<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 25, 2000
REGISTRATION NO. 333-92873
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
IMPROVENET, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1521 77-0452868
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
720 BAY ROAD, SUITE 200
REDWOOD CITY, CA 94063-2469
(650) 701-8000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------
RONALD B. COOPER
PRESIDENT
AND CHIEF EXECUTIVE OFFICER
IMPROVENET, INC.
720 BAY ROAD, SUITE 200
REDWOOD CITY, CA 94063-2469
(650) 701-8000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
<TABLE>
<S> <C>
Mark P. Tanoury, Esq. Laird H. Simons III, Esq.
Michael L. Weiner, Esq. Katherine T. Schuda, Esq.
Ryan E. Naftulin, Esq. R. Gregory Roussel, Esq.
Cooley Godward LLP Fenwick & West LLP
3000 Sand Hill Road Two Palo Alto Square
Building 3, Suite 230 Palo Alto, CA 94306-2155
Menlo Park, CA 94025-7116 (650) 494-0600
(650) 843-5100
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this registration statement.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) of the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED PROPOSED
MAXIMUM MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE REGISTRATION FEE(3)
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value per
Share.................................. 2,645,000 $16.00 $42,320,000 $10,411
</TABLE>
(1) Includes 345,000 shares of common stock issuable upon exercise of the
underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the amount of the
Registration Fee in accordance with Rule 457(a) of the Securities Act of
1933, as amended.
(3) $15,180 of the Registration Fee was previously paid.
--------------------------
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting offers to buy these securities
in any state where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 25, 2000
Shares
[LOGO]
Common Stock
---------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price is expected to be between $14.00 and
$16.00 per share. We have applied to list our common stock on The Nasdaq Stock
Market's National Market under the symbol "IMPV."
The underwriters have an option to purchase a maximum of 345,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See Risk Factors on page 7.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions ImproveNet, Inc.
----------------- ----------------- -----------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston
Robertson Stephens
E*OFFERING
The date of this prospectus is , 2000.
<PAGE>
DESCRIPTION OF INSIDE-COVER ARTWORK
PANEL ONE
Picture of a service provider with his arm around an older woman with the
caption, "Another beautiful relationship started on the Internet."
(INSIDE TWO-PAGE GATEFOLD SPREAD)
Reverse blueline drawing of a house depicting our information and services in
type and clip art in each room of the house under the title
"ImproveNet--America's Home Improvement Resource." The foundation of the house
includes the captions "ImproveNet.com" and "ImproveNetPro.com".
The roofline contains a counterclockwise ordering of our home improvement cycle
stages, beginning at the upper left and moving across and over the attic with:
"Dream & Design" "Plan & Budget" "Hire and Build" and "Fix and Maintain" all
connected in the triangle by directional arrows. Our logo appears in the
delineated attic.
The following text appears as a caption in each room of the house that
accompanies typed descriptions and clip art. From left to right and from top to
bottom the rooms are as follows:
"Personal Project Folder" with a subcaption "A place to compile project
elements" which relates to an image of a folder in the shape of a house
which bears our logo.
"Project Estimator" with a subcaption "Balancing the dream against reality"
which accompanies an image of a calculator whose display is our logo.
"Personal Project Advisor" with a subcaption "ImproveNet professionals take
the homeowner and service provider through a successful project" which
corresponds to a trio of people indicated as "homeowner", "advisor" and
"contractor."
"Contractor Screening, Matching & Leads" with a subcaption "Ensuring quality
service providers & fit to project" which is beneath a 5-point checklist
itemizing the following: "Credit", "License", "Legal", "Insurance" and
"Recommendations."
"Pro Site" with a subcaption "Professional services for contractors &
architects--job postings and more" which relates to an image of a drafting
table with a ruler, draftsman's triangle and folder with our logo.
"The Design Gallery" with a subcaption "Room designs organized by style"
which accompanies an image of a room with two workers, one measuring a wall
and the other installing a window, all under our logo.
"The Product Showcase" with a subcaption "Items organized by use and by
maker" which goes with an image of a showroom with an individual standing in
front of a display of different windows positioned under and beside our
logo. Three brochures with our logo are also shown to the left of the image.
"SmartLeads-TM-" with a subcaption "Targeted marketing opportunities based
on homeowner project" which ties with an image of the planet with a
satellite dish and two brochures beneath it which bear our logo.
"Powered By ImproveNet" with a subcaption "Providing service on partner's
behalf" which goes with the image of a cloud with our "Powered by
ImproveNet" logo inside and a lightening bolt coming out of the cloud.
"The Home Center" with a subcaption "Home & Garden, Remodeling, Real Estate,
Relocation and Financing Resources" corresponds to the image of a tool box
filled with a saw, screwdriver, ruler, hammer, rake and real estate sign
with the words "For Sale."
INSIDE BACK COVER ARTWORK:
Image depicting the ImproveNet logo as the roof of a house. The house is
comprised of the logos of MSN (Microsoft) HomeAdvisor, Dow Styrofoam Brand
Insulation, Armstrong, Owens Corning and General Electric. The foundation of the
house includes the caption "Building the Home Improvement Destination."
<PAGE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUMMARY.................... 4
RISK FACTORS.......................... 7
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS.................. 18
USE OF PROCEEDS....................... 19
DIVIDEND POLICY....................... 19
CAPITALIZATION........................ 20
DILUTION.............................. 21
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 23
</TABLE>
<TABLE>
BUSINESS.............................. 32
<CAPTION>
PAGE
--------
<S> <C>
MANAGEMENT............................ 46
RELATED PARTY TRANSACTIONS............ 56
PRINCIPAL STOCKHOLDERS................ 61
DESCRIPTION OF CAPITAL STOCK.......... 64
SHARES ELIGIBLE FOR FUTURE SALE....... 67
UNDERWRITING.......................... 69
NOTICE TO CANADIAN RESIDENTS.......... 71
LEGAL MATTERS......................... 72
EXPERTS............................... 72
WHERE YOU CAN FIND ADDITIONAL
INFORMATION......................... 72
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
EXCEPT AS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS IS BASED ON
THE FOLLOWING ASSUMPTIONS:
- THE CONVERSION OF ALL OUR OUTSTANDING SHARES OF PREFERRED STOCK INTO
SHARES OF COMMON STOCK IMMEDIATELY UPON THE CLOSING OF THIS OFFERING;
- NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION; AND
- THE FILING, UPON APPROVAL OF OUR STOCKHOLDERS, OF OUR RESTATED CERTIFICATE
OF INCORPORATION, BEFORE THE CLOSING OF THIS OFFERING.
