of
- an increase in Scotty's customer base to approximately 3,900 at
September 30, 1999, from approximately 3,100 at September 30, 1998
- an increase in the average order size to $131 in the nine months ended
September 30, 1999 from $122 in the comparable period in 1998
- an increase in the number of customer orders to approximately 41,000 in
the nine months ended September 30, 1999, from approximately 32,000 in the
comparable period in 1998
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In the first half of 1999, Scotty's increased its service area to include 35%
more suburban households in the metropolitan Chicago area.
DELIVERY FEES. In some cases, Scotty's customers pay delivery fees in
addition to the amounts paid for the products delivered to their homes. Revenue
from these fees increased to $116,000 in the nine months ended September 30,
1999, from $108,000 in the comparable period in1998, an increase of 7.5%, due to
an increase in the number of customer orders. Delivery fees as a percentage of
total revenue decreased to 2.2% in the nine months ended September 30, 1999,
from 2.7% in the comparable in 1998, primarily due to Scotty's decision in 1999
to discontinue offering delivery to customers on the same day that their orders
were placed, which had previously generated higher delivery fees.
COST OF REVENUE. The cost of revenue is comprised of wholesale costs of
products sold to customers. The cost of revenue increased to $3.7 million, or
68.6% of total revenues, in the nine months ended September 30, 1999, from
$2.8 million, or 72.0% of total revenues in the comparable period in 1998. The
decrease in the cost of revenue as a percentage of total revenue in 1999
resulted from Scotty's continued efforts to improve its product assortment,
introduce higher margin products, reduce the cost of products purchased from its
suppliers and continually re-evaluate its pricing relative to supermarkets in
the Chicago area.
FULFILLMENT CENTER OPERATIONS. Expenses attributable to fulfillment center
operations include costs associated with managing the facility and processing
orders, including salaries and wages, employee benefits, facility rent, utility
costs, vehicle expenses and order processing fees. These expenses increased to
$1.8 million, or 33.4% of total revenue, in the nine months ended September 30,
1999, from $1.3 million, or 33.0% of total revenue, in the comparable period in
1998, an increase of 37.3%. The increase in fulfillment center expenses as a
percentage of total revenue resulted primarily from an increase in management
and quality control staff in fulfillment operations and higher hourly pay rates
for fulfillment employees.
SALES AND MARKETING. Sales and marketing expenses include general marketing
expenses and the selling and marketing costs associated with acquiring
customers, including related salaries and wages, benefits and administrative
costs. Sales and marketing expenses increased to $1.5 million, or 28.2% of total
revenue, for the nine months ended September 30, 1999 from $515,000, or 13.1% of
total revenue, in the comparable period in 1998, an increase of 191.9%. This
increase, as well as the higher percentage of total revenue, was due to
additional advertising and promotional activities undertaken to acquire new
customers, expansion into additional service areas, an increase in the marketing
and sales staff and a non-cash charge resulting from a warrant earned by
Scotty's preferred shareholder in 1999 pursuant to the satisfaction of specified
marketing-related conditions under the preferred stock purchase agreement.
TECHNOLOGY SYSTEMS AND DEVELOPMENT. Expenses attributable to technology
systems and development include the non-capitalized costs associated with
- development of technology
- maintenance, ongoing enhancements
- information system personnel and consultants
- amortization of purchased and capitalized software costs
These expenses increased to $490,000 for the nine months ended September 30,
1999, from $302,000, in the comparable period in 1998, an increase of 62.4%,
primarily due to the costs associated with acquiring, maintaining, enhancing and
integrating Scotty's technology systems. Certain costs relating to
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systems that will be installed in the new fulfillment center have been
capitalized in 1999, including costs related to order fulfillment, enterprise
resource planning and order entry systems.
GENERAL AND ADMINISTRATIVE. General and administrative costs include
corporate salaries and wages, employee benefits, corporate facility costs and
depreciation, amortization and general and administrative expenses, including
office equipment and supplies, telephone expenses, travel costs and legal, audit
and other consulting fees. These costs increased to $2.4 million, or 45.5% of
total revenues, for the nine months ended September 30, 1999, from
$1.0 million, or 26.6% of total revenues, in the comparable period in 1998, an
increase of 131.5%, primarily due to the addition of management and
administrative staff and other costs to support continued corporate growth and
planned expansion.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, increased to
$66,000 income in the nine months ended September 30, 1999, from an expense of
$44,000 in the comparable period in 1998 primarily due to increased interest
income in 1999 from higher cash balances resulting from Scotty's receipt of
approximately $10 million from the sale of preferred stock to an investor in
October 1998 allowing Scotty's to earn interest on a portion of these funds in
1999.
1998 COMPARED TO 1997
TOTAL REVENUE. Total revenue increased to $5.6 million in the twelve months
ended December 31, 1998 from $3.9 million in 1997, an increase of 43.9%. This
increase was primarily due to the continuing expansion of Scotty's customer
base, the corresponding increase in customer orders and an increase in the
average order size.
PRODUCT REVENUE, NET. Product revenue increased to $5.4 million in the
twelve months ended December 31, 1998 from $3.8 million in 1997, an increase of
44.1%. The increase in revenue was the result of
- an increase in Scotty's customer base to approximately 3,300 at
December 31, 1998 from approximately 2,300 at December 31, 1997
- an increase in the average order size to $124 in 1998 from $117 in 1997
- an increase in the number of customer orders to approximately 45,000 in
the twelve months ended December 31, 1998 from approximately 33,000 in
1997
In 1998, Scotty's increased its service area to include 33% more households in
the metropolitan Chicago area.
DELIVERY FEES. Revenue from these fees increased to $152,000 in the twelve
months ended December 31, 1998, from $113,000 in 1997, an increase of 34.7%, due
to the increase in customer orders. Delivery fees as a percentage of total
revenue decreased to 2.7% in the twelve months ended December 31, 1998 from 2.9%
in 1997.
COST OF REVENUE. The cost of revenue increased to $4.0 million, or 71.2% of
total revenues, in the twelve months ended December 31, 1998, from
$2.9 million, or 73.6% of total revenues in 1997. The decrease in cost of
revenue as a percentage of total revenue resulted from Scotty's continued
efforts to improve its product assortment, introduce higher margin products,
reduce the cost of products purchased from its suppliers and continually
re-evaluate its pricing relative to supermarkets in the metropolitan Chicago
area.
FULFILLMENT CENTER OPERATIONS. Fulfillment center operations expenses
increased to $2.3 million, or 41.6% of total revenue, in the twelve months ended
December 31, 1998, from $1.4 million, or 35.6% of total revenue, in 1997, an
increase of 68.1%. Included in fulfillment center expenses for the twelve months
ended December 31, 1998, is a charge of $485,000, or 8.7% of total revenue,
related to the
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write-off of assets and other costs associated with the early termination of
certain leases. Excluding this charge, fulfillment center expenses were
$1.8 million, or 32.9% of total revenues. The decrease in fulfillment center
expenses as a percentage of total revenue in 1998, excluding this charge,
compared to 1997 was due to greater operating efficiencies resulting from higher
order volume.
SALES AND MARKETING. Sales and marketing expenses increased to $700,000, or
12.5% of total revenue, for the twelve months ended December 31, 1998, from
$323,000, or 8.3% of total revenue, in 1997, an increase of 116.7%. This
increase, as well as the higher percentage of total revenue, was due to
additional advertising and promotional activities undertaken to acquire new
customers, expansion into additional service areas and an increase in the
marketing and sales staff.
TECHNOLOGY SYSTEMS AND DEVELOPMENT. Technology systems and development
expenses increased to $498,000 for the twelve months ended December 31, 1998,
from $293,000 in 1997, an increase of 70.3%, primarily due to the costs
associated with acquiring, maintaining, enhancing and integrating Scotty's
technology systems.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased to
$1.8 million, or 31.6% of total revenues, for the twelve months ended
December 31, 1998, from $951,000, or 24.5% of total revenues in 1997, an
increase of 85.4%, primarily due to the addition of management and
administrative staff and other costs to support continued corporate growth and
planned expansion.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, increased to
$34,000 income in the twelve months ended December 31, 1998, from an expense of
$16,000 in 1997, primarily due to increased interest income in 1998 from higher
cash balances resulting from Scotty's receipt of approximately $10 million from
the sale of preferred stock to an investor in October 1998.
1997 COMPARED TO 1996
TOTAL REVENUE.
Total revenue increased to $3.9 million in the twelve months ended
December 31, 1997, from $2.6 million in 1996, an increase of 51.1%. This
increase was primarily due to the continuing expansion of Scotty's customer
base, the corresponding increase in customer orders and an increase in the
average order size.
PRODUCT REVENUE, NET. Product revenue increased to $3.8 million in the
twelve months ended December 31, 1997, from $2.5 million in 1996, an increase of
50.9%. The increase in revenue was the result of an increase in Scotty's
customer base to approximately 2,300 at December 31, 1997 from approximately
1,500 at December 31, 1996, an increase of 54.6%.
DELIVERY FEES. Revenue from these fees increased to $113,000 in the twelve
months ended December 31, 1997, from $72,000 in 1996, an increase of 56.6%, due
to the increase in customer orders. Delivery fees as a percentage of total
revenue increased to 2.9% in the twelve months ended December 31, 1997 from 2.8%
in the comparable period for 1996.
COST OF REVENUE. The cost of revenue increased to $2.9 million, or 73.6% of
total revenues, in the twelve months ended December 31, 1997, from
$1.9 million, or 75.2% of total revenues in 1996. The decrease in cost of
revenue as a percentage of total revenue resulted from Scotty's continued
efforts to improve its product assortment, introduce higher margin products,
reduce the cost of products purchased from its suppliers and continually
re-evaluate its pricing relative to supermarkets in the metropolitan Chicago
area.
FULFILLMENT CENTER OPERATIONS. These expenses increased to $1.4 million, or
35.6% of total revenue, in the twelve months ended December 31, 1997, from
$1.0 million, or 40.8% of total revenue, in 1996,
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an increase of 31.9%. The decrease in fulfillment center expenses as a
percentage of total revenue was due to greater operational efficiencies
resulting from higher order volume.
SALES AND MARKETING. Sales and marketing expenses increased to $323,000, or
8.3% of total revenue, for the twelve months ended December 31, 1997, from
$157,000, or 6.1% of total revenue, in 1996, an increase of 105.2%. This
increase, as well as the higher percentage of total revenue, was due to
additional advertising and promotional activities undertaken to acquire new
customers, expansion into additional service areas and an increase in the
marketing and sales staff.
TECHNOLOGY SYSTEMS AND DEVELOPMENT. Technology systems and development
expenses increased to $293,000 for the twelve months ended December 31, 1997,
from $63,000 in 1996, an increase of 362.6%, primarily due to the costs
associated with acquiring, maintaining, enhancing and integrating Scotty's
technology systems.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased to
$951,000, or 24.5% of total revenues, for the twelve months ended December 31,
1997, from $110,000, or 4.3% of total revenues in 1996, an increase of 761.3%,
primarily due to the addition of management and administrative staff and other
costs to support continued corporate growth and planned expansion.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, decreased to an
expense of $16,000 in the twelve months ended December 31, 1997 from income of
$8,000 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, Scotty's had cash, cash equivalents and marketable
securities of $1.0 million compared to $2,000 at September 30, 1998. Operating
activities used cash of $7.6 million in the nine months ended September 30,
1999, primarily due to the net loss incurred in the period and deposits made in
1999 relating to Scotty's new fulfillment center, compared to cash used of
$1.9 million for the same period in 1998. Investing activities used cash of
$1.5 million in the nine months ended September 30, 1999, primarily due to the
purchase of property and equipment for Scotty's new fulfillment center and costs
associated with purchased and capitalized software for Scotty's customer
ordering and warehouse management systems, compared to cash used of $302,000 for
the same period in 1998. Financing activities provided cash of $2.9 million in
the nine months ended September 30, 1999, as compared to providing cash of
$2.0 million for the same period in 1998.
Scotty's finances operations and capital requirements primarily through its
bank line of credit and proceeds from the sale of common stock and preferred
stock. In June 1999, Scotty's entered into an agreement whereby the new
fulfillment center currently under construction will be sold to a third party
(upon satisfaction of certain conditions detailed in the contract of sale) and
leased back to Scotty's for an initial term of 20 years. The sale price will be
$6.5 million. Scotty's expects to open this facility in the first quarter of
2000, and lease approximately $4.0 million of cooler/freezer and warehouse
material handling equipment and certain computer equipment, which will be leased
under a master lease agreement, dated August 1999, with Great American Leasing
Company, L.L.C. Additionally, Scotty's expects to incur operating losses from
this facility at least through 2000.
Scotty's has historically funded its operating losses and capital
investments primarily through equity capital obtained from private placement
sale of its stock. Absent a merger with another company that can fund these
requirements going forward, Scotty's anticipates an additional private placement
sale of its stock.
MARKET RISK
To date, Scotty's has not utilized derivative financial instruments or
derivative commodity instruments. Scotty's invests cash in high quality money
market funds, which are subject to minimal
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credit and market risk. Therefore, Scotty's believes that the market risks
associated with these financial instruments are immaterial.
YEAR 2000 COMPLIANCE
Potential Year 2000 problems stem from the fact that many computer systems
include software and hardware that are unable to distinguish 21st century dates
from those in the 20th century. As a result, computer systems used by many
companies and governmental agencies may need to be upgraded to avoid risk of
system failure or miscalculations that can disrupt normal business activities.
STATE OF READINESS.
Scotty's has assessed its computer systems to determine whether they present
a Year 2000 problem for the company. Scotty's has also reviewed Year 2000
readiness of its vendors that it relies upon.
INTERNAL COMPUTER SYSTEMS. Scotty's uses the following principal systems to
operate its business:
- a web site and web-based ordering system for customers and customer
service personnel
- an older direct dial-up customer ordering system that will be discontinued
in 1999
- an enterprise resource planning systems for vendor and item maintenance,
purchasing, and accounting
- a warehouse management system for inventory management and order
fulfillment
- servers and individual workstations, including personal computers and
network systems.
Scotty's currently believes that all of its critical systems are Year 2000
compliant. Scotty's has received written assurance from its software and
hardware providers that their products are Year 2000 compliant. The web-based
ordering system was developed in-house, and was developed to ensure Year 2000
compliance. Scotty's has also conducted Year 2000 compliance testing of its
individual workstations, system servers, and network systems and has certified
them as Year 2000 compliant. To date, Scotty's has not discovered Year 2000
problems in these internal systems.
THIRD-PARTY COMPLIANCE. Scotty's material third party business
relationships include customers who order products via personal computer,
telephone and fax; and vendors and suppliers who provide the goods that Scotty's
offers to its customers. Scotty's is unable to predict the Year 2000 readiness
of its customers or the systems they use to place orders with Scotty's. Scotty's
business could be materially affected if a significant number of customers were
unable to use their personal computers, telephones or fax to place their orders.
Any Year 2000 problems in the systems used by Scotty's suppliers could result in
Scotty's being unable to obtain certain products in a timely manner. Scotty's
has made inquiries regarding the Year 2000 readiness of its main suppliers and
has received confirmation of their readiness.
NON-INFORMATION SYSTEMS. Non-information systems used in Scotty's business,
such as control equipment for HVAC, telephone systems, delivery vehicles, and
refrigeration and other equipment, may contain date-processing embedded
technology. Any Year 2000 problems in this equipment could cause failures that
could disrupt Scotty's operations. Scotty's has evaluated the equipment that are
being installed in its new fulfillment center and believes that they are not
subject to Year 2000 problems.
COSTS.
Scotty's Year 2000 assessment, remediation and testing activities have been
conducted by internal personnel, and it has not recorded the amount of employee
time expended on these tasks. Accordingly, Scotty's is unable to determine the
cost of employee time devoted to Year 2000 matters. Scotty's did
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not have to incur, and has not incurred, significant costs to assess and
remediate its systems for Year 2000 compliance.
MOST REASONABLE WORST CASE SCENARIO.
It is possible that problems related to the Year 2000 could disrupt one or
more of the following systems:
- customer personal computer-based ordering
- credit card settlement
In each case, there is a low technology alternative available that would
allow Scotty's to continue to run its business. However, most of the
alternatives would result in increased costs, reduced revenues or delivery
delays, which would increase Scotty's operating losses. Extended disruptions may
impact long-term customer and supplier relationships, which would further impact
future profitability.
CONTINGENCY PLAN.
Other than the short-term, low technology alternatives discussed above, to
date Scotty's has not formulated contingency plans related to the failure of its
or a third-party's systems or equipment should they prove to not be Year 2000
compliant.
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OPERATION OF SCOTTY'S AFTER THE MERGER
Upon the effective time of the merger, Streamsub, Inc., a wholly owned
subsidiary of Streamline, will be merged into Scotty's, which will become a
wholly owned subsidiary of Streamline. Following the merger, Scotty's will
operate under the name Streamline and will continue to provide unattended home
delivery of groceries and related products to customers in the Chicago area.
DIRECTORS
In accordance with the merger agreement, at the effective time of the
merger, Timothy A. DeMello, the sole director of Streamsub, Inc., shall become
the sole director of Scotty's. The merger itself will not result in a change in
the composition of the Streamline board. However, immediately following the
merger, Chris Sang, the current Chief Operating Officer and Chief Financial
Officer of Scotty's, will be appointed to fill an existing vacancy in
Streamline's board of directors.
OFFICERS
Upon the closing of the merger, Scott DeGraeve, President of Scotty's, will
become Streamline's Vice President--General Manager of Chicago Market.
Additionally, under an employment agreement that will take effect upon the
closing of the merger, Chris Sang will continue to be an officer of Scotty's.
Mr. Sang will oversee the establishment of Scotty's new facility, which is
currently under development, until April 1, 2000 or the date on which he
determines that specified operational objectives have been achieved, whichever
is later. Upon satisfaction of these objectives, Mr. Sang will be granted an
option to purchase 50,000 shares of Streamline common stock at $6.875 per share,
the closing price of Streamline common stock on the date preceding the
announcement of the proposed merger. The option will vest annually over three
years, but will become fully exercisable at the expiration of the term of
Mr. Sang's employment under the agreement. This option is in addition to
Mr. Sang's existing option for 180,000 shares of Scotty's common stock, which
will become an option for approximately 72,000 shares of Streamline common stock
as a result of the merger.
Under the employment agreement, Mr. Sang will receive an annual base salary
of $150,000, a $50,000 bonus to be paid in January 2000 and an additional
$50,000 annual bonus to be paid on a pro rata basis with respect to the portion
of 2000 during which Mr. Sang is employed by Scotty's. Mr. Sang is also entitled
to participate in welfare and fringe benefit plans offered by Streamline. If
Streamline terminates Mr. Sang's employment without cause, if he resigns for
good reason or if his term of employment expires, Streamline will pay Mr. Sang
severance in the amount of $200,000.
70
<PAGE>
STREAMLINE AND SCOTTY'S
UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS
The unaudited pro forma combining statements of operations combine
Streamline's and Scotty's historical consolidated statements of operations for
each of the three years in the period ended December 31, 1998 giving effect to
the merger on a pooling of interests basis as if it had occurred at the
beginning of each period presented. The unaudited pro forma combining balance
sheet combines Streamline's historical consolidated balance sheet as of
October 2, 1999 with Scotty's historical balance sheet as of September 30, 1999,
giving effect to the merger as if it had occurred on October 2, 1999. The
historical financial information of Streamline has been derived from the audited
consolidated financial statements for each of the three years in the period
ended December 31, 1998 which are all included elsewhere herein and should be
read in conjunction with such financial statements and the notes thereto. The
historical financial information of Scotty's has been derived from the audited
financial statements for each of the two years in the period ended December 31,
1998, which are included elsewhere herein and should be read in conjunction with
such financial statements and notes thereto. The historical financial
information of Scotty's has been derived from unaudited financial statements for
the year ended December 31, 1996, which are included elsewhere herein and should
be read in conjunction with such financial statements and notes thereto. The pro
forma information is not necessarily indicative of the combined consolidated
operating results or financial position that would have occurred had the merger
been consummated at the beginning of the periods presented, nor is it
necessarily indicative of future combined operating results or financial
position.
71
<PAGE>
STREAMLINE AND SCOTTY'S
UNAUDITED PRO FORMA
COMBINING BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 2, 1999
----------------------------------------------
PRO FORMA
STREAMLINE SCOTTY'S ADJUSTMENTS COMBINED
ASSETS ---------- -------- ----------- --------
<S> <C> <C> <C> <C>
Current assets:
Cash, cash equivalents and marketable
securities..................................... $43,021 $ 1,023 $ 44,044
Accounts receivable.............................. 357 49 406
Inventory........................................ 737 385 1,122
Prepaid expenses and other current assets........ 731 144 875
------- -------- --------
Total current assets........................... 44,846 1,601 46,447
Property and equipment, net...................... 7,210 2,032 9,242
Purchased and capitalized software, net.......... 2,836 1,133 3,969
Goodwill, net of accumulated amortization........ 811 88 899
Other assets, net................................ 412 4,141 4,553
------- -------- --------
Total assets................................... $56,115 $ 8,995 $ 65,110
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Capital lease obligations........................ 369 277 646
Accounts payable................................. 2,582 130 2,712
Accrued expenses................................. 1,279 1,080 2,359
Notes payable.................................... -- 2,926 2,926
------- -------- --------
Total current liabilities...................... 4,230 4,413 8,643
------- -------- --------
Long-term portion of capital lease obligations..... 752 1,077 1,829
------- -------- --------
Stockholders' equity:
Common stock..................................... 184 4,798 $(4,761)(a) 221
Preferred stock.................................. -- 9,789 (9,296)(a) --
(493)(b)
Additional paid-in capital....................... 87,278 402 14,057(a) 101,737
Treasury stock................................... (238) -- -- (238)
Accumulated deficit.............................. (36,091) (11,484) 493(b) (47,082)
------- -------- ------- --------
Total stockholders' equity..................... 51,133 3,505 -- 54,638
------- -------- ------- --------
Total liabilities and stockholders' equity... $56,115 $ 8,995 $ -- $ 65,110
======= ======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
72
<PAGE>
STREAMLINE AND SCOTTY'S
UNAUDITED PRO FORMA COMBINING
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------
STREAMLINE SCOTTY'S COMBINED
---------- --------- ---------
<S> <C> <C> <C>
Revenue:
Product and service revenue, net.......................... $ 391 $ 2,496 $ 2,887
Subscription fees......................................... 20 72 92
Advertising, research and marketing fees.................. 511 -- 511
--------- --------- ---------
Total revenue........................................... 922 2,568 3,490
Operating expenses:
Cost of revenue........................................... 391 1,930 2,321
Fulfillment center operations............................. 916 1,048 1,964
Sales and marketing....................................... 441 158 599
Technology systems and development........................ 78 63 141
General and administrative................................ 985 110 1,095
--------- --------- ---------
Total operating expenses................................ 2,811 3,309 6,120
--------- --------- ---------
Loss from operations........................................ (1,889) (741) (2,630)
Other income (expense):
Interest income........................................... 74 11 85
Interest expense.......................................... (31) (3) (34)
--------- --------- ---------
Total other income (expense), net....................... 43 8 51
Net loss.................................................... (1,846) (733) (2,579)
Dividends on preferred stock................................ 203 -- 203
--------- --------- ---------
Net loss attributable to common stockholders................ $ (2,049) $ (733) $ (2,782)
========= ========= =========
Basic and diluted net loss per common share................. $ (0.62) $ (0.26) $ (0.63)
Shares used in computing basic and diluted net loss......... 3,284,625 2,832,493 4,417,622
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
73
<PAGE>
STREAMLINE AND SCOTTY'S
UNAUDITED PRO FORMA COMBINING
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------
STREAMLINE SCOTTY'S COMBINED
---------- --------- ---------
<S> <C> <C> <C>
Revenue:
Product and service revenue, net.......................... $ 1,815 $ 3,767 $ 5,582
Subscription fees......................................... 98 113 211
Advertising, research and marketing fees.................. 721 -- 721
--------- --------- ---------
Total revenue........................................... 2,634 3,880 6,514
Operating expenses:
Cost of revenue........................................... 2,098 2,855 4,953
Fulfillment center operations............................. 2,769 1,382 4,151
Sales and marketing....................................... 1,428 323 1,751
Technology systems and development........................ 1,673 293 1,966
General and administrative................................ 3,166 951 4,117
--------- --------- ---------
Total operating expenses................................ 11,134 5,804 16,938
--------- --------- ---------
Loss from operations........................................ (8,500) (1,924) (10,424)
Other income (expense):
Interest income........................................... 58 4 62
Interest expense.......................................... (50) (20) (70)
Other..................................................... (87) -- (87)
--------- --------- ---------
Total other income (expense), net....................... (79) (16) (95)
--------- --------- ---------
Loss before minority interest............................... (8,579) (1,940) (10,519)
Minority interest in net loss of consolidated subsidiary.... 265 -- 265
--------- --------- ---------
Net loss.................................................... $ (8,314) $ (1,940) $ (10,254)
========= ========= =========
Dividends on preferred stock................................ 157 -- 157
--------- --------- ---------
Net loss attributable to common stockholders................ $ (8,471) $ (1,940) $ (10,411)
========= ========= =========
Basic and diluted net loss per common share................. $ (2.47) $ (0.50) $ (2.10)
Shares used in computing basic and diluted net loss......... 3,424,035 3,860,285 4,968,149
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements
74
<PAGE>
STREAMLINE AND SCOTTY'S
UNAUDITED PRO FORMA COMBINING
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------
PRO FORMA
STREAMLINE SCOTTY'S ADJUSTMENTS COMBINED
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Product and service revenue, net............... $ 6,026 $ 5,430 $ 11,456
Subscription fees.............................. 391 152 543
Advertising, research and marketing fees....... 529 -- 529
--------- --------- ---------
Total revenue................................ 6,946 5,582 12,528
Operating expenses:
Cost of revenue................................ 4,992 3,973 8,965
Fulfillment center operations.................. 4,013 2,324 6,337
Sales and marketing............................ 1,479 700 2,179
Technology systems and development............. 3,002 498 3,500
General and administrative..................... 3,897 1,763 5,660
--------- --------- ---------
Total operating expenses..................... 17,383 9,258 26,641
--------- --------- ---------
Loss from operations............................. (10,437) (3,676) (14,113)
Other income (expense):
Interest income................................ 240 89 329
Interest expense............................... (569) (57) (626)
Other.......................................... (1) 2 1
--------- --------- ---------
Total other income (expense), net............ (330) 34 (296)
Loss before minority interest and extraordinary
item........................................... (10,767) (3,642) (14,409)
Minority interest in net loss of consolidated
subsidiary..................................... 138 -- 138
--------- --------- ---------
Loss before extraordinary item................... (10,629) (3,642) (14,271)
Extraordinary item -- loss on early redemption of
debt........................................... 744 -- 744
--------- --------- ---------
Net loss......................................... $ (11,373) $ (3,642) $ (15,015)
========= ========= =========
Dividends on preferred stock..................... 329 118 $(118)(b) 329
--------- --------- ---------
Net loss attributable to common stockholders..... $ (11,702) $ (3,760) $ (15,344)
========= ========= =========
Basic and diluted net loss per common share...... $ (3.32) $ (0.77) $ (2.63)
Shares used in computing basic and diluted net
loss........................................... 3,522,458 4,895,264 5,837,558(a)
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
75
<PAGE>
STREAMLINE AND SCOTTY'S
UNAUDITED PRO FORMA COMBINING
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------
STREAMLINE SCOTTY'S COMBINED
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Product and service revenue, net.......................... $ 3,882 $ 3,825 $ 7,707
Subscription fees......................................... 276 108 384
Advertising, research and marketing fees.................. 370 -- 370
--------- --------- ---------
Total revenue........................................... 4,528 3,933 8,461
Operating expenses:
Cost of revenue........................................... 3,266 2,832 6,098
Fulfillment center operations............................. 2,901 1,297 4,198
Sales and marketing....................................... 989 515 1,504
Technology systems and development........................ 1,937 302 2,239
General and administrative................................ 2,798 1,047 3,845
--------- --------- ---------
Total operating expenses................................ 11,891 5,993 17,884
--------- --------- ---------
Loss from operations........................................ (7,363) (2,060) (9,423)
Other income (expense):
Interest income........................................... 83 7 90
Interest expense.......................................... (537) (52) (589)
Other..................................................... -- 1 1
--------- --------- ---------
Total other income (expense), net....................... (454) 44 (498)
Loss before minority interest and extraordinary item........ (7,817) (2,104) (9,921)
Minority interest in net loss of consolidated subsidiary.... 138 -- 138
--------- --------- ---------
Loss before extraordinary item.............................. (7,679) (2,104) (9,783)
Extraordinary item -- loss on early redemption of debt...... 744 -- 744
--------- --------- ---------
Net loss.................................................... $ (8,423) $ (2,104) $ (10,527)
========= ========= =========
Dividends on preferred stock................................ 41 -- 41
--------- --------- ---------
Net loss attributable to common stockholders................ $ (8,464) $ (2,104) $ (10,568)
========= ========= =========
Basic and diluted net loss per common share................. $ (2.42) $ (0.45) $ (1.96)
Shares used in computing basic and diluted net loss......... 3,497,875 4,712,891 5,383,031
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
76
<PAGE>
STREAMLINE AND SCOTTY'S
UNAUDITED PRO FORMA COMBINING
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------------------------
OCTOBER 2, SEPTEMBER 30,
1999 1999 PRO FORMA
STREAMLINE SCOTTY'S ADJUSTMENTS COMBINED
----------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue:
Product and service revenue, net............ $ 8,694 $ 5,212 $ 13,906
Subscription fees........................... 693 116 809
Advertising, research and marketing fees.... 855 -- 855
--------- --------- ----------
Total revenue............................. 10,242 5,328 15,570
Operating expenses:
Cost of revenue............................. 7,016 3,655 10,671
Fulfillment center operations............... 5,978 1,781 7,759
Sales and marketing......................... 2,595 1,502 4,097
Technology systems and development.......... 2,808 491 3,299
General and administrative.................. 5,066 2,424 7,490
--------- --------- ----------
Total operating expenses.................. 23,463 9,853 33,316
--------- --------- ----------
Loss from operations.......................... (13,221) (4,525) (17,746)
Other income (expense):
Interest income............................... 731 147 878
Interest expense.............................. (149) (84) (233)
Other......................................... -- 3 3
--------- --------- ----------
Total other income (expense), net......... 582 66 648
--------- --------- ----------
Net loss...................................... $ (12,639) $ (4,459) $ (17,098)
========= ========= ==========
Dividends on preferred stock.................. 549 375 $(375)(b) 549
--------- --------- ----------
Net loss attributable to common
stockholders................................ $ (13,188) $ (4,834) $ (17,647)
========= ========= ==========
Basic and diluted net loss per common share... $ (1.39) $ (0.89) $ (1.34)
Shares used in computing basic and diluted net
loss........................................ 9,493,994 5,442,384 13,186,099(a)
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
77
<PAGE>
STREAMLINE AND SCOTTY'S
NOTES TO UNAUDITED PRO FORMA COMBINING
FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. The unaudited pro forma combined financial statements of Streamline and
Scotty's give retroactive effect to the merger, which is being accounted for
as a pooling of interests. As a result, such statements are presented as if
the combining companies had been combined for all periods presented, and
reflect the following adjustments:
(a) to reflect the assumed issuance of Streamline common stock in
exchange for Scotty's common stock outstanding and Scotty's
preferred stock which was assumed to be converted to common stock
when issued.
(b) to reverse previously accrued dividends on preferred stock for all
applicable periods, as dividends are cancelled pursuant to the
Company's Articles of Incorporation, in connection with the merger.
2. The pro forma combined net income per share is based on the combined
weighted average number of common stock and dilutive common stock
equivalents of Streamline common stock and Scotty's common stock for each
period. This is based on the Exchange Ratio of 0.40 shares of Streamline
common stock for each share of Scotty's common stock as described in the
Merger Agreement.
3. The unaudited pro forma combined financial statements combine Streamline's
financial statements for the nine months ended October 2, 1999 and
September 30, 1998 and the fiscal years ended December 31, 1998, 1997 and
1996 with Scotty's financial statements for the nine months ended
September 30, 1999 and 1998 and the fiscal years ended December 31, 1998,
1997 and 1996, respectively.
4. The unaudited pro forma combined financial statements do not include
adjustments to conform the accounting policies of Scotty's to those followed
by Streamline. The nature and extent of such adjustments, if any, will be
based upon further analysis.
5. Streamline and Scotty's estimate they will incur merger-related costs of
approximately $1.25 million. Such merger-related expenses include regulatory
filing costs, legal and accounting expenses and other transaction costs. The
costs have not been reflected as pro forma adjustments in the pro forma
combined financial statements. These amounts are preliminary estimates and
subject to change. Moreover, additional unanticipated expenses may be
incurred in connection with the integration of the business of the two
companies.
6. Certain financial statement balances of Scotty's have been reclassified to
conform with the Streamline financial statement presentation.
78
<PAGE>
PRINCIPAL SHAREHOLDERS OF STREAMLINE
The following table sets forth certain information regarding beneficial
ownership of Streamline's common stock as of November 26, 1999, as adjusted to
reflect the issuance of shares in connection with the merger, by (a) each person
known by Streamline to own beneficially more than 5% of Streamline's common
stock, (b) each of Streamline's directors and each of current executive officers
whose compensation exceeded $100,000 in 1998, (c) all current executive officers
and directors of Streamline as a group.
Unless otherwise indicated, each person named in the table has sole voting
power and investment power or shares such power with respect to all shares
listed as owned by such person. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and includes voting or
investment power with respect to the securities. The number of shares of
Streamline common stock outstanding used in calculating the percentage for each
listed person includes any shares the person has the right to acquire within
60 days of November 26, 1999.
<TABLE>
<CAPTION>
BEFORE THE MERGER AFTER THE MERGER
--------------------------------------- ---------------------------------------
NO. SHARES NO. SHARES
BENEFICIALLY PERCENTAGE BENEFICIALLY PERCENTAGE
NAME OWNED(1) BENEFICIALLY OWNED OWNED(2) BENEFICIALLY OWNED
- ---- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Nordstrom, Inc. (3)................... 5,932,643 32.3% 7,603,967 34.2%
J. Daniel Nordstrom
1617 Sixth Avenue
Seattle, WA 98101
Reliance Insurance Company(4)......... 2,597,615 14.1% 2,597,615 11.8%
John P. Fitzsimons
55 East 52(nd) Street
New York, NY 10055
Timothy A. DeMello (5)................ 1,849,310 10.1% 1,849,310 8.4%
Streamline.com, Inc.
27 Dartmouth Street
Westwood, MA 02090
Faith B. Popcorn (6).................. 56,250 * 56,250 *
Mark A. Cohn (7)...................... 55,000 * 55,000 *
Thomas O. Jones (8)................... 150,000 * 150,000 *
Mary E. Wadlinger (9)................. 50,834 * 50,834 *
All current executive officers and
directors as a group
(12 persons)(11).................... 10,756,651 58.5% 12,427,975 56.2%
</TABLE>
- ------------------------
* Less than 1%
(1) There were 18,373,796 shares of Streamline common stock outstanding as of
November 26, 1999.
(2) Assumes the issuance of 3,725,365 shares of Streamline common stock to
holders of outstanding shares of Scotty's common stock and preferred stock
in connection with the merger.
(3) Consists entirely of 2,597,615 shares beneficially owned by Nordstrom, Inc.
The number of shares held after the merger also includes up to 1,515,151
shares to be issued upon the exchange of shares of Scotty's preferred stock
owned by Nordstrom, Inc. and up to 156,172 shares that will be issuable upon
the exercise of a presently exercisable warrant to acquire shares of
Scotty's common
79
<PAGE>
stock owned by Nordstrom, Inc. Mr. Nordstrom, a director of Streamline, is
Co-President of Nordtrom, Inc. Although Mr. Nordstrom may be deemed to be a
beneficial owner of such shares, he disclaims all such beneficial ownership
except to the extent of his financial interest therein.
(4) Consists entirely of shares beneficially owned by Reliance Insurance
Company. Mr. Fitzsimons, a director of Streamline, is Senior Vice President,
Director of Equities of Reliance. Although Mr. Fitzsimons may be deemed to
be a beneficial owner of such shares, he disclaims all such beneficial
ownership except to the extent of his financial interest therein.
(5) Includes an aggregate of 10,000 shares held in custody for Mr. DeMello's
children and an aggregate of 200,000 shares held in trusts with respect to
which Mr. DeMello or his children have a beneficial interest. Mr. DeMello
disclaims beneficial ownership of such shares except to the extent of his
financial interest therein.
(6) Includes 12,500 shares issuable upon the exercise of options exercisable
within 60 days of November 26, 1999, and 50,000 shares issuable upon the
exercise of a presently exercisable warrant held by BrainReserve, Inc., of
which Ms. Popcorn is the founder and Chief Executive Officer. Ms. Popcorn
disclaims beneficial ownership of the shares beneficially owned by
BrainReserve except to the extent of her financial interest therein.
(7) Includes 12,500 shares issuable upon the exercise of options exercisable
within 60 days of November 26, 1999.
(8) Consists entirely of shares issuable upon the exercise of a presently
exercisable warrant held by Elm Square Technologies, Inc., of which
Mr. Jones is the President. Mr. Jones disclaims beneficial ownership of such
shares except to the extent of his financial interest therein.
(9) Consists entirely of shares issuable upon the exercise of options
exercisable within 60 days of November 26, 1999.
(10) Consists of shares issuable upon the exercise of options exercisable within
60 days of November 26, 1999.
80
<PAGE>
THE SPECIAL MEETING
GENERAL
This proxy statement and private placement memorandum is being furnished to
shareholders of Streamline in connection with the solicitation of proxies by
Streamline's board of directors for use at the Streamline special meeting to be
held on January 5, 2000, at 10:00 a.m. local time, at Streamline's principal
offices at 27 Dartmouth Street, Westwood, MA 02090, and any adjournments or
postponements of this Streamline special meeting.
MATTERS TO BE CONSIDERED
At the Streamline special meeting, shareholders of record of Streamline as
of the close of business on November 26, 1999 will be asked to consider and vote
upon proposals
- to approve the merger agreement and the merger
- to approve an amendment to increase the number of shares issuable upon the
exercise of stock options granted according to Streamline's 1993 Employee
Option Plan from 2,500,000 to 3,000,000
- to consider such other matters as may properly come before the Streamline
special meeting or any adjournments or postponements of this Streamline
special meeting.
RECORD DATE; VOTING AT THE STREAMLINE SPECIAL MEETING; VOTES REQUIRED
Streamline's board of directors has fixed the close of business on
November 26, 1999 as the record date for determining the shareholders of
Streamline entitled to notice of and to vote at the Streamline special meeting.
As of the record date, there were approximately 18,373,796 shares of Streamline
common stock outstanding and entitled to vote, held by approximately 182 holders
of record. Each record holder of Streamline common stock on the record date is
entitled to one vote per share, exercisable in person or by properly executed
proxy, on each matter properly submitted for a vote at the Streamline special
meeting.
The presence, in person or by properly executed proxy, of holders of a
majority of the outstanding shares of Streamline common stock entitled to vote
at the Streamline special meeting is necessary to constitute a quorum for the
transaction of business at the meeting. The Streamline special meeting may be
adjourned to obtain additional proxies or votes or for any other purpose, and,
at any subsequent reconvening of the Streamline special meeting, all proxies
will be voted in the same manner as such proxies would have been voted at the
original convening of the meeting, except for any proxies that have properly
been revoked or withdrawn prior to the reconvened Streamline special meeting,
regardless of whether they may have been properly voted on the same or any other
matter at a previous meeting.
The approval of the merger agreement, the merger and the proposed amendment
to the employee option plan will require the affirmative vote of the holders of
not less than a majority of the shares of Streamline common stock represented,
in person or by proxy, at the Streamline special meeting. Abstentions and
failures to vote will have the practical effect of voting against the merger
agreement and the merger since they represent fewer votes for approval and
adoption. Broker nonvotes will have no effect on the voting.
Streamline shareholders who own in the aggregate approximately 56.5% of the
outstanding shares of Streamline common stock as of the record date have
indicated that they plan to vote or direct the vote of all shares of Streamline
common stock over which they have voting control in favor of the merger
agreement and the proposed amendment to the employee option plan. Additionally,
holders of approximately 98.5% of the outstanding shares of Scotty's common
stock and 100% of the outstanding
81
<PAGE>
shares of Scotty's preferred stock have signed support/voting agreements in
which they have offered to vote in favor of the merger.
If the merger is consummated, holders of Scotty's common stock who have
properly exercised dissenters' rights in connection with the merger under
Sections 11.65 to 11.70 of the Illinois Business Corporation Act will have the
right to receive the consideration determined to be due according to the laws of
the State of Illinois.
PROXIES
All shares of Streamline common stock that are entitled to vote and are
represented at the Streamline special meeting by properly executed proxies
received prior to the vote at the Streamline special meeting, and not duly and
timely revoked, will be voted at the Streamline special meeting in accordance
with the instructions indicated on the proxy. If no instructions are indicated,
such proxies will be voted FOR approval of the merger agreement and FOR approval
of the proposed amendment to the employee option plan.
If any other matters are properly presented for consideration at the
Streamline special meeting or any adjournments or postponements of the
Streamline special meeting, including, among others, consideration of a motion
to adjourn or postpone the Streamline special meeting to another time and/or
place including an adjournment or postponement to solicit additional proxies,
the persons named in the enclosed form of proxy and voting under the proxy will
have discretion to vote on such matters in accordance with their best judgment.
Any proxy given according to this solicitation may be revoked at any time
before it is voted by:
- filing with the secretary of Streamline, before the vote at the Streamline
special meeting, a written notice of revocation bearing a later date than
the proxy
- duly executing a later dated proxy relating to the same shares and
delivering it to the secretary of Streamline's before the vote at the
Streamline special meeting or
- attending the Streamline special meeting and voting in person, although
attendance at the Streamline special meeting will not, in and of itself,
constitute a proxy revocation.
Any written notice of revocation or subsequent proxy should be sent so as to
be delivered to
Streamline.com, Inc.
27 Dartmouth Street
Westwood, MA 02090
Attention: Secretary
or hand-delivered to the Secretary of Streamline at or before the vote at the
Streamline special meeting.
SOLICITATION OF PROXIES
All expenses of this solicitation will be borne by Streamline. In addition
to solicitation by mail, directors, officers and employees of Streamline may
solicit proxies personally or by telephone, facsimile or telegraph transmission,
or other means of communication. Streamline's directors, officers and employees
will not be compensated for proxy solicitation, but may be reimbursed for
reasonable out-of-pocket expenses. Arrangements will also be made with
custodians, nominees and fiduciaries for forwarding proxy solicitation materials
to beneficial owners of shares held of record by such persons. Streamline will
reimburse custodians, nominees and fiduciaries for reasonable expenses incurred
in connection with forwarding the proxy solicitation materials.
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PROPOSAL 1--APPROVAL OF THE MERGER AGREEMENT
THE MERGER
GENERAL
The discussion in this proxy statement and private placement memorandum of
the merger and the description of the principal terms of the merger are subject
to and qualified in their entirety by reference to the merger agreement, a copy
of which is attached to this proxy statement and private placement memorandum as
Exhibit A and is incorporated herein by reference.
BACKGROUND OF THE MERGER
The first contact between Scotty's and Streamline occurred on February 24,
1999, at a leadership conference hosted by Nordstrom, Inc. in Phoenix, Arizona.
Nordstrom, Inc. is a shareholder of both Scotty's and Streamline. J. Daniel
Nordstrom, a co-president of Nordstrom, Inc. and director of Streamline, Darren
Jackson, Vice President of Strategic Planning of Nordstrom, Inc, and director of
Scotty's, William C. Steinmetz, chief executive officer and chairman of the
board of directors of Scotty's, and Timothy A. DeMello, chief executive officer
and chairman of the board of Streamline met to discuss the consumer direct
industry in general and the industry's trend toward consolidation. During this
discussion the possibility of a future business combination was introduced.
On March 12, 1999, Mr. Steinmetz placed a telephone call to Mr. DeMello to
express Scotty's interest in exploring a potential business combination
involving the two companies. Mr. DeMello and Mr. Steinmetz had several telephone
conversations over the next few weeks discussing the feasibility of such a
business combination. On , 1999, Mr. DeMello informed Mr. Steinmetz by
telephone that Streamline intended to focus on its initial public offering and
that a business combination with Scotty's was not in the best interest of
Streamline at that time.
On June 18, 1999, Mr. Steinmetz placed a telephone call to Mr. DeMello to
congratulate him on the completion of Streamline's initial public offering and
to discuss developments within the consumer direct industry. Over the next
several weeks, Mr. Steinmetz and Mr. DeMello discussed their general business
philosophies and the long-term objectives for each of Scotty's and Streamline.
On August 4, 1999, Mr. Patrick Pollard, a shareholder of Scotty's, advised
Mr. DeMello by telephone that he was authorized by the Scotty's board of
directors to explore and negotiate a merger with Streamline and invited
Mr. DeMello to Chicago to tour Scotty's distribution facility and meet with
certain members of Scotty's board of directors and executive management team.
On August 17, 1999, Mr. DeMello traveled to Chicago, toured the Scotty's
distribution facility and met with Mr. Pollard, Scott DeGraeve, President of
Scotty's, and Chris Sang, chief financial officer and chief operating officer of
Scotty's. Mr. DeMello and these representatives of Scotty's discussed the
potential benefits and possible structure of a business combination between
Scotty's and Streamline.
On August 26, 1999, Mr. Sang traveled to Streamline's headquarters in
Massachusetts to tour Streamline's distribution facility, meet with certain
members of Streamline's executive management team and to discuss with
Mr. DeMello the benefits to be achieved by the integration of the companies.
On August 26, 1999, Streamline executed a non-disclosure agreement for the
benefit of Scotty's and began to gather Scotty's business, legal and accounting
due diligence materials.
In a series of telephone conversations from August 27, 1999 through
September 1, 1999, Mr. DeMello and Mr. Pollard began discussing the valuation of
their respective companies. Streamline is a publicly traded company and,
therefore, a market valuation was readily available for Streamline common stock.
Although a privately held company, Scotty's had recently undergone a valuation
in
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connection with a proposed private equity financing transaction which was used
as a starting point for valuation negotiations. As of result of these
conversations, Mr. DeMello and Mr. Pollard reached a preliminarily understanding
on the basic parameters of the proposed transaction.
On September 2, 1999, at a previously scheduled telephonic board of
directors meeting, Mr. DeMello discussed Streamline's opportunity to acquire
Scotty. Mr. DeMello presented his analysis of the opportunity, the preliminary
terms negotiated, including price and the disinterested directors authorized
Mr. DeMello to continue the negotiations in accordance with the terms presented
to them.
On September 9, 1999, Mr. DeMello sent a first draft of a non-binding letter
of intent to Mr. Pollard. Streamline and Scotty's negotiated the letter of
intent over the course of the following week.
On September 17, 1999, Streamline and Scotty's entered into a final letter
of intent providing that Streamline would issue Scotty's shareholders,
optionholders and warrantholders an aggregate of approximately 4.3 million
shares of unregistered shares of Streamline common stock in exchange for 100% of
the outstanding shares of Scotty's capital stock and upon the exercise of
outstanding options and warrants to acquire Scotty's common stock. The letter of
intent further stated that the transaction would be structured as a merger of a
wholly owned subsidiary of Streamline into Scotty's, with Scotty's to survive
the merger as a wholly owned subsidiary of Streamline. The companies also
agreed, in addition to certain standard terms and conditions that:
- the transaction must qualify as a tax-free reorganization and as a pooling
of interests
- for a 60-day period Scotty's would not solicit, negotiate or discuss any
other merger or sale proposals with any third party
- Scotty's would pay Streamline a $500,000 break up fee if it failed to
enter into the acquisition if it took any of these prohibited actions
- Streamline would register for resale the shares of Streamline common stock
issued to Scotty's equityholders in the merger by filing a registration
statement on Form S-3 or other appropriate form, no later than 9 months
after the closing date of the merger
- Mr. Sang would join the Streamline board of directors
On September 17, 1999, Lauren Farrell, Vice President of Finance of
Streamline, delivered a formal due diligence request list to Mr. Sang of
Scotty's and thereafter Streamline began exchanging business, legal and
accounting due diligence materials with Scotty's.
On September 22, 1999, Mr. DeGraeve, Mr. Sang and Mr. Pollard traveled to
Streamline's headquarters in Massachusetts to meet with Mr. DeMello, Ms. Farrell
and other members of Streamline's management team. They executed a mutual
non-disclosure agreement and discussed the similarities and differences between
Streamline's and Scotty's business models. In addition, Bingham Dana LLP,
outside counsel to Streamline, delivered to Vedder, Price, Kaufman & Kammholz,
outside counsel to Scotty's, a draft of the proposed Agreement and Plan of
Merger and Reorganization.
Between September 23, 1999 and October 18, 1999, through a series of
conference calls, primarily involving Mr. Sang and Mr. Pollard of Scotty's,
Mr. DeMello and Ms. Farrell of Streamline, and their respective outside legal
advisors and accountants, Streamline and Scotty's negotiated the terms of the
merger agreement and related ancillary documents.