"ImproveNet," is a registered trademark of ImproveNet, Inc. "Powered by
ImproveNet," "ImproveNetPro" and "SmartLeads" are trademarks of
ImproveNet, Inc. This prospectus also includes trademarks owned by other
parties.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE INFORMATION YOU
SHOULD CONSIDER BEFORE BUYING SHARES IN THIS OFFERING. YOU SHOULD READ THE
ENTIRE PROSPECTUS CAREFULLY.
IMPROVENET, INC.
We are a leading source on the Internet for home improvement information and
services. Through our ImproveNet.com and ImproveNetPro.com Web sites, matching
services and targeted advertising, we are creating a national marketplace for
home improvement products and services in which homeowners, service providers
and suppliers of home improvement products benefit from an organized and
efficient online flow of information and communication.
We generate quality job leads for service providers from highly interested
homeowners within their geographic area using our proprietary matching service.
In 1998, we received approximately 33,100 job submissions valued at a total of
approximately $1.1 billion, compared to the estimated total expenditures for the
residential home improvement market for 1998 of approximately $120.7 billion,
according to the United States Department of Commerce. In 1999, we received
approximately 106,500 job submissions valued at a total of approximately
$2.7 billion, compared to the estimated total expenditures for the residential
home improvement market for 1999 of approximately $126.7 billion, according to
the National Association of Home Builders. We have designed our services to
deliver a satisfying home improvement experience to homeowners and to assist
them through the four phases of the home improvement process:
- DREAM AND DESIGN--We provide homeowners free online information and design
tools such as our design gallery and product showcase as well as a
personal project folder that allows homeowners to store all ideas and
information about their projects on our Web site.
- PLAN AND BUDGET--Our Web site provides interactive tools, such as our
kitchen visualization tool, that allow homeowners to plan their projects
or our kitchen estimator, that allow homeowners to calculate the expected
cost of their projects based on parameters such as physical dimensions,
styles and estimated costs for service providers within a given zip code.
- HIRE AND BUILD--Our proprietary matching process allows us to match
service providers who have passed our screening process with pre-qualified
job leads submitted by homeowners. We provide participating homeowners
free access, both online and offline, to one of our project advisors, who
assists them through the entire process.
- FIX AND MAINTAIN--Our online and offline information, services and support
personnel empower homeowners to continuously maintain and improve their
homes, from idea creation to project completion.
The home improvement industry is fragmented. Based upon a compilation of
industry sources, we believe there are up to 900,000 service providers in the
United States. Further, according to the United States Census Bureau, as of
September 30, 1999 there were 70.5 million owner-occupied homes out of a total
of 120 million housing units.
Our strategy is to become America's home improvement resource on the
Internet. The key elements of our strategy are:
- deliver a satisfying home improvement experience to homeowners, service
providers and suppliers;
- increase the number of jobs submitted to us and the percentage of those
jobs won by service providers in our network;
4
<PAGE>
- sign new multi-year commercial contracts and expand existing ones with
suppliers of home improvement products and services and related home
services; and
- continue to build the ImproveNet brand.
We generate revenues from our three constituents:
- service providers pay us lead fees and win fees for our matching service
that are included in service revenues;
- suppliers of home improvement products and services as well as other
advertisers pay us advertising fees for the purchase of advertising space
on our Web sites that are included in advertising revenues; and
- homeowners pay us fees for our premium home improvement services that are
included in service revenues and that to date have not been significant.
In 1999, service revenues represented approximately 55% of total revenues
and advertising revenues represented the remainder.
We have entered into multi-year commercial contracts with the following
providers of home improvement products and services and related home services:
Armstrong, Cendant, Dow Chemical, DuPont, General Electric Appliances,
Microsoft, Owens Corning and Wickes.
From inception through December 31, 1999, we had aggregate net losses of
approximately $42.0 million, and we anticipate incurring losses in the
foreseeable future.
Following this offering, our existing stockholders will own approximately
85.6% of our stock and therefore will have control over the election of
directors and all other matters submitted to stockholders for approval.
We were incorporated in California in January 1996 as Netelligence, Inc.,
changed our name to ImproveNet, Inc. in May 1996 and reincorporated in Delaware
in September 1998. Our principal executive offices are located at 720 Bay Road,
Suite 200, Redwood City, California 94063-2469. Our telephone number is
(650) 701-8000. Our consumer Internet address is WWW.IMPROVENET.COM and our
professional Internet address is WWW.IMPROVENETPRO.COM. The information found on
our Web sites is not part of this prospectus.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered........................... 2,300,000 shares
Common stock to be outstanding after the
offering..................................... 16,019,310 shares
Use of proceeds................................ For operating activities, including expansion
of our sales and marketing programs and field
support organization, capital expenditures and
other general corporate purposes.
Proposed Nasdaq National Market symbol......... IMPV
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of December 31, 1999, and
excludes:
- 1,858,067 shares subject to options outstanding as of December 31, 1999,
at a weighted average exercise price of $3.72 per share;
- 1,787,172 shares subject to warrants outstanding as of December 31, 1999,
at a weighted average exercise price of $6.67 per share;
- 1,179,356 additional shares that are available for issuance under our
stock option plans;
- 300,000 shares that we could issue under our employee stock purchase plan;
and
- 48,592 shares to be issued in connection with the acquisition of The J.L.
Price Corporation.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues.............................................. $ 2 $ 60 $ 258 $ 2,065
Loss from operations........................................ (360) (1,239) (4,199) (36,768)
Net loss attributable to common stockholders................ (359) (1,328) (4,832) (36,490)
Basic and diluted net loss per common share................. $(0.73) $ (1.08) $ (3.49) $ (23.85)
Shares used in calculating basic and diluted net loss per
common share.............................................. 493 1,228 1,383 1,530
Pro forma basic and diluted net loss per common share....... $ (4.40)
Shares used in calculating pro forma basic and diluted net
loss per common share..................................... 8,234
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $45,291 $45,291 $75,976
Working capital............................................. 39,891 39,891 70,576
Total assets................................................ 51,134 51,134 81,819
Total stockholders' equity.................................. 43,862 43,862 74,547
</TABLE>
See Note 2 of the notes to our consolidated financial statements for an
explanation of the determination of the number of shares used in computing per
share data.
The pro forma balance sheet information gives effect to the conversion of
all outstanding shares of preferred stock into common stock upon the closing of
this offering.
The pro forma as adjusted information is adjusted to give effect to the sale
of 2,300,000 shares of common stock in this offering at an assumed initial
public offering price of $15.00 per share, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses.
6
<PAGE>
RISK FACTORS
THIS OFFERING AND AN INVESTMENT IN OUR COMMON STOCK INVOLVE A HIGH DEGREE OF
RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER
INFORMATION IN THIS PROSPECTUS BEFORE PURCHASING OUR SHARES. ADDITIONAL RISKS
AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY SEE AS
IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING
RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE LARGE ACCUMULATED LOSSES, WE EXPECT FUTURE LOSSES, AND WE MAY NOT
ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred substantial losses and used substantial cash to support our
operations as we have expanded our sales and marketing programs, funded the
development of our services, promoted our Web sites and matching service and
expanded our operations infrastructure. Our net losses were approximately
$1.2 million in 1997, $4.1 million in 1998 and $36.3 million in 1999 on revenues
of $60,000, $258,000 and approximately $2.1 million, respectively. As of
December 31, 1999, our accumulated loss was approximately $42.0 million. We
expect our expenditures on sales and marketing activities, support field
services and the development of new products, services and technologies to
continue to increase. We will continue to lose money unless we significantly
increase our revenues. We cannot predict when, if ever, we will operate
profitably.
WE ARE AN EARLY STAGE COMPANY WITH A NEW AND UNPROVEN BUSINESS MODEL AND A
LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS.
We were incorporated in January 1996; however, we did not begin offering
home improvement services on the Internet until August 1997. Since March 1999,
we have implemented a new business plan, hired our new management team and
raised the majority of our financing. As a result, we have not yet experienced
one full year of operations under the new business plan and a new management
team. Therefore, we have a limited operating history upon which you can evaluate
our business and the performance of our management team.
To generate revenues, we must offer services at prices that achieve broad
market acceptance by homeowners, service providers and suppliers of home
improvement products. If we fail to provide services that achieve broad market
acceptance by homeowners, we will not be able to attract service providers or
multi-year commercial contracts. An important component of our business model is
our ability to match homeowners to service providers for home improvement
projects. Similarly, our matching service must gain broad market acceptance from
homeowners and service providers. Furthermore, even if our business plan is
successful, we may change our business plan to enter into new business areas,
including areas in which we do not have extensive experience. Before investing,
you should evaluate the risks, expenses and problems frequently encountered by
companies such as ours that are in the early stages of development and that are
entering new and rapidly changing markets like the Internet. We may not
successfully implement any of our strategies or successfully address these risks
and uncertainties.
OUR FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND SEASONALITY
AND ARE DIFFICULT TO PREDICT.
Our results of operations could vary significantly from quarter to quarter
or from year to year. In the near term, we expect our revenues to be
substantially dependent on advertising sales. We also
7
<PAGE>
expect to incur significant sales and marketing expenses to promote our brand
and services. Therefore, our revenues and operating results are likely to be
particularly affected by:
- the amount of advertising sold on our Web sites;
- the timing of payments for this advertising;
- sales and marketing expenses for a particular period; and
- the timing of our fixed infrastructure expenditures.
If revenues fall below our expectations, we will not be able to reduce our
spending rapidly in response to the shortfall.
Our limited operating history and rapid growth make it difficult to assess
the impact of seasonal factors on our business. However, our business is
dependent upon the home improvement industry. As a result, we expect that our
revenues may be lower during the first and fourth quarters since more homeowners
commit to home improvement projects during the spring and summer months.
According to the United States Department of Commerce, for quarterly periods in
1996 through 1998, average expenditures for the residential home improvement
industry were approximately 18% in the first quarter, 28% in the second quarter,
29% in the third quarter, and 25% in the fourth quarter. We are currently unable
to assess the effect of seasonality in the home improvement industry on our
business.
OUR MARKET IS BECOMING MORE COMPETITIVE AND WE MAY SUFFER PRICE REDUCTIONS, BE
UNABLE TO ATTRACT HOMEOWNERS TO OUR WEB SITE, BE UNABLE TO MAINTAIN OUR SERVICE
PROVIDER NETWORK OR ENTER INTO NEW MULTI-YEAR COMMERCIAL CONTRACTS IF WE DO NOT
COMPETE EFFECTIVELY.
The market for our services is intensely competitive, evolving and subject
to rapid technological change. To remain competitive, we must continue to
enhance and improve the ease of use, responsiveness, functionality and features
of our online and offline services in order to attract homeowners to our Web
site and maintain our service provider network. We expect the intensity of
competition to increase in the future. Increased competition may result in
changes in our pricing model, fewer homeowners visiting our Web site, service
providers leaving our network, less advertising revenue, reduced gross margins
and loss of market share, any one of which could significantly reduce our
expected future profitability. In addition, technological barriers to entry are
relatively low. As a result, current competitors, such as local referral
businesses and online referral companies such as ServiceMagic.com, iMandi,
iCastle, repairnet, HomesSpud, OurHouse.com, Handyman Online, Bid Express and
Contractor.com and potential competitors such as The Home Depot, Lowe's and
Sears Roebuck & Company could launch Web sites similar to ours that gain broader
market acceptance based on content, products and services. Remodel.com, recently
launched by HomeStore.com, offers a matching service.
Some of our competitors have more resources and broader and deeper customer
access than we do. In addition, many of these competitors have or can readily
obtain extensive knowledge of the home improvement industry. Our competitors may
be able to respond more quickly than we can to new technologies or changes in
Internet user preferences and devote greater resources than we can to the
development, promotion and sale of their services. We may not be able to
maintain our competitive position against current and future competitors,
especially those with significantly greater resources, especially offline home
improvement retail store chains such as The Home Depot, Lowe's and Sears Roebuck
& Company.
8
<PAGE>
OUR FAILURE TO DEVELOP BRAND RECOGNITION COULD LIMIT OR REDUCE THE DEMAND FOR
OUR SERVICE AND RESULT IN A COMPLETE LOSS OF THE ANTICIPATED BENEFITS
SIGNIFICANT MARKETING EXPENDITURES.