On September 22, 1999, and on several subsequent occasions over the
following weeks, a copy of the most recent version of the merger agreement was
sent to the board of directors of Streamline. During this period, Mr. DeMello
had telephone conversations with several directors for the purposes of
discussing the potential merger with Scotty's. During these telephone
conversations, the board members
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discussed with Mr. DeMello the commercial and strategic reasons for the proposed
business combination, as well as potential risks relating to the proposal.
By written consent dated as of October 12, 1999, Streamline's directors
unanimously approved the terms of the merger agreement and related transactions
and authorized Streamline's officers to take all necessary or desirable actions
to effectuate the merger and these transactions.
From October 8, 1999 to October 18, 1999, shareholders beneficially owning
over 50% of the outstanding shares of Streamline common stock, over 95% of the
outstanding shares of Scotty's common stock and 100% of the outstanding shares
of Scotty's preferred stock delivered agreements indicating that they would vote
to approve the merger.
On October 18, 1999, Streamline and Scotty's signed the merger agreement. A
press release announcing the execution of the agreement was issued the following
morning.
STREAMLINE'S REASONS FOR THE MERGER
Streamline's board of directors has determined that the merger is fair to,
and in the best interests of, Streamline, and, accordingly, has approved the
merger agreement. In reaching its determination, Streamline's board of directors
consulted with Streamline's management and considered a number of factors,
including the following:
- Streamline's board of directors believes that the consumer home direct
market as a whole is undergoing substantial changes, and that, in this
environment, continued growth is vital to the success of the company.
- Streamline's board of directors expects that, given the costs associated
with opening a facility in a new region (including the costs of customer
acquisition), the merger presents favorable means of entering into the
Chicago market.
- the combination of Streamline and Scotty's is expected to achieve cost
savings through the consolidation and integration of certain operations
that are currently duplicated within the two companies.
- the acquisition of Scotty's is hoped to cause the public capital market to
place a higher value on Streamline as it begins to execute its expansion
plans.
- the merger is expected to assist Streamline in establishing itself as a
nationally recognized service and, thereby, enable Streamline to better
compete against other consumer direct companies with greater financial
resources.
In the course of its deliberations, Streamline's board of directors reviewed
and considered the following additional factors, each of which it determined
were favorable to the merger:
- the terms and conditions of the merger agreement, including the amount and
form of the merger consideration set forth in the merger agreement
- the compatibility of the business strategies of Streamline and Scotty's.
Streamline's board of directors did not assign any specific or relative
weights when considering the foregoing factors.
SCOTTY'S REASONS FOR THE MERGER
The terms of the merger are the result of extensive arm's length negotiation
between representatives of Scotty's and Streamline. The Scotty's board has
evaluated the financial, legal and market conditions bearing on the decision to
recommend the merger. In reaching its conclusion to
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unanimously approve the merger agreement and the transactions contemplated
thereby, the Scotty's board consulted with management and considered a number of
factors, including the following:
- the opportunity to provide Scotty's shareholders with liquidity and
comparable returns on their investment with less risk than if Scotty's
were to continue operations solely in the Chicago market
- the improved ability of the merged company to attract investment capital
- the ability to participate in the national roll-out of the combined
companies' business model
- the improved ability of the merged company to attract and retain high
caliber employees in a highly competitive industry
- the financial and other significant terms and provisions of the merger
agreement
- information concerning the business, operations, asset quality and
prospects of Streamline
- the likelihood of a successful completion of the merger
- the compatibility of the respective business and management philosophies
of Scotty's and Streamline
The Scotty's board of directors also considered a number of potentially
negative factors in its deliberations concerning the merger, including but not
limited to:
- the risk that the potential benefits of the merger are not realized
- the potential difficulties of integrating the operations of Scotty's and
Streamline
- the direct expense of the merger
In reaching its determination to accept the merger agreement, the Scotty's
board did not assign any relative or specific weights to the foregoing factors,
and individual directors may have given different weights to different factors.
The importance of these factors relative to one another cannot precisely be
determined or stated herein and there can be no assurance that the expected
results or benefits of the proposed merger will actually occur. Although there
can be no assurance, the Scotty's board also believes that the merger will
provide Scotty's shareholders with increased value for their stock.
RECOMMENDATION OF THE STREAMLINE BOARD
Streamline's board of directors recommends that the shareholders vote "FOR"
approval of the merger agreement. The affirmative vote of the holders of a
majority of the shares of Streamline common stock represented in person or by
proxy at the Streamline special meeting is required for approval of the merger
agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the material federal income tax consequences
of the merger to Scotty's, Streamline and holders of Scotty's common and
preferred stock who are citizens or residents of the United States. It does not
discuss all the tax consequences that may be relevant to Scotty's shareholders
in special tax situations, such as insurance companies, financial institutions,
dealers in securities, tax-exempt organizations or non-U.S. persons, or to
Scotty's shareholders who acquired their shares of Scotty's stock pursuant to
the exercise of employee stock options or warrants, or otherwise as
compensation. The summary also does not discuss tax consequences that may be
relevant to the holders of Scotty's preferred stock upon conversion thereof into
Scotty's common stock prior to the merger or to holders of outstanding Scotty's
warrants or stock options.
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Neither Streamline nor Scotty's has requested a ruling from the Internal
Revenue Service with regard to any of the federal income tax consequences of the
merger, and the opinion of counsel to Scotty's as to the federal income tax
consequences of the merger set forth in the next paragraph will not be binding
on the IRS.
Vedder, Price, Kaufman & Kammholz, outside counsel to Scotty's, is of the
opinion that, under present federal income tax law, and based on
- the receipt, prior to the effective time of the merger, of certain
representations of Streamline, Scotty's and certain significant
shareholders of Scotty's, in form and substance satisfactory to Vedder,
Price, Kaufman & Kammholz
- the assumption that the merger will qualify as a merger under applicable
state law
- the assumption that the merger and related transactions will take place as
described in the merger agreement
- the assumption that Scotty's shareholders owning no more than 20% of the
shares of Scotty's outstanding common stock (for this purpose holders of
Scotty's preferred stock will be treated as if they converted their
preferred shares into Scotty's common stock) perfect dissenter's rights
under Illinois law relating to the merger
will constitute a reorganization for federal income tax purposes within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
Under the merger agreement, neither Scotty's nor Streamline is obligated to
consummate the merger unless an opinion to this effect is delivered to Scotty's
or both parties waive this condition prior to the effective time of the merger.
Under the reorganization provisions of the Internal Revenue Code, no gain or
loss will be recognized by Scotty's shareholders upon the conversion of their
shares of Scotty's common or preferred stock into shares of Streamline common
stock pursuant to the terms of the merger, except to the extent cash is received
in lieu of fractional shares. The tax basis of the shares of Streamline common
stock received by Scotty's shareholders in connection with the merger, including
any fractional shares of Streamline common stock deemed received, will be the
same as the tax basis of the shares of Scotty's stock converted into such shares
of Streamline common stock. The holding period for shares of Streamline common
stock received by Scotty's stockholders through conversion pursuant to the
merger will include the period that the shares of Scotty's stock were held by
the holder, provided such shares of Scotty's stock were held as a capital asset
by the holder at the time of the exchange. In addition, neither Streamline nor
Scotty's will recognize any taxable gain or loss as a result of the merger.
Any Scotty's shareholder who receives cash in lieu of a fractional share of
Streamline common stock will be treated for federal income tax purposes as if
the cash was received in payment for a fractional share, and the Scotty's
shareholder will therefore recognize gain or loss equal to the difference
between the cash received and the shareholder's tax basis in the fractional
share. If the Scotty's stock was held as a capital asset, the gain or loss will
be capital gain or loss if the payment is considered substantially
disproportionate or not essentially equivalent to a dividend under
Section 302(b) of the Internal Revenue Code.
A dissenting Scotty's shareholder who receives cash pursuant to the exercise
of dissenter's rights will be treated as having had the Scotty's stock redeemed
in exchange for cash. Generally, such a dissenting shareholder will recognize
gain or loss measured by the difference between the amount of cash received and
the tax basis of the shares of Scotty's stock redeemed. If the Scotty's stock
was held as a capital asset at the time of the exchange, such gain or loss will
be capital gain or loss and will be long-term capital gain or loss if the stock
was held for more than one year as of the effective time of the merger. However,
any dissenting shareholder that constructively owns shares of Scotty's stock
that are exchanged for Streamline common stock in the merger or actually or
constructively owns
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Streamline common stock after the merger may, in certain circumstances, be
required to treat the cash received as dividend income if the receipt of cash by
such dissenting shareholder has the effect of a dividend distribution. Whether
the receipt of cash has the effect of a dividend distribution would depend upon
the dissenting shareholder's particular circumstances. Dissenting Scotty's
shareholders are urged to consult their tax advisors regarding the tax treatment
of any payments they may receive as a result of the exercise of their
dissenter's rights. Payments of accrued but unpaid dividends, if any, on
Scotty's preferred stock will be treated as ordinary income.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY. THE
DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE INTERNAL REVENUE
CODE, EXISTING AND PROPOSED TREASURY REGULATIONS UNDER THE INTERNAL REVENUE CODE
AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS, ALL OF WHICH ARE SUBJECT
TO CHANGE, AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF THIS
DISCUSSION. WE HAVE PROVIDED NO INFORMATION WITH RESPECT TO THE TAX
CONSEQUENCES, IF ANY, OF THE MERGER UNDER APPLICABLE FOREIGN, STATE AND LOCAL
LAWS. SCOTTY'S SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN
REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL
AND OTHER APPLICABLE TAX LAWS AND THE POSSIBLE EFFECT OF ANY PROPOSED CHANGES IN
THE TAX LAWS.
INTEREST OF CERTAIN PERSONS IN THE MERGER
Nordstrom, Inc. beneficially owns 43.1% of the outstanding capital stock of
Scotty's, assuming the conversion of Scotty's preferred stock and the exercise
of a warrant, and 32.3% of Streamline's outstanding common stock. J. Daniel
Nordstrom, co-president of Nordstrom, Inc., is a director of Streamline and
Darren Jackson, Vice President of Strategic Planning of Nordstrom, Inc., is a
director of Scotty's. Accordingly, Nordstrom, Inc. has interests in the merger
that are in addition to the interests of Streamline shareholders generally. The
board of directors of each of Streamline and Scotty's was aware of these
interests, and considered them, among other matters, when approving the merger
agreement. Scotty's shareholders should also be aware that Streamline has agreed
to take steps to maintain directors and officers liability insurance for
Scotty's current directors and officers for a period of at least two years from
the closing of the merger.
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CERTAIN PROVISIONS OF THE MERGER AGREEMENT
The following is a summary of the material provisions of the merger
agreement not summarized elsewhere in this proxy statement and private placement
memorandum. The merger agreement is attached as Exhibit A to this proxy
statement and private placement memorandum and is incorporated herein by
reference. Such summary is qualified in its entirety by reference to the merger
agreement.
EFFECTIVE TIME
It is presently contemplated that the merger will be completed as soon as
practicable after approval of the merger agreement by Streamline's shareholders
and Scotty's shareholders. Subject to the rights of the respective directors of
Streamline and Scotty's to terminate the merger agreement and abandon the merger
(as discussed below) as soon as practicable after satisfaction and adoption or
waiver of all of the conditions to the merger, Streamline and Scotty's will file
articles of merger and a certificate of merger with the Secretary of State of
the State of Illinois and the Secretary of State of the State of Delaware,
respectively. The effective time of the merger will be the time these filings
are made and recorded.
EFFECTS OF THE MERGER
If the merger is approved and effected, then as of the effective time:
MERGER OF STREAMSUB, INC. INTO SCOTTY'S; SURVIVING
CORPORATION. Streamsub, Inc., a wholly owned subsidiary of Streamline, will be
merged into Scotty's and will cease to exist as a separate entity. Scotty's will
continue to exist as an Illinois corporation, which will be a wholly owned
subsidiary of Streamline.
CONVERSION OF SCOTTY'S COMMON STOCK. Each share of Scotty's common stock
issued and outstanding immediately prior to the effective time of the merger,
other than shares held directly or indirectly by shareholders of Scotty's who
duly exercise their dissenters' rights of appraisal, will automatically be
converted into and become 0.4000 shares of Streamline common stock, subject to
adjustment as described below. Each share of Scotty's preferred stock issued and
outstanding immediately prior to the effective time, if not previously converted
into shares of Scotty's common stock, other than shares held directly or
indirectly by shareholders of Scotty's who duly exercise their appraisal rights,
will automatically be converted into the number of shares of Streamline common
stock that would be issued to such shares of preferred stock had such shares of
preferred stock been converted into shares of Scotty's common stock immediately
prior to the effective time. As of November 26, 1999, there were approximately
9,313,413 outstanding shares of Scotty's common stock, assuming the conversion
of Scotty's preferred stock. Irrespective of the number of shares of capital
stock of Scotty's issued and outstanding immediately prior to the effective time
and the number of any outstanding options, warrants or other rights to purchase
shares of the capital stock of Scotty's immediately prior to the effective time
and of the number of any outstanding securities exchangeable for or convertible
into shares of the capital stock of Scotty's immediately prior to the effective
time, Streamline shall be obligated to issue no more than an aggregate of up to
approximately 4,330,000 shares of Streamline common stock, this number of shares
being subject to reduction to account for the exercise by any Scotty's
shareholder of statutory dissenters' rights of appraisal, in connection with the
merger. Each share of Scotty's common stock or preferred stock held by a
shareholder who duly exercises the appraisal rights referred to above will be
converted into the right to receive the fair value of such share, determined
according to Sections 11.65 to 11.70 of the Illinois Business Corporation Act.
SCOTTY'S STOCK OPTIONS/WARRANTS. As of November 26, 1999, Scotty's had
outstanding stock options to purchase an aggregate of 777,240 shares of Scotty's
common stock at exercise prices of $0.55 to $5.50 per share, and warrants to
purchase an aggregate of 730,430 shares of Scotty's common stock at
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exercise prices of $1.30 to $3.50 per share. Effective immediately prior to but
conditioned upon the merger, all outstanding options and warrants to purchase
Scotty's common stock, will become exercisable for the number of shares of
Streamline common stock that would be issued by operation of the merger if the
options and warrants were exercised immediately prior to the effective time, and
the exercise prices will be increased by dividing the exercise prices by the
exchange ratio.
EXCHANGE OF STOCK CERTIFICATES
At the effective time of the merger, stock certificates formerly
representing shares of Scotty's common stock will cease to represent such shares
and after the effective time of the merger will represent the shares of
Streamline common stock into which they have been converted according to the
merger agreement, except in the case of Scotty's shareholders who duly exercise
the appraisal rights referred to above, whose stock certificates will represent
their rights to receive the fair value of their shares. Scotty's stock
certificates will be exchangeable for new certificates as follows.
The First National Bank of Boston, transfer agent for Streamline, will act
as exchange agent for the exchange of Scotty's stock certificates for Streamline
stock certificates. As promptly as is practicable following the effective time
of the merger, the exchange agent will mail to each record holder of shares of
Scotty's common stock and preferred stock instructions and transmittal materials
for exchanging such holder's Scotty's stock certificates for new certificates
representing the shares of Streamline common stock into which such holder's
shares of Scotty's common stock have been converted. SCOTTY'S SHAREHOLDERS ARE
REQUESTED NOT TO SURRENDER THEIR STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY
RECEIVE SUCH TRANSMITTAL MATERIALS FROM THE PAYING AND EXCHANGE AGENT. Upon
surrender of a Scotty's stock certificate to the exchange agent, the exchange
agent will promptly cancel the Scotty's stock certificate and deliver in
exchange for it a new certificate representing that number of whole shares of
Streamline common stock into which the shares of Scotty's common stock formerly
represented by such certificate have been converted according to the merger less
the escrow, except that no shares issued to Scotty's shareholders who have not
become parties to the merger agreement will be placed in escrow. Until so
surrendered, each Scotty's stock certificate, other than those held by former
Scotty's shareholders who duly exercise their appraisal rights referred to
above, will represent for all purposes the shares of Streamline common stock
into which the shares of Scotty's common stock formerly represented by such
certificate have been converted according to the merger.
At the effective time, the stock transfer books of Scotty's will be closed
and no transfers of Scotty's common stock shall be made on those books after
such time. If, after the effective time, Scotty's stock certificates are
presented to Scotty's for transfer, they will be canceled and exchanged for
Streamline stock certificates representing the shares of Streamline common stock
deliverable in exchange therefor as described above.
FRACTIONAL SHARES
No scrip or fractional shares of Streamline common stock will be issued upon
conversion of any shares of Scotty's common stock. There shall be paid to each
former Scotty's shareholder who would otherwise have been entitled to a
fractional share of Streamline common stock, a cash payment, without interest,
instead of such fractional interest determined by valuing Streamline common
stock at its average closing prices reported on the Nasdaq National Market for
the ten (10) trading days ending two (2) trading days before the effective time
of the merger.
PURCHASE PRICE ADJUSTMENT
The total number of shares to be issued by Streamline through the merger,
will be reduced
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- in the event that proceeds to Scotty's of the pending sale-leaseback of
Scotty's new facility is less than $1,300,000, by the amount of the
deficiency divided by the average closing price described above
- by $200,000 divided by the average closing price described above
Additionally, the exchange ratio will be increased or decreased, as
appropriate, in connection with any reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split or other
similar change in Streamline's capitalization.
REGULATORY APPROVAL
Given the number of shares of Streamline common stock to be acquired by
Nordstrom, Inc. as a result of the merger, on November 18, 1999, Streamline and
Nordstrom each filed notification and report forms under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 with the Federal Trade Commission and the
Antitrust Division of the Department of Justice. The expiration or earlier
termination of the waiting period under the HSR Act is a condition to the
closing of the merger. Streamline and Scotty's do not believe that any
additional regulatory approvals are required, except for the filing and
recordation of appropriate merger documents as required by the laws of Illinois
and Delaware.
DISSENTERS' RIGHTS
All shares of Scotty's common stock and preferred stock outstanding prior to
the effective time of the merger that are held by shareholders who have
effectively perfected their dissenters' rights relating to such shares under the
Illinois Business Corporation Act will not be converted into the right to
receive Streamline common stock or cash for fractional shares issuable in the
merger, but shall only be entitled to the rights granted by the Illinois
Business Corporation Act.
REGISTRATION OF SHARES
The shares of Streamline common stock to be issued to the Scotty's
shareholders in connection with the merger will be unregistered and, therefore,
cannot be publicly traded unless registered with the Securities and Exchange
Commission or sold under an exemption from the SEC's registration requirements.
Streamline has agreed to file a registration statement covering these shares as
promptly as practicable following the date on which Streamline becomes eligible
to use a short-form registration statement or, if earlier, nine months after the
closing of the merger.
REPRESENTATIONS AND WARRANTIES
In the merger agreement, Scotty's and Streamline have made a number of
representations and warranties about their businesses, financial condition,
structure and other facts pertinent to the merger.
Scotty's made representations and warranties relating to matters including
the following:
- its corporate organization and similar matters
- its capital structure
- Scotty's authority to enter into the merger agreement, the enforceability
of the merger agreement, the receipt of required consents, licenses,
permits, orders and authorizations from governmental authorities relating
to the merger agreement and the absence of conflict between the
requirements of the merger agreement and Scotty's obligations under other
documents
- its financial statements and the absence of undisclosed liabilities
- the absence of certain changes in its business
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- the filing of tax returns and payment of taxes
- the condition and sufficiency of its properties and assets
- intellectual property matters
- its employee benefit plans
- its material contracts
- the absence of litigation that could materially harm Scotty's
- Scotty's compliance with safety and environmental laws
- its accounts receivable, accounts payable and inventories
- Scotty's compliance with applicable laws
- the absence of any action likely to prevent the merger from qualifying as
a reorganization under Section 368(a) of the Internal Revenue Code
- labor matters
- the adequacy of insurance policies held by Scotty's and its subsidiaries
- potential conflicts of interest
- its suppliers and customers
Streamline and Streamsub, Inc., a wholly owned subsidiary of Streamline,
made representations and warranties relating to matters including the following:
- their corporate organization and similar matters
- their capital structure
- their authority to enter into the merger agreement, the enforceability of
the merger agreement, the receipt of required consents, approvals, orders
and authorizations from governmental authorities relating to the merger
agreement and the absence of conflict between the requirements of the
merger agreement and obligations of Streamline and Streamsub, Inc. under
other contracts
- documents filed by Streamline with the Securities and Exchange Commission
and the accuracy of information contained in those documents
- the absence of undisclosed liabilities
- the absence of litigation that could materially harm Streamline
- the absence of any action likely to prevent the merger from qualifying as
a reorganization under Section 368(a) of the Internal Revenue Code
- the accuracy of information supplied by Streamline in connection with this
proxy
- the absence of business activities by Streamsub, Inc.
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CONDUCT OF BUSINESS PENDING THE MERGER
Scotty's has agreed that prior to the closing of the merger it will carry on
its business in the ordinary course and will not, in general terms, take
particular actions, including the following, without Streamline's consent:
- declare, set aside or pay dividends on or make any other distributions
related to any of its capital stock, or split, combine or reclassify its
stock, or issue or authorize the issuance of any securities related to,
instead of or in substitution for shares of its capital stock, or
purchase, redeem or otherwise acquire any shares of its capital stock
- increase compensation payable, except for increases in the usual and
ordinary course, increase any bonus, insurance, pension or other benefit
plan, payment or arrangement to or for its officers, directors, key
employees or agents, nor will it effect any general increase in the
compensation or benefits payable or made available to its employees
- enter into any contract, commitment or transaction other than in the usual
and ordinary course of business consistent with its normal past practices
- issue new stock or subscriptions, rights, warrants or options to acquire
its stock, other than issuances of stock according to the exercise of
warrants or options
- purchase, lease, license or otherwise dispose of any of its capital assets
having a market value in excess of $10,000 or $50,000 in the aggregate,
other than in the ordinary course of business
- make any investments in any other person
- take or omit to take any action that would cause a default or material
breach under any of its contracts, commitments, or obligations
ADDITIONAL AGREEMENTS
CONFIDENTIALITY. Scotty's shareholders have agreed that, following the
merger, they will maintain the confidentiality of all confidential, sensitive or
proprietary information of Scotty's, and will not use or disclose to any third
party any confidential information of Scotty's other than in the course of
conducting Scotty's business.
NON-COMPETITION. For two years after the closing of the merger, Scotty's
shareholders will not engage anywhere in the United States as a proprietor,
equityholder, investor other than as a passive and minority investor, lender,
partner, director, officer, employee or consultant in the business of providing
on-line shopping and home-delivery of groceries or health and beauty care
products or pet foods and supplies in connection with groceries.
NON-SOLICITATION OF EMPLOYEES. For two years after the closing of the
merger, the shareholders of Scotty's have agreed not to recruit, solicit, induce
or attempt to induce any of the employees or contractors of Streamline or
Scotty's, and will not assist or be engaged as a proprietor, investor other than
as a passive and minority investor, partner, director or officer of any person
who attempts to do so.
NON-SOLICITATION OF CUSTOMERS AND SUPPLIERS. For two years after the
closing of the merger, the shareholders of Scotty's have agreed not solicit,
divert, take away or attempt to solicit, divert or take away any of the business
or patronage of any of Scotty's customers, clients, accounts, vendors or
suppliers, and will not assist or be engaged as a proprietor, investor other
than as a passive and minority investor, partner, director or officer of any
person who attempts to do so.
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BOARD REPRESENTATION. Following the merger, Streamline's directors intend
to appoint Chris Sang, Chief Operating Officer and Chief Financial Officer of
Scotty's, to fill an existing vacancy in Streamline's board of directors.
NO SOLICITATION OF TRANSACTIONS
Scotty's and its shareholders have agreed that, until January 15, 2000, they
will not negotiate, solicit, discuss, other than to decline a soliciting party's
offer to enter into a discussion, or enter into any agreement or understanding
with respect to the issuance, sale, or transfer of capital stock, except for
certain permitted exceptions, or assets of Scotty's, other than in the ordinary
course of business, or any merger or other business combination of Scotty's.
POOLING-OF-INTERESTS ACCOUNTING TREATMENT
The merger is expected to be accounted for using the pooling-of-interests
method of accounting according to Opinion No. 16 of the Accounting Principles
Board. The pooling-of-interests method of accounting assumes that combining
companies have been merged from inception. Consequently, the historical
financial statements for periods prior to consummation of the merger are
restated as though the companies had been combined.
The merger agreement prohibits Streamline and Scotty's from taking any
action which would prevent the merger's qualification for pooling-of-interests
accounting treatment. As a condition to closing the merger, Streamline must
receive a letter from PricewaterhouseCoopers LLP concurring with Streamline's
opinion that the merger will qualify for pooling-of-interests accounting
treatment. Additionally, each of Streamline and Scotty's must receive from those
persons that it believes may be deemed to be an "affiliate" under the Securities
Act of 1933 an agreement to the effect that those persons will comply with the
resale restrictions imposed by the Internal Revenue Code to preserve eligibility
for pooling-of-interests accounting treatment.
CONDITIONS TO CONSUMMATION OF THE MERGER
Neither Streamline nor Scotty's will be obligated to complete the merger
unless certain conditions are satisfied or waived, including the following:
- Streamline's shareholders and Scotty's shareholders must have approved the
merger agreement
- All consents, approvals, orders or clearances of, or expirations of
waiting periods imposed by, any governmental entity must have been
obtained or occurred, including expiration or termination of the waiting
period under the Hart-Scott-Rodino Act
- No court will have issued a temporary restraining order, preliminary or
permanent injunction or other order, and there shall be no other legal
restraint or prohibition, that makes the merger illegal or otherwise
prohibits consummation of the merger
- The shares of Streamline common stock issuable to Scotty's shareholders in
the merger shall have been approved for quotation on the Nasdaq National
Market System
- Each of the companies will have received from persons who may be deemed
their "affiliates" agreements to comply with the resale restrictions
imposed by the Internal Revenue Code to preserve eligibility for
pooling-of-interests accounting treatment of the merger
- The companies and certain other parties shall have entered into an
agreement concerning the shares to be held in escrow on behalf of the
Scotty's shareholders
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Additionally, the obligations of Streamline and Streamsub, Inc. to effect
the merger are also subject to the satisfaction or waiver of the following
additional conditions:
- The representations and warranties of Scotty's and its shareholders
contained in the merger agreement and certain other related documents must
be materially true and correct on the closing date
- Scotty's and its shareholders must have performed in all material respects
all of their obligations under the merger agreement
- The option committee of Scotty's board of directors shall have taken any
action necessary to cause options to acquire Streamline common stock by
virtue of the merger
- Scotty's shall have completed the pending sale-leaseback of its new
facility, obtained a certificate of occupancy for the facility and
terminated its related construction line of credit
- Streamline will have received from Scotty's counsel an opinion as to
certain legal matters concerning Scotty's and its participation in the
merger
- Streamline must have received copies of resignations, effective as of the
effective time of the merger, of each director of Scotty's
- There must not have been a material adverse change in Scotty's financial
condition, business or assets
Further, the obligation of Scotty's to effect the merger is also subject to
the satisfaction or waiver of the following additional conditions:
- The representations and warranties of Streamline and Streamsub, Inc.
contained in the merger agreement and certain other related documents must
be materially true and correct on the closing date
- Streamline and Streamsub, Inc. must have performed in all material
respects all of their obligations under the merger agreement
- Scotty's must have received an opinion from its counsel to the effect that
the merger will be treated for federal income tax purposes as a tax-free
reorganization under Section 368(a) of the Internal Revenue Code
- Scotty's will have received from Streamline's counsel an opinion as to
certain legal matters concerning Streamline and Streamsub and their
participation in the merger
- Streamline shall have obtained the release of several shareholders of
Scotty's as guarantors or co-lessors of Scotty's under agreements between
Scotty's and several financial institutions
- There must not have been a material adverse change in Streamline's
financial condition, business or assets
INDEMNIFICATION; ESCROW OF SHARES
Streamline has agreed to indemnify Scotty's, its shareholders, and their
directors, officers, employees, representatives and affiliates from and against
any losses suffered by them arising out of any breaches of the representations,
warranties, covenants and other agreements made by Streamline in the merger
agreement or other related documents.
Scotty's shareholders have agreed severally to indemnify Streamline,
Streamsub, Inc., and their directors, officers, employees, representatives and
affiliates from and against any losses suffered by the indemnified parties
arising in connection with breaches of the representations, warranties,
covenants and other agreements made by Scotty's in the merger agreement other
related documents and certain
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governmental actions that might be brought prior to the date the new facility is
in operation, if such governmental action is instituted prior to the closing of
the merger. Scotty's shareholders have also agreed severally to provide
indemnification for any losses arising out of any breaches of their individual
representations, warranties, covenants and other agreements in the merger
agreement or other related documents.
No party will be entitled to indemnification until the aggregate losses
suffered by the indemnified parties exceed $300,000, at which point the
indemnified parties will be entitled to full indemnification for all such losses
in excess of that amount. The $300,000 does not apply to claims for
indemnification based on fraud, arising from breaches relating to obligations
relating to the issuance of shares, warrants or options in the merger and the
subsequent registration of those shares, or in connection with certain
governmental actions that might be brought prior to the date the new facility is
in operation, if such governmental action is instituted on or prior to the
closing of the merger.
With respect to certain tax-related liabilities, which survive until the
expiration of the applicable statute of limitations, the indemnification
obligations will terminate on the earlier of:
- October 18, 2000
- the date of effectiveness of the registration statement filed to register
the shares issued in connection with the merger
- the date which is nine (9) months after the closing of the merger, if
Streamline has failed to file the registration statement mentioned above
by that date
- the date on which Streamline's independent certified public accountants
deliver their audit report on Streamline's financial statements as at the
end of the fiscal year of Streamline during which the effective time of
the merger occurs and for the annual fiscal period then ended
In order to partially secure the indemnification obligations of Scotty's
shareholders, 10% of the shares of Streamline common stock issued to the
Scotty's shareholders will be deposited into escrow, except that no shares
issued to Scotty's shareholders who have not become parties to the merger
agreement will be placed in escrow. The escrow will continue until the
expiration of the indemnification period described above, unless a claim is
pending under the escrow in which case an amount equal to the amount of the
claim will remain in escrow until such claim is resolved.
Other than with respect to fraud, Scotty's shareholders will be liable
severally under their indemnification obligations for no more than 50% of the
value of the shares of Streamline common stock issued in the merger, valued at
the closing sale price of Streamline's common stock on the last trading day
prior to the closing date of the merger. Scotty's shareholders will be permitted
to pay any indemnification obligations with cash, by surrendering shares of
Streamline common stock, or through a combination of these payment methods.
ESCROW AGREEMENT
At the closing of the merger, Streamline, State Street Bank and Trust
Company, as escrow agent, and a representative of Scotty's shareholders, will
enter into the Escrow Agreement attached as Exhibit B to this proxy statement
and private placement memorandum.
In the merger agreement, Scotty's shareholders have appointed William C.
Steinmetz, chairman of Scotty's board of directors, as their representative in
connection with the administration of the escrow and have granted him the
authority to take the following actions, among others, in connection with
indemnification claims and matters relating to the escrow:
- sign the escrow agreement
- modify or amend the merger agreement and the escrow agreement
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- receive notices and service of process
- defend and settle legal proceedings
- sign agreements, certificates and other documents, including signing blank
stock certificates
- engage counsel and other advisors and incur other expenses
- liquidate escrowed shares to pay expenses
The methods and procedures for asserting a claim under the escrow agreement
and for defending, settling and/or paying claims are set forth in Section 16 of
the merger agreement and in the escrow agreement. We suggest that the
shareholders of Streamline and Scotty's review this section of the merger
agreement and the escrow agreement in their entirety.
TERMINATION
The merger agreement may be terminated at any time prior to the effective
time of the merger, whether before or after approval of the merger agreement by
the shareholders of Streamline or Scotty's, as follows:
- by mutual written consent of Streamline and Scotty's
- by either Streamline or Scotty's:
-- if the merger is not consummated on or before March 31, 2000, except
that this right to terminate the agreement shall not be available to
any party whose breach of the merger agreement has resulted in the
failure of the merger to occur on or before that date
-- if there exists any order, injunction or other binding legal
restraint or prohibition preventing the consummation of the merger
-- if the other party has breached any representation, warranty or
agreement in the merger agreement that has not been cured within
15 days after notice to the breaching party
TERMINATION FEE
Scotty's will be required to pay Streamline a $500,000 fee if the merger
agreement is terminated and it is determined that, at any time between
September 17, 1999 and January 15, 2000, Scotty's or any of its shareholders
negotiated, solicited, discussed or entered into any agreement or understanding
related to the issuance, sale, or transfer of capital stock, with certain
permitted exceptions or assets of Scotty's, other than in the ordinary course of
business, or any merger or other business combination of Scotty's.
AMENDMENT AND WAIVER
The merger agreement may be amended by the parties by action taken or
authorized by their respective boards of directors at any time before or after
approval by shareholders of Streamline and Scotty's, by an instrument in writing
signed on behalf of each of the parties.
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COMPARISONS OF SHAREHOLDERS' RIGHTS
GENERAL
The rights of the shareholders of Streamline are governed by the Delaware
General Corporation Law, Streamline's Second Amended and Restated Certificate of
Incorporation, as amended, and the Restated By-Laws of Streamline. The rights of
the shareholders of Scotty's are governed by the Illinois Business Corporation
Act, the Articles of Incorporation of Scotty's and the By-Laws of Scotty's. The
following is a summary of certain material differences between the rights of
shareholders of Scotty's and the rights of shareholders of Streamline, as
contained in provisions of the Delaware General Corporation Law and the Illinois
Business Corporation Act and the constituent documents of Streamline and
Scotty's.
The following is not intended to be a complete statement of the rights of
Streamline's shareholders and Scotty's shareholders. The identification of
certain specific differences is not meant to indicate that other equally or more
significant differences do not exist.
SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS
SCOTTY'S
Scotty's by-laws provide that the size of the board will be seven. This
number may be increased or decreased by an amendment to Scotty's by-laws. Each
director is elected to hold office until the next annual meeting of shareholders
or until his successor has been elected and qualified. The holders of a majority
of the shares entitled to vote for the election of the board have the right to
elect the entire board. Scotty's articles of incorporation deny cumulative
voting with respect to the election of the board of directors.
STREAMLINE
Streamline's charter and by-laws provide that the size of our board of
directors shall be determined by resolution of the board of directors. The board
of directors is divided into three classes, with the members of the respective
classes serving for staggered three-year terms. At each annual meeting of
shareholders, directors will be re-elected or elected for full three-year terms.
Our executive officers are appointed by the board of directors and serve until
their successors have been duly elected and qualified. There are no family
relationships among any of our executive officers or directors.
REMOVAL OF DIRECTORS
SCOTTY'S
Under the Illinois Business Corporation Act, any director or the entire
board of directors may be removed, with or without cause, with the approval of a
majority of the outstanding shares entitled to vote, provided that the removal
may only occur at a meeting of the shareholders held pursuant to a notice which
states that the purpose of the meeting is to remove a specific director or
directors from office. Only the specific director or directors named in the
notice may be removed at the meeting.
STREAMLINE
The Delaware General Corporation Law provides that a director or the entire
board of directors may be removed, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of directors.
However, in the case of a corporation whose board of directors is classified,
the directors may be removed only for cause unless the certificate of
incorporation otherwise provides.
Streamline's certificate of incorporation, also called its charter, and
by-laws provide for the division of the board of directors into three classes,
as nearly equal in size as possible, with each class beginning
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its three-year term in different years. Any director may be removed only for
cause by the vote of a majority of the shares entitled to vote for the election
of directors.
Our by-laws provide that for nominations for the board of directors or for
other business to be properly brought by a shareholder before a meeting of
shareholders, the shareholder must first have given timely notice of the matter
in writing to Streamline's secretary. To be timely, a notice of nominations or
other business to be brought before an annual meeting must be delivered between
120 days and 150 days prior to date one year after the date of the preceding
year's proxy statement. If the date of the current year's annual meeting is more
than 30 days before or 60 days after such anniversary, or if no proxy statement
was delivered to shareholders in connection with the preceding year's annual
meeting, a shareholder's notice will be timely if it is delivered not earlier
than 90 days prior to the current year's annual meeting and not later than
60 days prior to the annual meeting or 10 days following the date on which
public announcement of the date of the annual meeting is first made by
Streamline, whichever is later. Notice for a special meeting must generally be
delivered not more than 90 days prior to such meeting and not later than
60 days prior to such meeting or 10 days following the day on which public
announcement of the date of the annual meeting is first made by Streamline,
whichever is later. The notice must contain, among other things, certain
information about the shareholder delivering the notice and, as applicable,
background information about each nominee or a description of the proposed
business to be brought before the meeting.
Our charter empowers the board of directors, when considering a tender offer
or merger or acquisition proposal, to take into account factors in addition to
potential economic benefits to shareholders. These factors may include:
- comparison of the proposed consideration to be received by shareholders in
relation to the market price of Streamline's capital stock, the estimated
current value of Streamline in a freely negotiated transaction and the
estimated future value of Streamline as an independent entity
- the impact of such a transaction on the employees, suppliers and clients
of Streamline and its effect on the communities in which Streamline
operates
The provisions described above could make it more difficult for a third
party to acquire, or of discouraging a third party from acquiring control of
Streamline.
SHAREHOLDER VOTE REQUIRED FOR CERTAIN TRANSACTIONS
SCOTTY'S
Under Illinois law, the holders of at least two-thirds of the votes of the
shares entitled to vote thereon have the right to approve:
- any amendment to the articles of incorporation of a corporation, subject
to certain limited exceptions
- any proposed plan of merger, consolidation or share exchange, except for
certain parent-subsidiary mergers
- any sale, lease or other disposition of all, or substantially all, of the
property and assets of a corporation if not made in the usual and regular
course of its business
- a dissolution of the corporation, subject to certain limited exceptions
The articles of incorporation of a corporation may supersede the two-thirds
voting requirement by specifying any smaller or larger vote requirement not less
than a majority of the votes of the shares entitled to vote thereon.
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Any class of shares of a corporation are entitled to vote as a class (a) on
a plan of merger, consolidation or exchange, as the case may be, if it contains
any provision which, if contained in a proposed amendment to the articles of
incorporation, would entitle such class of shares to vote as a class, (b) on any
such matter if the articles of incorporation so provide, or (c) on an amendment
to the articles of incorporation if such amendment would:
- increase or decrease the aggregate number of authorized shares of such
class
- effect an exchange, reclassification or cancellation of all or part of the
shares of such class
- change the designations, preferences, qualifications, limitations,
restrictions or special or relative rights of the shares of such class
- in the case of a preferred or special class of shares, divide the shares
of such class into series and fix, or authorize the board of directors to
fix, the variations in the relative rights and preferences between the
shares of such series
- change the shares of such class into the same or a difference number of
shares of the same class or another class or classes
- create a right of exchange, of all or any part of the shares of another
class into the shares of such class
- create a new class of shares having rights and preferences prior, superior
or substantially equal to those of the shares of such class, or increase
the rights and preferences of any class having rights and preferences
prior, superior or substantially equal to those of the shares of such
class, or increase the rights and preferences of any class having rights
and preferences subordinate to those of such class if such increase would
then make the rights and preference substantially equal to or superior to
those of such class
- limit or deny the existing preemptive rights of the shares of such class
- cancel or otherwise affect dividends on the shares of such class which had
accumulated but had not been declared
- limit or deny the voting rights of the shares of such class
The merger agreement is subject to approval by a vote of the holders of
two-thirds of the outstanding common shares and Series A Preferred Shares of
Scotty's, voting by class. See "Comparisons of Shareholders' Rights--Dissenters'
Rights."
Illinois law provides that the by-laws may be altered, amended or repealed
by either the shareholders or the board of directors if the by-laws so provide.
Scotty's by-laws provide that the by-laws may be altered, amended or repealed by
either the board of directors or shareholders.
STREAMLINE
The Delaware General Corporation Law provides 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 by-laws, unless the corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. The charter requires the affirmative vote of the holders of at least
67% of the outstanding voting stock of Streamline to amend or repeal any of the
provisions of our charter described above, or to reduce the number of authorized
shares of common stock and preferred stock. The 67% vote is also required to
amend or repeal any of the provisions of our by-laws that are described above.
Our by-laws may also be amended or repealed by a majority vote of the board of
directors. The 67% shareholder vote would be in addition to any separate class
vote that might in the
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future be required according to the terms of any preferred stock that might be
outstanding at the time any amendments are submitted to shareholders.
SPECIAL MEETINGS OF SHAREHOLDERS
SCOTTY'S
Under Illinois law, an annual meeting of shareholders will be held at such
time as may be provided in the by-laws or in a resolution of the board of
directors pursuant to authority granted by the by-laws. In addition, a special
meeting of shareholders may be called by the board of directors, the President,
the holders of not less than one-fifth of all the outstanding shares entitled to
vote on the matter for which the meeting is called and the additional persons
that are authorized by the articles of incorporation or the by-laws. Scotty's
by-laws also allow the Chairman or the President to call a special meeting and
require the Chairman, President or Secretary to call a special meeting at the
request in writing of (i) majority of the board of directors, or (ii) the
holders of not less than one-fifth of all outstanding shares entitled to vote on
the matter for which the meeting is called. The notice must state the purpose of
the meeting.
STREAMLINE
Streamline's charter provides that any action required or permitted to be
taken by the shareholders of Streamline may be taken only at duly called annual
or special meetings of the shareholders, and that special meetings may be called
only by the chairman of the board of directors, a majority of the board of
directors or the president of Streamline. However, holders of a majority of the
common stock entitled to vote on the election of directors may call a special
meeting for the purpose of filling a vacancy on the board of directors, and
holders of at least two-thirds of the common stock entitled to vote generally
may call a special meeting for any other purpose. These provisions could have
the effect of delaying until the next annual shareholders' meeting shareholder
actions that are favored by the holders of a majority of the common stock. These
provisions may also discourage another person or entity from making a tender
offer to Streamline shareholders for the common stock. This is because the
person or entity making the offer, even if it acquired a majority of the
outstanding voting securities of Streamline, would be unable to call a special
meeting of the shareholders or to take action by written consent. As a result,
any desired actions they would like to take, such as electing new directors or
approving a merger, would have to wait until the next duly called shareholders'
meeting.
PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW AND THE ILLINOIS BUSINESS
CORPORATION ACT AFFECTING BUSINESS COMBINATIONS
SCOTTY'S
Similar to Delaware law, Sections 7.85 and 11.75 of the Illinois Business
Corporation Act, governing business combinations, only apply to Illinois
corporations which have a class of voting stock that is listed on a national
securities exchange, is quoted on an interdealer quotation system such as Nasdaq
or is held of record by more than 2,000 stockholders. Therefore, these
provisions would not apply to Scotty's or the merger.
Section 11.75 of the Illinois Business Corporation Act prohibits certain
"business combinations" by Illinois corporations with "interested shareholders"
for a period of three years following the time that the shareholder became an
interested shareholder. The three year moratorium does not apply if:
- prior to that time the board approved the business combination or the
transaction which resulted in the shareholder becoming an interested
shareholder
- upon consummation of the transaction which resulted in the shareholder
becoming an interested shareholder, the interested shareholder owned at
least 85% of the voting shares of the
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corporation outstanding at the time the transaction commenced (excluding
from the 85% calculation shares owned by directors who are also officers
of the target corporation and shares held by employee stock plans which do
not permit employees to decide confidentially whether to accept a tender
or exchange offer)
- on or after the date the person becomes an interested shareholder, the
board approves the business combination and it is also approved at a
shareholder meeting by 66 2/3% of the voting stock not owned by the
interested shareholder.
Unlike Delaware law, Illinois law provides an extra protection for
"interested shareholder" transactions. Section 7.85 requires any "business
combination" to be approved by (a) the affirmative vote of the holders of at
least 80% of the combined voting power of the then-outstanding shares of all
classes and series of the corporation entitled to vote for the election of
directors voting together or a single class; and (b) the affirmative vote of a
majority of the voting shares held by disinterested shareholders. This higher
vote requirement will not be required if (i) the business combination has been
approved by two-thirds of the directors who are not affiliated with the
interested shareholder, or (ii) certain price and procedure requirements of
Section 7.85 are met.
STREAMLINE
The Delaware General Corporation Law prohibits a corporation that has
securities traded on an exchange, designated on Nasdaq or held of record by more
than 2,000 shareholders from engaging in certain business combinations,
including a merger, sale of substantial assets, loan or substantial issuance of
stock, with an interested shareholder, or an interested shareholder's
affiliates, for a three-year period beginning on the date the interested
shareholder acquires 15% or more of the outstanding voting stock of the
corporation. The restrictions on business combinations do not apply if:
- the board of directors gives prior approval to the transaction in which
the 15% ownership level is exceeded
- the interested shareholder acquires at one time 85% of the corporation's
stock, excluding those shares owned by persons who are directors and also
officers as well as employee stock plans in which employees do not have a
confidential right to vote
- the business combination is approved by the board of directors and
authorized at a meeting of shareholders by the holders of at least
two-thirds of the outstanding voting stock, excluding shares owned by the
interested shareholder.
DISSENTERS' RIGHTS
SCOTTY'S
Under Illinois law, dissenter's rights are available upon
- consummation of a plan of merger or consolidation or a plan of share
exchange to which the corporation is a party if shareholder authorization
is required for the merger, consolidation or share exchange
- consummation of a sale, lease or exchange of all, or substantially all, of
the property and assets of the corporation other than in the usual and
regular course of business
- an amendment of the articles of incorporation that materially and
adversely affects certain specified rights in respect of a dissenter's
shares
- any other corporate action taken pursuant to a shareholder vote if the
articles of incorporation or by-laws of the corporation provide that
shareholders are entitled to dissent and obtain
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payment for their shares in accordance with the procedures of the Illinois
Business Corporation Act.
Illinois law grants Scotty's shareholders the right to dissent from the
merger. However, each shareholder of Scotty's, other than Nordstrom, Inc. as the
sole holder of Series A Preferred Shares of Scotty's, has agreed to vote in
favor of any merger recommended by Scotty's board of directors and to waive any
right to dissent therefrom. Therefore, all of the shareholder's of Scotty's,
other than Nordstrom, Inc., are contractually prohibited from exercising
statutory dissenters' rights to dissent from the merger under either the Stock
Restriction and Purchase Agreement dated July 20, 1995 or the Stock Restriction
and Purchase Agreement dated October 1, 1997. In addition, Nordstrom, Inc., as
the holder of all of the Series A Preferred Shares, which will be converted into
43.1% of the common shares of Scotty's on or prior to the merger, among other
shareholders of Scotty's, has signed a support/voting agreement in which it has
offered to vote in favor of the merger.
STREAMLINE
Under the Delaware General Corporation Law, dissenters' rights of appraisal
are limited. Rights of appraisal are available to a shareholder of a corporation
only in connection with certain mergers or consolidations involving such
corporation, amendments to the certificate of incorporation of such corporation,
if so provided in the certificate of incorporation or sales of all or
substantially all of the assets of such corporation. However, appraisal rights
are not available under Delaware law if the corporation's stock is, prior to the
relevant transaction, listed on a national securities exchange or designated on
Nasdaq or held of record by more than 2,000 shareholders; provided that
appraisal rights will be available if the merger or consolidation requires
shareholders to exchange their stock for anything other than shares of the
surviving corporation, shares of another corporation that will be listed on a
national securities exchange, designated on Nasdaq or held of record by more
than 2,000 shareholders, cash instead of fractional shares of any such
corporation, or a combination of such shares and cash.
COMMON STOCK MARKET AND DIVIDEND POLICY
SCOTTY'S
If the merger is not consummated, Scotty's intends to retain earnings, and
not pay dividends, for the continued development and expansion of its business.
STREAMLINE
We currently intend to retain earnings for the continued development and
expansion of our business. In the future, the terms of credit agreements or
other contractual provisions may impose restrictions or limitations on the
payment of dividends. In the absence of such restrictions or limitations, the
payment of any dividends will be at the discretion of our board of directors.
103
<PAGE>
PROPOSAL 2--AMENDMENT OF STREAMLINE'S 1993 EMPLOYEE OPTION PLAN
The board of directors has authorized, subject to shareholder ratification,
an increase in the number of shares available under our 1993 Employee Option
Plan from 2,500,000 to 3,000,000.
As of November 26, 1999, 1,916,046 shares were issued or issuable upon
exercise of options granted according to the employee option plan, and options
to purchase an additional 583,954 shares remained available for grant. On
December 10, 1999, the closing price of Streamline common stock reported on the
Nasdaq National Market was $11.56 per share.
The primary purpose of the proposed amendment is to enable us to issue
shares of Streamline common stock upon the exercise by Scotty's employees of
options that we are assuming in connection with the merger. The proposed
amendment will also provide us with additional capacity to award stock options
to existing personnel and to attract qualified new employees, directors,
advisers and consultants through grants of stock options.