We believe that continuing to strengthen our brand will be critical to
increasing demand for, and achieving widespread acceptance of, our matching
services, generating additional homeowner traffic, and entering into new
multi-year commercial contracts. Some of our competitors and potential
competitors have better name recognition and powerful brands. Promoting and
positioning our brand will depend largely on the success of our marketing
efforts, our ability to deliver features on our Web site that are engaging to
our users, and our ability to provide high quality matching services and
support. To promote our brand, we will need to increase our marketing budget and
otherwise increase our financial commitment to creating and maintaining brand
loyalty among users. We expect to spend between $25 million and $35 million in
2000 on sales and marketing programs and we expect our marketing expenditures to
increase in the future. Brand promotion activities may not yield increased
homeowner traffic, additional multi-year commercial contracts or increased
revenues and, even if they do, any increased revenues may not offset the
expenses we incur in building and maintaining our brand. If we fail to develop
sufficient brand recognition, our ability to generate advertising revenues and
service revenues may be harmed.
IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO MARKET, SELL AND DEVELOP OUR
SERVICES COULD BE HARMED.
Our growth has placed and will continue to place a significant strain on our
management systems and resources, and we may be unable to effectively manage our
growth in the future. We must plan and manage our growth effectively to offer
our services and achieve revenue growth and profitability in a rapidly evolving
market. We continue to increase the scope of our operations and have added a
number of employees recently, including employees in key management and sales
positions. We grew from 16 employees as of December 31, 1997 to 198 as of
December 31, 1999. For us to effectively manage our growth, we must continue to:
- improve our operational, financial and management systems and controls;
- install new management and information systems and controls;
- locate additional office space in a number of geographic locations; and
- hire, train and motivate our workforce.
Failure to manage our growth effectively would hinder our ability to
develop, market and sell our services and therefore harm our business.
IF WE DO NOT ATTRACT AND RETAIN A NETWORK OF HIGH QUALITY SERVICE PROVIDERS, OUR
BUSINESS COULD BE HARMED.
We expect to derive the majority of our revenues from our network of service
providers in the form of payments for each homeowner referral that we provide to
them and for each home improvement project that they win. In 1999, we derived
approximately 55% of our total revenues from our network of service providers in
the form of lead fees and win fees. Our business is highly dependent on
homeowners' use of our Web site to find service providers for their home
improvement projects so that service providers will achieve a satisfactory
return on their participation in the ImproveNet program.
A key element of the growth of our business is the pace at which service
providers adopt the ImproveNet matching process. This adoption includes
responding to homeowner inquiries within 48 hours, providing a competitive, firm
quote to homeowners quickly, and paying the service fees to ImproveNet. We
devote significant effort and resources to screening and supporting
participating service providers and to developing programs that monitor service
providers' job wins and that collect
9
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service fees from service providers for these wins. Our inability to screen and
support service providers effectively, or the failure of our service providers
to respond professionally and in a timely manner to homeowner inquiries, could
result in low homeowner satisfaction and harm our business. In addition, the
failure of our service providers to win home improvement projects, report their
wins to us, or pay us service fees could harm our business.
We must actively recruit new service providers and retain and motivate our
current service providers to ensure that we continually have adequate national
coverage. There is a high rate of turnover among service providers in the home
improvement industry. Accordingly, we expect that not all of our service
providers will remain active participants in our network. If we are unable to
maintain low turnover among our network of service providers our business could
be harmed.
IF HOMEOWNERS FAIL TO REPORT, AND SERVICE PROVIDERS FAIL TO REPORT AND TO PAY TO
US WIN FEES, DIRECTLY OR INDIRECTLY, OUR BUSINESS WOULD BE HARMED.
Our service providers are responsible for paying us a win fee for each job
that they obtain from us. We ask service providers not to pass on the cost of
the win fee to the homeowner. However, we do not currently provide any guarantee
to the homeowner that our service providers have not raised their rates to cover
the win fee nor do we audit or plan to audit our service providers to confirm
that they have not raised their rates. Homeowners may believe that they are
indirectly paying us our win fee through the higher rates of service providers
and, therefore, choose to select service providers through the Yellow Pages,
local contractor referral services or other means rather than using our matching
service. If homeowners choose not to use our service, we will lose service
revenues and visitors to our Web sites and our business will be harmed.
We depend on our service providers to report that they have won a job and
pay us our win fee. We rely on personal relationships with our service providers
and the incentive to receive future leads from us to encourage service providers
to report wins and pay win fees. Currently, we do not have a control or an
oversight mechanism in place with either service providers or homeowners to
ensure that they report wins and pay win fees. If service providers do not
report wins or pay us win fees, we will lose service revenues and our business
will be harmed.
WE DEPEND ON THIRD-PARTY RELATIONSHIPS TO ATTRACT VISITORS TO OUR WEB SITE.
During the fourth quarter of 1999, we entered into multi-year commercial
contracts with Armstrong, Cendant, Dow Chemical, DuPont, General Electric
Appliances, Microsoft, Owens Corning and Wickes with the expectation that they
will generate advertising revenues and increased job submissions for us. In
1999, we did not derive any revenue that could be recognized on a gross basis,
directly or indirectly, from our multi-year commercial contracts with suppliers
of home improvement products and services nor did we receive any significant
increased traffic from these contracts. Companies that we may pursue for a
multi-year commercial contract may offer services competitive with suppliers
with which we currently have multi-year contracts. As a result, these suppliers
may be reluctant to enter into multi-year contracts with us. If we do not
maintain our existing multi-year commercial contracts on terms as favorable as
currently in effect, if we do not establish additional ones on commercially
reasonable terms, or if any or all do not result in an increased use of our Web
sites, our business could be harmed.
We depend on establishing and maintaining a number of advertising
relationships with high-traffic Web sites that can help us to increase the
number of visitors to ImproveNet.com. For example, in 1999 approximately 19% of
our Web site traffic originated from AltaVista, America Online, Excite@Home,
Lycos, Microsoft HomeAdvisor, Quicken.com and Yahoo!. In 1999, we spent
approximately 14% of our sales and marketing expenses on relationships with
these Web sites. There is intense competition for preferential placements on
some of these Web sites, and in the future we may not be able to enter into
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these relationships on commercially reasonable terms or at all. Even if we enter
into commercial relationships with these Web sites, they themselves may not
attract significant numbers of homeowners and we may not receive a significant
number of additional homeowners from these relationships. Moreover, advertising
fees are currently increasing and we will have to pay significant fees to
establish new advertising relationships or renew our current relationships.