PURPOSE OF THE PLAN; ELIGIBILITY. The purpose of the employee option plan
is to attract and retain the best available personnel for positions of
substantial responsibility and to provide additional incentive to employees,
officers and directors of and consultants and advisors. No participant in the
employee option plan may, in any one year, be granted stock options with respect
to more than 1,000,000 shares of common stock.
ADMINISTRATION. The board of directors administers the employee option plan
and has the authority to determine which eligible individuals are to receive
options, the terms of such options, the status of such options as incentive or
nonqualified stock options under the federal income tax laws, including the
number of shares, exercise prices and times at which the options become and
remain exercisable, not to exceed 10 years in the case of incentive stock
options, and the time, manner and form of payment upon exercise of an option.
The exercise price of options granted under the employee option plan may not be
less than the fair market value of a share of common stock, or 110% of the fair
market value in the case of incentive stock options issued to an employee who at
the time of grant owns more than 10% of the combined voting power of all classes
of Streamline stock.
EXERCISABILITY. If an option holder's employment terminates for any reason
other than death or disability, any options exercisable on the date of
termination expire thirty days after such termination. If an option holder's
employment terminates due to death or disability, any options exercisable on the
date of termination may be exercised at any time within the shorter of the
option period or 12 months after such termination.
TRANSFERABILITY. No option is transferable except by will or the laws of
descent and distribution or, in the case of a nonqualified stock option,
according to a qualified domestic relations order.
EFFECT OF SIGNIFICANT CORPORATE EVENTS. In the event of a consolidation,
merger or sale of all or substantially all of the assets of Streamline in which
outstanding shares of common stock are exchanged for securities, cash or other
property of any other corporation or business entity or in the event of a
liquidation of Streamline, the board of directors of Streamline, or the board of
directors of any corporation assuming the obligations of Streamline, may, in its
discretion, provide that outstanding options under the employee option plan be:
- assumed, or equivalent options substituted, by the acquiring or succeeding
corporation, or an affiliate of the acquiring or succeeding corporation
exercised within a specified period of time, at the end of which period
the options will terminate
- terminated in exchange for a cash payment
- exercised in full immediately prior to such event
104
<PAGE>
AMENDMENTS TO OPTIONS AND THE PLAN. With the consent of an option holder,
the board of directors can cancel that holder's options and replace them with
new options for the same or a different number of shares having a higher or
lower exercise price per share than the cancelled options or amend the terms of
any option outstanding to provide for a higher or lower exercise price per
share. The board of directors may also, in its sole discretion, accelerate the
date or dates on which all or any particular option or options granted under the
employee option plan may be exercised or extend the dates during which all, or
any particular, option or options granted under the employee option plan may be
exercised. The board of directors may amend or modify the employee option plan
at anytime, subject to the rights of holders of outstanding options.
TERMINATION. The employee option plan will terminate on June 9, 2007.
SUMMARY OF TAX CONSEQUENCES. The following is a brief and general
discussion of the federal income tax rules applicable to stock options granted
under the employee option plan. With respect to an incentive stock option, an
employee will generally not be taxed at the time of grant or exercise, although
exercise of an incentive option will give rise to an item of tax preference that
may result in an alternative minimum tax. If the employee holds the shares
acquired upon exercise of an incentive stock option until at least one year
after issuance and two years after the option grant, he or she will have
long-term capital gain, or loss, based on the difference between the amount
realized on the sale or disposition and his or her option price. If these
holding periods are not satisfied, then upon disposition of the shares the
employee will recognize ordinary income equal, in general, to the excess of the
fair market value of the shares at time of exercise over the option price, plus
capital gain in respect of any additional appreciation. With respect to a
nonqualified option, an employee will not be taxed at the time of grant; upon
exercise, he or she will generally realize compensation income to the extent the
then fair market value of the stock exceeds the option price. Streamline will
generally have a tax deduction to the extent that, and at the time that, an
employee realizes compensation income with respect to an option.
OPTIONS GRANTED UNDER THE PLAN. The following table sets forth information
as of November 26, 1999 with respect to stock options which have been granted
under the employee option plan since its adoption to
- our chief executive officer and the one other current executive officer
whose compensation exceeded $100,000 in 1998
- all of our current executive officers of the as a group
- all of our current directors who are not executive officers as a group
- all employees of the Corporation, excluding executive officers, as a group
OPTION GRANTS UNDER 1993 EMPLOYEE OPTION PLAN
<TABLE>
<CAPTION>
NAME OPTIONS (SHARES)
- ---- ----------------
<S> <C>
Timothy A. DeMello.......................................... 250,000
Mary E. Wadlinger........................................... 87,500
All executive officers as a group........................... 1,019,997
All directors of the Corporation,
excluding executive officers, as a group.................. 0
All employees of the Corporation,
excluding executive officers, as a group(1)............... 911,049
</TABLE>
- ------------------------
(1) Does not include 596,949 shares subject to stock options previously granted
to former employees that were forfeited upon termination of their
employment.
105
<PAGE>
The board of directors recommends that the shareholders vote "FOR" the
proposed amendment of the employee option plan, and the enclosed proxy will be
so voted unless a contrary vote is indicated. The affirmative vote of the
holders of a majority of the shares of Streamline common stock represented in
person or by proxy at the Streamline special meeting is required for approval of
the amendment of the employee option plan.
SHAREHOLDER PROPOSALS
Streamline plans to hold its 2000 Annual Meeting of Shareholders on or about
May 25, 2000. Shareholder proposals to be considered for inclusion in
Streamline's proxy statement and form of proxy relating to Streamline's 2000
Annual Meeting of Shareholders must be received by Streamline no later than
January 25, 2000.
106
<PAGE>
STREAMLINE.COM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets at December 31, 1997 and 1998
and October 2, 1999 (unaudited)........................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1998 and October 2, 1999 (unaudited)........ F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996, 1997 and 1998 and
the nine months ended October 2, 1999 (unaudited)......... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and October 2, 1999 (unaudited)......... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Streamline.com, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Streamline.com, Inc. and its subsidiary at December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 13, 1999, except for Note 14 for
which the date is October 27, 1999
F-2
<PAGE>
STREAMLINE.COM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- OCTOBER 2,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,446 $12,593 $32,401
Marketable securities..................................... -- -- 10,620
Accounts receivable, net of allowance for doubtful
accounts of $25 at
December 31, 1998 and $39 at October 2, 1999............ 77 88 357
Inventory................................................. 254 324 737
Prepaid expenses and other current assets................. 375 149 731
-------- ------- -------
Total current assets.................................... 2,152 13,154 44,846
Property and equipment, net............................... 3,459 3,663 7,210
Purchased and capitalized software, net................... 1,529 2,025 2,836
Goodwill, net of accumulated amortization................. 649 992 811
Other assets, net......................................... 108 232 412
-------- ------- -------
Total assets............................................ $ 7,897 $20,066 $56,115
======== ======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Capital lease obligations................................. $ 197 $ 236 $ 369
Accounts payable.......................................... 1,132 447 2,582
Accrued expenses.......................................... 493 409 1,279
-------- ------- -------
Total current liabilities............................... 1,822 1,092 4,230
-------- ------- -------
Long-term portion of capital lease obligations.............. 334 381 752
Commitments and contingencies (Note 11)
Minority interest in consolidated subsidiary................ 139 -- --
Redeemable convertible preferred stock (Note 7), ($1.00 par
value);
Authorized: 300,000 at December 31, 1997, 680,000 at
December 31, 1998 and October 2, 1999...................
Issued and outstanding: 140,000 shares issued and
outstanding at December 31, 1997, 368,570 shares issued
and outstanding at December 31, 1998 and none issued and
outstanding at October 2, 1999.......................... 14,000 37,186 --
-------- ------- -------
Stockholders' (deficit) equity:
Preferred stock, $.01 par value; none authorized or
outstanding at December 31, 1997 and 1998, and 5,000,000
authorized and none outstanding at October 2, 1999...... -- -- --
Common stock, $.01 par value; Authorized: 12,500,000 at
December 31, 1997, 22,700,000 at December 31, 1998, and
50,000,000 at October 2, 1999
Issued and outstanding: 3,526,032 shares issued and
3,497,032 outstanding at December 31, 1997, 3,699,539
shares issued and 3,665,539 outstanding at December 31,
1998 and 18,407,796 issued and 18,373,796 outstanding at
October 2, 1999......................................... 35 37 184
Additional paid-in capital................................ 3,849 5,060 87,278
Treasury stock, at cost: 29,000 shares at December 31,
1997, 34,000 shares at December 31, 1998 and October 2,
1999.................................................... (203) (238) (238)
Accumulated deficit....................................... (12,079) (23,452) (36,091)
-------- ------- -------
Total stockholders' (deficit) equity.................... (8,398) (18,593) 51,133
-------- ------- -------
Total liabilities, redeemable convertible preferred
stock and stockholders' (deficit) equity.............. $ 7,897 $20,066 $56,115
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
STREAMLINE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------ --------------------------
SEPTEMBER 30, OCTOBER 2,
1996 1997 1998 1998 1999
---------- ---------- ---------- ------------- ----------
(NOTE 2)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product and service revenue,
net........................... $ 391 $ 1,815 $ 6,026 $ 3,882 $ 8,694
Subscription fees............... 20 98 391 276 693
Advertising, research and
marketing fees................ 511 721 529 370 855
---------- ---------- ---------- ---------- ----------
Total revenue..................... 922 2,634 6,946 4,528 10,242
---------- ---------- ---------- ---------- ----------
Operating expenses:
Cost of revenue................. 391 2,098 4,992 3,266 7,016
Fulfillment center operations... 916 2,769 4,013 2,901 5,978
Sales and marketing............. 441 1,428 1,479 989 2,595
Technology systems and
development................... 78 1,673 3,002 1,937 2,808
General and administrative...... 985 3,166 3,897 2,798 5,066
---------- ---------- ---------- ---------- ----------
Total operating expenses.......... 2,811 11,134 17,383 11,891 23,463
---------- ---------- ---------- ---------- ----------
Loss from operations............ (1,889) (8,500) (10,437) (7,363) (13,221)
Other income (expense):
Interest income................. 74 58 240 83 731
Interest expense................ (31) (50) (569) (537) (149)
Other........................... -- (87) (1) -- --
---------- ---------- ---------- ---------- ----------
Total other income (expense),
net............................. 43 (79) (330) (454) 582
---------- ---------- ---------- ---------- ----------
Loss before minority interest and
extraordinary item.............. (1,846) (8,579) (10,767) (7,817) (12,639)
Minority interest in net loss of
consolidated subsidiary......... -- 265 138 138 --
---------- ---------- ---------- ---------- ----------
Loss before extraordinary item.... (1,846) (8,314) (10,629) (7,679) (12,639)
Extraordinary item -- loss on
early redemption of debt........ -- -- 744 744 --
---------- ---------- ---------- ---------- ----------
Net loss.......................... $ (1,846) $ (8,314) $ (11,373) $ (8,423) $ (12,639)
========== ========== ========== ========== ==========
Dividends on preferred stock...... 203 157 329 41 549
Net loss attributable to common
stockholders.................... $ (2,049) $ (8,471) $ (11,702) $ (8,464) $ (13,188)
========== ========== ========== ========== ==========
Basic and diluted net loss per
common share.................... $ (0.62) $ (2.47) $ (3.32) $ (2.42) $ (1.39)
Shares used in computing basic and
diluted net loss per common
share........................... 3,284,625 3,424,035 3,522,458 3,497,875 9,493,994
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
STREAMLINE.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- TOTAL
ADDITIONAL STOCKHOLDERS'
$0.01 PAR PAID-IN TREASURY ACCUMULATED EQUITY
SHARES VALUE CAPITAL STOCK DEFICIT (DEFICIT)
---------- --------- ---------- -------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995................ 3,284,625 $ 33 $ 1,699 $ (1,919) $ (187)
Dividends on preferred stock.............. (203) (203)
Issuance of warrants for the purchase of
common stock in exchange for goods and
services................................ 57 57
Net loss.................................. (1,846) (1,846)
---------- ---- ------- ----- -------- --------
Balance, December 31, 1996................ 3,284,625 33 1,553 (3,765) (2,179)
Sale of common stock...................... 163,857 1 1,146 1,147
Dividends on preferred stock.............. (157) (157)
Issuance of warrants for the purchase of
common stock in exchange for goods and
services................................ 738 738
Options exercised......................... 77,550 1 89 90
Repurchase of common stock (29,000
shares)................................. $(203) (203)
Change in interest in consolidated
subsidiary.............................. 480 480
Net loss.................................. (8,314) (8,314)
---------- ---- ------- ----- -------- --------
Balance, December 31, 1997................ 3,526,032 35 3,849 (203) (12,079) (8,398)
Dividends on preferred stock.............. (329) (329)
Issuance of warrants in connection with
notes payable........................... 525 525
Reduction in value of warrants granted in
1997 in exchange for goods and
services................................ (67) (67)
Issuance of common stock and warrants for
the purchase of common stock in exchange
for goods and services.................. 12,500 516 516
Options exercised......................... 34,583 1 61 62
Common stock issued to acquire minority
interest................................ 126,424 1 505 506
Treasury stock acquired in connection with
forgiveness of notes receivable (5,000
shares)................................. (35) (35)
Net loss.................................. (11,373) (11,373)
---------- ---- ------- ----- -------- --------
Balance, December 31, 1998................ 3,699,539 37 5,060 (238) (23,452) (18,593)
Dividends on preferred stock
(unaudited)............................. (549) (549)
Issuance of warrants in connection with
financing commitment (unaudited)........ 472 472
Reduction in deferred financing costs
related to recission of warrants in
connection with financing commitment
(unaudited)............................. (387) (387)
Issuance of common stock (unaudited)...... 4,998,482 50 49,934 49,984
Stock issuance costs (unaudited).......... (4,992) (4,992)
Conversion of preferred stock
(unaudited)............................. 9,673,109 97 37,638 37,735
Options and warrants exercised
(unaudited)............................. 36,666 102 102
Net loss (unaudited)...................... (12,639) (12,639)
---------- ---- ------- ----- -------- --------
Balance, October 2, 1999 (unaudited)...... 18,407,796 $184 $87,278 $(238) $(36,091) $ 51,133
========== ==== ======= ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
STREAMLINE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEOCTOBER 2,,
------------------------------ ------------------------
1996 1997 1998 1998 1999
-------- -------- -------- ------------ ---------
(NOTE 2)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,846) $(8,314) $(11,373) $(8,423) $(12,639)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 157 674 1,532 1,109 1,799
Amortization of discount on notes payable............... -- -- 525 525 --
Loss on disposal of fixed assets........................ -- 86 120 -- --
Amortization of goodwill and other assets............... -- 152 257 154 264
Bad debt expense........................................
Issuance of warrants for the purchase of common stock in
exchange for consulting services...................... 57 330 447 -- --
Minority interest in net loss of consolidated
subsidiary............................................ -- (265) (138) (138) --
Changes in assets and liabilities:
Accounts receivable................................... (5) (68) (11) -- (269)
Inventory............................................. (176) (79) (69) 35 (413)
Prepaid expenses and other current assets............. (45) (236) 226 311 (582)
Other assets.......................................... -- -- (183) (120) (179)
Accounts payable...................................... 73 600 (684) (552) 2,135
Accrued expenses...................................... 55 429 (86) 30 871
------- ------- -------- ------- --------
Net cash used in operating activities....................... (1,730) (6,691) (9,437) (7,069) (9,013)
------- ------- -------- ------- --------
Purchases of marketable securities, net................... -- -- -- -- (10,620)
Purchases of property and equipment....................... (1,904) (1,450) (833) (386) (3,668)
Additions to purchased and capitalized software........... (49) (1,386) (1,238) (1,030) (1,722)
------- ------- -------- ------- --------
Net cash used in investing activities....................... (1,953) (2,836) (2,071) (1,416) (16,010)
------- ------- -------- ------- --------
Cash flows from financing activities:
Payments on notes receivable from related parties......... (292) -- -- -- --
Proceeds from sale of common stock........................ -- 1,147 -- -- 44,992
Proceeds from sale of common stock of subsidiary.......... -- 400 --
Proceeds from sale of preferred stock..................... 5,000 9,000 22,857 22,857 --
Proceeds from the exercise of stock options............... -- 90 62 2 56
Proceeds from the exercise of warrants.................... -- -- -- -- 46
Purchases of treasury stock............................... -- (203) -- -- --
Dividend payments on preferred stock...................... -- (360) -- -- --
Issuance of notes receivable.............................. -- -- (35) (28) --
Proceeds from notes payable-related party................. -- -- 600 600 --
Payments on notes payable-related party................... -- -- (600) (100) --
Proceeds from notes payable............................... -- -- 7,000 7,000 --
Payments on notes payable................................. -- -- (7,000) (7,000) --
Principal payments on capital lease obligations........... (54) (106) (229) (173) (263)
------- ------- -------- ------- --------
Net cash provided by financing activities................... 4,654 9,968 22,655 23,158 44,831
------- ------- -------- ------- --------
Net increase (decrease) in cash and cash equivalents........ 971 441 11,147 14,673 19,808
Cash and cash equivalents, beginning of period.............. 34 1,005 1,446 1,446 12,593
------- ------- -------- ------- --------
Cash and cash equivalents, end of period.................... $ 1,005 $ 1,446 $ 12,593 $16,119 $ 32,401
======= ======= ======== ======= ========
Supplemental information:
Cash paid for interest.................................... $ 31 $ 47 $ 495 178 67
Non-cash financing and investing transactions:
Assets acquired with capital lease obligations............ $ 340 $ 267 $ 315 $ 315 $ 767
Issuance of subsidiary's stock and warrants in connection
with acquisition (Note 3)............................... -- 485 -- -- --
Assumption of liabilities in connection with acquisition
(Note 3)................................................ -- 370 -- -- --
Issuance of common stock in connection with purchase of
minority interest (Note 3).............................. -- -- 506 -- --
Issuance and measurement of warrants in connection with
capitalized assets (Note 10)............................ -- 408 (34) (32) --
Issuance of warrants in connection with debt (Note 5)..... -- -- 525 525 --
Issuance of common stock for services provided............ -- -- 35 35 --
Common stock received in consideration of note receivable
(Note 8)................................................ -- -- 35 -- --
Dividends accrued on preferred stock (Note 7)............. 203 157 329 41 549
Conversion of preferred stock into common stock........... -- -- -- -- 37,735
Issuance of warrants in connection with financing
commitment.............................................. -- -- -- -- 472
Reduction in deferred financing costs related to recission
of warrants in connection with financing commitment..... -- -- -- -- (387)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. DESCRIPTION OF BUSINESS
Streamline.com, Inc. ("Streamline.com" or the "Company") was incorporated in
the state of Delaware in 1993 and provides Internet-based ordering and home
delivery of a wide range of goods and services to consumers. The Company seeks
to simplify the shopping chores of busy suburban families who place a high value
on their time and demand service excellence. The Company consolidates products
and services currently offered by various suppliers into a single weekly
delivery to its customers, thus minimizing their need to make frequent trips to
multiple physical stores. The Company currently provides its products and
services from a single service center in the greater Boston suburbs that it
intends to replicate in other markets nationwide. Additionally, the Company has
working relationships with various consumer packaged goods companies to perform
market research on consumer purchasing behavior.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and it's wholly owned subsidiary. In 1998, the Company purchased the remaining
minority interest in its subsidiary (See Note 3). All significant intercompany
transactions have been eliminated.
REVENUE RECOGNITION
Product and service revenue is recognized upon delivery of goods and
services to the customer. Advertising, research and marketing fees are
recognized over the life of the contract or as the services are performed.
Subscription revenues are billed and recognized monthly.
CUSTOMER ACQUISITION COSTS AND PRE-OPENING COSTS
Customer acquisition costs and pre-opening costs are expensed as incurred.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less at the time of purchase to be cash
equivalents. The Company invests its excess cash in money market funds and
marketable securities that are subject to minimal credit and market risk. Cash
equivalents at December 31, 1997 and 1998 included approximately $1,030 and
$12,256, respectively, in money market funds.
MARKETABLE SECURITIES (UNAUDITED)
Investments include high-grade commercial paper and short term U.S.
Government and municipal securities. Investments are classified as
available-for-sale to support current operations or to take advantage of other
investment opportunities. These securities are stated at cost plus accrued
interest which approximates fair market value and mature within one year.
Available-for-sale securities mature within one year and are carried at amounts
that approximate fair value. All of the investment holdings
F-7
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
have maturity dates of less than one year. For the purpose of computing realized
gains and losses, cost is identified on a specific identification basis. Gross
unrealized holding gains and losses at October 2, 1999 were not material.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over their
estimated useful lives of three to seven years using the straight-line method.
Assets held under capital leases are amortized over the shorter of the lease
life or the estimated useful life of the asset. Repairs and maintenance costs
are expensed as incurred. Upon retirement or sale, the cost of the assets
disposed and the related accumulated depreciation are removed from the accounts
and any resulting gain or loss is included in the results of operations.
PURCHASED SOFTWARE, CAPITALIZED SOFTWARE AND TECHNOLOGY SYSTEMS AND DEVELOPMENT
Purchased third party software and related implementation costs are recorded
at cost and are amortized over their estimated useful lives, typically three
years using the straight-line method. Internal and external costs incurred
related to the application development stage of internal use software are
capitalized and amortized over their estimated useful lives, typically three
years using the straight-line method. Amortization expense related to purchased
and capitalized software is included in technology systems and development
expense.
Technology development costs are charged to technology systems and
development expense as incurred. Technology development costs include internal
and external costs incurred in the development and enhancement of software used
internally or used in connection with services provided by the Company that do
not otherwise qualify for capitalization, the costs of maintenance and minor
enhancements and the costs associated with maintaining and supporting internal
information systems.
The Company capitalized approximately $1,386 and $1,238 for purchased and
capitalized software for the years ended December 31, 1997 and 1998,
respectively. Amortization expense for purchased and capitalized software was
approximately $13, $189, and $708 for years ended December 31, 1996, 1997 and
1998.
GOODWILL
Goodwill is being amortized on a straight-line basis over a five-year term.
The Company periodically evaluates the possible impairment of long-lived assets,
including goodwill, whenever events or changes in circumstances indicate that
the carrying value of the assets may not be recoverable. If such an event
occurred, the Company would project the future undiscounted cash flows expected
to result from the asset. If such projections indicated that the carrying value
would not be recoverable, the Company would reduce the carrying value of the
asset by the estimated excess of such value over future projected discounted
cash flows. Accumulated amortization of goodwill as of December 31, 1997 and
1998 was approximately $146 and $308, respectively.
F-8
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
YEAR 2000 COSTS
Costs of modifying computer software to ensure Year 2000 compliance are
expensed as incurred.
ADVERTISING
The Company expenses costs related to advertising as incurred. Advertising
expense was approximately $43, $389 and $557 for the years ended December 31,
1996, 1997 and 1998, respectively.
INVENTORY
The Company values all of its inventories at the lower of cost or market
value. Cost is determined on an average cost basis. All inventory items
represent finished goods.
INCOME TAXES
The Company provides for income taxes under the liability method that
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between financial statement and tax bases of assets and
liabilities, as measured by the current tax rates. Under this method, a
valuation allowance is required against net deferred tax assets if, based upon
the available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
Management periodically evaluates the recoverability of deferred tax assets
and the level of the adequacy of the valuation allowance. At such time as it is
determined that it is more likely than not that deferred tax assets are
realizable, the valuation allowance will be appropriately reduced.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no compensation expense is recorded for options issued to employees
in fixed amounts with fixed exercise prices at least equal to the fair market
value of the Company's common stock at the date of grant. The Company has
adopted the disclosure only provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
(Note 9). Stock-based awards, including warrants to non-employees are accounted
for at their fair value.
RISKS AND UNCERTAINTIES AND 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 liabilities at the date of the financial statements and
the
F-9
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The Company has a limited operating history, has never achieved
profitability and is therefore subject to the risks and uncertainties such as
the uncertain nature of the markets in which the Company competes and the risk
that the Company may be unable to manage any future growth successfully.
In addition, the Company is subject to the risks encountered by companies
relying on the continued growth of on-line commerce and Internet infrastructure.
The risks include the use of the Internet as a viable commercial marketplace and
the potentially inadequate development of the necessary network infrastructure.
Finally, the Company has historically experienced seasonal fluctuations in
revenue. This pattern may be expected to continue and results of financial
operations within any fiscal year or fiscal quarter cannot be expected to be
representative.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The Company's financial instruments consist primarily of cash, cash
equivalents, and marketable securities. As of December 31, 1998 and October 2,
1999, these financial instruments carrying values approximated fair value.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash, cash equivalents, and marketable
securities. The Company primarily invests its excess cash with high credit
quality financial institutions including primarily U.S. Government instruments
and commercial paper. The Company has not experienced any significant losses on
its cash, cash equivalents or marketable securities.
NET LOSS PER SHARE
The Company computes basic and diluted net loss per share in accordance with
SFAS No. 128, "Earnings Per Share." Basic net loss per share is computed by
dividing net loss attributable to common stockholders by the weighted average
number of shares of common stock outstanding for the period. Diluted loss per
share does not differ from basic loss per share since potential common shares
from conversion of preferred stock, stock options and warrants are anti-dilutive
for all periods presented.
F-10
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basic and diluted loss per share were calculated as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
YEAR ENDED DECEMBER 31, SEPTEMBER 30, OCTOBER 2,
--------------------------------- ------------- ----------
1996 1997 1998 1998 1999
--------- --------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Numerator:
Loss before extraordinary item........... $ (1,846) $ (8,314) $ (10,629) $ (7,679) $ (12,639)
Dividends on preferred stock............. 203 157 329 41 549
--------- --------- --------- --------- ---------
Loss attributable to common stockholders
before extraordinary item.............. (2,049) (8,471) (10,958) (7,720) (13,188)
Extraordinary item....................... -- -- 744 744 --
--------- --------- --------- --------- ---------
Net loss attributable to common
stockholders........................... $ (2,049) $ (8,471) $ (11,702) $ (8,464) $ (13,188)
========= ========= ========= ========= =========
Denominator:
Weighted average common shares
outstanding............................ 3,284,625 3,424,035 3,522,458 3,497,875 9,493,994
Basic and diluted net loss per common
share:
Loss per common share before
extraordinary item..................... $ (0.62) $ (2.47) $ (3.11) $ (2.21) $ (1.39)
Extraordinary item....................... -- -- (0.21) (0.21) --
--------- --------- --------- --------- ---------
Net loss per common share................ $ (0.62) $ (2.47) $ (3.32) $ (2.42) $ (1.39)
========= ========= ========= ========= =========
</TABLE>
Outstanding options of 450,500, 726,750, 593,000 and 1,803,495, as of
December 31, 1996, 1997 and 1998 and October 2, 1999 respectively, were not
included in the diluted loss per share computation because their effect would be
anti-dilutive. Outstanding warrants of 50,000, 435,714, 788,714 and 778,714 as
of December 31, 1996, 1997 and 1998 and October 2, 1999, respectively, were not
included in the diluted loss per share calculation because their effect would be
anti-dilutive.
INTERIM FINANCIAL STATEMENTS
The financial statements of the Company as of October 2, 1999 and for the
nine months ended September 30, 1998 and October 2, 1999 and related footnote
information are unaudited. All adjustments consisting only of normal recurring
adjustments, have been made which, in the opinion of management, are necessary
for a fair presentation of the interim financial information. Results of
operations for the nine months ended September 30, 1998 and October 2, 1999 are
not necessarily indicative of the results that may be expected for any future
period.
F-11
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting for Comprehensive Income"
for the year ended December 31, 1998 which requires that changes in
comprehensive income be shown in a financial statement that is displayed with
the same prominence as other financial statements. The Company's comprehensive
loss is not materially different from the net loss presented for the years ended
December 31, 1996, 1997 and 1998, and for the nine months ended September 30,
1998 and October 2, 1999.
3. SUBSIDIARY AND MINORITY INTEREST
The Company established Streamline Mid-Atlantic, Inc. ("Mid-Atlantic") as a
wholly owned subsidiary in February 1997, receiving 2.2 million common shares of
Mid-Atlantic in exchange for $22 cash.
In February 1997, Mid-Atlantic issued 800,000 shares of common stock in a
private offering to third parties, in exchange for net proceeds of $400.
Mid-Atlantic acquired substantially all of the assets and liabilities of
Shopping Alternatives, Inc., a provider of home grocery shopping services. In
the same month, stockholders of Shopping Alternatives received 970,000 shares of
Mid-Atlantic common stock plus warrants to purchase 30,000 shares of
Mid-Atlantic common stock. The value ascribed to the warrants was nominal. In
accordance with the purchase method of accounting, the purchase price of
approximately $855, which includes approximately $370 of liabilities assumed,
was allocated first to the fair value of the net assets acquired from Shopping
Alternatives. The excess of the purchase price over the fair value of the
acquired assets of approximately $794 was recorded by Mid-Atlantic as acquired
goodwill, in the absence of other intangibles, to be amortized on a
straight-line basis over a period of five years. The accompanying financial
statements for the year ended December 31, 1997 reflect the resultant change in
interest of the Company's ownership of Mid-Atlantic from 100% to approximately
55%.
In November 1998, the Company acquired the outstanding minority ownership
interest of Mid-Atlantic in a single transaction in which minority stockholders
of Mid-Atlantic received 126,424 shares of the Company's common stock, $0.01 par
value, having a fair value of approximately $506 at the date of acquisition. In
accordance with the purchase method of accounting, the Company allocated the
purchase price first to the fair value of the net assets of Mid-Atlantic, as of
the date of the transaction. The resulting total goodwill associated with
Mid-Atlantic, representing the excess of the purchase price over the fair value
of the acquired assets of approximately $1,300 at December 31, 1998, is being
amortized on a straight-line basis over a period of five years. Unaudited pro
forma combined results as if the acquisition had occurred at the beginning of
either of the fiscal years are not materially different than the results
presented.
F-12
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL LIVES -------------------
IN YEARS 1997 1998
------------ -------- --------
<S> <C> <C> <C>
Computer equipment.......................................... 3-5 $ 740 $ 822
Equipment, furniture and fixtures........................... 5-10 1,407 2,071
Vehicles.................................................... 5 265 589
Leasehold improvements...................................... 5-10 1,673 1,631
------- ------
4,085 5,113
Accumulated depreciation and amortization................... (626) (1,450)
------- ------
$ 3,459 $3,663
======= ======
</TABLE>
At December 31, 1997 and 1998, the costs of fixed assets held under capital
leases and included above amounted to approximately $714 and $1,029,
respectively, and accumulated amortization related to such assets amounted to
approximately $150 and $338, respectively.
5. DEBT
In April 1998, the Company received proceeds of $7,000 in connection with
the issuance of Senior Discount Notes ("Discount Notes"). The Company issued 777
units each consisting of a $10 aggregate principal amount of Discount Notes and
546.88 warrants to purchase common stock. The $7,770 face amount of the Discount
Notes is due April 15, 2001. The Discount Notes bear interest initially in the
form of accretion in the principal amount outstanding up to the face amount at
the rate of 11% per annum until April 15, 1999. Thereafter, the Discount Notes
bear interest on the face amount at the rate of 12% per annum with interest
payable semi-annually until maturity.
In conjunction with the issuance of the Discount Notes, the Company also
issued warrants for the purchase of up to a total of 425,000 shares of the
Company's common stock. Warrants to purchase 225,000 shares of common stock at
$7.00 per share vested immediately. The remaining 200,000 warrants vest
periodically at varying exercises prices until 2001 based upon the Company
obtaining certain amounts of financing. All of these warrants expire upon the
earlier of April 15, 2005 or five years after a public offering by the Company
raising at least $25,000. The Company recorded approximately $525 of additional
paid-in capital for the fair value of the warrants on the issuance date as an
additional discount associated with the Discount Notes.
On September 18, 1998, the Company redeemed all of the Discount Notes at a
price of $7,000 on plus approximately $334 of interest and $257 for a call
premium with the proceeds from the issuance of the Company's Series D Preferred
Stock (Note 7). In addition, the Company modified the terms of the warrants
issued in connection with this debt such that the remaining unvested warrants to
purchase 200,000 shares of the common stock expired immediately in exchange for
the issuance of 5,000 shares of common stock for $0.1. The redemption resulted
in the Company recording an extraordinary loss on the extinguishment of debt of
approximately $744 including approximately $257 for the call premium,
F-13
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. DEBT (CONTINUED)
approximately $452 for the unamortized discount value associated with the
warrants and approximately $35 for the issuance of the common shares and the
remaining deferred financing costs.
6. RELATED PARTY TRANSACTIONS
During 1996, the Company redeemed notes payable in the principal amounts of
approximately $176 from its Chairman, President and Chief Executive Officer and
$122 from several other stockholders of the Company. These notes payable were
redeemed at par plus accrued interest.
During 1997, the Company paid consulting fees under an agreement with a
marketing firm, the Chief Executive Officer of which is a director of the
Company. Total fees paid under this agreement during 1997 were approximately
$338. Additionally during 1997, the Company issued warrants valued at $25 to
this firm for the purchase of 50,000 shares of the Company's common stock at an
exercise price of $2.04 per share with an expiration date in 2001.
During 1997, the Company repurchased 11,500 shares of its common stock from
its Chairman and Chief Executive Officer at a purchase price of $7.00 per share,
which the Company's Board of Directors determined to be the fair value of those
shares at the date of repurchase.
During 1997 and 1998, the Company paid fees for technology development and
consulting under an agreement with a firm, the Chief Executive Officer of which
is a current director and former officer of the Company. Fees paid by the
Company under this agreement totaled approximately $1,250 and $1,676 in 1997 and
1998, respectively. In addition during 1997, the Company issued warrants valued
at approximately $330 to this firm for the purchase of 50,000 shares of the
Company's common stock at an exercise price of $2.04 per share with an
expiration date in 2007. During 1998, the Company issued additional warrants
valued at approximately $447 to this firm for the purchase of 100,000 shares of
its common stock at an exercise price of $4.00 per share with an expiration date
in 2003. Costs associated with these transactions have been recorded as
additions to capitalized software of approximately $595 and $683 for the years
ended December 31, 1997 and 1998, respectively, and as technology systems and
development expense of $985 and $1,440 for the years ended December 31, 1997 and
1998, respectively.
During 1998, the Company issued convertible subordinated notes payable in
the amount of $200 to two directors of the Company, and $400 to five
stockholders of the Company, which were redeemed during 1998 at par value plus
accrued interest.
The Company has capital equipment lease arrangements with one of its
stockholders and affiliated entities. The Company paid approximately $33, $69,
and $198 in the years ended December 31, 1996, 1997 and 1998, respectively under
these capital lease arrangements. As of December 31, 1997 and 1998, amounts due
to these related parties are $392 and $458, respectively and have been included
as capital lease obligations on the balance sheet.
F-14
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE PERIODS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. RELATED PARTY TRANSACTIONS
All warrant activity described in Note 10 during the years ended
December 31, 1997 and 1998 was with stockholders of the Company.
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The following table reflects redeemable convertible preferred stock activity
from December 31, 1995 through October 2, 1999:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
------------------- ------------------- ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares of Series A issued........... 50,000 $ 5,000
Accrual of Series A dividends....... -- 203
------- ------- ------- ------- ------- ------- -------- --------
Balance at December 31, 1996........ 50,000 5,203
Shares of Series B issued........... -- -- 80,000 8,000
Shares of Series C issued........... -- -- -- -- 10,000 1,000
Accrual of Series A dividends....... -- 157 -- -- -- --
Payment of Series A dividends....... -- (360) -- -- -- --
------- ------- ------- ------- ------- ------- -------- --------
Balance at December 31, 1997........ 50,000 5,000 80,000 8,000 10,000 1,000
Shares of Series D issued........... -- -- -- -- -- -- 228,570 22,857
Accrual of Series D dividends....... -- -- -- -- -- -- -- 329
------- ------- ------- ------- ------- ------- -------- --------
Balance at December 31, 1998........ 50,000 5,000 80,000 8,000 10,000 1,000 228,570 23,186
Accrual of Series D dividends....... -- -- -- -- -- -- -- 549
Conversion to common stock in
connection with initial public
offering.......................... (50,000) (5,000) (80,000) (8,000) (10,000) (1,000) (228,570) (23,735)
------- ------- ------- ------- ------- ------- -------- --------
Balance at October 2, 1999.......... -- $ -- -- $ -- -- $ -- -- $ --
======= ======= ======= ======= ======= ======= ======== ========
<CAPTION>
TOTAL
-------------------
SHARES AMOUNT
-------- --------
<S> <C> <C>
Shares of Series A issued........... 50,000 $ 5,000
Accrual of Series A dividends....... -- 203
-------- --------
Balance at December 31, 1996........ 50,000 5,203
Shares of Series B issued........... 80,000 8,000
Shares of Series C issued........... 10,000 1,000
Accrual of Series A dividends....... -- 157
Payment of Series A dividends....... -- (360)
-------- --------
Balance at December 31, 1997........ 140,000 14,000
Shares of Series D issued........... 228,570 22,857
Accrual of Series D dividends....... -- 329
-------- --------
Balance at December 31, 1998........ 368,570 37,186
Accrual of Series D dividends....... -- 549
Conversion to common stock in
connection with initial public
offering.......................... (368,570) (37,735)
-------- --------
Balance at October 2, 1999.......... -- $ --
======== ========
</TABLE>
At December 31, 1996, the Company had issued and outstanding 50,000 shares
of Series A redeemable cumulative convertible preferred stock, $1.00 par value,
(the "Series A") which entitled its holders to cumulative dividend rights
payable in either cash, shares of Series A or shares of common stock.
During 1997, the Company amended its certificate of incorporation to amend
the rights of the Series A and to create two new series of redeemable
convertible preferred stock, designated as Series B (the "Series B") and
Series C (the "Series C"). The Company is authorized to issue up to 100,000
shares of each of these series of preferred stock, and each series has a par
value of $1.00 per share. These series of preferred stock are not cumulative as
to dividends. In connection with the amendment, the Company made a cash payment
of approximately $360 representing the total accrued dividends due to the
holders of the Series A, of which $203 and $157 of dividends were accrued during
the years ended December 31, 1996 and 1997, respectively. In addition, the
Company issued 80,000 and 10,000 shares of Series B and Series C, respectively,
for gross proceeds of $8,000 and $1,000, respectively.
During 1998, the Company amended its certificate of incorporation to amend
certain terms of Series A, Series B and Series C and authorize the issuance of
up to 380,000 shares of preferred stock
F-15
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE PERIODS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
designated as Series D. In September 1998, the Company issued 228,570 shares of
Series D at $100 per share resulting in gross proceeds of $22,857.
All outstanding shares of redeemable convertible preferred stock were
converted into common stock upon the closing of the Company's initial public
offering on June 17, 1999. Shares of redeemable convertible preferred stock for
all Series, while outstanding, were subject to the following rights and
privileges:
REDEMPTION
The Company was required to redeem each series of preferred stock in the
amount of $100 per share plus accumulated and unpaid dividends in two equal
annual installments commencing on the fifth anniversary upon request by holders
of at least two-thirds of such series of preferred stock. Each holder of
preferred stock could elect immediate redemption upon the sale of substantially
all of the Company's capital stock or assets to a third party. Additionally, a
holder of Series D could elect redemption if the Company has violated certain
covenants. However, stockholders were not entitled to elect redemption if that
holder or a Director nominated by the holder voted its shares in favor of the
sale. As of December 31, 1998, future redemption requirements for the preferred
stock were $2,500, $7,000, $16,093, and $11,593 in the years ended December 31,
2001, 2002, 2003 and 2004 respectively, plus additional accrued dividends.
LIQUIDATION
In the event of any liquidation, dissolution, or winding-up of the Company,
the holders of the Series D were entitled to a liquidation preference of up to
$100 per share plus all accrued but unpaid dividends before any payments are
made to the holders of the Series A, Series B or Series C. After payments to the
Series D stockholders, the holders of the Series A, Series B or Series C were
entitled to receive a liquidation payment of $100 per share and any accumulated
and unpaid dividends. Any assets remaining after such liquidation payment to the
preferred stockholders would be available for distribution ratably to common
stockholders.
DIVIDENDS
The holders of Series D were entitled to cumulative dividend rights at a
rate of 5% per annum of the Series D liquidation preference. The dividend rights
would be payable in cash, as an addition to the liquidation preference or an
issuance of Series D shares at the discretion of the Company or any combination
of the foregoing. Series D accumulated dividends were to be paid before
dividends or distributions were made to the holders of the Series A, Series B or
Series C. The Company would pay a dividend or distribution on the same terms and
at the same or equivalent rate on each share of Series A, Series B, Series C and
Series D whenever a dividend or distribution was declared or paid on any shares
of the common stock. At December 31, 1998, Series D stockholders were entitled
to cumulative dividends in arrears of approximately $329. Accrued dividends of
$878 were converted to 218,387 shares of common stock in June 1999 in connection
with the Company's initial public offering.
F-16
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
CONVERSION
The number of shares of common stock into which the Series A, Series B,
Series C and Series D were convertible was determined by multiplying each share
by the quotient of $100 divided by the conversion price as follows:
Series A--approximately $2.04 per share; Series B and C--$7.00 per share;
Series D--$4.00 share. All unpaid dividends were to be paid upon conversion.
Each share of Series A, Series B and Series C was convertible into the
Company's common stock at the option of the holder at any time prior to
redemption, or would be automatically converted upon the closing of a public
offering of the Company's common stock resulting in a price of at least $8.00
per share and gross proceeds of at least $25,000, subject to anti-dilution
provisions.
Each share of Series D was convertible into the Company's common stock at
the option of the holder at any time after the earlier of a conversion event or
March 18, 2000. A conversion event includes any transaction that would be deemed
a liquidation, Mr. DeMello's ceasing to be an officer, director or consultant of
the Company, certain actions by the Company without a prior affirmative vote by
a majority of the Series D stockholders, a change in persons constituting the
majority of the board of directors or a material adverse change in the Company's
business. Each Series D share would be automatically converted upon the closing
of the first sale of a public offering resulting in at least $25,000 of gross
proceeds for at least $8.00 per share provided that an investment banker
delivers an opinion that deems the conversion is necessary to facilitate a
successful public offering, or upon a sale of the Company's assets to a third
party. In connection with the Company's initial public offering, all of the
shares of Series A, Series B, Series C and Series D redeemable convertible
preferred stock ("Preferred Stock") and accrued dividends on the Series D
Preferred Stock were converted into 9,673,109 shares of common stock. See
subsequent event note 14.
VOTING
Holders of Series A, Series B, Series C and Series D did not have voting
rights but holders of Series A and Series C, voting together, and holders of
Series B, voting separately, have the right to elect one director of the
Company, or in lieu thereof, one individual as an observer at all meetings of
the Company's board of directors. Holders of Series D had the right to elect one
director of the Company and one individual as an observer at all meetings of the
Company's board of directors. The Company was required to request the consent of
the Series D stockholders before engaging in certain activities such as the
modification of the rights of the Series D stockholders, a merger or
acquisition, the declaration of dividends for all capital stock and the issuance
of common stock at a price less than $7.00 per share and more than $4.00 per
share.
F-17
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. STOCKHOLDERS' EQUITY
COMMON STOCK AND PREFERRED STOCK
The holders of common stock are entitled to one vote for each share held at
all meetings of the stockholders. Dividends on common stock may be paid out of
lawfully available funds as and when determined by the board of directors,
subject to any preferential dividend rights of preferred shareholders. In
April 1999, the Company's board of directors adopted, and the stockholders
approved, effective upon the closing of an initial public offering, an increase
in the authorized capital stock of the Company to 50,000,000 shares of common
stock and 5,000,000 shares of preferred stock, each having a par value of $0.01
per share. The board of directors is authorized, without further stockholder
approval, to fix or alter the relative rights, preferences, qualifications,
limitations or restrictions thereof, including any dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series.
TREASURY STOCK
During 1997, the Company repurchased 29,000 shares of its common stock from
certain employees and directors of the Company for a total of approximately
$203. During 1998, the Company received 5,000 shares of common stock as
consideration for payment of a $35 employee note receivable.
STOCK SPLIT
On April 8, 1999, the board of directors declared a 1-for-2 reverse stock
split of common stock. All common shares and per share amounts in the
consolidated financial statements and related footnotes have been restated to
reflect the effect of the reverse stock split for all periods presented.
9. STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLAN
STOCK OPTION PLANS
On June 10, 1993, the Company adopted two stock option plans. The 1993
Employee Option Plan ("Employee Plan") initially allowed for the granting of
202,750 shares of either statutory or non-statutory options as defined by
Section 422 of the Internal Revenue Code. As of December 31, 1998, the Company
has authorized 1,500,000 shares to be issued in connection with the Employee
Plan. As of December 31, 1998 and October 2, 1999, there were approximately
882,500 and 690,900 shares available for future grants under the Employee Plan,
respectively. In April 1999, the Company increased the number of authorized
shares to be issued under this plan to 2,500,000.
The Director Option Plan ("Director Option Plan") allows for the granting of
shares of non-statutory options and is not intended to meet the requirements of
Internal Revenue Code Section 422. An aggregate of 125,000 shares of common
stock has been reserved for issuance upon the exercise of options available
under the Director Option Plan. As of December 31, 1998, and October 2, 1999
there were approximately 37,500 shares available for future grants under the
Director Option Plan. In April 1999, the Company increased the number of
authorized shares to be issued under this
F-18
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
plan to 250,000. In May 1999, the Company increased the number of authorized
shares to be issued under this plan to 400,000.
Options are generally granted at a price established by the board of
directors to be not less than the fair market value of the stock on the date of
grant. The options vest at various rates over periods up to three years and
expire up to ten years from the grant date for the Employee Option Plan and five
years from the grant date for the Director Option Plan.
The Company has adopted the disclosure only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for stock options granted
at or above fair value. Had compensation cost been determined based on the fair
value at the grant dates for awards in 1996, 1997 and 1998 consistent with the
provisions of SFAS No. 123, the Company's pro forma net loss attributable to
common stockholders and pro forma basic and diluted net loss per common share
for fiscal 1996, 1997 and 1998 would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net loss attributable to common stockholders
As reported............................................... $(2,049) $(8,471) $(11,702)
Pro forma................................................. (2,105) (8,554) (11,783)
Basic and diluted net loss per common share
As reported............................................... $ (0.62) $ (2.47) $ (3.32)
Pro forma................................................. (0.64) (2.50) (3.35)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model to apply the minimum value method with
the following assumptions for grants in 1996, 1997 and 1998: no dividend yield;
no volatility; risk-free interest rates of 6.1% in 1996, 5.6% for 1997, 5.3% for
1998, and expected lives of five years for the Employee Plan and three years for
the Directors Plan. The weighted average fair value of options granted was
$0.31, $0.45, and $0.14 per share for the years ended December 31, 1996, 1997
and 1998, respectively. All options granted during the years ended December 31,
1996, 1997 and 1998 were issued at exercise prices in excess of the fair market
value of the common stock.
Because the determination of the fair value of all options granted includes
vesting periods over several years and additional option grants may be made each
year, future effects on reported pro forma net income or net loss may differ
from the above pro forma disclosures.
F-19
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
The following table summarizes the activity in the Company's option plans at
December 31, 1996, 1997 and 1998 and October 2, 1999, and changes during the
periods then ended:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1996 1997 1998 OCTOBER 2, 1999
------------------- ------------------- ------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period........................ 273,500 $ 1.60 450,500 $1.76 726,750 $2.84 593,000 $3.88
Granted......................... 180,000 2.00 398,750 3.62 119,750 6.76 1,318,745 8.34
Exercised....................... -- -- (77,550) 1.16 (34,583) 1.80 (26,666) 3.10
Forfeited....................... (3,000) 1.80 (44,950) 1.80 (218,917) 2.30 (145,584) 7.95
------- ------ ------- ----- -------- ----- --------- -----
Outstanding at end of period.... 450,500 $ 1.76 726,750 $2.84 593,000 $3.88 1,739,495 $6.93
======= ====== ======= ===== ======== ===== ========= =====
Options exercisable at end of
period........................ 151,000 $ 1.44 162,250 $1.84 307,415 $2.80 416,767 $3.56
======= ====== ======= ===== ======== ===== ========= =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
TOTAL NUMBER WEIGHTED AVERAGE NUMBER OF
OF OPTIONS REMAINING OPTIONS
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- -------------- ------------ ---------------- -----------
<S> <C> <C> <C>
$1.50.................................. 12,500 4.5 12,500
$1.80.................................. 142,000 6.2 129,500
$2.04.................................. 212,500 7.7 110,583
$4.00.................................. 2,000 9.8 666
$7.00.................................. 224,000 9.0 54,166
$10.00................................. -- -- --
------- --------- -------
593,000 7.8 years 307,415
======= ========= =======
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In April 1999, the Company's board of directors and stockholders approved
the 1999 Employee Stock Purchase Plan (the "1999 Purchase Plan"). The Company
has reserved 250,000 shares of common stock for issuance under the 1999 Purchase
Plan.
F-20
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. COMMON STOCK WARRANTS
The following table summarizes the activity related to warrants at
December 31, 1996, 1997 and 1998, and October 2, 1999 and changes during the
periods then ended:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1996 1997 1998 OCTOBER 2, 1999
------------------- ------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period.......................... 22,500 $ 1.80 50,000 $1.93 435,714 $5.28 788,714 $5.67
Granted......................... 27,500 2.04 385,714 5.72 553,000 6.46 75,000 7.00
Exercised....................... -- -- -- -- -- -- (10,000) 2.04
Cancelled....................... -- -- -- -- (200,000) 7.00 (75,000) 7.00
------ ------ ------- ----- -------- ----- ------- -----
Outstanding at end of period.... 50,000 $ 1.93 435,714 $5.28 788,714 $5.67 778,714 $5.72
====== ====== ======= ===== ======== ===== ======= =====
Warrants exercisable at end of
period........................ 22,500 $ 1.80 193,929 $3.84 681,571 $5.46 671,571 $5.51
====== ====== ======= ===== ======== ===== ======= =====
</TABLE>
The weighted average fair value of warrants granted in 1996 was based upon
an estimated value of $2.04. The weighted average fair value of warrants granted
during 1997 and 1998 estimated on the date of grant using the Black-Scholes
option-pricing model was $2.74 and $1.82, respectively. The fair value was
estimated using an expected volatility of 50% in 1997 and 80% in 1998, risk free
rates of 5.8% to 6.3% in 1997 and 4.1% to 5.5% in 1998 and the contractual term
of the warrant.
The following table summarizes information about warrants outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
TOTAL AVERAGE
NUMBER REMAINING NUMBER OF
OF WARRANTS CONTRACTUAL WARRANTS
EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE
- -------------- ----------- ----------- -----------
<S> <C> <C> <C>
$1.80....................................... 22,500 2.0 22,500
2.04....................................... 127,500 4.7 127,500
4.00....................................... 100,000 5.0 100,000
7.00....................................... 538,714 4.1 431,572
------- ---------- -------
788,714 4.2 years 681,572
======= ========== =======
</TABLE>
During 1996, the Company issued warrants for the purchase of a total of
27,500 shares of common stock at an exercise price of $2.04 per share with an
expiration date of 2001 in exchange for services provided to the Company. The
Company recorded the fair value of these warrants as consulting expense.
F-21
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. COMMON STOCK WARRANTS (CONTINUED)
During 1997, the Company issued warrants for the purchase of a total of
385,714 shares of its common stock at exercise prices ranging from $2.04--$7.00
per share and expiration dates from 2001 through 2007. These warrants were
principally issued in lieu of cash consideration for services provided to the
Company. Certain of these warrants were issued with immediate vesting while some
of the warrants had vesting that was contingent on additional services being
provided. In 1997, in connection with the issuance of these warrants, the
Company recorded $330 of technology systems and development costs, $281 of
capitalized software and $77 of deferred financing costs based upon the
appraised value of the warrants at the date of grant. As of December 31, 1997,
approximately 214,500 of these warrants were subject to vesting upon certain
conditions and are subject to adjustment until the measurement date is reached.
In 1998, the remeasurement of these warrants resulted in the Company reducing
capitalized software recorded in 1997 by approximately $67. As of December 31,
1998, 107,143 warrants granted in 1997 were subject to vesting upon certain
future events and no significant value has been ascribed to these unvested
warrants.
During 1998, the Company issued warrants for the purchase of a total of
553,000 shares of its common stock at exercise prices ranging from $4.00--$7.00
per shares as described below.
Warrants for the purchase of 425,000 common shares were issued in connection
with the Discount Notes at an exercise price of $7.00 per share. These warrants
expire upon the earlier of April 15, 2005 or five years after a public offering
by the Company raising at least $25,000. In connection with the repayment of the
Discount Notes, the Company modified the terms of the warrants issued in
association with this debt such that the remaining unvested warrants to purchase
200,000 shares of the common stock expired immediately in exchange for the
issuance 5,000 shares of common stock for $0.1. (See Note 5).
In addition, the Company issued warrants for the purchase of a total of
100,000 shares of its common stock at an exercise price of $4.00 per share with
an expiration date in 2003 in exchange for services provided to the Company.
(See Note 6.)
The Company issued warrants for the purchase of 28,000 shares of common
stock at an exercise price of $7.00 per share which are all vested as of
December 31, 1998. These warrants expire in 2001. These warrants were
principally issued in lieu of cash consideration for services provided to the
Company. The Company recorded approximately $33 to capitalized software for the
fair value of the warrants.
In April 1999, the Company issued warrants for the purchase of 75,000 shares
of common stock at an exercise price of $7.00 per share in connection with a
financing commitment by a current stockholder. The stockholder agreed to provide
the Company with financing of up to $10,000 upon request, however, the financing
commitment terminated upon the closing of the initial public offering. See
footnote 14 subsequent events.
F-22
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company leases its facilities and certain equipment under noncancellable
leases. Future minimum lease obligations at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------ --------- --------
<S> <C> <C>
1999....................................................... $ 924 $294
2000....................................................... 799 221
2001....................................................... 483 115
2002....................................................... 495 80
2003....................................................... 508 12
Thereafter................................................. 2,068 --
------ ----
Total future payments...................................... $5,277 722
====== ----
Less: amount representing interest......................... 105
----
Present value of capital leases............................ $617
====
</TABLE>
All capital lease obligations are fully collateralized by the equipment and
are at interest rates ranging from 7% to 18%.
Total rent expense for the years ended December 31, 1996, 1997 and 1998 was
approximately $299, $639 and $948, respectively.
12. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Deferred provision
Federal............................................ $(628) $(2,827) $(3,867)
State.............................................. (116) (521) (713)
Change in valuation allowance...................... 744 3,348 4,396
Other.............................................. -- -- 184
----- ------- -------
Total provision.................................. $ -- $ -- $ --
===== ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets are
approximately $4,809 and $9,205 as of December 31, 1997 and 1998, respectively,
which are primarily related to net operating losses. Realization of total
deferred tax assets is contingent upon the generation of future taxable income.
Due to the uncertainty of realization of
F-23
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. INCOME TAXES (CONTINUED)
these tax benefits, the Company has provided a valuation allowance for the full
amount of its deferred tax assets.
As of December 31, 1998, the Company had federal and state net operating
loss carryforwards of approximately $22,600 and state net operating losses of
approximately $22,400. The federal and state net operating loss carryforwards
begin to expire in 2008 and 1999, respectively.
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may have limited, or may limit in the future,
the amount of net operating loss carryforwards which could be utilized annually
to offset future taxable income and income tax liability. The amount of any
annual limitation is determined based upon the Company's value prior to an
ownership change.
13. RETIREMENT SAVINGS PLAN
In 1997, the Company adopted the Streamline 401(k) Plan (the "Plan") for its
employees, which has been qualified under Section 401(k) of the Internal Revenue
Code. Eligible employees are permitted to contribute to the Plan through payroll
deductions within statutory limitations and subject to any limitations included
in the Plan. To date, the Company has made no contributions to the Plan.
14. SUBSEQUENT EVENTS
In June 1999, the Company completed an initial public offering of its common
stock (the "IPO"). A total of 4,998,482 shares of the Company's common stock
were sold at a price of $10.00 per share, including the exercise of the
underwriter's over-allotment option in July 1999, generating gross offering
proceeds of approximately $50,000. After deducting $5,000 in underwriting
discounts and other related expenses, the net proceeds to the Company were
approximately $45,000. Concurrent with the IPO, all of the shares of Series A,
Series B, Series C and Series D redeemable convertible preferred stock
("Preferred Stock") and accrued dividends on the Series D Preferred Stock were
converted into 9,673,109 shares of Streamline's common stock.
In April 1999, the Company issued warrants for the purchase of 75,000 shares
of common stock at an exercise price of $7.00 per share in connection with a
financing commitment by a current stockholder. The Company recorded
approximately $472 of deferred financing costs for the estimated fair value of
the warrant. The fair value was calculated using the Black-Scholes option
pricing model utilizing a common stock fair value of $10.00 per share, the
offering price of the common stock in the initial public offering. In
June 1999, the stockholder agreed to rescind all of its rights pursuant to this
warrant, effective as of the closing of the initial public offering. In
connection with this recission, the Company reversed the remaining unamortized
deferred financing costs of approximately $387 at the time of the initial public
offering.
As of October 2, 1999, the Company began reporting its earnings on a retail
calendar, using four 13-week periods. The Company's year end will be on the
Saturday closest to the 31st day of December. This change would not have had a
material impact on prior reported results.
F-24
<PAGE>
STREAMLINE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF OCTOBER 2, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND OCTOBER 2, 1999 HAS NOT BEEN AUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. SUBSEQUENT EVENTS (CONTINUED)
On October 18, 1999, the Company signed a merger agreement with Beacon Home
Direct d/b/a Scotty's Home Market. The transaction, which is subject to
shareholder approval, regulatory approval, and other typical conditions is
expected to be completed in early 2000 and to be accounted for as a pooling of
interests. Under the terms of the agreement the Company expects to issue
4.3 million shares to acquire all of the outstanding shares and equity interests
of Beacon Home Direct.
On October 27, 1999, the Company entered into a ten-year lease agreement for
a 102,000 square foot distribution facility commencing on the later of April 1,
2000 or sixty days following substantial completion of the building. The
agreement requires payments, including rent and certain operating expenses of
$66 per month.
F-25
<PAGE>
BEACON HOME DIRECT, INC.
D/B/A SCOTTY'S HOME MARKET
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-27
Balance Sheets at December 31, 1997 and 1998 and September
30, 1999 (unaudited)...................................... F-28
Statements of Operations for the years ended December 31,
1996 (unaudited), 1997 and 1998 and the nine months ended
September 30, 1998 and 1999 (unaudited)................... F-29
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1996 (unaudited), 1997 and 1998 and the
nine months ended September 30, 1999 (unaudited).......... F-30
Statements of Cash Flows for the years ended December 31,
1996 (unaudited), 1997 and 1998 and the nine months ended
September 30, 1998 and 1999 (unaudited)................... F-31
Notes to Financial Statements............................... F-32
</TABLE>
F-26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying balance sheets of BEACON HOME DIRECT, INC. (an
Illinois corporation) d/b/a Scotty's Home Market as of December 31, 1998 and
1997, and the related statements of operations, shareholders' equity and cash
flows for the years ended December 31, 1998 and 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require us to 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 evaluation of the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Beacon Home Direct, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years ended December 31, 1998 and 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago Illinois
November 11, 1999
F-27
<PAGE>
BEACON HOME DIRECT, INC.
D/B/A SCOTTY'S HOME MARKET
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
----------- ----------- -------------
(NOTE 2)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 673 $ 7,240,405 $ 1,022,961
Accounts receivable.................................... 13,641 13,990 49,093
Inventory.............................................. 208,925 326,960 384,547
Prepaid expenses and other current assets.............. 80,850 155,855 144,520
----------- ----------- ------------
Total current assets............................. 304,089 7,737,210 1,601,121
Property and equipment, net............................ 534,193 404,908 2,031,490
Purchased and capitalized software, net................ 48,166 208,423 1,133,204
Goodwill, net of accumulated amortization.............. 120,539 94,668 88,494
Other assets, net...................................... 31,959 103,519 4,141,078
----------- ----------- ------------
Total assets..................................... $ 1,038,946 $ 8,548,728 $ 8,995,387
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Capital lease obligations.............................. $ 21,409 $ 87,009 $ 276,799
Accounts payable....................................... 170,650 85,443 129,955
Accrued expenses....................................... 175,573 731,408 1,081,059
Notes payable.......................................... 692,574 -- 2,925,825
----------- ----------- ------------
Total current liabilities........................ 1,060,206 903,860 4,413,638
----------- ----------- ------------
Long-term portion of capital lease obligations........... 39,474 108,652 1,076,786
Stockholders' equity (deficit):
Common stock, no par value;
Authorized: 20,000,000 at December 31, 1997, December
31, 1998, and September 30, 1999
Issued and outstanding: 3,980,434 shares issued and
outstanding at December 31, 1997, 5,442,384 shares
issued and outstanding at December 31, 1998 and
5,524,884 issued and outstanding at September 30,
1999............................................... 2,778,375 4,706,603 4,798,178
Convertible redeemable Series A cumulative preferred
stock, $0.001 par value;
Authorized: none at December 31, 1997, 50,000 at
December 31, 1998 and September 30, 1999
Issued and outstanding: none issued and outstanding
at December 31, 1997, 10,000 issued and outstanding
at December 31, 1998 and and September 30, 1999.... -- 9,414,069 9,788,979
Additional paid-in capital............................. 11,142 21,393 21,393
Warrants............................................... 40,000 43,904 380,650
Accumulated deficit.................................... (2,890,251) (6,649,753) (11,484,237)
----------- ----------- ------------
Total stockholders' equity (deficit)............. (60,734) 7,536,216 3,504,963
----------- ----------- ------------
Total liabilities and stockholders' equity
(deficit)...................................... $ 1,038,946 $ 8,548,728 $ 8,995,387
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
BEACON HOME DIRECT, INC.
D/B/A SCOTTY'S HOME MARKET
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(NOTE 2) (NOTE 2)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product and service revenue, net...... $2,495,593 $ 3,767,034 $ 5,429,990 $ 3,825,134 $ 5,211,902
Delivery fees......................... 71,972 112,734 151,864 107,823 115,877
---------- ----------- ----------- ----------- -----------
Total revenue........................... 2,567,565 3,879,768 5,581,854 3,932,957 5,327,779
Operating expenses:
Cost of revenue....................... 1,929,802 2,854,638 3,972,863 2,832,276 3,655,215
Fulfillment center operations......... 1,048,002 1,382,480 2,323,830 1,296,834 1,780,904
Sales and marketing................... 157,429 323,046 699,951 514,529 1,501,988
Technology systems and development.... 63,247 292,566 498,282 302,101 490,487
General and administrative............ 110,390 950,826 1,762,755 1,047,224 2,424,378
---------- ----------- ----------- ----------- -----------
Total operating expenses................ 3,308,870 5,803,556 9,257,681 5,992,964 9,852,972
---------- ----------- ----------- ----------- -----------
Loss from operations.................. (741,305) (1,923,788) (3,675,827) (2,060,007) (4,525,193)
Other income (expense):
Interest income....................... 11,559 4,487 89,239 6,853 147,086
Interest expense...................... (3,465) (20,262) (56,715) (52,273) (83,975)
Other................................. -- -- 1,609 1,355 2,601
---------- ----------- ----------- ----------- -----------
Total other income (expense), net....... 8,094 (15,775) 34,133 (44,065) 65,712
---------- ----------- ----------- ----------- -----------
Net loss................................ $ (733,211) $(1,939,563) $(3,641,694) $(2,104,072) $(4,459,481)
========== =========== =========== =========== ===========
Dividends on preferred stock............ -- -- 117,808 -- 375,003
---------- ----------- ----------- ----------- -----------
Net loss attributable to common
stockholders.......................... $ (733,211) $(1,939,563) $(3,759,502) $(2,104,072) $(4,834,484)
========== =========== =========== =========== ===========
Basic and diluted net loss per
common share.......................... $ (0.26) $ (0.50) $ (0.77) $ (0.45) $ (0.89)
Shares used in computing basic and
diluted net loss per common share..... 2,832,493 3,860,285 4,895,264 4,712,891 5,442,384
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
BEACON HOME DIRECT, INC.
D/B/A SCOTTY'S HOME MARKET
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
UNAUDITED AS OF DECEMBER 31, 1995 AND FOR THE YEAR ENDED DECEMBER 31, 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
CONVERTIBLE
REDEEMABLE SERIES A
CUMULATIVE
COMMON STOCK PREFERRED STOCK
----------------------- ---------------------- ADDITIONAL
NO PAR $0.001 PAR PAID-IN NOTE RECEIVABLE
SHARES VALUE SHARES VALUE CAPITAL WARRANTS FROM SHAREHOLDER
---------- ---------- --------- ---------- ---------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995........ 2,000,000 $1,162,655 $ 40,000 $ (300,000)
Sale of common stock.............. 1,619,988 1,199,720
Net loss..........................
---------- ---------- --------- ---------- ---------- --------- ------------
Balance, December 31, 1996........ 3,619,988 2,362,375 40,000 (300,000)
Sale of common stock.............. 360,446 416,000
Issuance of options for the
purchase of common stock in
exchange for goods and
services........................ 11,142
Forgiveness of note receivable.... 300,000
Net loss..........................
---------- ---------- --------- ---------- ---------- --------- ------------
Balance, December 31, 1997........ 3,980,434 2,778,375 11,142 40,000 --
Dividends on preferred stock...... 117,808
Exercise of warrants.............. 150,000 111,500
Issuance of options and warrants
for the
purchase of common stock........ 10,251 3,904
Sale of common and preferred
stock........................... 1,311,950 1,816,728 10,000 9,296,261
Net loss..........................
---------- ---------- --------- ---------- ---------- --------- ------------
Balance, December 31, 1998........ 5,442,384 4,706,603 10,000 9,414,069 21,393 43,904
Options exercised................. 82,500 91,575
Issuance expenses................. (93)
Dividends on preferred stock...... 375,003
Measurement of warrant for the
purchase of common stock........ 336,746
Net loss..........................
---------- ---------- --------- ---------- ---------- --------- ------------
Balance, September 30, 1999....... 5,524,884 $4,798,178 10,000 $9,788,979 $ 21,393 $380,650
========== ========== ========= ========== ========== ========= ============
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY (DEFICIT)
------------ ----------------
<S> <C> <C>
Balance, December 31, 1995........ $ (217,477) $ 685,178
Sale of common stock.............. 1,199,720
Net loss.......................... (733,211) (733,211)
------------ -----------
Balance, December 31, 1996........ (950,688) 1,151,687
Sale of common stock.............. 416,000
Issuance of options for the
purchase of common stock in
exchange for goods and
services........................ 11,142
Forgiveness of note receivable.... 300,000
Net loss.......................... (1,939,563) (1,939,563)
------------ -----------
Balance, December 31, 1997........ (2,890,251) (60,734)
Dividends on preferred stock...... (117,808)
Exercise of warrants.............. 111,500
Issuance of options and warrants
for the
purchase of common stock........ 14,155
Sale of common and preferred
stock........................... 11,112,989
Net loss.......................... (3,641,694) (3,641,694)
------------ -----------
Balance, December 31, 1998........ (6,649,753) 7,536,216
Options exercised................. 91,575
Issuance expenses................. (93)
Dividends on preferred stock...... (375,003) --
Measurement of warrant for the
purchase of common stock........ 336,746
Net loss.......................... (4,459,481) (4,459,481)
------------ -----------
Balance, September 30, 1999....... $(11,484,237) $ 3,504,963
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
BEACON HOME DIRECT, INC.
D/B/A SCOTTY'S HOME MARKET
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(NOTE 2) (NOTE 2)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................... $ (733,211) $(1,939,563) $(3,641,694) $(2,104,072) $(4,459,481)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............ 70,443 132,430 169,097 121,427 208,609
Non-cash loss and impairment on
fixed assets........................... 12,474 10,543 324,909 4,909 7,124
Amortization of goodwill and other
assets................................. 14,604 14,544 25,871 10,908 6,174
Non-cash charge relating to forgiveness
of note receivable from shareholder.... -- 300,000
Non-cash charge for options and
warrants............................... -- 11,142 10,251 336,746
Changes in assets and liabilities
Accounts receivable.................... (6,205) (4,660) (349) (2,849) (35,103)
Inventory.............................. (69,535) (12,716) (118,035) 5,119 (57,587)
Prepaid expenses and other current
assets............................... (82,792) 17,440 (75,005) (37,101) 11,335
Other assets........................... (2,036) (8,573) (71,560) (62,597) (4,037,559)
Accounts payable....................... (5,360) 78,404 (85,207) (47,878) 44,512
Accrued expenses....................... 12,929 140,700 555,835 225,838 349,651
---------- ----------- ----------- ----------- -----------
Net cash used in operating activities........ (788,689) (1,260,309) (2,905,887) (1,886,296) (7,625,579)
---------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment........ (268,251) (113,639) (171,344) (135,655) (530,388)
Additions to purchased and
capitalized software..................... (34,983) (27,000) (181,950) (165,861) (976,623)
---------- ----------- ----------- ----------- -----------
Net cash used in investing activities........ (303,234) (140,639) (353,294) (301,516) (1,507,011)
---------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock, net of
issuance costs........................... 1,199,720 416,000 1,816,728 1,816,728 (93)
Proceeds from sale of preferred stock and
warrant, net of issuance costs........... -- -- 9,300,165 -- --
Proceeds from the exercise of warrants..... -- -- 111,500 56,000 --
Proceeds from the exercise of stock
options.................................. -- -- -- -- 91,575
Proceeds from notes payable................ 125,000 730,574 925,719 875,719 2,925,825
Payments on notes payable.................. (163,000) (1,618,293) (534,574) --
Principal payments on capital lease
obligations.............................. (6,620) (19,591) (36,906) (24,812) (102,161)
---------- ----------- ----------- ----------- -----------
Net cash provided by financing activities.... 1,318,100 963,983 10,498,913 2,189,061 2,915,146
---------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents........................... 226,177 (436,965) 7,239,732 1,249 (6,217,444)
Cash and cash equivalents, beginning of
period..................................... 211,461 437,638 673 673 7,240,405
---------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end of period..... $ 437,638 $ 673 $ 7,240,405 $ 1,922 $ 1,022,961
========== =========== =========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid for interest..................... $ 3,465 $ 20,262 $ 56,715 $ 52,273 $ 83,975
Supplemental non-cash transactions:
Assets acquired with capital lease
obligations.............................. $ 87,091 $ -- $ 181,684 $ 52,167 $ 1,260,085
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
BEACON HOME DIRECT, INC.
D/B/A SCOTTY'S HOME MARKET
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996
AND AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND 1999 HAS NOT BEEN AUDITED)
1. DESCRIPTION OF BUSINESS
Beacon Home Direct, Inc. d/b/a/ Scotty's Home Market (the "Company") is an
Illinois corporation and was incorporated in November 1994, and is the successor
to a business originally founded in 1991. The Company is an interactive on-line
grocery shopping and home delivery service that provides its customers time
savings, convenience and personalized consumer direct services. The Company
markets both branded and proprietary products for sale to its customers. All
orders are fulfilled at the Company's distribution center, located in suburban
Chicago, Illinois, and delivered to customers in the Company's own specialized
fleet of delivery vehicles.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less. The carrying amount of the Company's cash
and cash equivalents approximates fair value because of the short maturity of
those instruments.
INVENTORY
The Company uses the first-in, first-out method for costing its inventory.
PROPERTY AND EQUIPMENT
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives of the assets. Major repairs, which extend the useful
life of an asset, are charged to the property and equipment accounts. Routine
maintenance and repairs are charged against earnings. The cost of property and
equipment retired or sold and the related accumulated depreciation are removed
from the accounts and any related gain or loss is included in earnings.
Depreciation and amortization are provided over the following estimated
service lives:
<TABLE>
<CAPTION>
ASSET DESCRIPTION LIFE
- ----------------------- ----------
<S> <C>
Computer equipment 5 years
Furniture and fixtures 7-10 years
Refrigeration equipment 7-10 years
Vehicles 5 years
</TABLE>
The cost and accumulated depreciation for equipment leased under capitalized
leases are included in property and equipment. Depreciation is recorded over the
life of the lease or the service life of the asset.
F-32
<PAGE>
BEACON HOME DIRECT, INC.
D/B/A SCOTTY'S HOME MARKET
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996
AND AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND 1999 HAS NOT BEEN AUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The costs of internally developed software are capitalized in accordance
with Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and begins when the conceptual
formulation, evaluation and testing of possible software project alternatives
have been completed. Pilot projects and projects where expected future economic
benefits are less than probable are not capitalized. Internally developed
software costs include the cost of software licenses used in the development of
the Company's systems, as well as payroll and consulting costs. Capitalized
costs totaled $0 and $147,135 and $1,158,574 for the years ended December 31,
1997 and 1998, and for the nine months ended September 30, 1999, respectively.
GOODWILL
Goodwill is being amortized on a straight-line basis over its estimated
useful life of 15 years. Accumulated amortization as of December 31, 1997 and
1998 and September 30, 1999, was $20,580, $28,812 and $34,986, respectively. The
Company periodically evaluates the carrying value of goodwill for possible
impairment based upon expected future undiscounted operating cash flows.
Amortization expense for the years ended December 31, 1996, 1997 and 1998 and
for the nine months ended September 30, 1998 and 1999 was $8,232, $8,232 and
$8,232, $6,174 and $6,174, respectively.
INCOME TAXES
Prior to October 6, 1998, the Company elected to be taxed as an S
Corporation. As a result, income (loss) of the Company was taxable to the
shareholders. On October 6, the Company's S Corporation status was terminated
and the Company became a C Corporation. Income taxes are accounted for in
accordance with the liability method. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and income tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
STOCK OPTION PLANS
The Company accounts for its option plans in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." As
such, compensation expense would be recorded on the date of grant only if the
fair market value of the stock exceeded the exercise price. The Company provides
pro forma disclosure of net income as required under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options and other
equity instruments based on the fair value method of accounting.
F-33
<PAGE>
BEACON HOME DIRECT, INC.
D/B/A SCOTTY'S HOME MARKET
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996
AND AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND 1999 HAS NOT BEEN AUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Grocery sales are recognized when the grocery order is delivered to the
customer. Grocery sales are recorded net of discounts of $6,920 in 1996,
$117,930 in 1997, $142,343 in 1998, $106,065 for the nine months ended
September 30, 1998 and $109,391 for the nine months ended September 30, 1999.
The delivery fee, if any, is also recognized at such time.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents. The Company places
its cash and temporary investments with high-quality financial institutions. At
times, such investments may be in excess of the FDIC insurance limit. Temporary
investments are valued at the lower of cost or market and at the balance sheet
dates approximate fair market value.
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 the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The financial statements of the Company for the year ended December 31, 1996
and as of September 30, 1999 and for the nine months ended September 30, 1998
and 1999 and related footnote information are unaudited. All adjustments
consisting only of normal recurring adjustments, have been made which, in the
opinion of management, are necessary for a fair presentation of the interim
financial information. Results of operations for the nine months ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for any future period.
3. RISKS AND UNCERTAINTIES AND MANAGEMENT PLANS
The Company has incurred a net loss in each year since its founding and
expects to incur operating losses over the near term. The Company's ability to
achieve profitability will depend on several factors. These factors include
obtaining additional customers, increasing the order fulfillment capacity by
relocating to a new facility and hiring an adequate work force. No assurances
can be given that the Company will achieve profitability. Management plans to
complete the new facility construction during 1999, which will enable the
Company to handle substantially more business than its current facility. Once
the new facility is built and fully staffed, management plans on aggressively
marketing its services throughout the Chicagoland area.
F-34
<PAGE>
BEACON HOME DIRECT, INC.
D/B/A SCOTTY'S HOME MARKET
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996
AND AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND 1999 HAS NOT BEEN AUDITED)
3. RISKS AND UNCERTAINTIES AND MANAGEMENT PLANS (CONTINUED)
The Company has historically funded its operating losses and capital
investments primarily through equity capital obtained from private placement
sale of its stock. Absent a merger with another company that can fund these
requirements going forward, the Company anticipates additional private placement
sale of its stock.
4. PROPERTY AND EQUIPMENT
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Computer equipment.......................................... $175,042 $183,364 $1,202,203
Furniture and fixtures...................................... 186,645 116,466 756,035
Vehicles.................................................... 220,816 215,351 234,319
Refrigeration equipment..................................... 154,191 13,845 120,138
-------- -------- ----------
736,694 529,026 2,312,695
Accumulated depreciation and amortization................... (202,501) (124,118) (281,205)
-------- -------- ----------
$534,193 $404,908 $2,031,490
======== ======== ==========
</TABLE>
At December 31, 1997 and 1998, and September 30, 1999, the costs of fixed
assets held under capital leases and included above amounted to $87,091,
$268,775 and $1,528,860, respectively, and accumulated amortization related to
such assets amounted to $0, $20,624 and $70,112, respectively.
5. RELATED PARTY TRANSACTIONS
For the years ended December 31, 1996, 1997 and 1998 and the nine months
ended September 30, 1998 and 1999, the Company purchased $180,371, $320,307 and
$538,852 and $383,370 and $393,078, respectively, of product from a vendor that
is owned by a relative of a management employee and option holder of the
Company.
A director of the Company, who is also a shareholder, is employed by the
Company's investment advisory firm. In October 1998, this firm was paid
approximately $600,000 for fees relating to the sale of the Company's Series A
preferred stock.
6. LINE OF CREDIT
The Company has a line of credit arrangement with a bank that provides for
maximum borrowings of $750,000 and $1,500,000 for the years ending December 31,
1997 and 1998 and $3,000,000 for the nine months ended September 30, 1999.
Borrowings are secured by substantially all assets. Interest is at 0.25% above
the prime interest rate (8.50% and 7.75% as of December 31, 1997 and 1998,
respectively
F-35
<PAGE>
BEACON HOME DIRECT, INC.
D/B/A SCOTTY'S HOME MARKET
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996
AND AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND 1999 HAS NOT BEEN AUDITED)
6. LINE OF CREDIT (CONTINUED)
and 8.25% as of September 30, 1999). As of December 31, 1997 and 1998 and
September 30, 1999, the Company's outstanding borrowings under the line of
credit were $692,574 and $0 and $1,500,000, respectively. The Company was in
compliance with all covenants on December 31, 1997 and 1998 and September 30,
1999.
7. INCOME TAXES
As of December 31, 1998, the Company's federal and state tax net operating
loss, generated since October 6, 1998, was approximately $981,000. The net
operating loss expires in 2018. The Company has established a valuation
allowance of $392,000 against the deferred tax asset associated with this net
operating loss. The Company has also recorded a valuation allowance of
approximately $215,000 against the deferred tax asset related to expenses
associated with relocating the operations which are not currently deductible for
tax purposes.
8. EQUITY
On October 6, 1998, the Company received $10 million from an investor in
exchange for 10,000 Series A preferred shares that grant the investor certain
preferential rights and a nondetachable warrant to purchase 390,430 common
shares at an exercise price, subject to adjustment, of $2.64 per share. The
warrant vests based on the achievement of certain performance criteria by the
investor. The warrant is exercisable after the vesting date until October 6,
2008, or the effective date of a registration statement. The preferred shares
may be converted into the Company's common stock at the earlier of (a) April,
2000, or (b) a conversion event (e.g., merger, sale of assets), as defined. The
number of common shares into which the Series A preferred stock is convertible
is $10 million divided by the Series A conversion price (currently $2.64), as
defined. The Series A preferred shareholders can require the corporation to
purchase their shares at the redemption price, as defined, if a fundamental
change, as defined (e.g., change in control, merger, sale of assets or change in
the composition of the Board), occurs.
Subsequent to October, 2001, the Company may redeem all the Series A
preferred shares upon 60-day notice at the redemption price, as defined. Upon
such notice, the Series A preferred shareholders have the right to convert their
shares into common shares. An annual cumulative dividend of $50 per preferred
share accrues to the benefit of Series A preferred shareholders, until such
dividends are paid by the Board. The convertible redeemable Series A cumulative
preferred stock balance on the accompanying balance sheets includes such accrued
dividends. The purchase agreement with the investor contains covenants including
restrictions on indebtedness, loans or advances and transactions with holders of
more than 10% of the stock of the Company. The Company was in compliance with
all covenants as of December 31, 1998 and September 30, 1999.
The common stock entitles the holders to one vote per share. The
Series A preferred shareholders have no voting rights.
F-36
<PAGE>
BEACON HOME DIRECT, INC.
D/B/A SCOTTY'S HOME MARKET
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996
AND AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND 1999 HAS NOT BEEN AUDITED)
9. COMMON STOCK RESTRICTIONS
The stock restriction agreement provides that prior to transferring shares,
a shareholder must first notify the Company and other shareholders and give them
the option to purchase the shares that are being offered to the third party. The
purchase price of these shares would be the lesser of the price offered by the
proposed transferee or the applicable book value per share (book value is
defined as the difference between the Company's assets and liabilities as of the
close of the applicable calendar year, but not less than $1.00). The agreement
also states that if a shareholder involuntarily has to transfer his shares to a
third party (i.e., due to bankruptcy, notice of a judgment against or other
indebtedness of the shareholder, etc.), the shareholder must notify the Company
in writing of his intent. The Company will have the option to purchase the
shares before they could be transferred at the applicable book value per share.
10. STOCK OPTION PLAN
In October, 1997, the Company adopted the Restated and Amended Beacon Home
Direct, Inc. 1997 Stock Option Plan. As of September 30, 1999, 950,000 shares
are reserved for issuance under the plan. The plan provides that awards may be
granted to employees, officers, directors and certain consultants of the
Company. Awards may consist of nonstatutory stock options and incentive stock
options to purchase shares of the common stock. Incentive stock options
generally vest over a three-year period and certain stock options vest
immediately upon an initial public offering of the Company's common stock. The
stock option grants generally expire 10 years after the date of grant. As of
December 31, 1998 and September 30, 1999, there were approximately 331,910 and
125,610 shares available for future grants under the plan, respectively.
Stock option activity for the Company's plan is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------- SEPTEMBER 30,
1997 1998 1999
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period.......................... -- -- 262,500 $1.10 618,090 $1.16
Granted..................................................... 262,500 $1.10 368,240 1.21 396,400 3.00
Exercised................................................... -- -- -- -- (82,500) 1.11
Cancelled................................................... -- -- (12,650) 1.11 (190,100) 1.31
------- ----- ------- ----- -------- -----
Outstanding at end of period................................ 262,500 $1.10 618,090 $1.16 741,890 $2.11
======= ===== ======= ===== ======== =====
Options exercisable at end of period........................ 32,500 $0.99 111,566 $1.41 292,142 $1.22
======= ===== ======= ===== ======== =====
</TABLE>
F-37
<PAGE>
BEACON HOME DIRECT, INC.
D/B/A SCOTTY'S HOME MARKET
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996
AND AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND 1999 HAS NOT BEEN AUDITED)
10. STOCK OPTION PLAN (CONTINUED)
The following summarizes the options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
TOTAL NUMBER WEIGHTED AVERAGE NUMBER OF
OF OPTIONS REMAINING OPTIONS
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- -------------- ------------ ---------------- -----------
<S> <C> <C> <C>
$0.55.................................................. 7,000 8.75 7,000
$1.11.................................................. 602,690 9.27 96,166
$5.50.................................................. 8,400 9.71 8,400
------- --------- -------
618,090 9.5 years 111,566
======= ========= =======
</TABLE>
Had the Company accounted for its stock options in accordance with SFAS
No. 123, the net loss for the years ended December 31, 1997 and 1998 would have
been approximately $4,422 and $20,770 higher, respectively. The pro forma
disclosure is not likely to be indicative of pro forma results which may be
expected in future years because of the fact that options vest over several
years, compensation expense is recognized as the options vest and additional
awards may also be granted. For the years ended December 31, 1997 and 1998, the
Company recorded compensation expense of $11,142 and $10,251, respectively
associated with stock options, which is included in sales and marketing and
technology systems and development expenses in the accompanying statement of
operations.
For purposes of determining the pro forma effects of options granted, the
fair value of each option is estimated on the date of grant based on the
Black-Scholes option pricing model assuming, among other things, no dividend
yield, expected volatility of 50% for 1997 and 1998, risk-free interest rates of
5.0% in 1997 and 4.7% in 1998 and an expected life of three years.
11. ASSET IMPAIRMENT AND OTHER CHARGES
The highly competitive and rapidly evolving industry that the Company
operates in requires continual improvement in order fulfillment. In October
1998, management developed a plan to relocate its operations during 1999. As a
result, the Company will incur $220,000 in costs associated with the termination
of its existing leases. This event and the expectation for continued operating
losses triggered an impairment review of other long-lived assets associated with
this facility. As a result, the Company adjusted the carrying value of certain
long-lived assets, primarily warehouse and office equipment, to their estimated
fair value of approximately $70,000, resulting in a non-cash impairment loss of
approximately $320,000. These costs, which total $540,000, are included in
fulfillment center operations and general and administrative expenses in the
accompanying statement of operations for the year ended December 31, 1998.
In 1997, the Company recorded the write-off of a $300,000 note receivable
from its former owner, who is also a shareholder. The note receivable was issued
in connection with the purchase of the Company from the former owner, which
occurred in July 1995. The note receivable was to be cancelled on the earlier of
(a) his termination of employment other than for cause, as defined, (b) his
death, or
F-38
<PAGE>
BEACON HOME DIRECT, INC.
D/B/A SCOTTY'S HOME MARKET
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996
AND AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND 1999 HAS NOT BEEN AUDITED)
11. ASSET IMPAIRMENT AND OTHER CHARGES (CONTINUED)
(c) on the third anniversary date of the note. The Company decided to forgive
the note receivable in 1997. The write-off of the note receivable is included in
general and administrative expenses in the accompanying statement of operations.
12. WARRANTS
The following table summarizes the activity related to warrants at
December 31, 1996, 1997 and 1998, and September 30, 1999 and changes during the
periods then ended:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1996 1997 1998 SEPTEMBER 30, 1999
------------------- ------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period..................... 400,000 $1.09 400,000 $1.09 400,000 $1.09 640,430 $2.12
Granted.................. -- -- -- -- 390,430 2.64 -- --
Exercised................ -- -- -- -- (150,000) 0.74 -- --
-------- ----- ------- ----- -------- ----- ------- -----
Outstanding at end of
period..................... 400,000 $1.09 400,000 $1.09 640,430 $2.12 640,430 $2.12
======== ===== ======= ===== ======== ===== ======= =====
Warrants exercisable at end
of period.................. 400,000 $1.09 400,000 $1.09 250,000 $1.30 445,215 $1.89
======== ===== ======= ===== ======== ===== ======= =====
</TABLE>
The weighted average fair value of the warrant granted during 1998 and
vested in 1999 was calculated using the Black-Scholes option pricing model using
an expected volatility of 80%, a risk free interest rate of 4.5% and a term of
three years. This warrant, referred to in footnote 8, was vested due to the
achievement in May 1999 of certain performance criteria by an investor. The
Company recorded $336,746 of sales and marketing costs associated with this
warrant. There are approximately 190,000 additional shares that vest upon the
achievement of certain performance criteria. Once this performance criteria is
met, the related fair value will be calculated and the cost recorded in the year
of vesting.
F-39
<PAGE>
BEACON HOME DIRECT, INC.
D/B/A SCOTTY'S HOME MARKET
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996
AND AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND 1999 HAS NOT BEEN AUDITED)
13. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASES
The Company has capitalized certain computer equipment, vehicles and
furniture acquired through capital leases. These future minimum lease payments
as of December 31, 1998, are as follows:
<TABLE>
<S> <C>
1999........................................................ $106,306
2000........................................................ 92,542
2001........................................................ 25,227
--------
224,075
Less: amount representing interest.......................... (28,414)
--------
195,661
Less: current obligations................................... 87,009
--------
$108,652
========
</TABLE>
OPERATING LEASES
The Company leases office and distribution facilities, as well as various
equipment and vehicles under operating leases expiring through 2003. The future
minimum lease payments under these leases as of December 31, 1998, are as
follows:
<TABLE>
<S> <C>
1999........................................................ $264,820
2000........................................................ 243,329
2001........................................................ 180,426
2002........................................................ 83,491
2003........................................................ 3,947
--------
$776,013
========
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and the
nine months ended September 30, 1998 and 1999, was $64,723, $108,011 and
$163,459 and $116,040 and $159,529, respectively.
14. SUBSEQUENT EVENTS
Effective January 1, 1999, the Company established a contributory 401(k)
profit-sharing plan covering substantially all full time employees with a
service period greater than 180 days. The plan allows participants to contribute
up to 15% of their total compensation on a pretax basis, up to a specified
amount. The Company is not required to contribute to the plan.
F-40
<PAGE>
BEACON HOME DIRECT, INC.
D/B/A SCOTTY'S HOME MARKET
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996
AND AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND 1999 HAS NOT BEEN AUDITED)
14. SUBSEQUENT EVENTS (CONTINUED)
In 1999, the Company entered into a $390,000 contract for the software
license and implementation of a new warehouse management system which will be
completed in 1999.
In June 1999, the Company entered into an agreement whereby the new facility
currently under construction will be sold to a third party (upon satisfaction of
certain conditions detailed in the contract of sale) and leased back to the
Company for an initial term of 20 years. The sales price will be $6,500,000.
In August 1999, Beacon Home Direct, Inc. entered into a Master Lease
agreement with a third party which provides that the vendor shall lease up to
$4.0 million of cooler/freezer and warehouse material handling equipment and
computer equipment to the Company.
On October 18, 1999, Streamline.com, Inc. signed a definitive agreement to
combine with the Company. The proposed combination calls for the exchange of
Streamline.com, Inc. common stock for the Company's stock, which is expected to
result in the issuance of approximately 4.3 million shares of
Streamline.com, Inc. common stock. Following the combination, which was approved
by the board of directors of both companies, the Company will operate as
Streamline.com, Inc. The combination is expected to be treated as a pooling of
interests and expected to be completed by the first quarter of 2000 and is
subject to approval by the stockholders of each company and regulatory approval.
Prior to the closing of the combination with Streamline.com, Inc., the
holder of 10,000 shares of Series A preferred stock will convert those shares
into 3,787,879 shares of the Company's common stock. As part of this conversion,
all dividends previously accrued for the Series A preferred stock will be
cancelled pursuant to the Company's Articles of Incorporation.
F-41
<PAGE>
SCOTTY'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL STATEMENTS AND RESULTS OF OPERATIONS
OVERVIEW
Scotty's offers its customers time savings, convenience and personalized
service through its consumer direct grocery delivery service. Customers place
orders for grocery and related products with Scotty's via telephone, facsimile
and personal computer, and Scotty's delivers these products directly to its
customers' homes. Scotty's serves customers primarily in Chicago's northern and
western suburbs from its Lake Zurich, Illinois fulfillment center.
Scotty's has grown rapidly, with revenue increasing to $5.6 million in 1998
from $2.6 million in 1996. During this same period, Scotty's net loss increased
to $3.6 million in 1998 from $733,000 in 1996. Scotty's expects to continue to
incur losses as it increases expenditures in all areas of operations in order to
execute its business plan. In particular, Scotty's expects to incur costs
related to expanding into new service areas in the metropolitan Chicago area,
opening its new, highly automated fulfillment center, increasing its sales and
marketing efforts and continuing its investment in technology.
Due to Scotty's history of net operating losses, it currently pays no
federal or state income tax. As of December 31, 1998, Scotty's had federal and
state net operating loss carry forwards of approximately $981,000. The net
operating loss expires in 2018. These net operating losses are available to
offset future income tax obligations unless federal or state tax law
restrictions, such as those related to an ownership change as defined in the
Internal Revenue Code, limit Scotty's from doing so.
COMPONENTS OF REVENUE
Scotty's has two primary sources of revenue. The majority of Scotty's
revenue is generated by the sale of grocery and related products that Scotty's
delivers to customers' homes when customer orders are received. Scotty's charges
customers set retail prices for the products sold. Product revenue is comprised
of the retail prices charged to customers for these products. The wholesale
prices that Scotty's pays its distributors and suppliers for such products are
included in cost of revenue. In some cases, customers also pay Scotty's a
delivery fee, which is based on the amount of the order, when the order is
received by Scotty's in relation to when the customer requests delivery and the
method by which the order is placed. Revenue from products and delivery fees are
recognized upon delivery to the customer.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
TOTAL REVENUE. Total revenue increased to $5.3 million in the nine months
ended September 30, 1999 from $3.9 million in the comparable period in 1998, an
increase of 35.5%. This increase was primarily due to the continuing expansion
of Scotty's customer base, the corresponding increase in customer orders, and an
increase in the average order size.
PRODUCT REVENUE, NET. Product revenue, net, is comprised of the retail
prices customers pay to Scotty's for the products sold, net of returns. Product
revenue increased to $5.2 million in the nine months ended September 30, 1999
from $3.8 million in the comparable period in 1998, an increase of 36.3%. The
increase in revenue was the result of
- an increase in Scotty's customer base to approximately 3,900 at
September 30, 1999, from approximately 3,100 at September 30, 1998
- an increase in the average order size to $131 in the nine months ended
September 30, 1999 from $122 in the comparable period in 1998
- an increase in the number of customer orders to approximately 41,000 in
the nine months ended September 30, 1999, from approximately 32,000 in the
comparable period in 1998
F-42
<PAGE>
In the first half of 1999, Scotty's increased its service area to include 35%
more suburban households in the metropolitan Chicago area.
DELIVERY FEES. In some cases, Scotty's customers pay delivery fees in
addition to the amounts paid for the products delivered to their homes. Revenue
from these fees increased to $116,000 in the nine months ended September 30,
1999, from $108,000 in the comparable period in1998, an increase of 7.5%, due to
an increase in the number of customer orders. Delivery fees as a percentage of
total revenue decreased to 2.2% in the nine months ended September 30, 1999,
from 2.7% in the comparable in 1998, primarily due to Scotty's decision in 1999
to discontinue offering delivery to customers on the same day that their orders
were placed, which had previously generated higher delivery fees.
COST OF REVENUE. The cost of revenue is comprised of wholesale costs of
products sold to customers. The cost of revenue increased to $3.7 million, or
68.6% of total revenues, in the nine months ended September 30, 1999, from
$2.8 million, or 72.0% of total revenues in the comparable period in 1998. The
decrease in the cost of revenue as a percentage of total revenue in 1999
resulted from Scotty's continued efforts to improve its product assortment,
introduce higher margin products, reduce the cost of products purchased from its
suppliers and continually re-evaluate its pricing relative to supermarkets in
the Chicago area.
FULFILLMENT CENTER OPERATIONS. Expenses attributable to fulfillment center
operations include costs associated with managing the facility and processing
orders, including salaries and wages, employee benefits, facility rent, utility
costs, vehicle expenses and order processing fees. These expenses increased to
$1.8 million, or 33.4% of total revenue, in the nine months ended September 30,
1999, from $1.3 million, or 33.0% of total revenue, in the comparable period in
1998, an increase of 37.3%. The increase in fulfillment center expenses as a
percentage of total revenue resulted primarily from an increase in management
and quality control staff in fulfillment operations and higher hourly pay rates
for fulfillment employees.
SALES AND MARKETING. Sales and marketing expenses include general marketing
expenses and the selling and marketing costs associated with acquiring
customers, including related salaries and wages, benefits and administrative
costs. Sales and marketing expenses increased to $1.5 million, or 28.2% of total
revenue, for the nine months ended September 30, 1999 from $515,000, or 13.1% of
total revenue, in the comparable period in 1998, an increase of 191.9%. This
increase, as well as the higher percentage of total revenue, was due to
additional advertising and promotional activities undertaken to acquire new
customers, expansion into additional service areas, an increase in the marketing
and sales staff and a non-cash charge resulting from a warrant earned by
Scotty's preferred shareholder in 1999 pursuant to the satisfaction of specified
marketing-related conditions under the preferred stock purchase agreement.
TECHNOLOGY SYSTEMS AND DEVELOPMENT. Expenses attributable to technology
systems and development include the non-capitalized costs associated with
- development of technology
- maintenance, ongoing enhancements
- information system personnel and consultants
- amortization of purchased and capitalized software costs
These expenses increased to $490,000 for the nine months ended September 30,
1999, from $302,000, in the comparable period in 1998, an increase of 62.4%,
primarily due to the costs associated with acquiring, maintaining, enhancing and
integrating Scotty's technology systems. Certain costs relating to
F-43
<PAGE>
systems that will be installed in the new fulfillment center have been expensed
in 1999, including costs related to order fulfillment, enterprise resource
planning and order entry systems.
GENERAL AND ADMINISTRATIVE. General and administrative costs include
corporate salaries and wages, employee benefits, corporate facility costs and
depreciation, amortization and general and administrative expenses, including
office equipment and supplies, telephone expenses, travel costs and legal, audit
and other consulting fees. These costs increased to $2.4 million, or 45.5% of
total revenues, for the nine months ended September 30, 1999, from
$1.0 million, or 26.6% of total revenues, in the comparable period in 1998, an
increase of 131.5%, primarily due to the addition of management and
administrative staff and other costs to support continued corporate growth and
planned expansion.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, increased to
$66,000 income in the nine months ended September 30, 1999, from an expense of
$44,000 in the comparable period in 1998 primarily due to increased interest
income in 1999 from higher cash balances resulting from Scotty's receipt of
approximately $10 million from the sale of preferred stock to an investor in
October 1998 allowing Scotty's to earn interest on a portion of these funds in
1999.
1998 COMPARED TO 1997
TOTAL REVENUE. Total revenue increased to $5.6 million in the twelve months
ended December 31, 1998 from $3.9 million in 1997, an increase of 43.9%. This
increase was primarily due to the continuing expansion of Scotty's customer
base, the corresponding increase in customer orders and an increase in the
average order size.