WE DEPEND ON THIRD-PARTY RELATIONSHIPS TO PROVIDE SOFTWARE TOOLS AND
INFRASTRUCTURE.
We integrate third-party software into our service offerings on our Web
sites. We would be harmed if the providers from which we license software ceased
to deliver and support reliable products, to enhance their current products, or
to respond to emerging industry standards. In addition, third-party software may
not continue to be available to us on commercially reasonable terms or at all.
The loss of, or inability to maintain or obtain, this software could limit the
features available on our Web sites, which could harm our business.
IF WE FAIL TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, OUR ABILITY TO COMPETE
COULD BE HARMED.
We depend on the continued service of our key technical, sales and senior
management personnel. In particular, the loss of the services of Ronald B.
Cooper, our President and Chief Executive Officer, or other senior management
personnel, individually or as a group, could cause us to incur increased
operating expenses and divert other senior management time in searching for
their replacements. We do not have employment agreements with any employee,
except Mr. Cooper, and we do not maintain any key person life insurance policies
for any of our key employees, except for Mr. Cooper and Robert L. Stevens, our
Chairman of the Board. The loss of any of our key technical, sales or senior
management personnel could harm our business.
In addition, we must attract, retain and motivate highly skilled employees.
We face significant competition for individuals with the skills required to
develop, market and support our services. We may not be able to recruit and
retain sufficient numbers of highly skilled employees, and as a result our
business could suffer.
IF WE FAIL TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WE COULD LOSE THESE
RIGHTS AND OUR BUSINESS COULD BE HARMED.
We depend upon our ability to develop and protect our intellectual property
rights, including our databases of homeowners and service providers, our
internally-developed matching criteria and algorithms, to distinguish our
services from our competitors' services. We rely on a combination of copyright,
trademark and trade secret laws, as well as confidentiality agreements and
licensing arrangements, to establish and protect our proprietary rights. We have
no issued patents. Our databases are protected by trade secret laws and our
matching service is protected primarily by trade secret and copyright laws.
Existing laws afford only limited protection of intellectual property rights.
Attempts could be made to copy or reverse engineer aspects of our processes or
services or to obtain and use information that we regard as proprietary.
Accordingly, we may not be able to protect our intellectual property rights
against unauthorized third-party copying or use. Furthermore, policing the
unauthorized use of our product is difficult, and expensive litigation may be
necessary in the future to enforce our intellectual property rights. The use by
others of our proprietary rights could harm our business.
OUR SERVICES COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS CAUSING
COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS.
Third parties could claim that we have infringed their intellectual property
rights by claiming that our matching service infringes their patents, trade
secrets or copyrights. In addition, providers of goods and services over the
Internet are increasingly subject to claims that they infringe patents that
cover
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basic elements of electronic commerce. The resolution of any claims could be
time-consuming, result in costly litigation, delay or prevent us from offering
our products or services or require us to enter into royalty or licensing
agreements, any of which could harm our business. In the event an infringement
claim against us is successful and we cannot obtain a license on acceptable
terms, license a substitute technology or redesign our services, our business
would be harmed. Furthermore, former employers of our current and future
employees may assert that our employees have improperly disclosed to us or are
using confidential or proprietary information in our business.
IF WE EXPERIENCE SYSTEM FAILURES, OUR REPUTATION WOULD BE HARMED AND USERS MIGHT
SEEK ALTERNATIVE SERVICE PROVIDERS, CAUSING US TO LOSE REVENUES.
We depend on the efficient and uninterrupted operation of our computer and
communications hardware and software systems. Substantially all of our computer
hardware for operating our Web sites is currently located at Exodus
Communications in Santa Clara, California, with backups located at our facility
in Redwood City, California. These systems and operations are vulnerable to
damage or interruption from earthquakes, floods, fires, power loss,
telecommunication failures and similar events. They are also subject to
break-ins, sabotage, intentional acts of vandalism and similar misconduct. We do
not have fully redundant systems, a formal disaster recovery plan or alternative
providers of hosting services, and we do not carry business interruption
insurance to compensate us for losses that could occur. Despite any precautions
we may take, the occurrence of a natural disaster or other unanticipated
problems either at Exodus or at our facility could result in interruptions in
our services. Any damage to or failure of our systems could result in
interruptions in our service. In addition to placing an increased burden on our
engineering staff, any system failure could create user questions and complaints
that must be responded to by our customer support personnel. The system failures
of various third-party Internet service providers, online service providers and
other Web site operators could result in interruptions in our service to those
users who require the services of these third-party providers and operators to
access our Web sites. These interruptions could reduce our revenues and profits,
and our future revenues and profits will be harmed if our users believe that our
system is unreliable. Since we have been keeping logs of our Web sites, our
ImproveNet.com Web site has been unintentionally interrupted for periods ranging
from two minutes to one hour. On one occasion, some users experienced
interruptions in part of our service for a period of 48 hours. We have had no
interruptions or outages of our ImproveNetPro.com Web site since its inception
in December 1999.
WE MAY HAVE CAPACITY RESTRAINTS THAT COULD LIMIT THE GROWTH OF OR REDUCE OUR
REVENUES.
The satisfactory performance, reliability and availability of our Web sites,
processing systems and network infrastructure are critical to our reputation and
our ability to attract and retain large numbers of users. If the volume of
traffic, including at peak times, on our Web sites increases, we will need to
expand and upgrade our technology, transaction processing systems and network
infrastructure. We may not be able to accurately project the rate or timing of
these increases, if any, in the use of our services or to expand or upgrade our
systems and infrastructure in a timely manner to accommodate these increases.
We use internally developed systems for operating our services and
processing our transactions, including billing and collections processing. We
must continually improve these systems in order to accommodate the level of use
of our Web sites. In addition, if we add new features and functionality to our
services, we could be required to develop or license additional technologies.
Our inability to add additional software and hardware or upgrade our technology,
transaction processing systems or network infrastructure could cause
unanticipated system disruptions, slower response times, degradation in levels
of customer support, impaired quality of the users' experience, delays in
accounts receivable collection or losses of recorded financial information. Our
failure to provide new features or functionality also could result in these
consequences. The required equipment hardware may not be readily available or
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affordable and we may be unable to effectively upgrade and/or expand our systems
in a timely manner or to integrate smoothly any newly developed or purchased
technologies with our existing systems. These difficulties could harm or limit
our ability to expand our business.