PRODUCT REVENUE, NET. Product revenue increased to $5.4 million in the
twelve months ended December 31, 1998 from $3.8 million in 1997, an increase of
44.1%. The increase in revenue was the result of
- an increase in Scotty's customer base to approximately 3,300 at
December 31, 1998 from approximately 2,300 at December 31, 1997
- an increase in the average order size to $124 in 1998 from $117 in 1997
- an increase in the number of customer orders to approximately 45,000 in
the twelve months ended December 31, 1998 from approximately 33,000 in
1997
In 1998, Scotty's increased its service area to include 33% more households in
the metropolitan Chicago area.
DELIVERY FEES. Revenue from these fees increased to $152,000 in the twelve
months ended December 31, 1998, from $113,000 in 1997, an increase of 34.7%, due
to the increase in customer orders. Delivery fees as a percentage of total
revenue decreased to 2.7% in the twelve months ended December 31, 1998 from 2.9%
in 1997.
COST OF REVENUE. The cost of revenue increased to $4.0 million, or 71.2% of
total revenues, in the twelve months ended December 31, 1998, from
$2.9 million, or 73.6% of total revenues in 1997. The decrease in cost of
revenue as a percentage of total revenue resulted from Scotty's continued
efforts to improve its product assortment, introduce higher margin products,
reduce the cost of products purchased from its suppliers and continually
re-evaluate its pricing relative to supermarkets in the metropolitan Chicago
area.
FULFILLMENT CENTER OPERATIONS. Fulfillment center operations expenses
increased to $2.3 million, or 41.6% of total revenue, in the twelve months ended
December 31, 1998, from $1.4 million, or 35.6% of total revenue, in 1997, an
increase of 68.1%. Included in fulfillment center expenses for the twelve months
ended December 31, 1998, is a charge of $485,000, or 8.7% of total revenue,
related to the
F-44
<PAGE>
write-off of assets and other costs associated with the early termination of
certain leases. Excluding this charge, fulfillment center expenses were
$1.8 million, or 32.9% of total revenues. The decrease in fulfillment center
expenses as a percentage of total revenue in 1998, excluding this charge,
compared to 1997 was due to greater operating efficiencies resulting from higher
order volume.
SALES AND MARKETING. Sales and marketing expenses increased to $700,000, or
12.5% of total revenue, for the twelve months ended December 31, 1998, from
$323,000, or 8.3% of total revenue, in 1997, an increase of 116.7%. This
increase, as well as the higher percentage of total revenue, was due to
additional advertising and promotional activities undertaken to acquire new
customers, expansion into additional service areas and an increase in the
marketing and sales staff.
TECHNOLOGY SYSTEMS AND DEVELOPMENT. Technology systems and development
expenses increased to $498,000 for the twelve months ended December 31, 1998,
from $293,000 in 1997, an increase of 70.3%, primarily due to the costs
associated with acquiring, maintaining, enhancing and integrating Scotty's
technology systems.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased to
$1.8 million, or 31.6% of total revenues, for the twelve months ended
December 31, 1998, from $951,000, or 24.5% of total revenues in 1997, an
increase of 85.4%, primarily due to the addition of management and
administrative staff and other costs to support continued corporate growth and
planned expansion.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, increased to
$34,000 income in the twelve months ended December 31, 1998, from an expense of
$16,000 in 1997, primarily due to increased interest income in 1998 from higher
cash balances resulting from Scotty's receipt of approximately $10 million from
the sale of preferred stock to an investor in October 1998.
1997 COMPARED TO 1996
TOTAL REVENUE. Total revenue increased to $3.9 million in the twelve months
ended December 31, 1997, from $2.6 million in 1996, an increase of 51.1%. This
increase was primarily due to the continuing expansion of Scotty's customer
base, the corresponding increase in customer orders and an increase in the
average order size.
PRODUCT REVENUE, NET. Product revenue increased to $3.8 million in the
twelve months ended December 31, 1997, from $2.5 million in 1996, an increase of
50.9%. The increase in revenue was the result of an increase in Scotty's
customer base to approximately 2,300 at December 31, 1997 from approximately
1,500 at December 31, 1996, an increase of 54.6%.
DELIVERY FEES. Revenue from these fees increased to $113,000 in the twelve
months ended December 31, 1997, from $72,000 in 1996, an increase of 56.6%, due
to the increase in customer orders. Delivery fees as a percentage of total
revenue increased to 2.9% in the twelve months ended December 31, 1997 from 2.8%
in the comparable period for 1996.
COST OF REVENUE. The cost of revenue increased to $2.9 million, or 73.6% of
total revenues, in the twelve months ended December 31, 1997, from
$1.9 million, or 75.2% of total revenues in 1996. The decrease in cost of
revenue as a percentage of total revenue resulted from Scotty's continued
efforts to improve its product assortment, introduce higher margin products,
reduce the cost of products purchased from its suppliers and continually
re-evaluate its pricing relative to supermarkets in the metropolitan Chicago
area.
FULFILLMENT CENTER OPERATIONS. These expenses increased to $1.4 million, or
35.6% of total revenue, in the twelve months ended December 31, 1997, from
$1.0 million, or 40.8% of total revenue, in 1996, an increase of 31.9%. The
decrease in fulfillment center expenses as a percentage of total revenue was due
to greater operational efficiencies resulting from higher order volume.
F-45
<PAGE>
SALES AND MARKETING. Sales and marketing expenses increased to $323,000, or
8.3% of total revenue, for the twelve months ended December 31, 1997, from
$157,000, or 6.1% of total revenue, in 1996, an increase of 105.2%. This
increase, as well as the higher percentage of total revenue, was due to
additional advertising and promotional activities undertaken to acquire new
customers, expansion into additional service areas and an increase in the
marketing and sales staff.
TECHNOLOGY SYSTEMS AND DEVELOPMENT. Technology systems and development
expenses increased to $293,000 for the twelve months ended December 31, 1997,
from $63,000 in 1996, an increase of 362.6%, primarily due to the costs
associated with acquiring, maintaining, enhancing and integrating Scotty's
technology systems.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased to
$951,000, or 24.5% of total revenues, for the twelve months ended December 31,
1997, from $110,000, or 4.3% of total revenues in 1996, an increase of 761.3%,
primarily due to the addition of management and administrative staff and other
costs to support continued corporate growth and planned expansion.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, decreased to an
expense of $16,000 in the twelve months ended December 31, 1997 from income of
$8,000 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, Scotty's had cash, cash equivalents and marketable
securities of $1.0 million compared to $2,000 at September 30, 1998. Operating
activities used cash of $7.5 million in the nine months ended September 30,
1999, primarily due to the net loss incurred in the period and deposits made in
1999 relating to Scotty's new fulfillment center, compared to cash used of
$1.8 million for the same period in 1998. Investing activities used cash of
$1.7 million in the nine months ended September 30, 1999, primarily due to the
purchase of property and equipment for Scotty's new fulfillment center and costs
associated with purchased and capitalized software for Scotty's customer
ordering and warehouse management systems, compared to cash used of $302,000 for
the same period in 1998. Financing activities provided cash of $2.9 million in
the nine months ended September 30, 1999, as compared to providing cash of
$2.1 million for the same period in 1998.
Scotty's finances operations and capital requirements primarily through its
bank line of credit and proceeds from the sale of common stock and preferred
stock. In June 1999, Scotty's entered into an agreement whereby the new
fulfillment center currently under construction will be sold to a third party
(upon satisfaction of certain conditions detailed in the contract of sale) and
leased back to Scotty's for an initial term of 20 years. The sale price will be
$6.5 million. Scotty's expects to open this facility in the first quarter of
2000, and lease approximately $4.0 million of cooler/freezer and warehouse
material handling equipment and certain computer equipment, which will be leased
under a master lease agreement, dated August 1999, with Great American Leasing
Company, L.L.C. Additionally, Scotty's expects to incur operating losses from
this facility at least through 2000.
Scotty's has historically funded its operating losses and capital
investments primarily through equity capital obtained from private placement
sale of its stock. Absent a merger with another company that can fund these
requirements going forward, Scotty's anticipates an additional private placement
sale of its stock.
MARKET RISK
To date, Scotty's has not utilized derivative financial instruments or
derivative commodity instruments. Scotty's invests cash in high quality money
market funds, which are subject to minimal credit and market risk. Therefore,
Scotty's believes that the market risks associated with these financial
instruments are immaterial.
F-46
<PAGE>
YEAR 2000 COMPLIANCE
Potential Year 2000 problems stem from the fact that many computer systems
include software and hardware that are unable to distinguish 21st century dates
from those in the 20th century. As a result, computer systems used by many
companies and governmental agencies may need to be upgraded to avoid risk of
system failure or miscalculations that can disrupt normal business activities.
STATE OF READINESS.
Scotty's has assessed its computer systems to determine whether they present
a Year 2000 problem for the company. Scotty's has also reviewed Year 2000
readiness of its vendors that it relies upon.
INTERNAL COMPUTER SYSTEMS. Scotty's uses the following principal systems to
operate its business:
- a web site and web-based ordering system for customers and customer
service personnel
- an older direct dial-up customer ordering system that will be discontinued
in 1999
- an enterprise resource planning systems for vendor and item maintenance,
purchasing, and accounting
- a warehouse management system for inventory management and order
fulfillment
- servers and individual workstations, including personal computers and
network systems.
Scotty's currently believes that all of its critical systems are Year 2000
compliant. Scotty's has received written assurance from its software and
hardware providers that their products are Year 2000 compliant. The web-based
ordering system was developed in-house, and was developed to ensure Year 2000
compliance. Scotty's has also conducted Year 2000 compliance testing of its
individual workstations, system servers, and network systems and has certified
them as Year 2000 compliant. To date, Scotty's has not discovered Year 2000
problems in these internal systems.
THIRD-PARTY COMPLIANCE. Scotty's material third party business
relationships include customers who order products via personal computer,
telephone and fax; and vendors and suppliers who provide the goods that Scotty's
offers to its customers. Scotty's is unable to predict the Year 2000 readiness
of its customers or the systems they use to place orders with Scotty's. Scotty's
business could be materially affected if a significant number of customers were
unable to use their personal computers, telephones or fax to place their orders.
Any Year 2000 problems in the systems used by Scotty's suppliers could result in
Scotty's being unable to obtain certain products in a timely manner. Scotty's
has made inquiries regarding the Year 2000 readiness of its main suppliers and
has received confirmation of their readiness.
NON-INFORMATION SYSTEMS. Non-information systems used in Scotty's business,
such as control equipment for HVAC, telephone systems, delivery vehicles, and
refrigeration and other equipment, may contain date-processing embedded
technology. Any Year 2000 problems in this equipment could cause failures that
could disrupt Scotty's operations. Scotty's has evaluated the equipment that are
being installed in its new fulfillment center and believes that they are not
subject to Year 2000 problems.
COSTS.
Scotty's Year 2000 assessment, remediation and testing activities have been
conducted by internal personnel, and it has not recorded the amount of employee
time expended on these tasks. Accordingly, Scotty's is unable to determine the
cost of employee time devoted to Year 2000 matters. Scotty's did not have to
incur, and has not incurred, significant costs to assess and remediate its
systems for Year 2000 compliance.
F-47
<PAGE>
MOST REASONABLE WORST CASE SCENARIO.
It is possible that problems related to the Year 2000 could disrupt one or
more of the following systems:
- customer personal computer-based ordering
- credit card settlement
In each case, there is a low technology alternative available that would
allow Scotty's to continue to run its business. However, most of the
alternatives would result in increased costs, reduced revenues or delivery
delays, which would increase Scotty's operating losses. Extended disruptions may
impact long-term customer and supplier relationships, which would further impact
future profitability.
CONTINGENCY PLAN.
Other than the short-term, low technology alternatives discussed above, to
date Scotty's has not formulated contingency plans related to the failure of its
or a third-party's systems or equipment should they prove to not be Year 2000
compliant.
F-48
<PAGE>
EXHIBIT A
CONFORMED COPY
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
This Agreement and Plan of Merger and Reorganization (this "Agreement"),
dated as of October 18, 1999, is by and among Streamline.com, Inc.
("Streamline"), a Delaware corporation; Streamsub, Inc. ("Merger Sub"), a
Delaware corporation that is a wholly owned subsidiary of Streamline; Beacon
Home Direct, Inc. (d/b/a Scotty's Home Market) (the "Company"), an Illinois
corporation; and the Stockholders listed on EXHIBIT A attached hereto (the
"Stockholders") and the Other Stockholders who shall subsequently become parties
to this Agreement.
The parties desire that Merger Sub be merged with and into the Company,
subject to the terms and conditions set forth in this Agreement.
Certain terms used in this Agreement are defined in Section 20.
1. CLOSING. Subject to the other provisions of this Agreement, a closing
(the "Closing") will be held at the offices of Bingham Dana LLP, 150 Federal
Street, Boston, Massachusetts 02110, as soon as is reasonably practicable
following satisfaction or waiver of the conditions set forth in Sections 12
through 14 (the date on which the Closing actually occurs, the "Closing Date").
On the Closing Date, Merger Sub and the Company will (i) execute a Certificate
of Merger (the "Merger Certificate") substantially in the form of the attached
EXHIBIT B and file the Merger Certificate with the Delaware Secretary of State
and the Recorder for the County of New Castle, Delaware, in order to cause the
merger of Merger Sub with and into the Company (the "Merger") to be effected in
accordance with the laws of the State of Delaware and (ii) execute the Articles
of Merger (the "Articles of Merger") substantially in the form of the attached
EXHIBIT C and file it with the Illinois Secretary of State, in order to cause
the Merger to be effected in accordance with the laws of the State of Illinois.
The Merger will be effective (a) under the DGCL upon the filing of the Merger
Certificate with the Secretary of State of the State of Delaware and (b) under
the IBCA upon the filing of the Articles of Merger with the Secretary of State
of the State of Illinois and the issuance of a certificate of merger by the
Secretary of State of the State of Illinois, (or such later time as may be
agreed by each of the parties hereto, as specified in the Merger Certificate or
the Articles of Merger and in accordance with the provisions of the applicable
law of Delaware and Illinois, respectively) (the "Effective Time"). For all
purposes, all of the document deliveries and other actions to occur at the
Closing will be conclusively presumed to have occurred at the same time,
immediately before the Effective Time.
2. EFFECT OF MERGER. At the Effective Time, automatically and without
further action:
2.1. SURVIVING CORPORATION. Merger Sub will be merged with and into the
Company and the separate existence of Merger Sub will cease. The Company will
continue in existence as the surviving corporation in the Merger (the "Surviving
Corporation"). The Merger shall have further effects as set forth in the IBCA
and DGCL.
2.2. ARTICLES OF INCORPORATION. The Company's Articles of Incorporation,
as in effect immediately before the Effective Time, will be the Articles of
Incorporation of the Surviving Corporation.
2.3. BY-LAWS. The Company's by-laws, as in effect immediately before the
Effective Time, will be the by-laws of the Surviving Corporation.
2.4. DIRECTORS AND OFFICERS. From and after the Effective Time, the
respective officers and members of the Board of Directors of the Surviving
Corporation will consist of the respective officers and members of the Board of
Directors of Merger Sub as of immediately prior to the Merger, each such person
to hold office, subject to the applicable provisions of the Articles of
Incorporation and the by-laws of the Surviving Corporation, until the next
annual meeting of directors or stockholders, as the case may be, of the
Surviving Corporation and until his or her successor will be duly elected or
appointed and will duly qualify.
2.5. CONVERSION OF COMPANY STOCK.
(A) COMPANY COMMON STOCK. Each share of Company Common Stock issued and
outstanding immediately before the Effective Time (other than any Dissenting
Shares (as defined in Section 2.7)
<PAGE>
and other than any shares held directly or indirectly by Streamline or the
Company or any of their respective Subsidiaries) will be converted into and
become such number of shares of Streamline Common Stock as is equal to the
Exchange Ratio, subject to adjustment as provided in Section 2.5(c) and to the
payment of cash adjustments in lieu of the issuance of fractional shares as
provided in Section 3.6.
(B) COMPANY PREFERRED STOCK. If not previously converted into Company
Common Stock, each share of Company Preferred Stock issued and outstanding
immediately before the Effective Time (other than any Dissenting Shares (as
defined in Section 2.7) and other than any shares held directly or indirectly by
Streamline or the Company or any of their respective Subsidiaries) will be
converted into and become that number of shares of Streamline Common Stock into
which that number of shares of Company Common Stock into which such share of
Company Preferred Stock was convertible immediately before the Effective Time
would have been converted pursuant to Section 2.5(a), subject to adjustment as
provided in Section 2.5(c) and to the payment of cash adjustments in lieu of the
issuance of fractional shares as provided in Section 3.6.
(C) ADJUSTMENT OF EXCHANGE RATIO.
(I) In the event that, subsequent to the date of this Agreement but before
the Effective Time, the shares of Streamline Common Stock or Company Stock
(either Company Common Stock or Company Preferred Stock or both) issued and
outstanding as of the date of this Agreement are increased, decreased, or
changed into or exchanged for a different number or kind of shares or securities
through reorganization, recapitalization, reclassification, stock dividend,
stock split, reverse stock split, or other similar changes in Streamline's or
the Company's capitalization, then an appropriate and proportionate adjustment
will be made to the Exchange Ratio so that each holder of Company Stock
immediately before the Effective Time will receive pursuant to this
Section 2.5: (i) in the event of any such change with respect to Company Stock,
that number of shares of Streamline Common Stock that such holder would have
received if such change had never occurred and (ii) in the event of any such
change with respect to Streamline Common Stock, that number of shares of
Streamline Common Stock that such holder would have received as a result of such
change if such change had occurred immediately after the Effective Time (and
such holders were treated for purposes of such change as holders of Streamline
Common Stock).
(II) In the event that the Net Cash Balance of the Company as calculated on
the Final Net Cash Statement (as defined in Section 17(c) hereof), as of the
Calculation Date is negative, (A) the "Net Cash Adjustment" shall be equal to
the Negative Net Cash Amount as of the Calculation Date and (B) the Exchange
Ratio shall be adjusted as set forth in clause 2.5(c)(iv) below.
(III) In the event that the Sale Leaseback Proceeds are less than
$1,300,000, (A) the "Sale Leaseback Adjustment" shall be equal to the amount by
which $1,300,000 exceeds the Sale Leaseback Proceeds and (B) the Exchange Ratio
shall be adjusted as set forth in clause 2.5(c)(iv) below.
(IV) The Exchange Ratio shall be adjusted pursuant to clauses
2,5(c)(ii) and (iii) above and pursuant to another arrangement between
Streamline and the Company, such that the Number of Shares Issued shall be
reduced by the quotient of (x) the sum of the Net Cash Adjustment, if any, plus
and the Sale Leaseback Adjustment, if any, plus $200,000 divided by (y) the
Closing Price Per Share.
2.6. CANCELLATION OF TREASURY STOCK, ETC. At the Effective Time, each
share of Company Stock held directly or indirectly by Streamline or the Company
or any of their respective Subsidiaries will be canceled and will cease to
exist, and no payment will be made with respect thereto.
2.7. DISSENTING SHARES. Each share of Company Stock that, immediately
before the Effective Time, was held by any person who has duly exercised the
appraisal rights afforded to dissenting stockholders pursuant to Sections 11.65
and 11.70 of the Illinois Business Corporation Act of 1983 (such law, the
"IBCA"; such shares, collectively, "Dissenting Shares") will be converted into
the right to receive the fair value of such shares as determined in accordance
with the provisions of such sections;
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provided, however, that the provisions of this Section 2.7 shall not supersede
or in any other way affect the enforceability of any separate agreement between
the Company and any Stockholder requiring such Stockholder to approve this
Agreement and the Merger, and prohibiting such Stockholder from exercising such
appraisal rights.
2.8. CONVERSION OF MERGER SUB'S SHARES. Each share of the common stock,
$0.01 par value per share, of Merger Sub that was issued and outstanding
immediately before the Effective Time will be converted into and become one
common share, no par value per share, of the Surviving Corporation.
3. PROCEDURES; ESCROWED SHARES.
3.1. CERTIFICATES. Immediately after the Effective Time, stock
certificates (each, a "Certificate," and collectively, the "Certificates")
representing shares of Company Stock that have been converted into shares of
Streamline Common Stock in the Merger will be conclusively deemed to represent
such shares of Streamline Common Stock.
3.2. EXCHANGE OF CERTIFICATES. As promptly as practicable after the
Effective Time, Streamline or its transfer agent for Streamline Common Stock
will send to each Company Stockholder transmittal materials for use in
exchanging its Certificates for certificates for the shares of Streamline Common
Stock into which such shares of Company Common Stock have been converted. Upon
surrender of a Certificate to Streamline or its transfer agent, as the case may
be, together with a duly executed letter of transmittal and any other reasonably
required documents, the holder of such Certificate will be entitled to receive,
in exchange therefor, a certificate for the number of shares of Streamline
Common Stock to which such holder is entitled (subject to the escrow
arrangements referred to in Section 3.3), and such Certificate will be canceled.
3.3. ESCROWED SHARES. Notwithstanding any other provision of this
Agreement, at the Closing, Streamline and the Stockholders' Representative and
the Escrow Agent will execute and deliver an Escrow Agreement in the form of the
attached (with such additional revisions, prior to the Closing, as Streamline
and the Company may mutually agree after consultation with the Escrow Agent)
EXHIBIT D. Under the Escrow Agreement, the Stockholders will secure their
indemnification obligations hereunder by escrowing 10% of the shares of
Streamline Common Stock into which the shares of Company Stock are converted in
the Merger (the "Escrowed Shares").
3.4. DISTRIBUTIONS. No dividend or other distribution payable after the
Effective Time with respect to Streamline Common Stock will be paid to the
holder of any unsurrendered Certificate until the holder thereof surrenders such
Certificate, at which time such holder will receive all dividends and
distributions, without interest thereon, previously payable but withheld from
such holder pursuant hereto.
3.5. NO TRANSFERS. Immediately after the Effective Time, no transfers of
shares of Company Stock will be made in the stock transfer books of the Company.
If, after the Effective Time, Certificates are presented (for transfer or
otherwise) to the Surviving Corporation or its transfer agent for Company Stock,
they will be canceled and exchanged for the shares of Streamline Common Stock
deliverable in respect thereof as determined in accordance with this Agreement
(or returned to the presenting person, if such Certificate represents Dissenting
Shares).
3.6. NO FRACTIONAL SHARES. In lieu of the issuance of fractional shares of
Streamline Common Stock, cash adjustments will be paid (without interest) to the
Company Stockholders in respect of any fractional share of Streamline Common
Stock that would otherwise be issuable to them and the amount of such cash
adjustments will be determined by multiplying each relevant holder's fractional
interest by the Closing Price Per Share. For purposes of determining whether,
and in what amounts, a particular Company Stockholder would be entitled to
receive cash adjustments under this section, shares of record held by such
holder and represented by two or more Certificates will be aggregated.
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<PAGE>
3.7. TERMINATION OF RIGHTS. After the Effective Time, holders of Company
Stock will cease to be, and will have no rights as, stockholders of the Company,
other than (i) in the case of shares other than Dissenting Shares, the rights to
receive shares of Streamline Common Stock into which such shares have been
converted and/or payments in lieu of fractional shares, as provided in this
Agreement, and (ii) in the case of Dissenting Shares, the rights afforded to the
holders thereof under Sections 11.65 and 11.70 of the IBCA and (iii) rights
under this Agreement and the Escrow Agreement.
3.8. ABANDONED PROPERTY. Neither Streamline nor the Company nor any other
person will be liable to any holder or former holder of shares of Company Stock
for any shares, or any dividends or other distributions with respect thereto,
properly delivered to a public official pursuant to applicable abandoned
property, escheat, or similar laws.
3.9. LOST CERTIFICATES, ETC. In the event that any Certificate has been
lost, stolen, or destroyed, then upon receipt of appropriate evidence as to such
loss, theft, or destruction, and to the ownership of such Certificate by the
person claiming such Certificate to be lost, stolen, or destroyed, and the
receipt by Streamline or its transfer agent for Streamline Common Stock of
appropriate and customary affidavit of loss or personal indemnification
undertaking documentation, Streamline or such transfer agent will issue in
exchange for such lost, stolen, or destroyed Certificate the shares of
Streamline Common Stock and the fractional share payment, if any, deliverable in
respect thereof as determined in accordance with this Agreement.
4. COMPANY STOCK OPTIONS AND WARRANTS.
(a) After the Effective Time, each option to purchase shares of Company
Common Stock (a "Company Option") granted pursuant to the Company's Amended and
Restated Beacon Home Direct, Inc. 1997 Stock Option Plan (the "Company Option
Plan") that is outstanding immediately before the Effective Time will be deemed
to be an option granted pursuant to Streamline's 1993 Employee Option Plan and
the holder thereof will be entitled, in accordance with the terms of such
Company Option, to purchase from Streamline up to a number of whole shares of
Streamline Common Stock equal to the product of (i) the number of shares of
Company Common Stock subject to such Company Option, multiplied by (ii) the
Exchange Ratio, at a price per share of Streamline Common Stock determined by
dividing the exercise price per share of Company Common Stock provided for in
such Company Option by the Exchange Ratio. No scrip or fractional share
interests will be issued in connection with the exercise of any Company Option.
Except for the foregoing, each Company Option will remain subject after the
Effective Time to the same terms and conditions (including without limitation
those with respect to dates on which and the proportionate extent to which such
Company Options may be exercised) as were applicable to such Company Option
immediately before the Effective Time. The Company hereby represents and
warrants to Streamline that the aggregate number of shares of Company Common
Stock subject to outstanding Company Options is not greater than 779,240 shares
as of the date hereof, and agrees not to grant or issue any additional Company
Options, except as set forth on the Company Disclosure Schedule.
(b) After the Effective Time, each outstanding warrant to purchase shares of
Company Common Stock ("Company Warrant") that is outstanding immediately before
the Effective Time will be deemed to be a warrant to purchase Streamline Common
Stock ("Streamline Warrant"), and the holder thereof will be entitled, in
accordance with the terms of such warrant to purchase from Streamline up to the
number of whole shares of Streamline Common Stock equal to the product of
(i) the number of shares of Company Common Stock for which the applicable
Company Warrant was exercisable, multiplied by (ii) the Exchange Ratio, at a
price per share of Streamline Common Stock determined by dividing the exercise
price per share of the applicable Company Common Stock provided for in such
warrant by the Exchange Ratio. No scrip or fractional share interests will be
issued in connection with the exercise of any Streamline Warrant. Except for the
foregoing, each Company Warrant will remain subject after the Effective Time to
the same terms and conditions (including without limitation those with respect
to
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<PAGE>
dates on which and the proportionate extent to which such Company Warrant may be
exercised) as were applicable to such Company Warrant immediately before the
Effective Time. The Company hereby represents and warrants to Streamline that
the aggregate number of shares of Company Common Stock subject to outstanding
Company Warrants is not greater than 730,430 shares as of the date hereof and
agrees not to grant or issue any additional warrants to purchase Company Common
Stock, except as set forth in the Company Disclosure Schedule.
5. REGISTRATION OF STREAMLINE COMMON STOCK. As promptly as practicable,
following the earlier of (i) the date Streamline becomes eligible to file with
the SEC a registration statement on Form S-3, or (ii) the date which is nine
(9) months after the Closing Date, Streamline, at its expense will file with the
SEC a registration statement on Form S-3 or other appropriate form in order to
register for resale by the Company Stockholders and the Warrantholders all of
the shares of Streamline Common Stock (including the Escrowed Shares) to be
issued to such Company Stockholders and Warrantholders pursuant to the Merger.
Streamline will use its reasonable best efforts to cause this registration
statement to become effective as promptly as practicable and to remain effective
until the earlier of (i) the second anniversary of the Effective Date, or
(ii) such time at which all of the shares registered have been resold pursuant
to such registration statement or otherwise. Streamline further agrees to
supplement the prospectus contained in such registration statement or make
amendments to such registration statement, in each case as promptly as
practicable, if Streamline reasonably determines that developments relating to
Streamline necessitate such a filing as required by the rules, regulations or
instructions applicable to the registration form utilized by Streamline or by
the Securities Act. Streamline shall use its reasonable best efforts to cause
such shares to be listed on the Nasdaq National Market at its expense.
Streamline agrees to use its reasonable best efforts to timely file all periodic
reports required under the Exchange Act and to maintain the listing of the
Streamline Common Stock on the Nasdaq National Market for a period of at least
two years following the Effective Time. The registration statement and all such
periodic reports shall comply in all material respects with all applicable
requirements of the Securities Act and the Exchange Act and the rules and
regulations promulgated thereunder, and shall not contain any untrue statement
of a material fact or fail to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to Streamline as follows, subject in each case to such
exceptions as are specifically contemplated by this Agreement or as are set
forth in (i) the attached Disclosure Schedule of the Company (the "Company
Disclosure Schedule"), or (ii) except as provided in the final sentence of
Section 10.17, the disclosure supplements contemplated by that section.
Notwithstanding any other provision of this Agreement (except the final sentence
of Section 10.17), the Company Disclosure Schedule, or any such disclosure
supplement, each exception set forth in the Company Disclosure Schedule or any
such disclosure supplement will be deemed to qualify each representation and
warranty set forth in this Agreement (i) that is specifically identified (by
cross-reference or otherwise) in the Company Disclosure Schedule or such
disclosure supplement as being qualified by such exception, or (ii) with respect
to which the relevance of such exception is apparent on the face of the
disclosure of such exception set forth in the Company Disclosure Schedule or
such disclosure supplement, PROVIDED, in either case, that the relevant facts
are set forth in reasonable detail in the Company Disclosure Schedule or such
disclosure supplement.
6.1. INCORPORATION; AUTHORITY. The Company is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Illinois and has all requisite corporate power and authority to own or lease and
operate its properties and to carry on its business as now conducted. The
Company has delivered to Streamline complete and correct copies of its Articles
of Incorporation and by-laws, in each case with all amendments thereto.
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6.2. AUTHORIZATION AND ENFORCEABILITY. Subject to the approval of this
Agreement and the Merger by the Company Stockholders, the Company has all
requisite power and full legal right and authority (including due approval of
its Board of Directors and its stockholders, respectively) to enter into this
Agreement, to perform all of its agreements and obligations hereunder, and to
consummate the Merger and the other transactions contemplated hereby. This
Agreement has been duly executed and delivered by the Company and constitutes a
legal, valid, and binding obligation of the Company, enforceable against the
Company in accordance with its terms.
6.3. GOVERNMENTAL AND OTHER THIRD-PARTY CONSENTS, NON-CONTRAVENTION,
ETC. No consent, approval, or authorization of or registration, designation,
declaration, or filing with any governmental authority, federal or other, or any
other person, is required on the part of the Company in connection with the
execution, delivery, and performance of this Agreement or the consummation of
the Merger and the other transactions contemplated hereby, except (i) for
applicable requirements, if any, of the Exchange Act, the Securities Act, state
securities or "blue sky" laws and state takeover laws, the HSR Act, and filing
and recordation of appropriate merger documents as required by the IBCA and the
Delaware General Corporation Law ("DGCL") and (ii) as specified in Section 6.3
of the Company Disclosure Schedule. The execution, delivery, and performance of
this Agreement and the consummation of such transactions will not violate
(a) any provision of the Company's Articles of Incorporation or by-laws,
(b) any order, judgment, injunction, award or decree of any court or state or
federal governmental or regulatory body applicable to the Company, (iii) any
judgment, decree, order, statute, rule or regulation to which the Company is a
party or by or to which it or any of its assets is bound or subject, or
(iv) any agreement, instrument or other obligation to which the Company is a
party or by or to which it or any of its assets is bound or subject, except to
the extent that the failure to obtain any such consent, approval or
authorization would not, individually or in the aggregate, have a Material
Adverse Effect on the Company.
6.4. CAPITALIZATION. The authorized and outstanding capital stock and
other securities of the Company are as set forth in Section 6.4 of the Company
Disclosure Schedule. All of such outstanding shares of capital stock of the
Company are duly authorized, validly issued, fully paid, and non-assessable, and
all of such outstanding shares and other securities are owned of record as set
forth in Section 6.4 of the Company Disclosure Schedule, and were issued in
compliance with all applicable laws, including securities laws, and all
applicable preemptive or similar rights of any person. No person has any valid
right to rescind any purchase of any shares of the Company's capital stock or
other securities.
There are no agreements or other obligations on the part of the Company to
purchase or sell, and other than as set forth in Section 6.4 of the Company
Disclosure Schedule, no convertible or exchangeable securities, options,
warrants, or other rights to acquire from the Company any shares of its capital
stock or other securities. Section 6.4 of the Company Disclosure Schedule sets
forth the name of each person who holds any option, warrant or other right to
acquire shares of the Company's capital stock, the number and type of shares
subject to such option, warrant or right, and the per-share exercise price
payable therefor.
6.5. QUALIFICATION. The Company is duly qualified and in good standing as
a foreign corporation in all jurisdictions in which the character of its owned
or leased properties or the nature of its activities makes such qualification
necessary.
6.6. SUBSIDIARIES. Except as set forth in Section 6.6 of the Company
Disclosure Schedule, the Company does not have any Subsidiaries or own any legal
and/or beneficial interests in any person.
6.7. FINANCIAL STATEMENTS. Included in Section 6.7 of the Company
Disclosure Schedule are copies of (i) the audited balance sheet of the Company
as of December 31, 1997, certified by Arthur Andersen LLP, and the related
unaudited statements of operation, shareholders' equity and cash flows, the
audited balance sheet of the Company as of December 31, 1998 (such balance
sheet, the "Most
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Recent Audited Balance Sheet"), and the related audited statements of operation,
shareholders' equity and cash flows of the Company, for the fiscal year ended on
such date, certified by Arthur Andersen LLP and (ii) the unaudited balance sheet
of the Company as of August 31, 1999 (the "Most Recent Unaudited Balance Sheet),
and the related unaudited statements of operation, shareholders' equity and cash
flows, respectively, of the Company, for the 8-month period ended on such date.
Each of such financial statements is true and correct in all material respects
and has been prepared in accordance with generally accepted accounting
principles applied on a basis consistent with prior periods; each of such
balance sheets fairly presents in all material respects the financial condition
of the Company as of its respective date; and each of such statements of
operation, shareholders' equity and cash flows, respectively, fairly presents in
all material respects the results of operations and retained earnings, or cash
flows, as the case may be, of the Company for the period covered thereby; in
each case, subject, with respect to the unaudited financial statements referred
to in clause (ii) of this section, to the absence of footnote disclosure and to
normal, recurring end-of-period adjustments.
6.8. ABSENCE OF CERTAIN CHANGES. Except as set forth in Section 6.8 of the
Company Disclosure Schedule, since the Most Recent Audited Balance Sheet Date,
there has not been: (i) any change in the assets, liabilities, sales, income, or
business of the Company or in its relationships with suppliers, customers, or
lessors, other than changes that were both in the ordinary course of business
and have not had, either in any case or in the aggregate, a Material Adverse
Effect on the Company; (ii) any acquisition or disposition by the Company of any
material asset or property other than in the ordinary course of business;
(iii) any damage, destruction or loss, whether or not covered by insurance,
materially and adversely affecting, either in any case or in the aggregate, the
property or business of the Company; (iv) any declaration, setting aside or
payment of any dividend or any other distributions in respect of any shares of
capital stock of the Company; (v) any issuance of any shares of the capital
stock of the Company or any direct or indirect redemption, purchase, or other
acquisition by the Company of any such capital stock; (vi) any loss of the
services of any officer or key employee or consultant, or any increase in the
compensation, pension, or other benefits payable or to become payable by the
Company to any of its officers or key employees or consultants, or any bonus
payments or arrangements made to or with any of them; (vii) any forgiveness or
cancellation of any debt or claim by the Company or any waiver of any right of
material value, other than compromises of accounts receivable in the ordinary
course of business; (viii) any entry by the Company into any transaction with
any of its Affiliates; (ix) any incurrence or imposition of any Lien on any of
the material assets, tangible or intangible, of the Company; or (x) any
discharge or satisfaction by the Company of any Lien or payment by the Company
of any obligation or liability (fixed or contingent) other than (A) current
liabilities included in the Most Recent Balance Sheet, (B) current liabilities
to persons other than Affiliates of the Company incurred since the date of the
Most Recent Audited Balance Sheet in the ordinary course of business, and
(C) current liabilities incurred in connection with the transactions
contemplated hereby and disclosed in Section 6.8 of the Company Disclosure
Schedule.
6.9. PROPERTIES AND ASSETS. The assets and properties of the Company are
and as of the Closing Date will be adequate and sufficient to conduct the
business of the Company as currently conducted. The Company has good and
marketable title to all of its assets and properties, including without
limitation all those reflected in the Most Recent Unaudited Balance Sheet
(except for properties or assets sold, consumed, or otherwise disposed of in the
ordinary course of business since the date of the Most Recent Unaudited Balance
Sheet), all free and clear of Liens. All such properties and assets, in the
aggregate, are in good condition and repair, reasonable wear-and-tear and normal
maintenance excepted, and are adequate and sufficient to carry on the business
of the Company as presently conducted. Section 6.9(a) of the Company Disclosure
Schedule sets forth a complete and correct list of all capital assets of the
Company having a net book value in excess of $10,000. To the Company's
knowledge, there are no material defects in any such capital assets as to title
or condition.
The Company does not own any real property. The Company has not received any
notice that either the whole or any portion of any real property leased by it is
to be condemned, requisitioned, or
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otherwise taken by any public authority or is to be the subject of any public
improvements that may result in special assessments against or otherwise affect
such real property. Section 6.9(b) of the Company Disclosure Schedule sets forth
a complete and correct description of all leases of real property to which the
Company is a party. Complete and correct copies of all such leases have been
delivered to Streamline. Each such lease is valid and subsisting and no event or
condition exists that constitutes, or after notice or lapse of time or both
could constitute, a default thereunder. The leasehold interests of the Company
are subject to no Lien, and the Company is in quiet possession of the properties
covered by such leases.
6.10. INTELLECTUAL PROPERTIES.
(a) Section 6.10 of the Company Disclosure Schedule lists all patents,
patent applications, trademarks, trade names, service marks, logos, copyrights,
technology, know-how, trade secrets, processes, formulas, techniques, and
licenses (other than off-the-shelf software programs that have not been
customized for its use) material to and used in or necessary to the businesses
of the Company as now being conducted (collectively, the "Intellectual
Properties"). The Company owns, or is licensed or otherwise has the right to
use, without the payment of royalties or other further consideration except as
indicated in Section 6.10 of the Company Disclosure Schedule, all Intellectual
Properties, and no other intellectual property rights, privileges, licenses or
contracts are necessary to or used in the conduct of the businesses of the
Company as now being conducted.
(b) In any instance where the Company's rights to Intellectual Properties
arise under a license or similar agreement (other than for off-the-shelf
software programs that have not been customized for its use), this is indicated
in Section 6.10 of the Company Disclosure Schedule and to the Company's
knowledge such rights are licensed exclusively to the Company except as
indicated in Section 6.10 of the Company Disclosure Schedule. No other person
has an interest in or right or license to use any of the Intellectual
Properties. To the best of the Company's knowledge, none of the Intellectual
Properties is being infringed by others, or is subject to any outstanding order,
decree, judgment, or stipulation. No litigation (or other proceedings in or
before any court or other governmental, adjudicatory, arbitral, or
administrative body) relating to the Intellectual Properties is pending, or to
the best of the Company's knowledge, threatened against the Company, nor, to the
best of the Company's knowledge, is there any valid basis for any such
litigation or proceeding. The Company maintains reasonable security measures for
the preservation of the secrecy and proprietary nature of such of its
Intellectual Properties which constitute trade secrets or other confidential
information.
(c) (i) The Company has not infringed or made unlawful use of, and is not
infringing or making unlawful use of, any intellectual property or other
proprietary or confidential information of any other person except for such
infringement or use which would not, individually or in the aggregate have a
Material Adverse Effect on the Company; and (ii) to the Company's knowledge the
activities of the Company's current and past employees in connection with their
employment relationship with the Company did not and do not violate any
agreements or arrangements that any such employees had or have with any former
employer or any other person. No litigation (or other proceedings in or before
any court or other governmental, adjudicatory, arbitratory, or administrative
body) charging the Company with infringement or unlawful use of any patent,
trademark, service mark, trade name, logo, copyright, trade secret, or other
proprietary right is pending, or to the best of the Company's knowledge,
threatened; nor to the Company's knowledge is there any valid for any such
litigation or proceeding.
(d) To the best of the Company's knowledge, no officer, director or employee
of the Company is obligated under or bound by any agreement or instrument, or
any judgment, decree, or order of any court of administrative agency, that
(i) conflicts or may conflict with his or her agreements and obligations to use
his or her best efforts to promote the interests of the Company, (ii) conflicts
or may
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conflict with the business or operations of the Company, or (iii) restricts or
may restrict the use or disclosure of any information that may be useful to the
Company.
(e) To the best of the Company's knowledge, all of the Company's material
information technology systems and material non- information technology embedded
systems (including systems or technology currently under development) will
record, store, process, calculate and present calendar dates falling on and
after (and, if applicable, during spans of time including) January 1, 2000, and
will calculate any information dependent on or relating to such date in the same
manner, and with the same functionality, data integrity and performance, as the
information technology systems and non- information technology embedded systems
record, store, process, calculate and present, calendar dates on or before
December 31, 1999, or calculate any information dependent on or relating to such
date.
6.11. INDEBTEDNESS. At the date hereof, the Company has no Indebtedness
outstanding except as set forth in Section 6.11 of the Company Disclosure
Schedule. The Company is not in default with respect to any outstanding
Indebtedness or any agreement, instrument, or other obligation relating thereto
and no such Indebtedness or any agreement, instrument, or other obligation
relating thereto purports to limit the issuance of any securities by the Company
or the operation of its businesses. Complete and correct copies of all
agreements, instruments, and other obligations (including all amendments,
supplements, waivers, and consents) relating to any Indebtedness of the Company
have been furnished to Streamline.
6.12. ABSENCE OF UNDISCLOSED LIABILITIES. Except (a) to the extent
(i) reflected or reserved against in the Most Recent Audited Balance Sheet, or
(ii) incurred with persons other than any Affiliate of the Company in the
ordinary course of business after the date of the Most Recent Audited Balance
Sheet, and (b) either to be discharged before the Closing or described in
Section 6.12 of the Company Disclosure Schedule, the Company does not have any
liabilities or obligations of any nature, whether accrued, absolute, contingent,
or otherwise (including without limitation liabilities, as guarantor or
otherwise, in respect of obligations of others) other than performance
obligations with respect to the contracts that would not be required to be
reflected or reserved against in a balance sheet prepared in accordance with
generally accepted accounting principles or referred to in the footnotes
thereto, except any such liabilities and obligations which, individually or in
the aggregate, would not have a Material Adverse Effect on the Company.
6.13. TAXES.
(A) BASIS, ETC. Set forth in Section 6.13(a) of the Company Disclosure
Schedule are the net operating loss, net capital loss, credit, minimum tax,
charitable contribution, and other Tax carryforwards (by type of carryforward
and expiration date, if any) of the Company.
(B) ELECTIONS. All material elections with respect to Taxes (including
without limitation any elections under Sections 108(b)(5), 338(g), 565, 936(a),
or 936(e) of the Internal Revenue Code of 1986, as amended (the "Code") or
Treasury Regulation Sections 1.1502-20(g) or 1.1502-32(f)(2)) affecting the
Company are described in Section 6.13(b) of the Company Disclosure Schedule.
(C) FILING OF TAX RETURNS AND PAYMENT OF TAXES. The Company has timely
filed all Tax Returns required to be filed by it, each such Tax Return has been
prepared in compliance with all applicable laws and regulations, and all such
Tax Returns are true and accurate in all material respects. All Taxes due and
payable by the Company have been paid, and the Company will not be liable for
any additional Taxes in respect of any taxable period ending on or before the
Closing Date in an amount that exceeds the corresponding reserve therefor, if
any, reflected in the accounting records of the Company. The Company has
delivered to Streamline correct and complete copies of all Tax Returns filed by
or with respect to it with respect to taxable periods ended on or before
December 31, 1998, and all relevant documents and information with respect
thereto, including without limitation work
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papers, records, examination reports, statements of deficiencies assessed
against or agreed to by the Company.
(D) AUDIT HISTORY. With respect to the taxable period of the Company ended
on or before December 31, 1995, such taxable period has not been audited by the
relevant taxing authority and the time for assessing or collecting Tax with
respect to each such taxable period has not closed and such taxable period is
subject to review by relevant taxing authorities.
(E) DEFICIENCIES. No deficiency or proposed adjustment in respect of Taxes
that has not been settled or otherwise resolved has been asserted or assessed by
any taxing authority against the Company.
(F) LIENS. There are no Liens for Taxes (other than current Taxes not yet
due and payable) on the assets of the Company.
(G) EXTENSIONS TO STATUTE OF LIMITATIONS FOR ASSESSMENT OF TAXES. The
Company has not consented to extend the time in which any Tax may be assessed or
collected by any taxing authority.
(H) EXTENSIONS OF THE TIME FOR FILING TAX RETURNS. The Company has not
requested or been granted an extension of the time for filing any Tax Return to
a date on or after the Closing Date.
(I) PENDING PROCEEDINGS. There is no action, suit, taxing authority
proceeding, or audit with respect to any Tax now in progress, pending, or to the
best of the Company's knowledge, threatened, against or with respect to the
Company.
(J) NO FAILURES TO FILE TAX RETURNS. To the Company's knowledge, no claim
has ever been made by a taxing authority in a jurisdiction where the Company
does not pay Tax or file Tax Returns that the Company is or may be subject to
Taxes assessed by such jurisdiction.
(K) MEMBERSHIP IN AFFILIATED GROUPS, ETC. The Company has never been a
member of any Affiliated Group, or filed or been included in a combined,
consolidated, or unitary Tax Return.
(L) TAX ELECTIONS. The Company has not made any elections under Code
Sections 108(b)(5), 338(g), or 565, or Treasury Regulations Sections
1.1502-20(g) or 1.1502-32(f)(2).
(M) ADJUSTMENTS UNDER SECTION 481. The Company will not be required, as a
result of a change in method of accounting for any period ending on or before
the Closing Date, to include any adjustment under Section 481(c) of the Code (or
any similar or corresponding provision or requirement under any Tax law) in
taxable income for any period ending on or after the Closing Date.
(N) TAX SHARING, ALLOCATION, OR INDEMNITY AGREEMENTS. The Company is not a
party to or bound by any Tax sharing or allocation agreement or has any current
or potential contractual obligation to indemnify any other person with respect
to Taxes.
(O) WITHHOLDING TAXES. The Company has withheld and paid all Taxes required
to have been withheld and paid by it in connection with amounts paid or owing to
any employee, creditor or other person.
(P) FOREIGN PERMANENT ESTABLISHMENTS AND BRANCHES. The Company does not
have a permanent establishment in any foreign country, as defined in the
relevant tax treaty between the United States of America and such foreign
country, and does not otherwise operate or conduct business through any branch
in any foreign country.
(Q) U.S. REAL PROPERTY HOLDING CORPORATION. The Company is not and has not
been a United States real property holding corporation within the meaning of
Code Section 897(c)(2), during the applicable period specified in Code
Section 897(c)(1)(A)(ii).
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(R) SAFE HARBOR LEASE PROPERTY. None of the property owned or used by the
Company is subject to a tax benefit transfer lease executed in accordance with
Section 168(f)(8) of the Internal Revenue Code of 1954, as amended by the
Economic Recovery Tax Act of 1981.
(S) TAX-EXEMPT USE PROPERTY. None of the property owned by the Company is
"tax-exempt use property" within the meaning of Section 168(h) of the Code.
(T) SECURITY FOR TAX-EXEMPT OBLIGATIONS. None of the assets of the Company
directly or indirectly secures any indebtedness, the interest on which is
tax-exempt under Section 103(a) of the Code, and the Company is not directly or
indirectly an obligor or a guarantor with respect to any such indebtedness.
(U) SECTION 341(F) CONSENT. The Company has not filed a consent under Code
Section 341(f) concerning collapsible corporations.
(V) PARACHUTE PAYMENTS. The Company has not made any payments, is not
obligated to make any payments, and is not a party to any agreement that under
certain circumstances could obligate it to make any payments, that will not be
deductible under Code Sections 162(m) or 280G.
6.14. EMPLOYEE BENEFIT PLANS.
(a) Except as described in Section 6.14 of the Company Disclosure Schedule,
the Company does not now maintain or contributes to, nor has any outstanding
liability with respect to, and has not in the current or preceding six calendar
years maintained or contributed to, any pension, profit-sharing, deferred
compensation, bonus, stock option, share appreciation right, severance, group or
individual health, dental, medical, life insurance, survivor benefit, or similar
plan, policy, or arrangement, whether formal or informal, for the benefit of any
director, officer, consultant or employee, whether active or terminated, of the
Company. Each of the arrangements set forth in Section 6.14(a) of the Company
Disclosure Schedule is hereinafter referred to as an "Employee Benefit Plan,"
except that any such arrangement that is a multi-employer plan will be treated
as an Employee Benefit Plan only for purposes of Sections 6.14(d)(iv), (vi), and
(viii) and 6.14(g) below. Except for the Beacon Home Direct, Inc. 401(k) Plan
(the "401(k) Plan") effective January 1, 1999, the Company has not maintained or
contributed to any Employee Benefit Plan intended to qualify under
Section 401(a) of the Code.
(b) The Company has delivered to Streamline true, correct, and complete
copies of each Employee Benefit Plan, and with respect to each such Plan
(i) any associated trust, custodial, insurance, or service agreements, (ii) any
annual report, actuarial report, or disclosure materials (including specifically
any summary plan descriptions) submitted to any governmental agency or
distributed to participants or beneficiaries thereunder in the current or any of
the three preceding calendar years, and (iii) the most recently received
Internal Revenue Service ("IRS") determination letters and any governmental
advisory opinions or rulings.
(c) Each Employee Benefit Plan is and has heretofore been maintained and
operated in compliance in all material respects with the terms of such Plan and
with the requirements prescribed (whether as a matter of substantive law or as
necessary to secure favorable tax treatment) by any and all statutes,
governmental or court orders, and governmental rules or regulations in effect
from time to time, including but not limited to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") and the Code and applicable to such
Plan. No Employee Benefit Plan is intended to qualify under Section 401(a) of
the Code other than the 401(k) Plan.
(d) (i) There is no pending, or to the best of the Company's knowledge,
threatened, legal action, proceeding, or investigation, other than routine
claims for benefits, concerning any Employee Benefit Plan, or to the best of the
Company's knowledge, any fiduciary or service provider thereof, and to the best
of the Company's knowledge, there is no basis for any such legal action,
proceeding, or investigation.
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(ii) No liability (contingent or otherwise) to the Pension Benefit Guaranty
Corporation ("PBGC") or any multi-employer plan has been incurred by the Company
or any of its Affiliates (other than insurance premiums satisfied in due
course).
(iii) No reportable event, or event or condition that presents a material
risk of termination by the PBGC, has occurred with respect to any Employee
Benefit Plan, or any retirement plan of an Affiliate of the Company, which is
subject to Title IV of ERISA.
(iv) No Employee Benefit Plan nor any party in interest with respect
thereof, has engaged in a prohibited transaction that could subject the Company
directly or indirectly to liability under Section 409 or 502(i) of ERISA or
Section 4975 of the Code.
(v) No written communication, report, or disclosure has been made that, at
the time made, did not in all material respects accurately reflect the terms and
operations of any Employee Benefit Plan.
(vi) No Employee Benefit Plan provides welfare benefits subsequent to
termination of employment to employees or their beneficiaries (except to the
extent required by applicable state insurance laws and Title I, Part 6 of
ERISA).
(vii) No benefits due under any Employee Benefit Plan have been forfeited
subject to the possibility of reinstatement (which possibility would still exist
at or after the Closing).
(e) With respect to each Employee Benefit Plan for which a separate fund of
assets is or is required to be maintained, full payment has been made of all
amounts that the Company is required, under the terms of each such Plan, to have
paid as contributions to that Plan as of the end of the most recently ended plan
year of that Plan, and no accumulated funding deficiency (as defined in
Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists
with respect to any such Plan. The current value of the assets of each such
Employee Benefit Plan, as of the end of the most recently ended plan year of
that Plan, exceeded the current value of all accrued benefits under that Plan.
(f) Except as described on Section 6.14 of the Company Disclosure Schedule,
the execution of this Agreement and the consummation of the transactions
contemplated hereby will not result in any payment (whether of severance pay or
otherwise) becoming due from any Employee Benefit Plan to any current or former
director, officer, consultant, or employee of the Company or result in the
vesting, acceleration of payment, or increases in the amount of any benefit
payable to or in respect of any such current or former director, officer,
consultant, or employee.
(g) No Employee Benefit Plan is a multi-employer plan.
(h) For purposes of this Section 6.14, "multi-employer plan," "party in
interest," "current value," "accrued benefit," "reportable event," and "benefit
liability" have the same meaning assigned such terms under Sections 3, 4043(b)
or 4001(a) of ERISA, and "affiliate" means any entity that under Section 414 of
the Code is treated as a single employer with the Company.
6.15. SAFETY AND ENVIRONMENTAL MATTERS.
(a) Except as would not, individually or in the aggregate, have a Material
Adverse Effect on the Company, none of the plants, offices, or properties in or
on which the Company carries on business nor any of the activities carried on by
it are in violation of any zoning, health, or safety law or regulation,
including without limitation the Occupational Safety and Health Act of 1970, as
amended.
(b) Except as set forth in Section 6.15 of the Company Disclosure Schedule
or as would not, individually or in the aggregate, have a Material Adverse
Effect on the Company, neither the Company nor any operator of any real property
presently or formerly owned, leased, or operated by the Company is in violation
or alleged violation of any judgment, decree, order, law, license, rule or
regulation pertaining to environmental matters, including without limitation the
Resource Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental
Response, Compensation and Liability
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Act of 1980, as amended ("CERCLA"), the Superfund Amendments and Reauthorization
Act of 1986 ("SARA"), the Federal Clean Water Act, the Federal Clean Air Act,
the Toxic Substances Control Act, and applicable federal, state, foreign, and
local statutes, regulations, ordinances, orders, and decrees relating to health,
safety, or the environment (all of the foregoing, collectively, "Environmental
Laws").
(c) Except as set forth in Section 6.15 of the Company Disclosure Schedule,
the Company has not received notice from any third party, including without
limitation any federal, state, foreign, or local governmental authority, that
(i) the Company has been identified by the United States Environmental
Protection Agency (the "EPA") as a potentially responsible party under CERCLA
with respect to a site listed on the National Priorities List, 40 C.F.R.
Part 300 Appendix B (1986); (ii) any hazardous waste as defined by 42 U.S.C.
Section 6903(5), any hazardous substance as defined by 42 U.S.C.
Section 9601(14), any pollutant or contaminant as defined by 42 U.S.C. Section
9601(33) or any toxic substance, oil, or hazardous material or other chemical or
substance regulated by any Environmental Laws (collectively, "Hazardous
Substances") that the Company has generated, transported, handled, used, or
disposed of has been found in violation of Environmental Laws at any site at
which a federal, state, foreign, or local agency or other third party has
conducted or has ordered that the Company conduct a remedial investigation,
removal, or other response action pursuant to any Environmental Law; or
(iii) the Company is or will be a named party to any claim, action, cause of
action, complaint (contingent or otherwise), or legal or administrative
proceeding arising out of any third party's incurrence of costs, expenses,
losses, or damages of any kind whatsoever in connection with the release of
Hazardous Substances.
(d) Except as set forth in Section 6.15 of the Company Disclosure Schedule,
(i) no portion of any real property presently or formerly owned, leased, or
operated by the Company has been used by the Company, or to the best of the
Company's knowledge, by any other person, for the handling, usage,
manufacturing, processing, storage, or disposal of Hazardous Substances except
in accordance with applicable Environmental Laws; and no underground tank or
other underground storage receptacle for Hazardous Substances is located on any
real property presently owned, leased, or operated by the Company, or to the
best of the Company's knowledge, any real property formerly owned, leased, or
operated by it; (ii) in the course of the activities conducted by the Company
and to the best of the Company's knowledge, those of any other operators of any
real property presently or formerly owned, leased, or operated by the Company,
no Hazardous Substances have been generated, stored, or used on such properties
except in accordance with applicable Environmental Laws; (iii) to the best of
the Company's knowledge, there have been no releases (i.e. any past or present
releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, disposing, or dumping) or threatened releases of Hazardous
Substances on, upon, into, or from any real property presently or formerly
owned, leased, or operated by the Company; (iv) to the best of the Company's
knowledge, there have been no releases on, upon, from, or into any real property
in the vicinity of any real property presently or formerly owned, leased, or
operated by the Company that, through soil or groundwater contamination, may
have come to be located on, any of the real property presently or formerly
owned, leased, or operated by the Company; and (v) any Hazardous Substances that
have been generated by the Company, or to the best of the Company's knowledge,
any other person, on any real property presently or formerly owned, leased, or
operated by the Company, have been transported offsite only by carriers having
an identification number issued by the EPA and treated or disposed of only by
treatment or disposal facilities maintaining valid permits as required under
applicable Environmental Laws, which transporters and facilities, to the best of
the Company's knowledge, have been and are operating in compliance with such
permits and applicable Environmental Laws.
(e) Except as set forth in Section 6.15 of the Company Disclosure Schedule,
no real property presently owned, leased, or operated by the Company, and to the
best of the Company's knowledge, no real property formerly owned, leased, or
operated by the Company, is or will be subject to any environmental cleanup
responsibility law or regulation or environmental restrictive transfer law or
regulation by reason of the Merger or the other transactions contemplated
hereby.
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6.16. LABOR RELATIONS. The Company is and has been in compliance in all
material respects with all federal and state laws respecting employment and
employment practices, terms and conditions of employment, wages and hours,
nondiscrimination in employment, and unfair labor practices. There is no charge
or proceeding pending, or to the best of the Company's knowledge, threatened,
against the Company alleging unlawful discrimination in employment practices or
unfair labor practice before any court or agency, including without limitation
the National Labor Relations Board. There is no labor strike, work slow-down, or
work stoppage pending or to the best of the Company's knowledge threatened
against or involving the Company. No one has petitioned within the last five
years or, to the best of the Company's knowledge, is now petitioning for union
representation of any of the employees of the Company. None of the employees of
the Company is covered by any collective bargaining agreement, and no collective
bargaining agreement is currently being negotiated by the Company. The Company
has not experienced any labor strike, work slowdown, work stoppage or other
material labor difficulty during the last five years.
6.17. LITIGATION. No litigation, arbitration, action, suit, proceeding, or
to the Company's knowledge investigation (whether conducted by any judicial or
regulatory body, arbitrator, or other person) is pending or, to the best of the
Company's knowledge, threatened, against the Company, nor is there any valid
therefor known to the Company.
6.18. ACCOUNTS RECEIVABLE. The accounts receivable recorded in the records
and books of account of the Company as due to the Company as of the Closing
Date, represents all of the receivables that have arisen from bona fide
transactions in the ordinary course of business in connection with the Company,
consistent with past practice and the extensions of credit reflected by such
receivables have been extended, or will be extended, in the manner consistent
with past trade and credit practices of the Company. Said receivables, less the
amount of any reserve therefore, have been recorded in the records and books of
account of the Company in accordance with GAAP, consistent with past business
practices and except as set forth on Section 6.18 of the Company Disclosure
Schedule, none of such accounts receivable or other credits is or will at the
Closing Date, be subject to any valid counterclaim or set off, except to the
extent of any such provision for reserve.
6.19. INVENTORIES. The inventories of the Company will consist solely of,
material and goods of a quality and quantity which are usable or saleable in the
normal course of the business, consistent with past practices as carried on by
the Company, or to be carried on by the Surviving Corporation, as the case may
be, net of any reserve for excessive or obsolete inventories. The Inventories
are adequate for present needs of the Company, are fairly reflected on the books
of account of the Company, stating items of inventory at the lower of cost or
market value in accordance with GAAP, with adequate allowance for excessive,
spoiled or obsolete inventories.
6.20. ACCOUNTS PAYABLE. Accounts payable recorded in the records and books
of account of the Company, represents all of the payables that have arisen from
bona fide transactions in the ordinary course of business in connection with the
Company, consistent with past practice and the payment of such payables have
been made in the manner consistent with past trade and credit practices of the
Company. Said payables, have been recorded in the records and books of account
of the Company in accordance with GAAP, consistent with past business practices
and except as set forth on Section 6.20 of the Company Disclosure Schedule, none
of such accounts payables is or will at the Closing Date, be payable for a
period in excess of 90 days.
6.21. CONTRACTS. Section 6.21 of the Company Disclosure Schedule sets
forth a complete and accurate list of all material contracts to which the
Company is a party or by or to which it or any of its assets or properties is
bound or subject. As used in this Agreement, the word "contract" includes every
agreement or understanding of any kind, written or oral, that is legally
enforceable by or against or otherwise binding on the Company, and specifically
includes without limitation: (a) agreements with any current or former officer,
director, employee, consultant, or stockholder, or any partnership,
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corporation, joint venture, or any other entity in which any such person has an
interest and the Company has knowledge of such person's interest;
(b) agreements with any labor union or association representing any employee;
(c) agreements for the provision of services by or to the Company; (d) bonds or
other security agreements provided by any party in connection with the business
of the Company; (e) agreements for the purchase or other acquisition or the sale
or other disposition of assets or properties, in each case other than in the
ordinary course of business, or for the grant to any person of any preferential
rights to purchase any of such assets or properties; (f) joint venture
agreements relating to the assets, properties, or business of the Company or by
or to which it or any of its assets or properties is bound or subject;
(g) agreements under which the Company agrees to indemnify any party, to share
tax liability of any party, or to refrain from competing with any party;
(h) agreements with regard to Indebtedness; or (i) any other contract or other
agreement, whether or not made in the ordinary course of business. All of the
contracts listed in Section 6.21 of the Company Disclosure Schedule are in full
force and effect, and (A) the Company, is not in material default under or
breach of any of them, and (B) to the best of the Company's knowledge, no other
party thereto, is in material default under or breach of any of them, nor to the
best of the Company's knowledge, does any event or condition exist that after
notice or lapse of time or both could constitute a default thereunder or breach
thereof on the part of the Company, or to the best of the Company's knowledge,
any other party thereto. No approval or consent of any person that has not
already been obtained and listed in Section 6.21 of the Company Disclosure
Schedule is needed in order that the contracts listed in Section 6.21 of the
Company Disclosure Schedule continue in full force and effect following the
consummation of the Merger and the other transactions contemplated hereby, and
no such contract includes any provision, the effect of which may be to terminate
(or give rise to a right of termination under) such contract, to enlarge or
accelerate any obligations of the Company thereunder, or to give additional
rights to any other person, upon consummation of the Merger or the other
transactions contemplated hereby. The Company has delivered to Streamline true,
correct, and complete copies of all such contracts, including all amendments,
modifications, and supplements thereto.
6.22. POTENTIAL CONFLICTS OF INTEREST. Except as set forth on
Section 6.22 of the Company Disclosure Schedule, no officer, director, or
stockholder of the Company (a) owns, directly or indirectly, any interest
(excepting not more than 1% stock holdings for investment purposes in securities
of publicly held and traded companies) in, or is an officer, director, employee,
or consultant of, any person that is a material competitor, lessor, lessee, or
supplier of the Company; (b) owns, directly or indirectly, in whole or in part,
any tangible or intangible property that the Company is using or the use of
which is necessary for the business of the Company; or (c) to the best of the
Company's knowledge, has any cause of action or other claim whatsoever against,
or owes any amount to, the Company, except for claims in the ordinary course of
business, such as for accrued vacation pay, accrued benefits under Employee
Benefit Plans, and similar matters and agreements.
6.23. INSURANCE. Section 6.23 of the Company Disclosure Schedule lists the
policies of theft, fire, liability, workmen's compensation, life, property and
casualty, and other insurance owned or held by the Company. Such policies of
insurance are maintained with financially sound and reputable insurance
companies, funds, or underwriters, and are of the kinds, cover such risks, and
are in such amounts and with such deductibles and exclusions, as are consistent
with prudent business practice. In all material respects, all such policies are
in full force and effect; are sufficient for compliance by the Company with all
requirements of law and of all agreements to which the Company is a party; are
valid, outstanding, and enforceable policies and provide that they will remain
in full force and effect through the respective dates set forth in the Company
Disclosure Schedule; and will not in any way be affected by, or terminate or
lapse by reason of, the transactions contemplated by this Agreement.
6.24. BANK ACCOUNTS, SIGNING AUTHORITY, POWERS OF ATTORNEY. Section 6.24
of the Company Disclosure Schedule sets forth a complete and accurate list of
all bank, brokerage, and other accounts, and all safe-deposit boxes, of the
Company and the persons with signing or other authority to act with
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respect thereto. Except as so listed, the Company does not have any account or
safe deposit box in any bank, and no person has any power, whether singly or
jointly, to sign any checks on behalf of the Company, to withdraw any money or
other property from any bank, brokerage, or other account of the Company, or to
act under any agency or power of attorney granted by the Company at any time for
any purpose. Section 6.24 of the Company Disclosure Schedule also sets forth the
names of all persons authorized to borrow money or sign notes on behalf of the
Company.
6.25. SUPPLIERS AND CUSTOMERS. Section 6.25 of the Company Disclosure
Schedule lists the twenty (20) largest suppliers of the Company during the
twelve calendar month period immediately preceding the date of this Agreement.
The relationships of the Company with its suppliers and customers (as a whole)
are good commercial working relationships, and no supplier or customer of
material importance to the Company or material number of Company customers has
canceled or otherwise terminated, or threatened in writing to cancel or
terminate, its relationship with the Company or has during the last such twelve
months decreased materially, or threatened to decrease or limit materially, its
services, supplies, or materials to the Company or its usage or purchase of the
services or products of the Company, except for normal cyclical changes related
to customers' businesses. The Company has no knowledge or reason to know that
any such supplier or a material number of customers intends to cancel or
otherwise substantially modify its relationship with the Company or to decrease
materially or limit its services, supplies, or materials to the Company, or its
usage or purchase of the Company's services or products, and the consummation of
the transactions contemplated hereby will not, to the best of the Company's
knowledge, adversely affect the relationship of the Company with any such
supplier or customers.
6.26. EMPLOYMENT OF OFFICERS, EMPLOYEES. Section 6.26 of the Company
Disclosure Schedule lists the name and current annual salary and other
compensation payable by the Company to each exempt non-hourly employee whose
current total annual compensation or estimated compensation from the Company
(including but not limited to wages, salary, commissions, normal bonus, deferred
compensation, and other extra compensation) is $50,000 or more.
6.27. MINUTE BOOKS. The minute books of the Company made available to
Streamline for inspection accurately record therein all material actions taken
by its Board of Directors, all committees thereof, and its stockholders.
6.28. BROKERS. No finder, broker, agent, or other intermediary has acted
for or on behalf of the Company in connection with the negotiation, preparation,
execution, or delivery of this Agreement or the consummation of the Merger or
the other transactions contemplated hereby.
6.29. COMPLIANCE WITH OTHER AGREEMENTS, LAWS, ETC.
(a) The Company has complied with, and is in compliance with, (i) all laws,
statutes, governmental regulations and all judicial or administrative tribunal
orders, judgments, writs, injunctions, decrees or similar commands applicable to
its business (including, without limitation, any laws, statutes, governmental
regulations, of the United States Department of Agriculture, the United States
Food and Drug Administration, the United States Department of Commerce and any
federal or state governmental authorities relating to the preparation, storage,
handling and/or delivery of food products), and (ii) its Articles of
Incorporation and by-laws, respectively, each as amended to date; in the case of
the preceding clause (i), excepting only any such noncompliances that, both
individually and in the aggregate, have not resulted in and will not have a
Material Adverse Effect on the Company. The Company has not been charged with,
or to the best of its knowledge, been under investigation with respect to, any
violation of any provision of any federal, state, or local law or administrative
regulation. The Company has and maintains and Section 6.29 of the Company
Disclosure Schedule sets forth a complete and correct list of, all such
licenses, permits, and other authorizations of governmental authorities as are
necessary or desirable for the conduct of its businesses or in connection with
the ownership or use of its properties, all of which are in full force and
effect, true and complete copies of
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all of which have previously been delivered to Streamline, and none of which
will be affected by the consummation of the Merger and the other transactions
contemplated hereby.
(b) Except as set forth on Section 6.29 of the Company Disclosure Schedule,
(i) each person or entity that supplies to the Company any food products that
contain seafood, poultry, meat (including deli meat), or eggs has obtained
proper certification of its facilities and operations from the United States
Department of Agriculture, the United States Food and Drug Administration, the
United States Department of Commerce and any applicable state or local agency,
(ii) each person or entity that supplies to the Company any food products that
do not contain seafood, poultry, meat (including deli meat), or eggs has
provided the Company with reasonable evidence to that effect, and (iii) to the
Company's knowledge, after reasonable investigation, no person or entity that
supplies any food products to the Company is under investigation with respect
to, or in violation of, any federal, state, or local law or administrative
regulation relating to the preparation, storage, handling and/or delivery of
food products.
6.30. OWNERSHIP OF STREAMLINE STOCK. Except as set forth in Section 6.8 of
the Company Disclosure Schedule, neither the Company, nor to the best of the
Company's knowledge, any of its affiliates or associates (as such terms are
defined under the Exchange Act) beneficially owns, directly or indirectly, or is
a party to any agreement, arrangement, or understanding with respect to the
acquisition, holding, voting, or disposition of any shares of the capital stock
or other securities of Streamline.
6.31. ACCOUNTING MATTERS. To the knowledge of the Company, after
consulting with the Company's independent auditors, neither the Company, nor to
the best of the Company's knowledge, any of its Affiliates, has through the date
of this Agreement taken or agreed to take any action that would prevent the
business combination to be effected through the Merger from being accounted for
as a "pooling of interests."
6.32. DISCLOSURE. No representation or warranty of the Company in this
Agreement (including the exhibits and schedules hereto) or any of the other
transactions contemplated hereby contains or will contain any untrue statement
of a material fact or omits or will omit to state a material fact required to be
stated therein or necessary to make the statements contained therein not false
or misleading.
6.33 ACTIVE STOCKHOLDERS. Scott DeGraeve is the only Stockholder who is
active in the Company's day-to-day operations.
7. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS.
Each of the Stockholders hereby represents and warrants to Streamline, with
respect to him-, her-, or itself only, as follows:
7.1. AUTHORIZATION AND ENFORCEABILITY. Such Stockholder has all requisite
power and full legal right and authority (including, in the case of a
Stockholder who is not a natural person, due approval of its Board of Directors,
stockholders, managers, and/or other persons exercising similar powers) to enter
into this Agreement, to perform all of such Stockholder's agreements and
obligations hereunder, and to consummate the Merger and the other transactions
contemplated hereby. This Agreement has been duly executed and delivered by such
Stockholder and constitutes a legal, valid, and binding obligation of such
Stockholder, enforceable against such Stockholder in accordance with its terms.
7.2. GOVERNMENTAL AND OTHER THIRD-PARTY CONSENTS, NON-CONTRAVENTION,
ETC. No consent, approval, or authorization of or registration, designation,
declaration, or filing with any governmental authority, federal or other, or any
other person is required on the part of such Stockholder in connection with this
Agreement, the Merger, or any of the other transactions contemplated hereby. The
execution, delivery, and performance of this Agreement and the consummation of
such transactions will not violate (a) in the case of any Stockholder who is not
a natural person, any provision of its Certificate of Incorporation, by-laws,
partnership or operating agreement, and/or other
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constituting documents, (b) any order, judgment, injunction, award or decree of
any court or state or federal governmental or regulatory body applicable to such
Stockholder, or (iii) any judgment, decree, order, statute, rule, regulation,
agreement, instrument, or other obligation to which such Stockholder is a party
or by or to which it or any of such Stockholder's assets is bound or subject.
7.3. TITLE TO SHARES, ETC. Such Stockholder owns, as of the date hereof,
and will own, as of the Closing, in each case both of record and beneficially,
the shares of the Company's capital stock and other securities of the Company,
if any, indicated with respect to such Stockholder in Section 6.4 of the Company
Disclosure Schedule, all free and clear of Liens. Such Stockholder does not own,
either legally or beneficially, any other shares of capital stock or other
securities of the Company.
7.4. INVESTMENT REPRESENTATIONS. Each Stockholder has completed an
investor questionnaire in the form attached as EXHIBIT E hereto, and represents
and warrants that it has completed such investor questionnaire accurately, and
acknowledges and understands that Streamline is relying upon such investor
questionnaire to establish, in part, that an exemption from registration of the
shares of Streamline Common Stock to be issued pursuant to the terms hereof
under federal Securities Act is available. Such Stockholder has such knowledge
and experience in financial and business matters that it is capable of
evaluating the merits and risks of the investment in Streamline Common Stock
that such Stockholder is making by reason of the Merger and the other
transactions contemplated by this Agreement. Such Stockholder's financial
condition is such that it is able to bear all economic risks of investment in
Streamline Common Stock, including a complete loss of such Stockholder's
investment. Streamline has provided such Stockholder with access to financial
and other information concerning Streamline (including without limitation,
Streamline's SEC Reports) and such Stockholder has had the opportunity to ask
questions of and receive answers from Streamline concerning the Merger and the
other transactions contemplated by this Agreement and to obtain from Streamline
additional information regarding an investment in Streamline. Such Stockholder
will acquire shares of Streamline Common Stock in the Merger solely for
investment purposes, with no present intention of distributing or reselling any
of such shares or any interest therein. Such Stockholder is aware that except as
set forth in this Agreement, such shares of Streamline Common Stock will not be
registered under the Securities Act, and that neither such shares nor any
interest therein may be sold, pledged, or otherwise transferred unless the
resale of such shares is registered under the Securities Act or qualifies for an
exemption from such registration.
8. REPRESENTATIONS AND WARRANTIES OF STREAMLINE AND MERGER SUB.
Streamline and Merger Sub, jointly and severally, hereby represent and
warrant as follows, subject in each case to such exceptions as are specifically
contemplated by this Agreement or as are set forth in (i) the attached
Disclosure Schedule of the Streamline and Merger Sub (the "Streamline and Merger
Sub Disclosure Schedule"),
8.1. INCORPORATION; AUTHORITY. Each of Streamline and Merger Sub is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to own or lease and operate its properties and to carry on its
business as now conducted. Streamline has delivered to the Company complete and
correct copies of the Certificate of Incorporation and by-laws of Streamline and
the Certificate of Incorporation and by-laws of the Merger Sub, in each case
with all amendments thereto.
8.2. AUTHORIZATION AND ENFORCEABILITY. Subject to the approval of
shareholders of Streamline of the Meeting Purposes, each of Streamline and
Merger Sub has all requisite power and full legal right and authority (including
due approval of its Board of Directors) to enter into this Agreement, to perform
all of its agreements and obligations hereunder, and to consummate the Merger
and the other transactions contemplated hereby. This Agreement has been duly
executed and delivered by each of Streamline and Merger Sub and constitutes a
legal, valid, and binding obligation of each of them, enforceable against each
of them in accordance with its terms.
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8.3. GOVERNMENTAL AND OTHER THIRD-PARTY CONSENTS, NON-CONTRAVENTION,
ETC. No consent, approval, or authorization of or registration, designation,
declaration, or filing with any governmental authority, federal or other, or any
other person, is required on the part of Streamline or Merger Sub in connection
with this Agreement, the Merger, or any of the other transactions contemplated
hereby, except for applicable requirements, if any, of the Exchange Act, the
Securities Act, state securities or "blue sky" laws and state takeover laws, the
HSR Act, the Nasdaq National Market and filing and recordation of appropriate
merger documents as required by the IBCA and the DGCL. The execution, delivery,
and performance of this Agreement and the consummation of such transactions will
not violate (a) any provision of Streamline's or Merger Sub's Certificate of
Incorporation or by-laws, (b) any order, judgment, injunction, award or decree
of any court or state or federal governmental or regulatory body applicable to
Streamline or Merger Sub, or (iii) any judgment, decree, order, statute, rule,
regulation, agreement, instrument, or other obligation to which Streamline or
Merger Sub is a party or by or to which either of them or any of their
respective assets is bound or subject.
8.4. MERGER SUB. Merger Sub has been organized for the specific purpose of
engaging in the Merger and the other transactions contemplated hereby and has
not incurred any material liabilities, conducted any material business, or
entered into any material contracts or commitments, in each case except such as
are in furtherance of or incidental to such transactions. The capitalization of
Merger Sub consists of 100 shares of common stock, all of which shares are owned
directly by Streamline.
8.5. STREAMLINE'S SEC STATEMENTS, REPORTS AND DOCUMENTS. Since June 17,
1999, Streamline has timely filed with the SEC all forms, reports, registration
statements, and documents required to be filed by it. Streamline has delivered
to the Company true and complete copies of (i) the prospectus dated June 17,
1999 filed by Streamline with the SEC on June 18, 1999, (ii) its Quarterly
Report on Form 10-Q for its fiscal quarter ended June 30, 1999 (the "June 1999
10-Q"), and (iii) all other forms, reports (including without limitation annual
reports pursuant to Exchange Act rule 14a-3), registration statements, and
documents filed by Streamline with the SEC since June 18, 1999 (collectively,
all of the foregoing documents, "Streamline's SEC Reports"). As of their
respective dates, Streamline's SEC Reports complied in all material respects
with all applicable requirements of the Securities Act and the Exchange Act and
the rules and regulations promulgated thereunder, and did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. None of Streamline's
SEC Reports is required to be amended or supplemented as of the date hereof. The
financial statements (including any related notes) of Streamline included in
Streamline's SEC Reports were prepared in conformity with generally accepted
accounting principles applied on a consistent basis (except as otherwise stated
in the financial statements or, in the case of audited statements, the related
report of Streamline's independent certified public accountants) and present
fairly the consolidated financial position, results of operations, changes in
stockholders' equity, and cash flows, as applicable, of Streamline and its
consolidated Subsidiaries as of the dates and for the periods indicated;
subject, in the case of unaudited interim consolidated financial statements, to
condensation, the absence of footnote disclosure, and normal, recurring
end-of-period adjustments, the effect of which was not and will not be material.
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8.6. CAPITALIZATION. The authorized capital stock of Streamline consists
of 50,000,000 shares of Streamline Common Stock, $0.01 par value per share with
one vote per share on all matters on which shareholders are entitled to vote
under the DGCL ("Streamline Common Stock") and 5,000,000 shares of Streamline
Preferred Stock, $0.01 par value per share. No shares of such Preferred Stock
are issued and outstanding. All of the outstanding shares of Streamline Common
Stock were issued in compliance with all applicable laws, including securities
laws and all applicable preemptive and similar rights of any person. No person
has the right to rescind any purchase of any shares of Streamline's capital
stock or other securities.
As of September 30, 1999 (i) 18,373,796 shares of Streamline Common Stock
were issued and outstanding, all of which were duly authorized, validly issued,
fully paid and non-assessable, and (ii) outstanding options granted pursuant to
the Streamline's 1993 Employee Option Plan, 1993 Director Option Plan and
Streamline's 1999 Employee Stock Purchase Plan (collectively, the "Streamline
Stock Plans") are, in the aggregate, not greater than 1,755,495. Since that
date, no shares of Streamline Common Stock have been issued except upon the
exercise of options granted under the Streamline Stock Plans.
Except (i) as set forth in Section 8.6 of the Streamline and Merger Sub
Disclosure Schedule, (ii) as set forth in Streamline's SEC Reports filed prior
to the date hereof, and (iii) for stock options issued pursuant to the
Streamline's Stock Plans, there are no agreements or other obligations on the
part of Streamline to purchase or sell, no convertible or exchangeable
securities, options, warrants or other rights to acquire from Streamline any
shares of its capital stock or other securities. The Streamline stockholders who
have executed and delivered to the Company the Support/Voting Agreement, in the
aggregate, beneficially own and control the voting rights of not less than a
majority of the issued and outstanding shares of Streamline Common Stock.
8.7 LITIGATION. Except as set forth on Streamline's SEC Reports, no
litigation, arbitration, action, suit, proceeding, or, to Streamline's
knowledge, investigation (whether conducted by any judicial or regulatory body,
arbitrator, or other person) is pending or, to the best of Streamline's
knowledge, threatened, against Streamline or any of its subsidiaries, nor is
there is any valid basis therefor known to Streamline.
8.8 ABSENCE OF UNDISCLOSED LIABILITIES. Except to the extent
(a) reflected or reserved against in the balance sheet set forth in June 1999
10-Q, or (b) incurred with persons other than any Affiliate of Streamline in the
ordinary course of business after the filing date of the June 1999 10-Q,
Streamline does not have any liabilities or obligations of any nature (including
obligations or liabilities relating to any violation of law), whether accrued,
absolute, contingent or otherwise (including, without limitation, liabilities,
as guarantor or otherwise, in respect of obligations of others) other than
performance obligations with respect to the contracts that would not be required
to be reflected or reserved against in a balance sheet prepared in accordance
with generally accepted accounting principles or referred to in the footnotes
thereto, except such liabilities and obligations which, individually or in the
aggregate, would not have a Material Adverse Effect on Streamline.
8.9 BROKERS. No finder, broker, agent, or other intermediary has acted for
or on behalf of Streamline or Merger Sub in connection with the negotiation,
preparation, execution, or delivery of this Agreement or the consummation of the
transactions contemplated hereby.
8.10. OWNERSHIP OF COMPANY STOCK. Except as set forth in Section 8.10 of
the Streamline and Merger Sub Disclosure Schedule, none of Streamline, Merger
Sub, or any other Subsidiary of Streamline, or to the best of Streamline's
knowledge, any of its affiliates or associates (as such terms are defined under
the Exchange Act) beneficially owns, directly or indirectly, or is a party to
any agreement, arrangement, or understanding with respect to the acquisition,
holding, voting, or disposition of any shares of the capital stock or other
securities of the Company.
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8.11. ACCOUNTING MATTERS. To the knowledge of Streamline, after consulting
with Streamline's independent auditors, neither Streamline nor Merger Sub, nor
to the best of Streamline's knowledge, any of their respective Affiliates, has
through the date of this Agreement, taken or agreed to take any action that
would prevent the business combination to be effected through the Merger from
being accounted for as a "pooling of interests."
8.12. DISCLOSURE. No representation or warranty of Streamline or Merger
Sub in this Agreement (including the exhibits and schedules hereto) or any of
the other transactions contemplated hereby contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
required to be stated therein or necessary to make the statements contained
therein not false or misleading.
8.13 CONTINUITY OF BUSINESS ENTERPRISE. It is the present intention of
Streamline and Merger Sub to continue at least one significant historic business
line of the Company, or to use a significant portion of the Company's historic
business assets in a business, in each case within the meaning of
Section 1.368-1(d) of the Treasury Regulations.
9. MUTUAL COVENANTS.
9.1. SATISFACTION OF CONDITIONS. Each of the parties will use its
reasonable best efforts to cause the satisfaction on or before December 31,
1999, of the conditions contained in Sections 12 through 14 of this Agreement
that impose obligations on it or require action on its part or the part of any
of its stockholders or Affiliates.
9.2. POOLING AND TAX-FREE REORGANIZATION TREATMENT. No party will
knowingly take or cause or permit to be taken any action, whether before or
after the Effective Time, that would disqualify the Merger as a "pooling of
interests" for accounting purposes or as a "reorganization" within the meaning
of Section 368(a)(2)(E) of the Code.
9.3. AGREEMENTS OF AFFILIATES. The Affiliates Schedules of the Company,
attached as EXHIBIT F-1 hereto, and Streamline, attached as EXHIBIT F-2 hereto,
respectively set forth all persons whom the scheduling party believes may be
deemed to be "affiliates" of such party, as that term, in the case of the
Company, is (i) defined for purposes of paragraphs (c) and (d) of Rule 145 under
the Securities Act or (ii) used in and for purposes of Accounting Series,
Releases 130 and 135, as amended, of the SEC, or in the case of Streamline, is
used in and for purposes of Accounting Series Releases 130 and 135, as amended,
of the SEC.
Each of the Company and Streamline will use its reasonable best efforts to
cause each person who is so identified as an Affiliate of it, to execute and
deliver to it as promptly as possible an executed copy of an Affiliate's
Agreement substantially in the form of EXHIBIT G-1 or G-2 attached hereto, as
applicable ("Affiliate's Agreement(s)"), and each of the Stockholders who is so
identified as an Affiliate agrees to execute and deliver a copy of the
applicable Affiliate's Agreement.
Before the Closing Date, each of the parties will (if necessary) amend and
supplement its Affiliates Schedule and will use all reasonable efforts to cause
each additional person who is identified therein as an affiliate of it to
execute and deliver a copy of the applicable Affiliate's Agreement in accordance
with the foregoing.
9.4. TAX MATTERS. The parties understand and agree that none of them is
making any representation or warranty with respect to the tax consequences of
this Agreement, the Merger, or the other transactions contemplated hereby. The
parties intend, however, that the Merger constitute a "tax-free reorganization"
under Section 368(a)(2)(E) of the Code, and agree to report the Merger as such
on their respective Tax Returns. Each of the parties will use its reasonable
best efforts to obtain, as promptly as is practicable following the date hereof
and in any event before the Effective Time of the Merger, such oral or written
assurances as it reasonably deems sufficient to enable the Company, Streamline,
and Merger Sub to execute and deliver to the others and to the tax counsel that
will render
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the Tax Opinion a certificate that such tax counsel reasonably deems sufficient
to allow such tax counsel to deliver the Tax Opinion.
9.5. FURTHER ASSURANCES. Subject to the terms and conditions set forth in
this Agreement, from time to time both before and after the Effective Time, each
of the parties will use his or its reasonable best efforts, as promptly as is
practicable to take or cause to be taken all actions, and to do or cause to be
done all other things, as are necessary, proper, or advisable to consummate and
make effective the Merger and the other transactions contemplated hereby. In the
event the Secretary of State of the State of Illinois raises any technical
objection to the terms of this Agreement as part of the Articles of Merger, the
parties hereto agree to restate and amend this Agreement to eliminate such
objection so long as such amendment does not adversely affect any party hereto.
10. CONDUCT OF THE COMPANY'S BUSINESS PENDING THE CLOSING. The Company and
the Stockholders jointly and severally covenant and agree that, from and after
the date of this Agreement and until the Closing, except as otherwise
specifically consented to or approved by Streamline in writing:
10.1. FULL ACCESS. The Company will afford to Streamline and its
authorized representatives, upon reasonable notice, full access during normal
business hours to all properties, books, records, contracts, and documents of
the Company and a full opportunity to make such investigations as they will
desire to make of the Company, and the Company will furnish or cause to be
furnished to Streamline and its authorized representatives all such information
with respect to the affairs and businesses of the Company as Streamline may
reasonably request, except to the extent that such access and opportunity cannot
be provided and such information can be furnished without unreasonably
interfering with the business of the Company.
10.2. CARRY ON IN REGULAR COURSE. The Company will maintain its owned and
leased properties in good operating condition and repair, will make all
necessary renewals, additions, and replacements thereto, will carry on its
businesses diligently and substantially in the same manner as heretofore, and
will not make or institute any material new, unusual, or novel methods of
manufacture, purchase, sale, lease, management, accounting, or operation or take
or permit to occur or exist any action or circumstance referred to in
Section 6.8 hereof, except to the extent to comply with outstanding contractual
obligations otherwise disclosed in this Agreement or as contemplated by this
Agreement.
10.3. NO DIVIDENDS, ISSUANCES, REPURCHASES, ETC. The Company will not
declare, set aside, or pay any dividends (whether in cash, shares of stock,
other property, or otherwise) on, or make any other distribution in respect of,
any shares of its capital stock or other securities, or issue, purchase, redeem,
or otherwise acquire for value any shares of its capital stock or other
securities.
10.4. NO COMPENSATION CHANGES. The Company will not increase the
compensation payable or to become payable to any of its officers or directors or
(except for increases made in the usual and ordinary course of business and
consistent with past) any of its key employees or agents, or increase any bonus,
insurance, pension, or other benefit plan, payment, or arrangement made to, for,
or with any such officers, directors, key employees or agents, nor will it
effect any general or uniform increase in the compensation payable or to become
payable to its employees, including without limitation any increase in the
benefits under any bonus or pension plan or other contract or commitment.
10.5. CONTRACTS AND COMMITMENTS. Except for those contracts, commitments
or transactions for which the Company has received the prior written consent of
Streamline, the Company will not enter into any contract or commitment, or
engage in any other transaction, with any of its Affiliates, other than in the
usual and ordinary course of business and consistent with its normal past
business practices.
10.6. PURCHASE AND SALE OF CAPITAL ASSETS. The Company will not purchase,
lease as lessee, license as licensee, or otherwise acquire any interest in, or
sell, lease as lessor, license as licensee, or otherwise dispose of any interest
in, any capital asset(s) (i) other than in the ordinary course of business,
(ii) having a market value in excess of $10,000 in any instance, or in excess of
$50,000 in the aggregate, or (iii) other than to the extent necessary in order
to comply with outstanding contractual
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obligations under agreements specified in Section 6.21 of the Company Disclosure
Schedule or as contemplated by this Agreement.
10.7 NO INVESTMENTS. The Company will not establish any subsidiary or make
or commit to make any investment in any subsidiary or other person.
10.8. INSURANCE. The Company will maintain with financially sound and
reputable insurance companies, funds or underwriters adequate insurance
(including without limitation the insurance referred to on Section 6.23 of the
Company Disclosure Schedule) of the kinds, covering such risks, in such amounts,
and with such deductibles and exclusions, as are consistent with prudent
business practice.
10.9. PRESERVATION OF ORGANIZATION. The Company will use its reasonable
best efforts to preserve its business organization intact, to keep available for
the benefit of the Surviving Corporation its present officers and key employees
and consultants, and to preserve for the benefit of the Surviving Corporation
its present business relationships with its material suppliers and customers and
others having business relationships with it.
10.10. NO DEFAULT. The Company will not take or omit to take any action,
or permit any action or omission to act, within the Company's reasonable
control, that would cause a default under or a material breach of any of its
contracts, commitments, or obligations, provided that no such default or breach
would, individually or in the aggregate, be reasonable likely to have a Material
Adverse Effect on the Company.
10.11. COMPLIANCE WITH LAWS. The Company will duly comply in all material
respects with all applicable laws, regulations, and orders.
10.12. ADVICE OF CHANGE. The Company will promptly advise Streamline in
writing of any material adverse change in the business, assets, condition
(financial or otherwise), or operations of the Company.
10.13. NO SHOPPING. From the date hereof until January 15, 2000, neither
the Company nor any of the Stockholders will negotiate for, solicit, discuss
(other than to decline a soliciting party's offer to enter into such a
discussion), negotiate, or enter into any agreement or understanding, whether or
not binding, with respect to the issuance, sale, or transfer of any of the
capital stock (other than pursuant to the Company's Option Plan or with respect
to other securities existing as of the date hereof) or the assets of the Company
(other than sales of inventory in the ordinary course of business) or any merger
or other business combination of the Company, to or with any person other than
Streamline and Merger Sub.
10.14 STOCKHOLDERS MEETING. The Company shall call a special meeting of
the Company Stockholders (or circulate a written consent) to consider and vote
upon the approval of this Agreement and the Merger and the other transactions
contemplated hereby. Subject to the fiduciary duties of The Company's Board of
Directors under applicable law the Company shall recommend to its stockholders
the approval of this Agreement and the Merger and the other transactions
contemplated hereby and shall use its reasonable best efforts to solicit and
obtain the requisite vote of approval.
10.15. CONSENT OF THIRD PARTIES. The Company shall employ its reasonable
best efforts to secure, before the Closing, the consent, in form and substance
reasonably satisfactory to Streamline and Streamline's counsel, to the
consummations of the transactions contemplated by the Agreement by each party to
any contract, commitment or obligation of the Company, in each case under which
such consent is required.
10.16. SATISFACTION OF CONDITIONS PRECEDENT. The Company shall use its
best efforts to cause the satisfaction of the conditions precedent contained in
Sections 13 and 14 hereof.
10.17. DISCLOSURE SUPPLEMENTS. From time to time before the Closing, and
in any event immediately before the Closing, the Company and the Stockholders
will promptly advise Streamline in writing of any matter hereafter arising or
becoming known to any of them that, if existing, occurring, or
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known at or before the date of this Agreement, would have been required to be
set forth or described in the Company Disclosure Schedule, or that is necessary
to correct any information in the Company Disclosure Schedule that is or has
become inaccurate.
10.18 STOCKHOLDER PARTIES. The Company shall use its reasonable best
efforts to cause each Other Stockholder to become a party to this Agreement by
executing and delivering to Streamline an instrument to such effect in form and
substance reasonably satisfactory to Streamline.
10.19 SALE LEASEBACK. The Company shall use its reasonable best efforts to
cause (i) a certificate of occupancy for the distribution center currently under
construction to be obtained; (ii) the sale leaseback transaction with Cardinal
Capital Partners, Inc. (SCOTMKT Chicago, L.L.C.) to be consummated, (iii) its
construction line of credit related to such sale leaseback transaction to be
terminated and (iv) net sale proceeds of not less than $1,300,000 in connection
with such sale leaseback to be received.
10.20 OPTION COMMITTEE. The Company shall use its reasonable best efforts
to cause the Option Committee of its Board of Directors to take all steps
necessary, pursuant to Section 15(b) of the Company Option Plan, to cause each
Company Option to be deemed a Streamline Option as of the Effective Time
10.21 POOLING LETTER. The Company shall use its reasonable best efforts to
cause Arthur Andersen LLP or such other independent accounting firm designated
by the Company (the "Company's Accountants") to execute and deliver to the
Company a "poolability letter" with respect to the Company in form which would
reasonably allow PricewaterhouseCoopers LLP or such other independent accounting
firm designated by Streamline ("Streamline's Accountants") to deliver the letter
described in Section 14.10 hereof, and the Company shall promptly deliver to
Streamline a copy of such "poolability letter."
10.22 LINE OF CREDIT. The Company shall use its reasonable best efforts to
increase the maximum principal amount borrowable under the Line of Credit from
$3,000,000 to $4,800,000.
10.23 SHAREHOLDERS AGREEMENT. The Company shall use its reasonable best
efforts to cause the Company Stockholders to terminate the Shareholders
Agreement, dated as of October 6, 1998 (the "Shareholders Agreement"), by and
among the Company, Nordstrom, Inc and certain other Company Shareholders, on or
before the Closing Date.
11. STREAMLINE'S AND MERGER SUB'S COVENANTS. Streamline and Merger Sub
covenant and agree that, except as otherwise specifically consented to or
approved by the Company in writing:
11.1 FULL ACCESS. Streamline will afford the Company and its authorized
representatives, upon reasonable notice, full access during normal business
hours to all properties, books, records, contracts and documents of Streamline
and a full opportunity to make such investigations as they will desire to make
of Streamline, and Streamline will furnish or cause to be furnished to the
Company and its authorized representatives all such information with respect to
the affairs and businesses of Streamline as the Company reasonably requests,
except to the extent that such access and opportunity cannot be provided and
such information can be furnished without unreasonably interfering with the
business of Streamline.
11.2 PRESERVATION OF ORGANIZATION. Streamline will use its reasonable best
efforts to continue to conduct its business in a manner designed, in its
reasonable judgement, to enhance the long-term value of the Streamline Common
Stock and the business prospects of Streamline and to the extent consistent
therewith use all reasonable efforts to preserve intact the Streamline core
business and Streamline's present business relationships with its material
suppliers and customers.
11.3 COMPLIANCE WITH LAWS. Streamline and each of its Subsidiaries will
duly comply in all material respects with all applicable laws, regulations, and
orders.
11.4 ADVICE OF CHANGE. Streamline will promptly advise the Company in
writing of any material adverse effect in the business, assets, condition
(financial or otherwise) or operations of Streamline.
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11.5. STOCKHOLDER MEETING AND PROXY STATEMENT.
(a) As promptly as practicable after the date hereof, Streamline shall
schedule a meeting of Streamline's stockholders (the "Streamline Meeting") to
seek approval from Streamline's stockholders of (i) the issuance of shares of
Streamline Common Stock pursuant to the Merger and this Agreement and (ii) the
ratification of an increase in the number of shares issuable under the 1993
Employee Stock Plan from 2,500,000 to 3,000,000, (the "Meeting Purposes"). Upon
the obtaining of such approval, Streamline shall have authorized and reserved
for issuance such number of shares of Streamline Common Stock as are to be
issued or reserved for issuance pursuant to this Agreement.
(b) Promptly after the date hereof, Streamline shall prepare and file with
the Commission under the Exchange Act, preliminary proxy materials for the
purpose of soliciting proxies for stockholder approval of the Meeting Purposes
at the Streamline Meeting. Such proxy materials, together with any accompanying
letter to stockholders, notice of meeting and form of proxy, shall be referred
to herein as the "Proxy Statement". Streamline shall respond to any SEC comments
on the Proxy Statement and shall otherwise use reasonable best efforts to
resolve promptly all SEC comments on the Proxy Statement to the satisfaction of
the SEC. If the SEC comments on the Proxy Statement cannot be resolved to the
reasonable satisfaction of Streamline's Board of Directors acting in good faith,
following consultation with the Company and its counsel regarding the failure to
resolve such SEC comments, Streamline shall be entitled to withdraw the Proxy
Statement. Upon receipt of any SEC comments Streamline will promptly provide a
copy thereof to the Company and its counsel and shall consult with the Company
and its counsel regarding such comments and shall promptly provide the Company
and its counsel with copies of all responses and other written communications
with the SEC.
(c) The Company shall supply all information regarding the Company required
to be included with respect to the Company in the Proxy Statement under the
Exchange Act and applicable rules and regulations thereunder and applicable
provisions of the DGCL (the "Proxy Rules").