RISKS RELATED TO OUR INDUSTRY
THE MARKET FOR INTERNET-BASED SERVICE PROVIDER MATCHING SERVICES IS NEW AND
UNPROVEN AND, IF IT DOES NOT DEVELOP SUFFICIENTLY, WE MAY NOT BE ABLE TO
GENERATE SIGNIFICANT REVENUES.
The market for Internet-based service provider matching services is new and
unproven, so there is uncertainty whether demand for our services will develop
and, if developed, be sustained. If the market for our services does not develop
or if our services do not achieve market acceptance, we will not be able to
generate significant revenues from either services or advertising, or be able to
enter into new multi-year commercial contracts.
IF THE HOME IMPROVEMENT INDUSTRY DECLINES, OUR REVENUES COULD DECLINE AND OUR
BUSINESS COULD BE HARMED.
Our business is dependent on the economic strength of the home improvement
industry. The home improvement industry is cyclical, with the number of home
improvement projects affected by national and global economic forces, primarily
fluctuations in interest rates and employment levels. We believe that our future
performance will be affected by the cyclical nature of the home improvement
industry and, as a result, be adversely affected from time to time by industry
downturns.
WE COULD BE HELD LIABLE FOR PRODUCTS AND SERVICES REFERRED BY MEANS OF OUR WEB
SITE.
We could be subject to claims relating to products and services that we
refer through our Web site. Homeowners may bring claims against us for referring
service providers who may have, among other things, provided them with poor
workmanship or caused bodily injury or damage to property. Our existing
insurance coverage may not cover all potential claims or may not adequately
cover all costs incurred in defense of potential claims or may not indemnify us
for all liability that may be imposed or may not be renewable in future periods
or renewable on terms and conditions satisfactory to us. In addition, claims,
with or without merit, would result in diversion of our financial resources and
management resources or the absence of insurance coverage could harm our
business.
WE DEPEND ON THE INCREASING USE OF THE INTERNET. IF THE USE OF THE INTERNET DOES
NOT GROW, OUR REVENUES MAY NOT GROW AND COULD DECLINE AND OUR BUSINESS COULD BE
HARMED.
We depend on increased acceptance and use of the Internet. In particular,
our matching service depends upon service providers being willing to use the
Internet to find jobs through our service. We believe that service providers
generally have not traditionally used computers or the Internet to operate their
businesses. Demand and market acceptance for recently introduced products and
services over the Internet are subject to a high level of uncertainty. As a
result, acceptance and use of the Internet may not develop or a sufficiently
broad base of users may not adopt or continue to use the Internet as a medium of
commerce.
THE INTERNET IS CHARACTERIZED BY RAPIDLY CHANGING TECHNOLOGIES, FREQUENT NEW
PRODUCT AND SERVICE INTRODUCTIONS AND EVOLVING INDUSTRY STANDARDS.
To succeed, we will need to adapt effectively to rapidly changing
technologies and continually improve the performance features and reliability of
our services. We could incur substantial costs in modifying our products,
services or infrastructure to adapt to these changes, and we may also lose
customers and revenues if our services fail to adapt to the rapid changes
characteristic of the Internet.
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Conversely, if the Internet experiences increased growth in number of users,
frequency of use and bandwidth requirements, the Internet infrastructure may be
unable to support the demands placed on it. The success of our business will
rely on the Internet providing a convenient means of interaction and commerce.
Our business depends on the ability of users to access information without
significant delays or aggravation.
FUTURE GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES PERTAINING TO THE INTERNET
COULD DECREASE THE DEMAND FOR OUR SERVICES OR INCREASE THE COST OF DOING
BUSINESS.
There is, and will likely continue to be, an increasing number of laws and
regulations pertaining to the Internet. These laws and regulations may relate to
liability for information retrieved from or transmitted over the Internet,
online content, user privacy, taxes or the quality of services. Any new law or
regulation pertaining to the Internet, or the adverse application or
interpretation of existing laws, could decrease the demand for our services or
increase our cost of doing business.
We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity
and export or import matters. The vast majority of these laws was adopted prior
to the advent of the Internet. As a result, they do not contemplate or address
the unique issues created by the Internet and related technologies. Changes in
laws intended to address these issues could create uncertainty for or adversely
affect companies doing business on the Internet. This could reduce demand for
our services or increase the cost of doing business.
LEGISLATIVE AND REGULATORY INITIATIVES REGARDING THE COLLECTION AND USE OF OUR
USERS' PERSONAL INFORMATION MAY RESULT IN LIABILITY AND EXPENSES.
Current computing and Internet technology allows us to collect personal
information about our users. In the past, the Federal Trade Commission has
investigated companies that have sold personal information to third parties
without permission or in violation of a stated privacy policy. Currently, we
collect personal information only with the user's consent and under our privacy
policy. If we begin collecting or selling personal information without
permission or in violation of our privacy policy, we could face potential
liability for compiling and providing information to third parties.
THE IMPOSITION OF ADDITIONAL STATE AND LOCAL TAXES ON INTERNET-BASED
TRANSACTIONS WOULD INCREASE OUR COST OF DOING BUSINESS AND HARM OUR ABILITY TO
BECOME PROFITABLE.
We file state tax returns as required by law based on principles applicable
to traditional businesses. However, one or more states could seek to impose
additional income tax obligations or sales and use tax collection obligations on
out-of-state companies such as ours that engage in or facilitate Internet-based
commerce. A number of proposals have been made at state and local levels that
could impose taxes on the sale of products and services through the Internet or
the income derived from those sales. These proposals, if adopted, could
substantially impair the growth of Internet-based commerce and harm our ability
to become profitable.
United States federal law limits the ability of the states to impose taxes
on Internet-based transactions. Until October 21, 2001, state and local taxes on
Internet-based commerce that are discriminatory against Internet access are
prohibited, unless the taxes were generally imposed and actually enforced before
October 1, 1998. It is possible that this tax moratorium will not be renewed by
October 21, 2001 or at all. Failure to renew this legislation would allow
various states to impose taxes on Internet-based commerce. The imposition of
state and local taxes could harm our ability to become profitable.