(d) Promptly following the resolution to the satisfaction of the SEC and the
reasonable satisfaction of Streamline's Board of Directors (in accordance with
Section 11.5(b) hereof) of all SEC comments on the Proxy Statement (or the
expiration of the ten-day period under Rule 14a-6(a) under the Exchange Act, if
no SEC comments are received by such date), Streamline shall promptly distribute
the Proxy Statement to its stockholders, the Company, and with the Company's
assistance, to the Company Stockholders, and, pursuant thereto, promptly call
the Streamline Meeting in accordance with Proxy Rules and solicit proxies from
Streamline's stockholders to obtain approval of the Meeting Purposes. The Proxy
Statement shall include the recommendation of the Board of Directors of
Streamline in favor of the each of Meeting Purposes.
(e) Streamline shall comply with all Proxy Rules in the preparation, filing
and distribution of the Proxy Statement, the solicitation of proxies thereunder
and the calling and holding of the Streamline Meeting. Without limiting the
foregoing, Streamline shall ensure that the Proxy Statement does not, as of the
date on which it is distributed to Streamline's stockholders and the Company
Stockholders and as of the date of the Streamline Meeting and the meeting of the
Company Stockholders to be held to approve the Merger, contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which they were
made, not misleading (provided that Streamline shall not be responsible for the
accuracy or completeness of any information furnished in writing by or on behalf
of the Company for inclusion in the Proxy Statement).
11.6 CONSENT OF THIRD PARTIES. Streamline shall employ its reasonable best
efforts to secure, before the Closing, the consent, in form and substance
reasonably satisfactory to the Company and the Company's counsel, to the
consummation of the transactions contemplated by the Agreement, by each party to
any material contract, commitment or obligation of Streamline, in each case
under which the failure of which to obtain such consent would be materially
adverse to Streamline.
11.7 SATISFACTION OF CONDITIONS PRECEDENT. Streamline shall use its
reasonable best efforts to cause satisfaction of the conditions precedent
contained in Sections 12 and 14 hereof.
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11.8 DISCLOSURE SUPPLEMENTS. From time to time before the Closing, and in
any event immediately before the Closing, Streamline will promptly advise the
Company in writing of any matter hereinafter arising or becoming known to
Streamline that, if occurring, or known to Streamline at or before the date of
this Agreement, would have been required to be set forth or described in the
Streamline and Merger Sub Disclosure Schedule, or that is necessary to correct
any information in the Streamline and Merger Sub Disclosure Schedule that is or
has become inaccurate.
11.9 CONTINUITY OF BUSINESS ENTERPRISE. Streamline and Merger Sub will
continue at least one significant historic business line of the Company, or use
at least a significant portion of the Company's historic business assets in a
business, in each case within the meaning of Section 1.368-1(d) of the Treasury
Regulations. Streamline and Merger Sub will not transfer the Surviving
Corporation's stock or its historic business assets to (i) a corporation that is
not a member of Streamline's Qualified Group or (ii) to a partnership or any
other entity for a period of not less than two years.
11.10 CONTINUITY OF INTEREST. Streamline will not acquire and will use its
reasonable best efforts to ensure that no "related party" to Streamline (as
defined under Section 1.368-1(e)(3) of the Treasury Regulations) acquires,
directly or indirectly (as set forth under Section 1.368-1(e)(6), examples 4 and
5), any of the Company's stock prior to the Closing or, for at least two years
after the Closing, any Streamline Common Stock issued to the Company
Stockholders in the Merger (other than as part of an ongoing stock repurchase
program of Streamline meeting the requirements of Treasury Regulation
Section 1.368-1(e)(6), example 8).
11.11 BOARD OF DIRECTORS. Immediately following the Effective Time,
Streamline will use its reasonable best efforts to cause its Board of Directors
to appoint Mr. Chris Sang as a member of the Board of Directors of Streamline.
11.12 STOCKHOLDERS GUARANTIES. At or prior to the Effective Time,
Streamline will take such action as is necessary in order to cause the
Stockholders to be released from their obligations as guarantors or co-lessees
of the Company pursuant to agreements with (i) LaSalle National Bank,
(ii) Comerica Bank Illinois, (iii) Cambridge Bank, (iv) Gentile
Chrysler-Plymouth, Inc. and (v) Hoskins Chevrolet, Inc.
11.13 DIRECTOR AND OFFICERS INSURANCE. Streamline will use its reasonable
best efforts to cause the Company's existing directors and officers liability
insurance policy to remain in effect for at least two years from the Closing
Date or to replace such policy with a policy providing substantially comparable
coverage; provided, however, that Streamline shall have no obligation to
maintain or replace such policy (except as set forth below in this
Section 11.13) if so maintaining or replacing such policy would require
Streamline to spend in excess of $29,000 per year in connection therewith, and
in which case Streamline will notify the Stockholders' Representative in writing
of the cost of taking such action. Following the delivery of any such notice, if
requested in writing by the Stockholders' Representative, Streamline will use
its reasonable best efforts, at the election of the Stockholders'
Representative, to (i) obtain a directors and officers liability insurance
policy providing lesser coverage as may be reasonably agreeable to the
Stockholders' Representative, provided that the cost thereof would not exceed
$29,000 per year or (ii) maintain or replace the Company's existing directors
and officers liability insurance policy, provided that the Stockholders'
Representative provides Streamline with reasonable assurance that the
Stockholders' Representative and/or other parties will pay all costs in
connection therewith in excess of $29,000 per year.
12. MUTUAL CONDITIONS TO THE PARTIES' OBLIGATIONS. The parties'
obligations to consummate the Merger are subject to the satisfaction (or waiver
by the Company or Streamline, each in its sole discretion) of each of the
conditions set forth in this section on or before the Closing Date. If the
Merger is consummated, such conditions will conclusively be deemed to have been
satisfied or waived.
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12.1. NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction, or other order issued by any court of
competent jurisdiction, or other legal restraint or prohibition preventing the
consummation of the Merger, will be in effect, and no petition or request for
any such injunction or other order will be pending.
12.2. ACCOUNTING MATTERS. Each of the Company and Streamline will have
received all of the Affiliates' Agreements contemplated by Section 9.3 to be
received by it.
12.3. PROCEEDINGS AND DOCUMENTS SATISFACTORY. All proceedings in
connection with the transactions contemplated by this Agreement and all
certificates and other documents delivered to such party pursuant to this
Agreement or in connection with the Closing will be reasonably satisfactory to
such party and his or its counsel.
12.4. APPROVAL BY STOCKHOLDERS. The Company Stockholders shall have
authorized and approved this Agreement, the Merger and the transactions
contemplated hereby as required by Section 11.20 of the IBCA.
12.5. AUTHORIZATION OF ISSUANCE OF STREAMLINE COMMON STOCK. The
stockholders of Streamline shall have approved the Meeting Purposes at the
Streamline Meeting.
12.6. ESCROW AGREEMENT. Streamline, the Stockholder Representative and the
Escrow Agent (as defined therein) shall have entered into the Escrow Agreement
substantially in the form attached as EXHIBIT D hereto.
12.7. GOVERNMENTAL CONSENTS. All consents, approvals, orders or clearances
of any governmental authority (including any approvals or clearances under the
HSR Act), the granting of which is required for the consummation of the
transactions contemplated by this Agreement, shall have been obtained, and all
waiting periods specified under applicable law, the expiration of which is
necessary for such consummation, shall have passed.
12.8. NASDAQ NATIONAL MARKET LISTING. The shares of Streamline Common
Stock into which shares of Company Common Stock will be converted in the Merger
will have been authorized for listing, subject to official notice of issuance,
on the Nasdaq National Market or such other exchange or automated quotation
system on which the Streamline Common Stock is then listed or quoted.
12.9. FINAL NET CASH STATEMENT. The Final Net Cash Statement shall have
been determined in accordance with Section 17(c) hereof.
13. CONDITIONS TO THE COMPANY'S AND THE STOCKHOLDERS' OBLIGATIONS. The
obligations of the Company and each of the Stockholders, respectively, to
consummate the Merger are subject to the satisfaction (or waiver by the Company,
in its sole discretion) of each of the conditions set forth in this section on
or before the Closing Date. If the Merger is consummated, such conditions will
conclusively be deemed to have been satisfied or waived.
13.1. REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties made by Streamline and/or Merger Sub in or pursuant to this Agreement
or in any statement, certificate, or other document delivered to the Company or
the Stockholders in connection with this Agreement, the Merger, or any of the
other transactions contemplated hereby will have been true and correct in all
material respects when made and (after taking into account any supplement to or
amendment of this Agreement or any such statement, certificate or other document
required to correct any information therein that is or has become inaccurate)
will be true and correct in all material respects at and as of the Closing.
13.2. COMPLIANCE WITH AGREEMENT. Streamline and Merger Sub will have
performed and complied in all material respects with all of their respective
obligations under this Agreement to be performed or complied with by them before
or at the Closing, including without limitation the
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execution and delivery of all documents to be executed and delivered by any of
them in connection with this Agreement and/or the consummation of the Merger and
the other transactions contemplated hereby.
13.3. CLOSING CERTIFICATE. Streamline and Merger Sub will have executed
and delivered to the Company, at and as of the Closing, a certificate (without
qualification as to knowledge or materiality) certifying that the conditions
referred to in Sections 13.1 and 13.2 have been satisfied.
13.4. OPINION OF COUNSEL. Bingham Dana LLP, counsel to Streamline and
Merger Sub, will have delivered to the Company a written legal opinion, dated on
and as of the Closing Date, and substantially in the form of the attached
EXHIBIT H.
13.5 OPINION OF TAX COUNSEL. Vedder, Price, Kaufman & Kammholz will have
delivered to the Company a written legal opinion, dated on and as of the Closing
Date, reasonably acceptable to the Company that the Merger will qualify as a
reorganization pursuant to Section 368(a)(2)(E) of the Code and that the
Company, Streamline and Merger Sub will each be a "party to a reorganization"
with respect to the Merger as such term is defined in Section 368(b) of the Code
(the "Tax Opinion"). Each of the Company, Streamline and Merger Sub agrees to
provide all customary and necessary representations to such counsel necessary
for it to prepare such Tax Opinion.
13.6 NO MATERIAL CHANGE. There shall not have been any material adverse
change in the financial condition, business or assets of Streamline, provided
however, for the purposes of this Section 13.6, a material adverse change shall
not include a decrease in the trading price of Streamline Common Stock as
reported on the Nasdaq National Market or such other exchange or automated
quotation system on which the Streamline Common Stock is then listed or quoted.
13.7 STOCKHOLDER GUARANTIES RELEASE. Streamline shall have obtained the
release of the guaranties referred to in Section 11.12 hereof.
14. CONDITIONS TO STREAMLINE'S AND MERGER SUB'S OBLIGATIONS. The
obligations of each of Streamline and Merger Sub, respectively, to consummate
the Merger are subject to the satisfaction (or waiver by Streamline, in its sole
discretion) of each of the conditions set forth in this section on or before the
Closing Date. If the Merger is consummated, such conditions will conclusively be
deemed to have been satisfied or waived.
14.1. REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties made by the Company and/or any of the Stockholders in or pursuant to
this Agreement or in any statement, certificate, or other document delivered to
Streamline in connection with this Agreement, the Merger, or any of the other
transactions contemplated hereby will have been true and correct in all material
respects when made and (after taking into account any supplement to or amendment
of this Agreement or any such statement, certificate or other document required
to correct any information therein that is or has become inaccurate) will be
true and correct in all material respects at and as of the Closing.
14.2. COMPLIANCE WITH AGREEMENT. The Company and each of the Stockholders
will have performed and complied in all material respects with all of their
respective obligations under this Agreement to be performed or complied with by
them before or at the Closing, including without limitation the execution and
delivery of all documents to be executed and delivered by any of them in
connection with this Agreement and/or the consummation of the Merger and the
other transactions contemplated hereby.
14.3. CLOSING CERTIFICATE. The Company will have executed and delivered to
Streamline, at and as of the Closing, a certificate (without qualification as to
knowledge or materiality) certifying that the conditions referred to in Sections
14.1 and 14.2 have been satisfied.
14.4. NO MATERIAL CHANGE. Except as set forth on Section 14.4 of the
Company Disclosure Schedule, there shall not have been any material adverse
change in the financial condition, business or
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assets of the Company, provided however, for the purposes of this Section 14.4,
a material adverse change shall not be deemed to have occurred if, as of any
particular measurement date immediately preceding the Closing, the Company's
Negative Net Cash Amount (as certified to Streamline by an officer of the
Company) is less than (i) in the event the sale-leaseback transaction referenced
in Section 14.9 hereof has closed as of such measurement date, the "Post-Sale
Leaseback Allowable Negative Cash Amount" set forth below and (ii) in the event
such sale leaseback transaction has not closed as of such measurement date, the
"Pre-Sale Leaseback Allowable Negative Cash Amount" set forth below:
<TABLE>
<CAPTION>
POST-SALE LEASEBACK PRE-SALE LEASEBACK
ALLOWABLE NEGATIVE ALLOWABLE NEGATIVE
MEASUREMENT DATE CASH AMOUNT CASH AMOUNT
- --------------------- ------------------- ------------------
<S> <C> <C>
12/31/99 $3,276,000 $4,656,000
01/31/00 $4,476,000 $5,856,000
02/29/00 $5,169,000 $6,549,000
</TABLE>
14.5 RESIGNATIONS OF DIRECTORS AND OFFICERS. All of the directors and
officers of the Company designated in writing by Streamline to the Company not
less than twenty (20) days prior to the Closing, shall have resigned their
positions as officers or directors with the Company effective on or prior to the
Closing Date, and prior thereto shall have executed such appropriate documents
with respect to the transfer of establishment of bank accounts, signing
authority, etc., as Streamline shall have requested.
14.6. OPINION OF COUNSEL. Vedder, Price Kaufman & Kammholz, counsel to the
Company, will have delivered to Streamline a written legal opinion addressed to
Streamline, dated on and as of the Closing Date, and substantially in the form
of the attached EXHIBIT I.
14.7. STOCKHOLDER PARTIES. Holders of not less than (i) ninety-five
percent (95%) of the issued and outstanding shares of Company Common Stock and
(ii) ninety-five percent (95%) of the issued and outstanding shares of Company
Preferred Stock shall either (i) be a Stockholders or (ii) become a party to
this Agreement by executing and delivering to Streamline an instrument to such
effect in form reasonably satisfactory to Streamline.
14.8. OPTION COMMITTEE. The Company shall have executed and delivered to
Streamline a certificate certifying that the Option Committee of the Board of
Directors of the Company has taken all action necessary, pursuant to
Section 15(b) of the Company Option Plan, to cause each Company Option to be
deemed a Streamline Option as of the Effective Time.
14.9. SALE LEASEBACK COMPLETE. The Company shall have (i) obtained a
certificate of occupancy for the distribution center currently under
construction; (ii) consummated the sale leaseback transaction with Cardinal
Capital Partners, Inc. (SCOMKT Chicago, L.L.C.), (iii) terminated its
construction line of credit related to such sale leaseback transaction and
(iv) provided Streamline written evidence of each of the foregoing.
14.10 ACCOUNTING TREATMENT. Streamline will have received a letter from
Streamline's Accountants, addressed to Streamline, dated the Closing Date, in
form reasonably satisfactory to it, and substantially to the effect that, on the
basis of a review of this Agreement and the Merger and the other transactions
contemplated hereby, in such accountants' opinion the Merger will qualify for
"pooling of interests" accounting treatment under Accounting Principles Board
Opinion No. 16.
14.11 SHAREHOLDERS AGREEMENT. Streamline will have received written
evidence that the Shareholders Agreement has been terminated.
15. OTHER COVENANTS. In order to induce Streamline and Merger Sub to enter
into this Agreement and to consummate the Merger and the other transactions
contemplated hereby, each of the Stockholders hereby severally agrees and
covenants (and such covenants will be in addition and without prejudice to any
other confidentiality, inventions, noncompetition, nonsolicitation, and/or other
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agreements and covenants to which any of the Stockholders may be subject from
time to time) that, unless Streamline otherwise agrees in writing prior to such
action, such Stockholder shall take such actions or refrain from taking such
actions as are set forth below.
15.1. CONFIDENTIAL INFORMATION. If the Merger is consummated, such
Stockholder will maintain the confidentiality of all confidential, sensitive, or
proprietary information of the Surviving Corporation, including without
limitation with respect to its businesses, finances, affairs, and technology,
which will be and remain the exclusive property of the Surviving Corporation;
and unless previously authorized in writing by Streamline, and except with
respect to information that has otherwise become public through no action or
omission on the part of such Stockholder, will not disclose any such information
to any third party, or use it for any purpose other than (if applicable) in the
discharge of such Stockholder's employment responsibilities in the ordinary
course of the Surviving Corporation's business.
15.2. NON-COMPETITION, ETC. For a period of two (2) years after the
Closing Date (which period will automatically be extended by a period of time
equal to any period in which such Stockholder is in breach of any obligations
under this Section 15.2; including any such extension, the "Restricted Period"),
such Stockholder will not engage, directly or indirectly (except as a
stockholder, director, officer, and/or employee of Streamline and/or the
Surviving Corporation), as a proprietor, equityholder, investor (except as a
passive investor holding not more than 5% of the outstanding capital stock of a
publicly held or private company), lender, partner, director, officer, employee,
or consultant, anywhere in the United States, in the business of providing
on-line shopping and home-delivery of (i) groceries or (ii) health and beauty
care products or pet foods and supplies, in each case, in combination with
groceries; provided that (in accordance with an existing commitment of the
Company) nothing in this Section 15.2 shall restrict the activities of Patterson
Dental Company.
15.3. NON-SOLICITATION OF EMPLOYEES, ETC. During the Restricted Period,
such Stockholder will not directly or indirectly recruit, solicit, induce, or
attempt to induce (other than by general advertisement) any of the employees or
independent contractors of the Streamline or Surviving Corporation to terminate
their employment or contractual relationship with Streamline or the Surviving
Corporation; and will not assist any other person to do so, or be a proprietor,
investor (except as a passive investor holding not more than 5% of the capital
stock of a publicly held or private company), partner, director, or officer of
any person who does or attempts to do so.
15.4. NON-SOLICITATION OF CUSTOMERS, SUPPLIERS, ETC. During the Restricted
Period, such Stockholder will not directly or indirectly solicit, divert, take
away, or attempt to divert or take away, from Streamline or the Surviving
Corporation any of the business or patronage of any of its customers, clients,
accounts, vendors, or suppliers, or induce or attempt to induce (other than by
general advertisement) any such person to reduce the amount of business it does
with Streamline or the Surviving Corporation, and will not assist any other
person to do so, or be a proprietor, equityholder, investor (except as a passive
investor holding not more than 5% of the capital stock of a publicly held
company), partner, director, or officer of any person who does or attempts to do
so.
15.5. NON-DISPARAGEMENT. During the Restricted Period, such Stockholder
will not disparage, deprecate, or make any negative comment with respect to
Streamline or the Surviving Corporation or its businesses, operations,
properties, or prospects.
15.6. EQUITABLE REMEDIES. Such Stockholder hereby acknowledges that any
breach by him or her of his or her obligations under this Section 15 would cause
substantial and irreparable damage to Streamline and the Surviving Corporation,
and that money damages would be an inadequate remedy therefor, and accordingly,
acknowledges and agrees that each of Streamline and the Surviving Corporation
will be entitled to an injunction, specific performance, and/or other equitable
relief to prevent the breach of such obligations (in addition to all other
rights and remedies to which they may be entitled in respect of any such
breach).
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15.7. MODIFICATION. In the event that a court of competent jurisdiction
determines that any of the provisions of this Section 15 would be unenforceable
as written because they cover too extensive a geographic area, too broad a range
of activities, or too long a period of time, or otherwise, then such provisions
will automatically be modified to cover the maximum geographic area, range of
activities, and period of time as may be enforceable, and in addition, such
court is hereby expressly authorized so to modify this Agreement and to enforce
it as so modified. No invalidity or unenforceability of any section of this
Agreement or any portion thereof will affect the validity or enforceability of
any other section or of the remainder of such section.
16. INDEMNIFICATION.
16.1. INDEMNIFICATION BY STREAMLINE AND MERGER SUB. Subject to the
limitations set forth in Section 16.6 hereof, Streamline and Merger Sub, jointly
and severally, will indemnify, defend, and hold harmless each of the Company
Stockholders, and if the Merger is not consummated, also the Company, and each
of their respective directors, officers, employees, representatives, and other
Affiliates, from and against any and all Damages related to or arising, directly
or indirectly, out of or in connection with any (i) breach by Streamline and/or
Merger Sub of any representation, warranty, covenant, agreement, obligation, or
undertaking made by Streamline and/or Merger Sub in this Agreement (including
any schedule or exhibit hereto), or any other agreement, instrument,
certificate, or other document delivered by or on behalf of Streamline and/or
Merger Sub in connection with this Agreement, the Merger, or any of the other
transactions contemplated hereby and (ii) any misstatement or omission in the
registration statement contemplated by Section 5 hereof (other than a
misstatement or omission based on information provided in writing to Streamline
by the Company or any Company Stockholder specifically for inclusion therein).
16.2. INDEMNIFICATION BY THE STOCKHOLDERS AND THE COMPANY. Subject to the
limitations set forth in Section 16.6 hereof, if the Merger is not consummated,
the Company, or if the Merger is consummated, the Stockholders, severally and
not jointly, will indemnify, defend and hold harmless Streamline, and if the
Merger is consummated, also the Surviving Corporation, and each of their
respective directors, officers, employees, representatives and other Affiliates,
from and against any and all Damages related to or arising, directly or
indirectly, out of or in connection with (i) any breach by the Company of any
representation, warranty, covenant, agreement, obligation or undertaking made by
the Company in this Agreement (including any schedule or exhibit hereto), or any
other agreement, instrument, certificate or other document delivered by or on
behalf of the Company at or prior to the Closing to effect the transactions
contemplated by this Agreement and/or (ii) any action, investigation or
proceeding of any federal, state or local governmental authority that is
asserted in writing against the Company on or prior to the date on which the
Company's new facility is in operation with respect to item number six set forth
on Section 6.29 of the Company Disclosure Schedule and that is instituted on or
prior to the Closing Date (regardless of when such Damages are incurred and
regardless of whether such Damages are incurred by the Company, Streamline or
Merger Sub).
16.3. INDEMNIFICATION BY EACH STOCKHOLDER. Subject to the limitations set
forth in Section 16.6 hereof, each of the Stockholders, severally and not
jointly, will indemnify, defend, and hold harmless Streamline, and if the Merger
is consummated, also the Surviving Corporation, and each of their respective
directors, officers, employees, representatives, and other Affiliates, from and
against any and all Damages related to or arising, directly or indirectly, out
of or in connection with any breach by such Stockholder of any representation,
warranty, covenant, agreement, obligation, or undertaking made by such
Stockholder in this Agreement (including any schedule or exhibit hereto), or any
other agreement, instrument, certificate, or other document delivered by or on
behalf of such Stockholder at or prior to the Closing to effect the transactions
contemplated by this Agreement.
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16.4 CLAIMS.
(a) In the event that any party hereto (the "Indemnified Party") desires to
make a claim against another party hereto (the "Indemnifying Party"), which term
includes all indemnifying parties if more than one) in connection with any
third-party litigation, arbitration, action, suit, proceeding, claim or demand
at any time instituted against or made upon it for which it may seek
indemnification hereunder (a "Third-Party Claim"), the Indemnified Party will
promptly notify the Indemnifying Party of such Third-Party Claim and of its
claims of indemnification with respect thereto; provided, that failure to
promptly give such notice will not relieve the Indemnifying Party of its
indemnification obligations under this section except to the extent, if any,
that the Indemnifying Party has actually been prejudiced thereby.
(b) The Indemnifying Party will have the right to assume the defense of the
Third-Party Claim with counsel of its choice reasonably satisfactory to the
Indemnified Party by written notice to the Indemnified Party within twenty days
after the Indemnifying Party has received notice of the Third-Party Claim;
provided, however, that the Indemnifying Party must conduct the defense of the
Third-Party Claim actively and diligently thereafter in order to preserve its
rights in this regard; and, provided further, that the Indemnified Party may
retain separate co-counsel at its sole cost and expense and participate in the
defense of the Third-Party Claim.
(c) The Indemnifying Party will not consent to the entry of any judgment or
enter into any settlement with respect to the Third-Party Claim without the
prior consent of the Indemnified Party (which will not be unreasonably withheld
or delayed) unless the judgment or proposed settlement (i) includes an
unconditional release of all liability of each Indemnified Party with respect to
such Third-Party Claim and (ii) involves only the payment of money damages by
the Indemnifying Party and does not impose an injunction or other equitable
relief upon the Indemnified Party. So long as the Indemnifying Party has assumed
and is conducting the defense of the Third-Party Claim in accordance with
Section 16.4(b) above the Indemnified Party will not consent to the entry of any
judgment or enter into any settlement with respect to the Third-Party Claim
without the prior written consent of the Indemnifying Party (which will not be
unreasonably withheld or delayed).
(d) In the event the Indemnifying Party fails to assume the defense of the
Third-Party Claim in accordance with Section 16.4(b) above, (i) the Indemnified
Party may defend against, and consent to the entry of any judgment or enter in
any settlement with respect to, the Third-Party Claim in any manner it
reasonably may deem appropriate (and the Indemnified Party need not consult
with, or obtain any consent from, the Indemnifying Party in connection
therewith) and (ii) the Indemnifying Party will remain responsible for any
Damages the Indemnified Party may suffer as a result of such Third-Party Claim
to the extent provided in this Article 16.
16.5 PAYMENT OF CLAIMS. In the event of any bona fide claim for
indemnification hereunder, the Indemnified Party will advise the Indemnifying
Party that is required to provide indemnification therefor in writing with
reasonable specificity of the amount and circumstances surrounding such claim.
With respect to liquidated claims, if within thirty (30) days the Indemnifying
Party has not contested such claim in writing, the Indemnifying Party will pay
and/or the Escrow Agent shall pay, as applicable, the full amount thereof,
subject to the limitations set forth in Section 16.6, within ten (10) days after
the expiration of such period. Any indemnification obligations pursuant to this
Section 16 of any Stockholder who is an Indemnifying Party shall be paid, at
such Stockholder's option (i) in cash, (ii) by surrendering Streamline Common
Stock (each share of which shall be valued for such purpose at the Closing Date
Price Per Share), or (iii) through a combination of the methods specified in
clauses (i) and (ii).
16.6. LIMITATIONS OF LIABILITY.
(A) BASKET. No Indemnifying Party will be required to indemnify an
Indemnified Party hereunder until such time as the aggregate amount of Damages
for which (i) Streamline, and if the
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Merger is not consummated, also Merger Sub, or if the Merger is consummated,
also the Surviving Corporation, and in any case their respective directors,
officers, employees, representatives, and other Affiliates, on the one hand, or
(ii) the Stockholders, and if the Merger is not consummated, the Company, and in
any case their respective directors, officers, employees, representatives, and
other Affiliates, as the case may be, on the other, are otherwise entitled to
indemnification pursuant to this Agreement exceeds $300,000 (provided, however,
that such $300,000 minimum amount shall not be applicable with respect to any
indemnification obligation of the Stockholders under Section 16.2(ii) hereof),
whereupon such Indemnified Parties will be entitled to indemnification for the
amount of Damages that exceed such amount; provided, however, that this
Section 16.6(a) shall not apply to any Damages arising out of or in connection
with any breach of Streamline, Merger Sub, the Company or the Stockholders of
any of their respective covenants, agreement or obligations under Sections 2, 3,
4, or 5 of this Agreement.
(B) MAXIMUM LIABILITY. If the Merger is consummated, the maximum liability
of any Stockholder for indemnification hereunder will not exceed fifty percent
(50%) of the value of the shares of Streamline Common Stock (including Escrowed
Shares) into which such Stockholder's shares of Company Stock are converted in
the Merger, which for this purpose will be conclusively deemed to be Closing
Date Price Per Share.
(C) TIME LIMIT. All representations and warranties in this Agreement shall
survive the Closing and any investigation at any time made by or on behalf of an
Indemnified Party and shall expire, and no Indemnifying Party will be liable for
any Damages hereunder unless a written claim for indemnification is given by the
Indemnified Party to the Indemnifying Party with respect thereto prior to the
date (the "Cut-Off Date") which is the earlier of (i) the first anniversary of
the date of this Agreement, (ii) the date of effectiveness of the registration
statement referenced in Section 5 hereof, (iii) the date which is nine
(9) months after the Closing Date, if Streamline has failed to file the
registration statement referenced in Section 5 hereof by such date, or (iv) the
date on which Streamline's independent certified public accountants deliver
their audit report on Streamline's financial statements as at the end of the
fiscal year of Streamline during which the Effective Time occurs and for the
annual fiscal period then ended. Notwithstanding the foregoing, liability for
Damages resulting from a breach of the covenants contained in Sections 11.9 and
11.10 shall continue until the expiration of all applicable statute of
limitations relating to any Taxes that a Stockholder might owe as a result of
such breach.
(D) EXCLUSIVE REMEDY. Except with respect to claims based on fraud, after
the Effective Time, the rights of a party under this Article 16 shall be the
exclusive remedy of an Indemnified Party with respect to claims resulting from
or relating to any misrepresentation or breach of warranty contained in this
Agreement.
17. PROCEDURES; NET CASH BALANCE ADJUSTMENT.
(a) On or before the date which is fourteen (14) days after October 31,
1999 (the "Calculation Date"), the Company shall have prepared and delivered to
Streamline (i) a statement (the "Net Cash Statement") which shall (y) set forth
the Cash Balance and the Line of Credit Balance of the Company as of such date
and (z) calculate the Net Cash Balance of the Company as of such date, and
(ii) a certificate of an officer of the Company certifying that the Net Cash
Statement presents fairly the character and the amount of the Cash Balance and
the Line of Credit Balance as of the Calculation Date, in accordance with GAAP
applied consistently with the principles, practices and policies used to prepare
the Company's Most Recent Audited Balance Sheet.
(b) Streamline shall have fourteen (14) days after its receipt of the Net
Cash Statement to review the balances and calculations set forth therein. During
the review of the Net Cash Statement by Streamline and Streamline's Accountants
and the period of any dispute referred to in Section (c) below, the Company
shall provide Streamline and Streamline's Accountants full access to the books,
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records, facilities and employees of the Company and Company's Accountants and
shall cooperate with Streamline and Streamline's Accountants, in each case to
the extent reasonably required by Streamline and Streamline's Accountants in
order to review the Net Cash Statement and to investigate the basis for any such
dispute; PROVIDED, HOWEVER, that (i) any such investigation shall be conducted
in such a manner as not to interfere unreasonably with the operation of the
Company, and (ii) the Company shall not be required to supply Streamline or
Streamline's Accountants with any information which the Company is under a legal
obligation not to supply. Streamline and its representatives shall be entitled
to have access to the Company's Accountants' workpapers or internally prepared
workpapers prepared in connection with the Net Cash Statement and shall be
entitled to discuss such workpapers with Streamline and Streamline's
Accountants.
(c) Within fourteen (14) days after Streamline's receipt of the Net Cash
Statement, Streamline shall notify the Company in writing of its acceptance of,
or disagreement with, the Net Cash Statement and the balances and calculations
set forth therein, setting forth in reasonable detail the basis for its
disagreement, if any. The "Final Net Cash Statement" shall result from any of
the following: (i) if Streamline fails to provide such notification of
disagreement that the same was prepared in accordance with Section 17(a) within
such fourteen (14) day period or if Streamline gives notice of acceptance, then
the Net Cash Statement shall be deemed final, binding and conclusive on the
parties; (ii) if Streamline notifies the Company of its disagreement with the
Net Cash Statement, the Company, the Company's Accountants, Streamline, and
Streamline's Accountants shall use their best efforts to resolve any such
disagreement relating to the Net Cash Statement and, if appropriate, agree on a
revised Net Cash Statement; (iii) if such resolution cannot be achieved within
fourteen (14) days of delivery of Streamline's written notice of disagreement to
the Company, the disputed matter shall be submitted for resolution to an
independent accounting firm of national reputation mutually appointed by the
Company and Streamline (the "Independent Accounting Firm"), which shall, within
fourteen (14) days of such submission, determine and report to the Company and
Streamline upon the disputed Net Cash Statement and such report shall be final,
binding and conclusive on the Company and Streamline; (iv) if the Company and
Streamline are unable to agree on the Independent Accounting Firm, the
resolution of the disputed Net Cash Statement shall be made promptly by
arbitration in Boston, Massachusetts in accordance with the rules of the
American Arbitration Association. Any such determination shall be final, binding
and conclusive on the Company and Streamline. The fees and disbursements of the
Independent Accounting Firm and the fees and disbursements in connection with
any such arbitration shall be shared equally between Streamline, on the one
hand, and the Company, on the other hand.
18. RELEASES. If the Merger is consummated, then effective as of the
Effective Time, each of the Stockholders, for himself or itself and his or its
heirs, legatees, successors, and assigns, hereby fully and irrevocably releases,
remises, and discharges the Surviving Corporation and its officers, directors,
employees, agents, representatives, successors, and assigns from any and all
Damages, regardless of whether known, unknown, or unknowable, and regardless of
whether absolute, contingent, or otherwise, and regardless of whether at law, in
equity, or otherwise, without limitation, whether now existing or arising in the
future, in each case to the extent based on actions, omissions, and/or events
occurring at or before the Effective Time, including without limitation all
rights to indemnification and/or contribution, but excluding Damages arising
expressly under this Agreement; provided, however, that notwithstanding any
statement to the contrary in this Section 18, each Stockholder who, as of the
date of this Agreement, is entitled to indemnification from the Company for any
actions taken by such Stockholder in his capacity as an officer and/or director
of the Company shall continue from and after the Effective Time to be entitled
to indemnification by the Surviving Corporation to the same extent to which such
Stockholder would be entitled indemnification therefor as of the date of this
Agreement. Furthermore, each of such releasing persons hereby irrevocably agrees
not to sue, or to commence, maintain, or aid in the prosecution of any
litigation, arbitration, or other action or proceeding against or adverse to any
of such released persons, or otherwise to seek any recourse against any of such
released persons, in respect of any matter hereby released or purported or
attempted to be released.
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19. TERMINATION.
(a) This Agreement may be terminated at any time before the Effective Time:
(i) by agreement of Streamline and the Company;
(ii) by Streamline, in the event of a willful breach by the Company of any
representation, warranty or agreement contained herein which has not been cured
or is not curable within fifteen (15) days after notice thereof to the breaching
party; or
(iii) by the Company, in the event of a material breach by Streamline of any
representation, warranty or agreement contained herein which has not been cured
or is not curable within fifteen (15) days after notice thereof to the breaching
party;
(b) If (i) any temporary restraining order, preliminary or permanent
injunction, or other order issued by any court of competent jurisdiction, or
other binding legal restraint or prohibition preventing the consummation of the
Merger or the other transactions contemplated hereby is at any time in effect
for a period of more than 20 consecutive days, or (ii) the Closing does not
occur on or before March 31, 2000 then either Streamline or the Company may
terminate this Agreement by delivering written notice to the other at any time
after the close of business on date such termination right arises hereunder,
PROVIDED that such failure to close is not the result of a breach of this
Agreement by the terminating party (including, in the case of any such
termination by Streamline, any breach by Merger Sub, or in the case of any such
termination by the Company, any breach by any of the Stockholders).
(c) The Company shall pay Streamline a fee of $500,000 if (i) the Agreement
is terminated and (ii) it is determined that the Company or any of the
Stockholders committed a breach of Section 10.13 hereof at any time within the
period commencing on the September 17, 1999 through the date of termination of
this Agreement.
20. DEFINITIONS.
20.1. CERTAIN DEFINED TERMS. As used in this Agreement, the following
terms have the following respective meanings:
"Affiliate" shall have the meaning as the term "affiliate" is (i) defined
for purposes of paragraphs (c) and (d) of Rule 145 under the Securities Act
and/or (ii) used in and for purposes of Accounting Series Releases 130 and 135,
as amended, of the SEC.
"Cash Balance" means, as of any particular date, any cash on hand or in
banks and marketable securities owned by the Company.
"Closing Date Price Per Share" means the closing sale price (in thousandths)
of Streamline Common Stock on the Nasdaq National Market for the trading day
prior to the Closing Date.
"Closing Price Per Share" means the average closing sale price (in
thousandths) of Streamline Common Stock on the Nasdaq National Market for the 10
trading days up to and including the day that is two trading days prior to the
Closing Date.
"Company Common Stock" means, the Company's Common Shares, no par value.
"Company Preferred Stock" means the Series A Preferred Shares, $0.001 par
value per share, of the Company.
"Company Stock" means, collectively, the Company Common Stock and the
Company Preferred Stock.
"Company Stockholder" means any Stockholder or Other Stockholder.
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"Damages" means all damages, losses, claims, demands, actions, causes of
action, suits, litigations, arbitrations, liabilities, costs, and expenses,
including court costs and the reasonable fees and expenses of legal counsel.
"Escrow Agent" means the escrow agent named in the Escrow Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the SEC thereunder, as in effect as of the relevant
time of reference.
"Exchange Ratio" means, subject to adjustment as set forth in
Section 2.5(c) hereof, (i) the Number of Shares Issued divided by (ii) the total
number of shares of Company Common Stock calculated on a fully-diluted basis as
of immediately prior to the Effective Time. (By way of example, the Exchange
Ratio, as of the date hereof, is .4000, as there are 4,329,233 shares of
restricted Streamline Common Stock issued or issuable to holders of Company
Stock, Company Options and Company Warrants (whether upon the Closing or upon
the exercise of options or warrants after the Closing), and 10,823,083
fully-diluted shares of Company Common Stock: 4,329,233/10,823,083=.4000).
"GAAP" means generally accepted accounting principles, applied on a
consistent basis.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations thereunder.
"Indebtedness," as applied to any person, means (a) all indebtedness of such
person for borrowed money, whether current or funded, or secured or unsecured,
(b) all indebtedness of such person for the deferred purchase price of property
or services represented by a note or other security, (c) all indebtedness of
such person created or arising under any conditional sale or other title
retention agreement (even if the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession or sale
of specific property), (d) all indebtedness of such person secured by a purchase
money mortgage or other Lien to secure all or part of the purchase price of
property subject to such mortgage or other Lien, (e) all obligations of such
person under leases that have been or must be, in accordance with generally
accepted accounting principles, recorded as capital leases in respect of which
such person is liable as lessee, (f) any liability of such person in respect of
banker's acceptances or letters of credit, and (g) all indebtedness referred to
in clauses (a), (b), (c), (d), (e), or (f) above that is directly or indirectly
guaranteed by such person or which such person has agreed (contingently or
otherwise) to purchase or otherwise acquire or in respect of which such person
has otherwise assured a creditor against loss.
"knowledge," when used to qualify a representation or warranty in this
Agreement, has the following meaning: Where a representation or warranty is made
to the best of the Company's knowledge, or with a similar qualification, the
Company will be deemed to have knowledge of any matter with respect to which
William C. Steinmetz, Scott DeGraeve and Chris Sang has actual knowledge or
would have knowledge after conducting a reasonable investigation. Where a
representation is made to the best of Streamline's or Merger Sub's knowledge or
with a similar qualification, Streamline and the Merger Sub will be deemed to
have knowledge of any matter with respect to which (i) Streamline's or Merger
Sub's chief executive and financial officers, has actual knowledge or would have
knowledge after conducting a reasonable investigation.
"Liens" means any and all liens, claims, mortgages, security interests,
charges, encumbrances, and restrictions on transfer of any kind, except, in the
case of references to securities, those arising under applicable securities laws
solely by reason of the fact that such securities were issued pursuant to
exemptions from registration under such securities laws.
"Line of Credit" means the line of credit issued to the Company pursuant to
that certain secured guaranteed line of credit, dated as of June 8, 1998 (as
amended) by and between the Company and LaSalle National Bank.
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"Line of Credit Balance" means, as of any particular date, the outstanding
principal balance, plus accrued interest, of the Line of Credit.
"Material Adverse Effect" means any change or effect that is or is
reasonable likely to be materially adverse to (i) the business, results of
operations, or financial condition of entity, taken as a whole, or (ii) the
ability of the entity to perform its obligations under this Agreement or to
consummate the Merger or the other transactions contemplated by this Agreement.
"Negative Net Cash Amount" means, as of any particular date, the absolute
value of the amount by which the Net Cash Balance is less than zero, if the Net
Cash Balance is less than zero.
"Net Cash Balance" means, (i) as of the Calculation Date, (a) $1,380,000
PLUS the Cash Balance MINUS (b) the Line of Credit Balance and (ii) as of any
other particular date, (y) the Cash Balance minus (z) the Line of Credit
Balance.
"Number of Shares Issued" shall mean the product obtained by multiplying
.4000 by the total number of shares of Company Common Stock calculated on a
fully-diluted basis as of immediately prior to the Effective Time. (By way of
example, the Number of Shares Issued, as of the date hereof would be 4,329,233,
as there are 10,823,083 shares of Company Common Stock on a fully-diluted basis
as of the date hereof: .4000 X 10,823,083 = 4,329,233.)
"Other Stockholder" means any holder of shares of Company Stock who is not a
Stockholder.
"person" (regardless of whether capitalized) means any natural person,
entity, or association, including without limitation any corporation,
partnership, limited liability company, government (or agency or subdivision
thereof), trust, joint venture, or proprietorship.
"Qualified Group" shall have the meaning as set forth in
Section 1.368-1(d)(4)(ii) of the Treasury Regulations.
"Sale Leaseback Proceeds" means the net sale proceeds received by the
Company in connection with the sale leaseback transaction pursuant to that
certain contract of sale, dated as of June, 1999 by and between the Company and
Cardinal Capital Partners, Inc. (SCOTMKT Chicago, L.L.C.)
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the rules
and regulations of the SEC thereunder, as in effect as of the relevant time of
reference.
"Subsidiary" or "Subsidiaries" means, with respect to any person, any
corporation a majority (by number of votes) of the outstanding shares of any
class or classes of which will at the time be owned by such person or by a
Subsidiary of such person, if the holders of the shares of such class or classes
(a) are ordinarily, in the absence of contingencies, entitled to vote for the
election of a majority of the directors (or persons performing similar
functions) of the issuer thereof, even though the right so to vote has been
suspended by the happening of such a contingency, or (b) are at the time
entitled, as such holders, to vote for the election of a majority of the
directors (or persons performing similar functions) of the issuer thereof,
whether or not the right so to vote exists by reason of the happening of a
contingency.
"Tax" or "Taxes" means any federal, state, local, or foreign income, gross
receipts, franchise, estimated, alternative minimum, add-on minimum, sales, use,
transfer, registration, value added, excise, natural resources, severance,
stamp, occupation, premium, windfall profit, environmental, customs, duties,
real property, personal property, capital stock, intangibles, social security,
unemployment, disability, payroll, license, employee, or other tax or levy, of
any kind whatsoever, including any interest, penalties, or additions to tax in
respect of the foregoing.
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"Tax Return" means any return, declaration, report, claim for refund,
information return, or other document (including any related or supporting
estimates, elections, schedules, statements, or information) filed or required
to be filed in connection with the determination, assessment, or collection of
any Tax or the administration of any laws, regulations, or administrative
requirements relating to any Tax.
"Treasury Regulation" means the Income Tax Regulations, including Temporary
Regulations, promulgated under the Code, as such regulations may be amended from
time to time (including corresponding provisions of succeeding regulations).
"Warrantholders" means any holder of a warrant to purchase Company Common
Stock.
20.2. TERMS DEFINED ELSEWHERE. The following terms are defined herein in
the sections identified below:
<TABLE>
<CAPTION>
TERM SECTION AS TERM SECTION
- ------------------------------- --------- ------------------------------- ------------
<S> <C> <C> <C>
401(k) Plan.................... 6.14(a) June 1999 10-Q................. 8.5
Affiliate's Agreement(s)....... 9.3 Meeting Purposes............... 11.5(a)
Agreement...................... Preamble Merger......................... 1
Articles of Merger............. 1 Merger Certificate............. 1
Calculation Date............... 17(a) Merger Sub..................... Preamble
CERCLA......................... 6.15(b) Most Recent Audited
Certificate.................... 3.1 Balance Sheet.................. 6.7
Closing........................ 1 Most Recent Unaudited
Closing Date................... 1 Balance Sheet.................. 6.7
Code........................... 6.13(b) Net Cash Adjustment............ 2.5(c)(ii)
Company........................ Preamble Net Cash Statement............. 17(a)
Company Disclosure PBGC........................... 6.14(d)(ii)
Schedule..................... 6 RCRA........................... 6.15(b)
Company Option................. 4(a) Pre-Sale Leaseback Allowable
Company Option Plan............ 4(A) Negative Cash Amount........... 14.4
Company's Accountants.......... 10.21 Post-Sale Leaseback Allowable
Company Warrant................ 4(b) Negative Cash Amount........... 14.4
contract....................... 6.21 Proxy Rules.................... 11.5(c)
Cut-off Date................... 16.6(c) Proxy Statement................ 11.5(b)
DGCL........................... 6.3 Restricted Period.............. 15.2
Dissenting Shares.............. 2.7 Sale Leaseback Adjustment...... 2.5(c)(iii)
Effective Time................. 1 SARA........................... 6.15(b)
Employee Benefit Plan.......... 6.14(a) Shareholders Agreement......... 10.23
Environmental Laws............. 6.15(b) Stockholder(s)................. Preamble
EPA............................ 6.15(c) Stockholder Representative..... 20.3
ERISA.......................... 6.14(c) Streamline..................... Preamble
Escrowed Shares................ 3.3 Streamline and Merger Sub
Exchange Ratio................. 2.6(a) Disclosure Schedule............ 8
Final Net Cash Streamline Common Stock........ 8.6
Statement.................... 17(c) Streamline Meeting............. 11.5(a)
Hazardous Substances........... 6.15(c) Streamline's Accountants....... 10.21
IBCA........................... 2.7 Streamline's SEC Reports....... 8.5
Indemnified Party.............. 16.4 Streamline Stock Plans 4(b)
Indemnifying Party............. 16.4 Streamline Warrant............. 8.6
Independent Accounting Surviving Corporation.......... 2.1
Firm......................... 17(c) Tax Opinion.................... 13.5
Intellectual Properties........ 6.10(a) Third-Party Claim.............. 16.4
IRS............................ 6.14(b)
</TABLE>
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21. GENERAL.
21.1. COOPERATION. Each of the parties will cooperate with the others and
use its reasonable best efforts to prepare all necessary documentation, to
effect all necessary filings, and to obtain all necessary permits, consents,
approvals, and authorizations of all governmental bodies and other third parties
necessary to consummate the transactions contemplated by this Agreement.
21.2. SURVIVAL OF PROVISIONS. The provisions of this Agreement, including
without limitation the representations and warranties of the parties, and the
provisions of the other documents executed and delivered in connection with this
Agreement, the Merger, and the other transactions contemplated hereby will be
deemed material, and, notwithstanding any investigation by or on behalf of any
other party, will be deemed to have been relied on by each other party, and
subject to the provisions of Section 16.6 hereof, will survive the Closing and
the consummation of the Merger and the other transactions contemplated hereby.
21.3. STOCKHOLDER REPRESENTATIVE.
(A) APPOINTMENT OF STOCKHOLDERS' REPRESENTATIVE. Upon approval of the
Merger by the Company Stockholders, each Stockholder, (other than any holder of
Dissenting Shares) shall be deemed to have constituted and appointed, effective
from and after the date of such approval of the Merger, William C. Steinmetz, as
the agent and attorney-in-fact (the "Stockholders' Representative") of such
Stockholder to act as Stockholders' Representative under this Agreement and the
Escrow Agreement in accordance with the terms of this Section 21.3 and the
Escrow Agreement. In the event of the resignation, death or incapacity of the
Stockholders' Representative, a successor Stockholders' Representative shall
thereafter be appointed by an instrument in writing signed by such successor
Stockholder Representative and by those Stockholders who immediately prior to
the Effective Time of the Merger held a majority of the shares of outstanding
Company Common Stock on a fully-converted basis (other than Dissenting Shares),
and such appointment shall become effective as to any such successor
Stockholders' Representative when a copy of such instrument shall have been
delivered to Streamline.
(B) AUTHORITY. The Stockholders' Representative is hereby fully authorized
by the Stockholders to:
(i) execute and deliver the Escrow Agreement;
(ii) receive all notices or other documents given or to be given to the
Stockholders by Streamline under Sections 16 of this Agreement or to the
Stockholders' Representative by Streamline pursuant to the Escrow Agreement;
(iii) receive and accept service of legal process in connection with any
claim or other proceeding against the Stockholders arising under Section 16
of this Agreement or the Escrow Agreement in respect of the Escrowed Shares;
(iv) undertake, compromise, defend and settle any such suit or
proceeding;
(v) execute and deliver all agreements, certificates and documents
required or deemed appropriate by the Stockholders' Representative in
connection with any of the transactions contemplated by Section 16 of this
Agreement or the Escrow Agreement (including, without limitation, one or
more blank stock powers relating to the transfer of any Escrowed Shares;
(vi) engage special counsel, accountants and other advisors and incur
such other expenses on behalf of the Stockholders in connection with any
matter arising under Section 16 of this Agreement or the Escrow Agreement as
the Stockholders' Representative deems appropriate;
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(vii) retain and liquidate any Escrowed Shares to which the Stockholders
are entitled and apply the proceeds thereof to the payment of (or
reimbursement of the Stockholders' Representative for) expenses and
liabilities for which the Stockholders' Representative may incur pursuant to
this Section 20.3; and
(viii) take such other action as such Stockholders' Representative may
deem appropriate, including, without limitation:
(A) agreeing to any modification or amendment of this Agreement or the
Escrow Agreement and executing and delivering an agreement of such modification
or amendment;
(B) taking any actions required or permitted under Section 16 of this
Agreement or the Escrow Agreement to protect or enforce the Stockholders' rights
hereunder and thereunder to the Escrowed Shares; and
(C) all such other matters as the Stockholders' Representative may deem
necessary or appropriate to carry out the intents and purposes of Section 16 of
this Agreement and the Escrow Agreement.
(C) EXTENT AND SURVIVAL OF AUTHORITY. The appointment of the Stockholders'
Representative is an agency coupled with an interest and is irrevocable and any
action taken by a Stockholders' Representative pursuant to the authority granted
in this Section 21.3 or under the Escrow Agreement shall be effective and
absolutely binding on each Stockholder notwithstanding any contrary action of or
direction from such Stockholder, except for actions or omissions of the
Stockholders' Representative constituting willful misconduct or gross
negligence. The death or incapacity, or dissolution or other termination of
existence, of any Stockholder shall not terminate the authority and agency of
the Stockholders' Representative.
(D) RELEASE FROM LIABILITY; INDEMNIFICATION. Each Stockholder hereby
releases the Stockholders' Representative from, and each Stockholder (in the
same proportion as the number of Escrowed Shares to which such Stockholder is
entitled as of the Effective Time bears to the aggregate number of such Escrowed
Shares) agrees to indemnify the Stockholders' Representative against, liability
for any action taken or not taken by him in his capacity as such Agent
(including the expenses referred to in Sections 21.3(b) and (e) hereof), except
for the liability of any such Stockholders' Representative to a Stockholder for
loss which such Stockholder may suffer from the willful misconduct or gross
negligence of such Stockholders' Representative in carrying out his duties
hereunder under the Escrow Agreement.
(E) REIMBURSEMENT OF EXPENSES. The Stockholders' Representative shall
receive no compensation for services as Stockholders' Representative, but shall
receive reimbursement from, and be indemnified by, the Stockholders, pro rata,
for any and all expenses, charges and liabilities, including, but not limited
to, reasonable attorneys' fees, incurred by the Stockholders' Representative in
the performance or discharge of his duties pursuant to this Section 21.3 and the
Escrow Agreement, which expenses, charges and liabilities shall be a first
charge against any Escrowed Shares to which the Stockholders may be entitled
under the Escrow Agreement. Unless the Stockholders pay all such expenses,
charges and liabilities upon demand by the Stockholders' Representative, the
Stockholders' Representative shall have no obligation to incur such expenses,
charges or liabilities, or to continue to perform any duties hereunder. In
addition, the Stockholders' Representative is hereby authorized to pay with the
Escrowed Shares such other expenses, liabilities and obligations as the holders
of a majority of the Escrowed Shares shall approve from time to time.
21.4. EXPENSES. Each of the parties will be responsible for and will pay
his or its own expenses in connection with the negotiation and preparation of
this Agreement and the consummation of the Merger and the other transactions
contemplated hereby.
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21.5. BENEFITS OF AGREEMENT; NO ASSIGNMENTS; NO THIRD-PARTY BENEFICIARIES.
(a) This Agreement will bind and inure to the benefit of the parties hereto
and their respective heirs, successors, and permitted assigns.
(b) No party will assign any rights or delegate any obligations hereunder
without the consent of the other parties, and any attempt to do so will be void
except that after the Closing, any Stockholder may assign its rights hereunder
without the consent of any other party hereto.
(c) Nothing in this Agreement is intended to or will confer any rights or
remedies on any person other than the parties hereto and their respective heirs,
successors, and permitted assigns and the Stockholders and their heirs and
permitted assigns.
21.6. NOTICES. All notices, requests, payments, instructions, or other
documents to be given hereunder will be in writing or by written
telecommunication, and will be deemed to have been duly given if (i) delivered
personally (effective upon delivery), (ii) mailed by registered or certified
mail, return receipt requested, postage prepaid (effective five business days
after dispatch), (iii) sent by a reputable, established courier service that
guarantees next business day delivery (effective the next business day), or
(iv) sent by telecopier followed within 24 hours by confirmation by one of the
foregoing methods (effective upon receipt of the telecopy in complete, readable
form), addressed as follows (or to such other address as the recipient party may
have furnished to the sending party for the purpose pursuant to this section):
(a) If to Streamline, Merger Sub, and/or (after the Effective Time), the
Company to:
Streamline.com, Inc.
27 Dartmouth Street
Westwood, MA 02090
Attention: Timothy A. DeMello
Chairman and CEO
Telecopier No. (781) 407-1946
with a copy sent at the same time and by the same means to:
Wayne D. Bennett, Esq.
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
Telecopier No. (617) 951-8736
(b) If to any of the Stockholders and/or (before the Effective Time) the
Company, to the Stockholder Representative at:
Mr. William C. Steinmetz
c/o ABN AMRO Incorporated
208 South LaSalle Street
Chicago, IL 60604
Telecopier No. (312) 855-2880
A-41
<PAGE>
with a copy sent at the same time and by the same means to:
Dalius F. Vasys, Esq.
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street
Chicago, Illinois 60601
Telecopier No. (312) 609-5005
21.7. COUNTERPARTS. This Agreement may be executed by the parties in
separate counterparts, each of which when so executed and delivered will be an
original, but all of which together will constitute one and the same agreement.
In pleading or proving this Agreement, it will not be necessary to produce or
account for more than one such counterpart.
21.8. CAPTIONS. The captions of sections or subsections of this Agreement
are for reference only and will not affect the interpretation or construction of
this Agreement.
21.9. EQUITABLE RELIEF. Each of the parties hereby acknowledges that any
breach by him or it of his or its obligations under this Agreement would cause
substantial and irreparable damage to the parties, and that money damages would
be an inadequate remedy therefor, and accordingly, acknowledges and agrees that
each other party will be entitled to an injunction, specific performance, and/or
other equitable relief to prevent the breach of such obligations.
21.10. CONSTRUCTION. The language used in this Agreement is the language
chosen by the parties to express their mutual intent, and no rule of strict
construction will be applied against any party.
21.11. WAIVERS. No waiver of any breach or default hereunder will be valid
unless in a writing signed by the waiving party. No failure or other delay by
any party exercising any right, power, or privilege hereunder will be or operate
as a waiver thereof, nor will any single or partial exercise thereof preclude
any other or further exercise thereof or the exercise of any other right, power,
or privilege.
21.12. ENTIRE AGREEMENT. This Agreement, together with the exhibits and
schedules hereto and the other agreements, instruments, certificates, and other
documents referred to herein as having been or to be executed and delivered in
connection with the transactions contemplated hereby, contains the entire
understanding and agreement among the parties, and supersedes any prior
understandings or agreements among them, or between or among any of them, with
respect to the subject matter hereof. Notwithstanding the foregoing, the
provisions of the Confidentiality Agreement dated as of September 2, 1997, by
and between the Company and Streamline, will survive the execution and delivery
of this Agreement and the consummation of the Merger.
21.13. GOVERNING LAW. Except to the extent the DGCL and the IBCA apply,
this Agreement will be governed by and interpreted and construed in accordance
with the internal laws of the Commonwealth of Massachusetts, as applied to
contracts under seal made, and entirely to be performed, within the Commonwealth
of Massachusetts, and without reference to principles of conflicts or choice of
laws.
[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
A-42
<PAGE>
Executed and delivered under seal as of the date first above written.
<TABLE>
<S> <C> <C>
STREAMLINE: STREAMLINE.COM, INC.
By /s/ TIMOTHY A. DEMELLO
-----------------------------------------
Name: Timothy A. DeMello
Title: Chairman and CEO
MERGER SUB:
STREAMSUB, INC.
By /s/ TIMOTHY A. DEMELLO
-----------------------------------------
Name: Timothy A. DeMello
Title: President
COMPANY:
BEACON HOME DIRECT, INC.
(d/b/a Scotty's Home Market)
By /s/ WILLIAM C. STEINMETZ
-----------------------------------------
Name: William C. Steinmetz
Title: Chairman
STOCKHOLDERS' REPRESENTATIVE
/s/ WILLIAM C. STEINMETZ
-----------------------------------------
William C. Steinmetz, not individually but
solely as Stockholders' Representative
</TABLE>
A-43
<PAGE>
The undersigned hereby executes and delivers under seal this Agreement and
Plan of Merger and Reorganization by and among Streamline.com, Inc.;
Streamsub, Inc.; Beacon Home Direct, Inc. (d/b/a Scotty's Home Market) and the
other parties hereto as of the date first above written.
<TABLE>
<S> <C> <C>
NORDSTROM, INC.
By /s/ DARREN R. JACKSON
-----------------------------------------
Name: Darren R. Jackson
Title: Vice President
</TABLE>
<TABLE>
<S> <C>
/s/ DAVID K. BEECKEN
---------------------------------------------
David K. Beecken
/s/ WILLIAM H. BEECKEN
---------------------------------------------
William H. Beecken, as Trustee for the
Erica K. Beecken Trust U/A 11/30/94
/s/ WILLIAM H. BEECKEN
---------------------------------------------
William H. Beecken, as Trustee for the
Kurt H. Beecken Trust U/A 11/30/94
/s/ WILLIAM H. BEECKEN
---------------------------------------------
William H. Beecken, as Trustee for the
D. Kyle. Beecken Trust U/A 11/30/94
/s/ SCOTT DEGRAEVE
---------------------------------------------
Scott DeGraeve
/s/ PETER L. FRECHETTE
---------------------------------------------
Peter L. Frechette
/s/ THOMAS HERSKOVITZ
---------------------------------------------
Thomas Herskovitz
/s/ PETER L. FRECHETTE
---------------------------------------------
Peter L. Frechette
/s/ KAREN N. PIGOTT
---------------------------------------------
Karen N. Pigott, as Trustee of the Alicia K.
Pigott Fund
</TABLE>
A-44
<PAGE>
<TABLE>
<S> <C>
/s/ KAREN N. PIGOTT
---------------------------------------------
Karen N. Pigott, as Trustee of the
Christopher B. Pigott Fund
/s/ RICHARD J. PIGOTT
---------------------------------------------
Richard J. Pigott
/s/ PATRICK POLLARD
---------------------------------------------
Patrick Pollard
/s/ WILLIAM C. STEINMETZ
---------------------------------------------
William C. Steinmetz
</TABLE>
<TABLE>
<S> <C> <C>
THE TORTOISE FUND I, LLC
By /s/ PATRICK POLLARD
-----------------------------------------
Name: Patrick Pollard
Title: Manager
</TABLE>
A-45
<PAGE>
EXHIBIT B
CONFORMED COPY
ESCROW AGREEMENT
<PAGE>
ESCROW AGREEMENT
This Escrow Agreement (this "AGREEMENT"), dated as of , is by and
among Streamline.com, Inc. ("STREAMLINE"), a Delaware corporation, William C.
Steinmetz, not acting individually but solely in his capacity as Stockholders'
Representative (the "STOCKHOLDERS' REPRESENTATIVE") representing and acting
hereunder on behalf certain of the Stockholders (the "STOCKHOLDERS") of Beacon
Home Direct, Inc., an Illinois corporation ("BEACON"), and State Street Bank and
Trust Company, as escrow agent. Streamline and the Stockholders' Representative
are sometimes referred to herein, collectively, as the "INTERESTED PARTIES."
Streamline, its wholly owned subsidiary Streamsub, Inc., Beacon, the
Stockholders Representative and the Stockholders have entered into an Agreement
and Plan of Merger and Reorganization (the "MERGER AGREEMENT") dated as of
October 18, 1999, pursuant to which Streamsub, Inc. has been merged with and
into Beacon, and Beacon, as the surviving corporation in such merger, has become
a wholly owned subsidiary of Streamline, all subject to the terms and conditions
set forth in the Merger Agreement. This Agreement is to secure part of the
Stockholders' indemnification obligations under the Merger Agreement.
The parties hereby agree as follows:
1. Certain Defined Terms. Capitalized terms used and not otherwise defined
in this Agreement have the respective meanings ascribed to them in the Merger
Agreement. Notwithstanding the foregoing, the parties agree that the use of such
defined terms is solely for the convenience of Streamline and the Stockholders
Representative, and the Escrow Agent may rely on the use of defined terms in any
communication received by it. In addition, as used in this Agreement:
"DAMAGES" means all damages, losses, claims, demands, actions, causes of
action, suits, litigations, arbitrations, liabilities, costs, and expenses,
including court costs and the reasonable fees and expenses of legal counsel.
"ESCROW AGENT" means State Street Bank and Trust Company, a Massachusetts
banking corporation, and any of its successors appointed pursuant to Section 9
hereof, in each case in the capacity of escrow agent hereunder.
"ESCROWED MONEY" means any money from time to time held in escrow hereunder,
in cash or in the form of any investment or reinvestment or otherwise, including
any cash substituted for the Escrowed Securities pursuant to Section 3(e)
hereof.
"ESCROWED SECURITIES" means any securities from time to time held in escrow
hereunder, including without limitation the aggregate of shares of
Streamline Common Stock initially deposited in escrow hereunder, any income
earned thereon in the form of additional shares of the same type of security on
which such income was earned, and any other accessions thereto in the form of
additional shares of the same type of security on which any such accessions
relate, and any securities received in respect thereof (whether by dividend,
upon conversion, exchange, or redemption, or otherwise).
"ESCROW FUND" means the Escrowed Money and the Escrowed Securities and any
other money, securities, and other property held in escrow hereunder as of the
relevant time of reference. The Escrow Fund will be constituted of the
Stockholders' individual escrow accounts established in accordance with
Section 3(a) hereof.
<PAGE>
"PRO RATA PORTION" means, with respect to a Stockholder, the percentage
indicated opposite such Stockholder's name below:
<TABLE>
<CAPTION>
NAME PRO RATA PORTION
- ------------------------------------------------------------ ----------------
<S> <C>
%
Total: 100%
===
</TABLE>
2. Appointment of Escrow Agent. Streamline and the Stockholders
Representative hereby appoint State Street Bank and Trust Company to act as
Escrow Agent hereunder, and State Street Bank and Trust Company hereby accepts
such appointment and agrees to serve in such capacity subject to the terms and
conditions set forth herein.
3. Escrow Fund.
(a) Establishment of Escrow Fund. Upon execution of this Agreement and
pursuant to the Merger Agreement, Streamline will deposit in escrow with the
Escrow Agent one or more stock certificates representing the aggregate number of
shares of Streamline Common Stock indicated with respect to each such
Stockholder in the attached SCHEDULE 1. Such escrowed shares will be deemed held
in separate escrow accounts, each designated 'Streamline Escrow Account'
followed by the name of the Stockholder on behalf of whom such shares were
deposited, each of such escrow accounts to constitute a separate escrow fund,
but all of which together will be held hereunder by the Escrow Agent as the
Escrow Fund.
In addition, each of the Stockholders (or the Stockholders' Representative
acting on behalf of any such Stockholder) will deposit into escrow three duly
executed (with Medallion signature guaranties) stock powers for transfer of the
shares deposited in escrow on behalf of such Stockholder, with the transferee,
date, and number of shares covered by each such stock power left blank. At the
Escrow Agent's request from time to time hereafter, each of the Stockholders (or
the Stockholders' Representative acting on behalf of any such Stockholder) will
promptly deposit additional such stock powers into escrow to replace any such
stock powers used to effect transfers of Escrowed Securities. The Stockholders'
Representative, as attorney-in-fact of each Stockholder, hereby irrevocably
appoints the Escrow Agent as each such Stockholder's agent and attorney-in-fact,
in the name and on behalf of such Stockholder to complete and deliver such stock
powers to Streamline (but only in strict accordance with the terms and
conditions of this Agreement), with the same legal force and effect as if done
by such Stockholder itself (or by the Stockholders' Representative acting on
behalf of such Stockholder). The Stockholders' Representative represents and
warrants to the Escrow Agent that he has irrevocable right, power and authority
(i) to enter into and perform this Agreement and bind all of the Stockholders to
its terms, (ii) to give and receive directions and notices hereunder; and (iii)
to make all determinations that may be required or that he deems appropriate
under this Agreement. Until notified in writing by the Stockholders'
Representative that he has resigned or by a majority in interest of the
Stockholders that he has been removed, the Escrow Agent may act upon the
directions, instructions and notices of the Stockholders' Representative named
above and, thereafter, upon the
B-2
<PAGE>
directions, instructions and notices of any successor named in a writing
executed by a majority-in-interest of the Stockholders filed with the Escrow
Agent.
The Escrow Agent will hold and safeguard the Escrow Fund during the term of
this Agreement and will hold and dispose of the Escrow Fund only in accordance
with the terms of this Agreement.
The Escrow Agent will be entitled to rely on the characterization of a Claim
(as defined below) set forth in the relevant Notice of Claim (as defined below)
as to whether such Claim is against the Escrow Fund.
The assets of the Escrow Fund shall be treated for federal and state income
tax purposes as owned by the Stockholders, and each party shall file all tax
returns required to be filed by such party in a manner consistent with such tax
treatment.
TAX REPORTING. The Interested Parties agree that, for tax reporting
purposes, all interest or other income earned from the investment of the Escrow
Funds in any tax year shall (i) to the extent such interest or other income is
distributed by the Escrow Agent to any person or entity pursuant to the terms of
this Agreement during such tax year, be allocated to such person or entity, and
(ii) otherwise shall be allocated to the Stockholders.
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER. The Interested Parties
hereto agree to provide the Escrow Agent with a certified tax identification
number by signing and returning a Form W-9 (or Form W-8, in case of non-U.S.
persons) to the Escrow Agent prior to the date on which any income earned on the
investment of the Escrow Funds is credited to the Escrow Funds. The Interested
Parties understand that, in the event their tax identification numbers are not
certified to the Escrow Agent, the Internal Revenue Code, as amended from time
to time, may require withholding of a portion of any interest or other income
earned on the investment of the Escrow Funds.
TAX INDEMNIFICATION. Each of the Interested Parties agree, jointly and
severally, (i) to assume any and all obligations imposed now or hereafter by any
applicable tax law with respect to any payment or distribution of the Escrow
Funds or performance of other activities under this Agreement, (ii) to instruct
the Escrow Agent in writing with respect to the Escrow Agent's responsibility
for withholding and other taxes, assessments or other governmental charges, and
to instruct the Escrow Agent with respect to any certifications and governmental
reporting that may be required under any laws or regulations that may be
applicable in connection with its acting as Escrow Agent under this Agreement,
and (iii) to indemnify and hold the Escrow Agent harmless from any liability or
obligation on account of taxes, assessments, additions for late payment,
interest, penalties, expenses and other governmental charges that may be
assessed or asserted against the Escrow Agent in connection with or relating to
any payment made or other activities performed under the terms of this
Agreement, including without limitation any liability for the withholding or
deduction of (or the failure to withhold or deduct) the same, and any liability
for failure to obtain proper certifications or to report properly to
governmental authorities in connection with this Agreement, including costs and
expenses (including reasonable legal fees and expenses), interest and penalties.
The foregoing indemnification and agreement to hold harmless shall survive the
termination of this Agreement.
(b) Investment of the Escrowed Money. The Escrow Agent from time to time
will invest and reinvest Escrowed Money as directed by Streamline and the
Stockholders' Representative in (i) money market funds of major brokerage or
mutual fund firms (e.g., Fidelity Investments) or that invest exclusively in
debt securities for the payment of which is pledged the full faith and credit of
the United States of America, (ii) time deposits and other interest-bearing
deposits of any commercial bank having capital, surplus, and undivided profits
of at least $100,000,000, provided, that such deposits are fully insured by the
Federal Deposit Insurance Corporation or Federal Savings and Loan Insurance
Corporation and are capable of liquidation within three business days, and/or
(iii) such other types of investments as may be agreed to in writing by
Streamline and the Stockholders' Representative from
B-3
<PAGE>
time to time. Absent its timely receipt of such specific written investment
instruction from Streamline and the Stockholders' Representative, the Escrow
Agent shall have no obligation or duty to invest (or otherwise pay interest on)
the Escrow Funds. All earnings received from the investment of the Escrow Funds
shall be credited to, and shall become a part of, the Escrow Fund (and any
losses on such investments shall be debited to the Escrow Account). The Escrow
Agent shall have no liability for any investment losses, including any losses on
any investment required to be liquidated prior to maturity in order to make a
payment required hereunder. All income from such investments will be received by
the Escrow Agent and, as promptly as practicable, will be distributed by the
Escrow Agent to the Stockholders' Representative (who shall promptly distribute
to each Stockholder his Pro Rata Portion of such income). For tax and
withholding purposes, all income will be allocable to the Stockholders unless
and until actually distributed to Streamline.
(c) Stop-Transfer Instructions. For so long as any Escrowed Securities are
held in escrow hereunder, they will be subject to "stop-transfer" instructions
to Streamline's transfer agent for such securities.
(d) Dividends, Etc. on Escrowed Securities. Until such time, if any, when
the Escrowed Securities may be required hereunder to be delivered to a person
entitled to indemnification under the Merger Agreement, such Escrowed Securities
will remain registered in the names of the respective Stockholders, and subject
to the terms and conditions of this Agreement, each of the Stockholders will be
entitled in respect of such Stockholder's Escrowed Securities to do any other
thing that is lawful for the registered holder of such Escrowed Securities to do
(including, without limitation, voting of such Escrowed Securities). The Escrow
Agent shall be under no obligation to preserve, protect or exercise rights in
the Escrowed Shares, and shall be responsible only for reasonable measures to
maintain the physical safekeeping thereof, and otherwise to perform and observe
such duties on its part as are expressly set forth in this Agreement. The Escrow
Agent shall not be responsible for forwarding to any Party, notifying any Party
with respect to, or taking any action with respect to, any notice, solicitation
or other document or information, written or otherwise, received from an issuer
or other person with respect to the Escrowed Shares, including but not limited
to, proxy material, tenders, options, the pendency of calls and maturities and
expiration of rights. Any securities issued upon the conversion, redemption, or
exchange of the Escrowed Securities, will be deposited with the Escrow Agent in
escrow hereunder immediately upon payment or issuance; but the Escrow Agent will
not have any duty to require that such other securities be delivered to it or to
give any notice of non-delivery thereof to any person. For tax and withholding
purposes, all dividends and other distributions in respect of Escrowed
Securities, and all securities issued upon the conversion, redemption, or
exchange of Escrowed Securities, will be allocable to the Stockholders unless
and until actually distributed to Streamline.
(e) Substitution of Cash for Escrowed Securities.
(i) Each Stockholder (or the Stockholders' Representative acting on
any such Stockholder's behalf) will have the right from time to time to
substitute cash in immediately available funds in place of all or part of
such Stockholder's Escrowed Securities, provided, that the amount of such
cash is equal to the value of the Escrowed Securities for which it is to
be substituted, which will be conclusively deemed to be $ [to be the
Closing Price Per Share] per share of Streamline Common Stock (such
amount to be proportionately adjusted to reflect stock splits, stock
dividends, reverse stock splits, and other recapitalizations,
reorganizations, and similar events affecting Streamline Common Stock and
occurring after the date of this Agreement). The Escrow Agent shall not
be responsible for computing or ascertaining any amount of cash required
to be deposited pursuant to this subparagraph (e)(i) of this Section 3.
(ii) If any Stockholder (or the Stockholders' Representative acting
on any such Stockholder's behalf) proposes to substitute cash for any of
such Stockholder's Escrowed
B-4
<PAGE>
Securities, such Stockholder (or the Stockholders' Representative) will
give written notice to Streamline and the Escrow Agent not less than one
business day prior to the date of the proposed substitution, specifying
the proposed date of substitution and the number of such Stockholder's
Escrowed Securities to be released from escrow. Upon the receipt of cash
tendered in substitution for Escrowed Securities in accordance with this
subsection, the delivery of which cash shall be accompanied or preceded
by the delivery by such Stockholder (or the Stockholders' Representative
acting on such Stockholder's behalf) of a certified Form W-9 and such
other information as the Escrow Agent may reasonably require, the Escrow
Agent will release from escrow and deliver to such Stockholder (or the
Stockholders' Representative acting on any such Stockholder's behalf) a
number of such Stockholder's Escrowed Securities having a value
(determined in accordance with the preceding subsection 3(e)(i)) equal to
the amount of such cash received. Delivery of stock certificates will be
made in the same manner described in Section 4(f).
4. Claims against Escrow Fund.
(a) Notice of Claim. Streamline will give the Escrow Agent and the
Stockholders' Representative written notice (a "Notice of Claim") of any claim
for indemnification to be paid from the Escrow Fund (a "Claim"), specifying in
reasonable detail the factual basis therefor to the extent then known to
Streamline. Upon receipt of any Notice of Claim, the Escrow Agent will send a
copy of such Notice of Claim to the Stockholders' Representative in accordance
with the provisions of Section 12 hereof.
If the Damages for which indemnification is sought are liquidated,
Streamline's Notice of Claim will so state and a charge in such amount will be
deemed asserted against the Escrow Fund. If such Damages are not liquidated,
Streamline's Notice of Claim will so state and will contain its good-faith
estimate of the maximum amount of such Claim, and in such event, a charge in
such amount will be deemed asserted against the Escrow Fund.
Streamline will not be entitled to give any Notice of Claim in respect of
any Claim after the Cut-off Date, and the Escrow Agent shall not take any action
with respect to any Notice of Claim received by it after the Cut-off Date;
provided, that this time limit will apply only to the giving of Notices of
Claims, and not to the liquidation or final resolution of Claims.
If Streamline or the Stockholders' Representative believes that the Cut-off
Date has occurred prior to October 18, 2000 (the "Cut-Off Date"), then such
party may provide a written notice specifying that the Cut-Off Date has occurred
(the "Notice of Cut-Off Date") to the Escrow Agent and to the other party (the
"non-notifying party"). If within ten (10) days after the date the Notice of
Cut-off Date is delivered to the non-notifying party, the non-notifying party
does not provide a written objection to the Escrow Agent regarding the Cut-off
Date as specified in the Notice of Cut-off Date, the Cut-off Date as specified
in the Notice of Cut-off Date shall be the Cut-off Date for all purposes
hereunder.
(b) Objection to Claim. If within 30 days after the date a Notice of Claim
is delivered to the Escrow Agent and the Stockholders' Representative in
accordance with Section 4(a), the Stockholders' Representative advises the
Escrow Agent in writing that it objects to such Notice of Claim, stating in
reasonable detail the basis of its objection, then unless and until the
Stockholders' Representative withdraws such objection in writing, the Claim to
which such Notice of Claim relates will be deemed to be a "Disputed Claim";
otherwise, such Claim will be deemed to be an "Allowed Claim" (which term shall
also include any Disputed Claim which is subsequently (i) agreed upon by
Streamline and the Stockholders' Representative or (ii) adjudicated by a court).
The parties may consider using non-binding mediation and/or other alternative
dispute resolution procedures to resolve any disputes that may arise with
respect to any Claims, but no party will be required to participate in any such
procedures against his or its will.
(c) Payment of Allowed Claims.
B-5
<PAGE>
(i) As promptly as is practicable after a Claim is determined to be
an Allowed Claim, or if at the time a Notice of Claim with respect to
such Claim was given in accordance with Section 4(a), such Claim was not
liquidated in amount, then as promptly as practicable after such Claim is
so liquidated and notice thereof is given by Streamline to the Escrow
Agent and the Stockholders' Representative and such Claim becomes an
Allowed Claim in accordance with Section 4(b), the Escrow Agent will
release from escrow from the appropriate escrow accounts of the
applicable Stockholder(s), and will deliver to Streamline, Escrowed
Securities and/or Escrowed Money sufficient to satisfy such Claim,
together with a stock power dated and completed by the Escrow Agent
pursuant to Section 3(a)(i) hereof for transfer of such Escrowed
Securities to Streamline. To the extent that Escrowed Securities are
delivered to Streamline in payment of any Claim, the value of such
Escrowed Securities will be conclusively deemed to be the Closing Price
Per Share per share of Streamline Common Stock (such amount to be
proportionately adjusted to reflect stock splits, stock dividends,
reverse stock splits, and other recapitalizations, reorganizations, and
similar events affecting Streamline Common Stock and occurring after the
date of this Agreement; Streamline will send notice of any event giving
rise to such an adjustment, along with a description of the adjustment to
be made, to the Escrow Agent and the Stockholders' Representative in
accordance with the provisions of Section 12 hereof).
(ii) If Streamline is entitled to obtain payment for a Claim, then
upon compliance with the terms hereof, (A) if the Claim relates to a
matter other than a breach of a representation or warranty set forth in
Section 7 of the Merger Agreement (as specified in a Notice of Claim),
then payment of each Stockholders' Pro Rata Portion of the amount to
which Streamline is entitled in respect of such Claim will be made from
such Stockholder's Escrow Fund, and (B) if the Claim relates to a breach
of a representation or warranty set forth in Section 7 of the Merger
Agreement, then payment of such Claim will be made from the Escrow Fund
of the breaching Stockholder.
(d) No Payment of Disputed Claims. Except as otherwise expressly provided
herein, the Escrow Agent will not release from escrow or deliver any part of the
Escrow Fund in respect of any Disputed Claim.
(e) Payment of Income, Etc. Except as otherwise expressly provided herein
(including, without limitation, pursuant to the provisions of Section 3(d)
hereof), to the extent that any amount of the money and/or property originally
deposited into escrow hereunder is distributed to Streamline or any Stockholder
(or the Stockholders' Representative acting on any such Stockholder's behalf),
all income and other accessions with respect to such amount (including without
limitation interest and dividends) will be distributed to the same party and at
the same time.
(f) Use of Stock Certificates. Whenever the Escrow Agent makes a
distribution of Escrowed Securities hereunder it will deliver such stock
certificates as it in its sole discretion determines, and if such certificates
represent a greater number of shares than are to be distributed, the excess
shares will be registered in the relevant Stockholder's name and returned to the
Escrow Agent to be held in escrow hereunder; provided, that the Escrow Agent
will not have any duty to require the return of any such certificate to it or to
give any notice of non-delivery thereof.
(g) Rounding. In distributing the Escrow Fund hereunder to satisfy a Claim
or to distribute the balance of the Escrow Fund, as the case may be, the Escrow
Agent shall round down the number of shares being delivered to Streamline or to
any Stockholder (or to the Stockholders' Representative acting on any such
Stockholder's behalf), as the case may be , so that only a whole number of
shares are distributed.
5. Release and Delivery of Escrow Fund.
B-6
<PAGE>
(a) On the Cut-Off Date. (i) No later than two business days after the
Cut-off Date, the Escrow Agent will release all of the remaining Escrow Fund
from escrow and deliver it to the Stockholders (or the Stockholders'
Representative acting on such Stockholders' behalf) in accordance with their
respective interests therein, provided, that the Escrow Agent will retain and
continue to hold in escrow such portion, if any, of the Escrow Fund with respect
to which Streamline has asserted any Claim in accordance with this Agreement.
(b) As Directed by a Court. Except as otherwise specifically provided
herein, in the event of any Disputed Claim(s) or other dispute between
Streamline, on the one hand, and the Stockholders or the Stockholders'
Representative, on the other hand, the Escrow Agent will retain the Escrow Fund
until such time or times as it receives notice that a judgment, order, or decree
has been entered or made by any court with respect to the disposition of the
Escrow Fund that, in the opinion of legal counsel chosen by the Escrow Agent
(whose reasonable fees and expenses will be paid by Streamline), is binding upon
the Escrow Agent and not subject to further appeal or modification before
compliance is required therewith, in which case the Escrow Agent will comply
with such judgment, order, or decree.
(c) As Directed by the Parties. Notwithstanding any other provision of this
Agreement, the Escrow Agent will release all or any part of the Escrow Fund and
deliver it in accordance with written instructions duly executed (in
counterparts or otherwise) by Streamline and the Stockholders' Representative.
(d) Deliveries of Escrowed Money. All deliveries of Escrowed Money to
Streamline or any Stockholder (or the Stockholders' Representative acting on any
such Stockholder's behalf) will be made by wire transfer of immediately
available funds to an account designated in writing by the receiving party at
least two business days before such delivery (or in the absence of such
designation, by certified or bank check payable to such party and sent to such
party (or in the case of a Stockholder, to the Stockholders' Representative) to
the address set forth in Section 12 of this Agreement).
6. Liability of Escrow Agent. This Agreement is entered into by the Escrow
Agent as an accommodation to, and solely for the benefit of, Streamline, the
Stockholders and the Stockholders' Representative; and no other person will have
any right to enforce or receive the benefits of this Agreement. The Escrow Agent
will be obligated to perform only such duties as are expressly set forth in this
Agreement, and will not be liable to any person or entity whatsoever, except for
actual damages caused by its own gross negligence or willful misconduct, and in
any event will not be liable for any incidental or consequential damages,
including without limitation lost profits. References in this Agreement to the
Merger Agreement or any other document are for identification purposes only, and
will not be deemed to be notice to the Escrow Agent of (and the Escrow Agent
will not have any duty of inquiry with respect to) the provisions thereof.
7. Indemnification of Escrow Agent. The Stockholders will indemnify,
defend, and hold harmless the Escrow Agent (and its respective officers,
directors, stockholders, partners, employees, agents, and other representatives)
from and against all Damages caused by the Stockholders, the Stockholders'
Representative, or their agents and/or other representatives relating to or
arising, directly or indirectly, out of or in connection with this Agreement or
the transactions hereby contemplated, excepting only such Damages as may be
finally determined by a court of competent jurisdiction to have been caused
directly by the Escrow Agent's gross negligence or willful misconduct.
Streamline will indemnify, defend, and hold harmless the Escrow Agent (and its
respective officers, directors, stockholders, partners, employees, agents, and
other representatives) from and against all Damages caused by Streamline (or its
officers, directors, agents and/or other representatives) relating to or
arising, directly or indirectly, out of or in connection with this Agreement or
the transactions hereby contemplated, excepting only such Damages as may be
finally determined by a court of competent jurisdiction to have been caused
directly by the Escrow Agent's gross negligence or willful misconduct.
B-7
<PAGE>
The foregoing indemnification and agreement to hold harmless shall survive the
termination of this Agreement.
8. Reliance by Escrow Agent.
(a) In the absence of gross negligence or willful misconduct, the Escrow
Agent will not incur any liability for (a) acting or failing to act in
good-faith reliance upon any written instruction (including, without limitation,
wire transfer instructions, whether incorporated herein or provided in a
separate written instruction), notice, or other document that the Escrow Agent
in good faith believes is required or permitted under this Agreement and
believed by it to be genuine and to have been signed by the proper person(s),
without any obligation on its part to make any additional inquiry or
investigation, and (b) acting or failing to act in good-faith reliance upon the
advice of legal counsel, including in-house counsel, including in-house counsel
(whose reasonable fees and expenses will be paid by Streamline).
(b) The Escrow Agent shall not be liable to anyone for any action taken or
omitted to be taken by it hereunder except in the case of the Escrow Agent's
gross negligence or willful misconduct in breach of the terms of this Agreement.
In no event shall the Escrow Agent be liable for indirect, punitive, special or
consequential damage or loss (including but not limited to lost profits)
whatsoever, even if the Escrow Agent has been informed of the likelihood of such
loss or damage and regardless of the form of action.
(c) The Escrow Agent shall have no more or less responsibility or liability
on account of any action or omission of any book-entry depository, securities
intermediary or other subescrow agent employed by the Escrow Agent than any such
book-entry depository, securities intermediary or other subescrow agent has to
the Escrow Agent, except to the extent that such action or omission of any
book-entry depository, securities intermediary or other subescrow agent was
caused by the Escrow Agent's own gross negligence, bad faith or willful
misconduct in breach of this Agreement.
9. Resignation or Removal of Escrow Agent. The Escrow Agent will have the
right to resign as Escrow Agent hereunder at any time, upon 30 days prior
written notice to Streamline and the Stockholders' Representative; and the
Escrow Agent may be removed by written agreement of Streamline and the
Stockholders' Representative delivered to the Escrow Agent, which removal will
be effective not earlier than 30 days after such delivery to the Escrow Agent,
unless the Escrow Agent consents in writing to an earlier effective time. Before
the effectiveness of any such resignation or removal, Streamline and the
Stockholders' Representative will jointly appoint another person, reasonably
acceptable to both of them, to act in the resigning or removed Escrow Agent's
stead hereunder, which unless otherwise agreed by Streamline and the
Stockholders' Representative, will be a bank or trust company having capital,
surplus, and undivided profits in excess of $100,000,000. If Streamline and the
Stockholders' Representative fail to agree upon and appoint such successor
Escrow Agent before the effectiveness of any such resignation or removal, then
unless otherwise instructed to distribute the Escrow Fund in any other manner by
written notice duly executed by Streamline and the Stockholders' Representative,
the resigning or removed Escrow Agent will deposit the Escrow Fund with a court
of competent jurisdiction and will institute an interpleader proceeding against
Streamline and the Stockholders' Representative (all reasonable fees and
expenses incurred by the Escrow Agent in connection with such proceeding to be
paid by Streamline), upon which such Escrow Agent will be relieved of all future
obligations hereunder.
10. Termination, Amendment, and Modification. This Agreement will terminate
when the entire Escrow Fund has been distributed in accordance with the terms
hereof. Prior to such time, this Agreement may be terminated, amended, or
modified only by a written agreement (in counterparts or otherwise) duly
executed and delivered by Streamline, the Stockholders' Representative, and the
Escrow Agent.
B-8
<PAGE>
11. Disputes. In the event that there arises any dispute with respect to
this Agreement or any transaction or matter in connection with this Agreement,
including without limitation the respective rights of Streamline and the
Stockholders' Representative (acting on behalf of one or more of the
Stockholders), to the release or return of all or any part of the Escrow Fund,
the Escrow Agent is authorized (but will not be required) (a) to retain
possession of all or any part of the Escrow Fund until such dispute is finally
resolved, including without limitation, resolution by mutual agreement of the
disputants or by the final judgment, order, or decree of a court of competent
jurisdiction after the time for appeal has expired and without any rights of
appeal having been perfected; and/or (b) to deposit all or any part of the
Escrow Fund with a court of competent jurisdiction and institute an interpleader
proceeding against Streamline and the Stockholders' Representative (all
reasonable fees and expenses incurred by the Escrow Agent in connection with
such proceeding to be paid by Streamline), upon which the Escrow Agent's future
obligations under this Agreement will immediately terminate. The Escrow Agent is
authorized (but will not be required) to institute, prosecute, intervene in,
and/or defend any such proceedings, unless it shall have been furnished with
acceptable indemnification.
12. Notices; Wiring Instructions. All notices, requests, payments,
instructions, or other documents to be given hereunder will be in writing or by
written telecommunication, and will be deemed to have been duly given if
(i) delivered personally (effective upon delivery), (ii) mailed by registered or
certified mail, return receipt requested, postage prepaid (effective five
business days after dispatch), (iii) sent by a reputable, established courier
service that guarantees next business day delivery (effective the next business
day), or (iv) sent by telecopier followed within 24 hours by confirmation by one
of the foregoing methods (effective upon receipt of the telecopy in complete,
readable form), addressed as follows (or to such other address as the recipient
party may have furnished to the sending party for the purpose pursuant to this
section); provided, that no notice or other communication will be binding on or
against the Escrow Agent unless and until actually received by the Escrow
Agent):
(a) If to Streamline, to:
Streamline.com, Inc.
27 Dartmouth Street
Westwood, MA 02090
Attention: Chief Executive Officer
Telecopier No. (781) 407-1946
with a copy sent at the same time and by the same means to:
Wayne D. Bennett, Esq.
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
Telecopier No. (617) 951-8736
(b) If to any of the Stockholders or the Stockholders' Representative, to:
William C. Steinmetz
c/o ABN AMRO Incorporated
208 South LaSalle Street
Chicago, IL 60604
Telecopier No. (312) 855-2880
with a copy sent at the same time and by the same means to:
B-9
<PAGE>
Dalius Vasys, Esq.
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street
Chicago, IL 60601
Telecopier No. (312) 609-5005
(c) If to the Escrow Agent, to:
MAILING ADDRESS:
State Street Bank and Trust Company
Global Investor Services Group
Corporate Trust Division
P.O. Box 778
Boston, Massachusetts 02102-0778
Attention: Streamline Escrow
(617) 662-1463
Fax:
COURIER ADDRESS:
2 Avenue de Lafayette - 6th Floor
Boston, Massachusetts 02110
Any funds to be paid to the Escrow Agent hereunder shall be sent by wire
transfer pursuant to the following instructions (or by such method of payment
and pursuant to such instruction as may have been given in advance and in
writing by the Escrow Agent in accordance with this Section 12):
Bank: State Street Bank and Trust Company
ABA #: 0110 0002 8
A/C #: 9903-990-1
Attn: Corporate Trust Department
Ref: Streamline Escrow
Any funds to be paid by the Escrow Agent hereunder shall be sent by such method
of payment and pursuant to such instruction as may have been given in advance
and in writing to the Escrow Agent in accordance with this Section 12.
13. Governing Law. This Agreement will be governed by and interpreted and
construed in accordance with the internal laws of the Commonwealth of
Massachusetts, as applied to contracts under seal made, and entirely to be
performed, within Massachusetts, and without reference to principles of
conflicts or choice of laws.
14. Counterparts. This Agreement may be executed by the parties in separate
counterparts, each of which when so executed and delivered will be an original,
but all of which together will constitute one and the same agreement. In
pleading or proving this Agreement, it will not be necessary to produce or
account for more than one such counterpart.
15. Entire Agreement. This Agreement (together, as to Streamline and the
Stockholders' Representative, with the Merger Agreement) contains the entire
understanding and agreement among the parties, and supersedes any prior
understandings or agreements among them, or between or among any of them, with
respect to the subject matter hereof.
16. Captions. The captions of sections or subsections of this Agreement are
for reference only and will not affect the interpretation or construction of
this Agreement.
B-10
<PAGE>
17. Expenses.Streamline will be responsible for the fees and expenses of the
Escrow Agent incurred in connection with performance of its duties hereunder, as
agreed to between Streamline and the Escrow Agent. Streamline agrees (i) to pay
or reimburse the Escrow Agent for its reasonable attorney's fees and expenses
incurred in connection with the preparation of this Agreement and (ii) to pay
the Escrow Agent's compensation for its normal services hereunder in accordance
with the attached fee schedule, which may be subject to change hereafter on an
annual basis; provided that the Escrow Agent provides Streamline at least 60
days' written notice in advance of any such change. Streamline agrees to
reimburse the Escrow Agent on demand for all reasonable costs and expenses
incurred in connection with the administration of this Agreement or the escrow
created hereby or the performance or observance of its duties hereunder which
are in excess of its compensation for normal services hereunder, including
without limitation, payment of any legal fees and expenses incurred by the
Escrow Agent in connection with resolution of any claim by any party hereunder.
18. Benefits of Agreement; No Assignments; No Third-Party Beneficiaries.
(a) This Agreement will bind and inure to the benefit of the parties hereto
and their respective heirs, successors, and permitted assigns.
(b) No party will assign any rights or delegate any obligations hereunder
without the consent of the other parties, and any attempt to do so will be void.
(c) Nothing in this Agreement is intended to or will confer any rights or
remedies on any person other than the parties hereto, the Stockholders, and
their respective heirs, successors, and permitted assigns.
19. Equitable Relief. Each of the parties hereby acknowledges that any
breach by him or it of his or its obligations under this Agreement would cause
substantial and irreparable damage to the parties, and that money damages would
be an inadequate remedy therefor, and accordingly, acknowledges and agrees that
each other party will be entitled to an injunction, specific performance, and/or
other equitable relief to prevent the breach of such obligations.
20. Construction. The language used in this Agreement is the language
chosen by the parties to express their mutual intent, and no rule of strict
construction will be applied against any party.
21. Modification; Waiver. This Agreement may not be altered or modified
without the express written consent of the parties hereto. No waiver of any
breach or default hereunder will be valid unless in a writing signed by the
waiving party. No failure or other delay by any party exercising any right,
power, or privilege hereunder will be or operate as a waiver thereof, nor will
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power, or privilege.
22. Waiver of Trial by Jury. Each of the parties hereto irrevocably waives
all rights to trial by jury in any action, proceeding, or counterclaim (whether
based on contract, tort, or otherwise) arising out of or relating to this
Agreement.
23. Consent to Jurisdiction and Service. Each of the Interested Parties
hereby absolutely and irrevocably consent and submit to the jurisdiction of the
courts in the Commonwealth of Massachusetts and of any Federal court located in
said Commonwealth in connection with any actions or proceedings brought against
any of the Interested Parties (or each of them) by the Escrow Agent arising out
of or relating to this Escrow Agreement. In any such action or proceeding, the
Interested Parties each hereby absolutely and irrevocably (i) waives any
objection to jurisdiction or venue, (ii) waives personal service of any summons,
complaint, declaration or other process, and (iii) agrees that the service
thereof may be made by certified or registered first-class mail directed to such
party, as the case may be, at their respective addresses in accordance with
Section 12 hereof.
B-11
<PAGE>
24. Force Majeure. The Escrow Agent shall not be responsible for delays or
failures in performance resulting from acts beyond its control. Such acts shall
include but not be limited to acts of God, strikes, lockouts, riots, acts of
war, epidemics, governmental regulations superimposed after the fact, fire,
communication line failures, computer viruses, power failures, earthquakes or
other disasters.
25. Reproduction of Documents. This Agreement and all documents relating
thereto, including, without limitation, (a) consents, waivers and modifications
which may hereafter be executed, and (b) certificates and other information
previously or hereafter furnished, may be reproduced by any photographic,
photostatic, microfilm, optical disk, micro-card, miniature photographic or
other similar process. The parties agree that any such reproduction shall be
admissible in evidence as the original itself in any judicial or administrative
proceeding, whether or not the original is in existence and whether or not such
reproduction was made by a party in the regular course of business, and that any
enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence.
[The rest of this page is intentionally left blank.]
B-12
<PAGE>
Executed and delivered under seal as of the date first above written.
<TABLE>
<CAPTION>
STREAMLINE: STREAMLINE.COM, INC.
<S> <C>
By
Name:
Title:
ESCROW AGENT: STATE STREET BANK
AND TRUST COMPANY
By
Name:
Title:
STOCKHOLDER
REPRESENTATIVE: William C. Steinmetz
</TABLE>
B-13
<PAGE>
SCHEDULE 1
<TABLE>
<S> <C>
Stockholder Number of Shares of
- ------------------------------- Streamline Common Stock
Deposited in Escrow
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
B-14
<PAGE>
ANNEX
FORM OF PROXY CARD
[SIDE ONE]
STREAMLINE.COM, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD JANUARY 5, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints Timothy A. DeMello, Edward Albertian and Lauren A.
Farrell, and each of them, as Proxies, with full powers of substitution, and
hereby authorizes them to represent and vote, as designated, all shares of stock
that the undersigned is entitled to vote at the Special Meeting of Shareholders
of Streamline.com, Inc. ("Streamline") to be held at 27 Dartmouth Street,
Westwood, Massachusetts 02090, on January 5, 2000 at 10:00 a.m. and at any
postponements or adjournments thereof, with all powers the undersigned would
possess if personally present, and revokes all proxies previously given by the
undersigned with respect to the shares covered hereby.
(TO BE CONTINUED AND SIGNED ON THE OTHER SIDE)
<PAGE>
[SIDE TWO]
PLEASE MARK YOUR VOTES BY CHECKING THE APPROPRIATE BOXES BELOW.
The Board of Directors recommends a vote "FOR" the proposals:
1. To approve the Agreement and Plan of Merger and Reorganization, dated as of
October 18, 1999, among Streamline, Streamsub, Inc. Beacon Home
Direct, Inc. d/b/a Scotty's Home Market, and certain other parties, as
described more fully in the Proxy Statement/Private Placement Memorandum
accompanying this proxy card.
/ / FOR / / AGAINST / / ABSTAIN
2. To approve an increase in the number of shares of Streamline common stock
authorized for issuance under Streamline's 1993 Employee Stock Option Plan,
as amended, from 2,500,000 to 3,000,000.
/ / FOR / / AGAINST / / ABSTAIN
3. To consider such other matters as may properly come before the special
meeting and any adjournments or postponements thereof.
The proxy will be voted in accordance with the instructions given. Unless
revoked or otherwise instructed, the shares represented by this proxy will be
voted FOR Proposals 1 and 2, and will be voted in accordance with the discretion
of the proxies upon all other matters which may come before the meeting or any
adjournment or postponement thereof.
Signature ____________________________________________________________ Date ___
Signature if held
jointly _______________________________________________________________ Date ___
IMPORTANT: When shares are held by joint tenants, both should sign. When signing
as attorney, executor, administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in full corporate name by
authorized officer. If a partnership, please sign in name by an authorized
person.
PLEASE DATE AND MAIL IN ENCLOSED POSTAGE-PAID ENVELOPE.