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RISKS RELATED TO OUR OFFERING
SUBSTANTIAL SALES OF OUR COMMON STOCK BY OUR STOCKHOLDERS COULD DEPRESS OUR
STOCK PRICE.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
would likely fall. Based on shares outstanding as of December 31, 1999, upon
completion of this offering, we will have outstanding 16,019,310 shares of
common stock. Upon completion of this offering, 2,456,093 shares of common
stock, including the 2,300,000 shares being sold in this offering, will be
eligible for immediate sale in the public market, unless purchased by our
affiliates. Substantially all of our stockholders will be subject to agreements
with the underwriters that restrict their ability to transfer their stock for
180 days after the date of this prospectus without the prior written consent of
Credit Suisse First Boston Corporation. However, Credit Suisse First Boston
Corporation may, in its sole discretion, release all or any portion of the
common stock from the restrictions of these agreements. After these agreements
expire, an additional 8,115,045 shares will be eligible for sale in the public
market.
FAILURE TO RAISE ADDITIONAL CAPITAL OR GENERATE THE SIGNIFICANT CAPITAL
NECESSARY TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS AND SERVICES COULD
REDUCE OUR ABILITY TO COMPETE AND RESULT IN LOWER REVENUES.
We expect that the net proceeds from this offering, together with currently
available funds, will be sufficient to meet our working capital and capital
expenditure needs for at least the next 12 months. If we are unable to generate
sufficient cash flows from operations to meet our anticipated needs for working
capital and capital expenditures, we will need to raise additional funds after
12 months to fund brand promotions, develop new or enhanced services or respond
to competitive pressures. We cannot be certain that we will be able to obtain
additional financing on favorable terms, or at all. If we need additional
capital and cannot raise it on acceptable terms, we may not be able, among other
things, to:
- develop or enhance our services;
- develop or acquire new technologies, products or businesses;
- expand operations in the United States or internationally;
- hire, train and retain employees; or
- respond to competitive pressures or unanticipated capital requirements.
Our failure to do any of these things could result in lower revenues and
could harm our business.
In addition, we may seek to raise additional funds, finance acquisitions or
develop commercial relationships by issuing equity or convertible debt
securities, which would reduce the percentage ownership of existing
stockholders. Furthermore, any new securities could have rights, preferences or
privileges senior to those of our common stock.
NEW INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION.
The initial public offering price will be substantially higher than the book
value per share of our common stock. Investors purchasing common stock in this
offering will, therefore, incur immediate dilution of $10.39 per share of common
stock in net tangible book value, based on an assumed initial public offering
price of $15.00 per share. In addition, we have issued options and warrants to
acquire common stock at prices significantly below the assumed initial public
offering price. To the extent outstanding options or warrants are ultimately
exercised, there will be further dilution to investors in this offering.
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OUR STOCK PRICE MAY BE VOLATILE BECAUSE OF FACTORS BEYOND OUR CONTROL, AND YOU
MAY LOSE ALL OR A PART OF YOUR INVESTMENT.
The market prices of stock for Internet and other technology companies,
particularly following an initial public offering, frequently reach levels that
bear no relationship to the past or present operating performance of those
companies. These market prices may not be sustainable and may be subject to wide
variations. Following this offering, the market price of our common stock may
experience a substantial decline. The market price of our common stock may
fluctuate significantly in response to a number of factors, most of which are
beyond our control, including:
- variations in our quarterly operating results;
- changes in securities analysts' estimates of our financial performance;
- the discussion of our company or stock price in online investor
communities such as chat rooms;
- changes in market valuations of similar companies;
- announcements by us or our competitors of significant contracts, new
technologies, acquisitions, commercial relationships, joint ventures or
capital commitments;
- loss of a major customer or failure to complete significant license
transactions;
- additions to or subtraction from our service provider network;
- additions or departures of key personnel; and
- fluctuations in stock market prices and volumes, particularly among
securities of Internet-based companies.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY.
In the past, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
This risk is especially acute for us because technology companies have
experienced greater than average stock price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities class
action claims than companies in other industries. We may in the future be the
target of litigation of this type. Securities litigation could result in
substantial costs and divert management's attention and resources, and could
harm our business.
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS THAT COULD DISCOURAGE OR PREVENT A
TAKEOVER, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL IN THE OPINION OF OUR
STOCKHOLDERS.
Provisions of our amended and restated certificate of incorporation and
bylaws could make it more difficult for a third party to acquire us, even if
doing so would be beneficial in the opinion of our stockholders. These
provisions include:
- authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
- prohibiting cumulative voting in the election of directors, which would
allow less than a majority of stockholders to elect director candidates;
- limitations on the ability of stockholders to call special meetings of
stockholders;
- prohibiting stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of our stockholders; and
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- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.
In addition, section 203 of the Delaware General Corporation Law and the
terms of our stock option plans may discourage, delay or prevent a change in
control of ImproveNet.
EXISTING STOCKHOLDERS SIGNIFICANTLY INFLUENCE US AND COULD PREVENT NEW INVESTORS
FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS.
Upon completion of this offering, our executive officers, directors,
principal stockholders and their affiliates will beneficially own, in the
aggregate, approximately 66.8% of our outstanding common stock. As a result,
these stockholders will be able to control all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions, which could delay or prevent a change of control of
ImproveNet and will make some transactions difficult or impossible without the
support of these stockholders.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "anticipates,"
"believes," "continue," "could," "estimates," "expects," "intends," "may,"
"plans," "potential," "predicts," "should" or "will" or the negative of these
terms or other comparable terminology. These statements are only predictions and
involve known and unknown risks, uncertainties and other factors, including the
risks outlined under "Risk Factors," that may cause our, or our industry's,
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform these statements to actual results, unless
required by law.
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USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of 2,300,000 shares of
common stock in this offering will be approximately $30.7 million, approximately
$35.5 million if the underwriters' over-allotment option is exercised in full,
at an assumed initial public offering price of $15.00 per share, after deducting
the estimated underwriting discounts and commissions and estimated offering
expenses.
We intend to use the net proceeds from this offering for operating
activities, including approximately $18 million to expand our sales and
marketing programs, approximately $5 million to expand our field support
organization, approximately $3.5 million for capital expenditures and the
balance for other general corporate purposes, including general and
administrative operations and potential acquisitions. Our management will retain
broad discretion in the allocation of the net proceeds of this offering. The
amounts we actually spend will depend on a number of factors, including the
amount of our future revenues and other factors described elsewhere in this
prospectus. We may also use a portion of the net proceeds to invest in
additional businesses, business development, products and technologies, to lease
additional facilities, or to establish joint ventures that we believe will
complement our current or future business. However, we have no specific plans,
agreements or commitments to do so and are not currently engaged in any
negotiations for any acquisition or joint venture. Pending these uses, we will
invest the net proceeds of this offering in short-term, interest-bearing,
investment-grade securities.
DIVIDEND POLICY
We have never paid or declared any cash dividends. We currently expect to
retain earnings for use in the operation and expansion of our business, and
therefore do not anticipate paying any cash dividends for the foreseeable
future.
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CAPITALIZATION
The table below presents the following information:
- our actual capitalization as of December 31, 1999;
- our pro forma capitalization giving effect to the conversion of all
outstanding shares of preferred stock into common stock upon the closing
of this offering; and
- our pro forma as adjusted capitalization reflecting the sale of 2,300,000
shares of common stock in this offering at an assumed initial public
offering price of $15.00 per share, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses.
The number of shares outstanding excludes the following shares:
- 1,858,067 shares of common stock subject to options outstanding as of
December 31, 1999, at a weighted average exercise price of $3.72 per
share;
- 1,787,172 shares subject to warrants outstanding as of December 31, 1999,
at a weighted average exercise price of $6.67 per share;
- 1,179,356 additional shares of common stock that are available for grant
under our stock option plan;
- 300,000 shares of common stock that we could issue under our employee
stock purchase plan; and
- 48,592 shares of common stock to be issued in connection with the
acquisition of The J.L. Price Corporation.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
ACTUAL (UNAUDITED) (UNAUDITED)
-------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Long-term obligations....................................... $ 116 $ 116 $ 116
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 12,482,935
shares authorized and 11,382,694 shares issued and
outstanding, actual; 12,482,935 shares authorized and no
shares issued and outstanding, pro forma; 5,000,000
shares authorized and no shares issued and outstanding,
pro forma as adjusted................................... 12 -- --
Common stock, $0.001 par value; 34,000,000 shares
authorized and 2,336,616 shares issued and outstanding,
actual; 34,000,000 shares authorized and 13,719,310
shares issued and outstanding, pro forma; 100,000,000
shares authorized and 16,019,310 shares issued and
outstanding, pro forma as adjusted...................... 2 14 16
Additional paid-in capital................................ 108,656 108,656 139,339
Notes receivable from stockholders........................ (633) (633) (633)
Unearned stock-based compensation......................... (22,208) (22,208) (22,208)
Accumulated deficit....................................... (41,967) (41,967) (41,967)
-------- -------- --------
Total stockholders' equity.............................. 43,862 43,862 74,547
-------- -------- --------
Total capitalization.................................. $ 43,978 $ 43,978 $ 74,663
======== ======== ========
</TABLE>
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DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $43.1 million, or approximately $3.14 per share. Net tangible book
value per share represents the amount of our total tangible assets less total
liabilities divided by the number of shares of common stock outstanding after
giving effect to the conversion of all outstanding shares of preferred stock
into shares of common stock upon completion of this offering.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by new investors purchasing shares of common
stock in this offering and the net tangible book value per share immediately
after completion of this offering. Our net tangible book value as of
December 31, 1999 would have been approximately $73.8 million or $4.61 per
share, after giving effect to the sale of 2,300,000 shares of our common stock
in this offering at an assumed initial public offering price of $15.00 per share
and after deducting estimated underwriting discounts and commissions and
estimated offering expenses. This amount represents an immediate increase in net
tangible book value of $1.47 per share to existing stockholders and an immediate
dilution in net tangible book value of $10.39 per share to new investors
purchasing shares of common stock in this offering, as illustrated in the
following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $15.00
Pro forma net tangible book value per share as of December
31, 1999................................................ $ 3.14
Increase per share attributable to new investors.......... 1.47
------
Pro forma net tangible book value per share after this
offering.................................................. 4.61
------
Dilution per share to new investors......................... $10.39
======
</TABLE>
The following table summarizes, on the pro forma basis described above, as
of December 31, 1999, the differences between the number of shares of common
stock purchased from us, the total consideration paid and the average price per
share paid by existing stockholders and by new investors purchasing shares in
this offering. We have assumed an initial public offering price of $15.00 per
share, before deducting estimated underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 13,719,310 86% $ 81,722,638 70% $ 5.96
New investors........................... 2,300,000 14 34,500,000 30 15.00
---------- --- ------------ ---
Total............................... 16,019,310 100% $116,222,638 100%
========== === ============ ===
</TABLE>
As of December 31, 1999, there were outstanding options to purchase a total
of 1,858,067 shares of common stock at a weighted average exercise price of
$3.72 per share. After December 31, 1999, we issued options to purchase 90,000
shares of common stock at a weighted average exercise price of $12.00 per share.
As of December 31, 1999, there were outstanding warrants to purchase a total of
1,787,172 shares at a weighted average exercise price of $6.67 per share. To the
extent these outstanding options or warrants are exercised, there will be
further dilution to new investors.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statement of
operations data for the three years in the period ended December 31, 1999 and
the consolidated balance sheet data as of December 31, 1998 and 1999 are derived
from the audited consolidated financial statements included elsewhere in this
prospectus. The consolidated statement of operations data for the year ended
December 31, 1996 and the consolidated balance sheet data as of December 31,
1996 and 1997 are derived from audited consolidated financial statements not
included elsewhere in this prospectus. Historical results are not necessarily
indicative of results to be expected for future periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998 1999
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Service revenues.......................................... $ 2 $ 60 $ 238 $ 1,139
Advertising revenues...................................... -- -- 20 926
------ ------- ------- --------
Total revenues.......................................... 2 60 258 2,065
Cost of revenues:
Cost of service revenues.................................. 8 59 767 1,984
Cost of advertising revenues.............................. -- -- 49 567
------ ------- ------- --------
Total cost of revenues.................................. 8 59 816 2,551
------ ------- ------- --------
Gross profit (loss)......................................... (6) 1 (558) (486)
Operating expenses:
Sales and marketing....................................... 38 414 1,669 25,784
Product development....................................... 65 288 504 665
General and administrative................................ 251 527 1,142 4,214
Stock-based compensation.................................. -- 11 326 5,619
------ ------- ------- --------
Total operating expenses................................ 354 1,240 3,641 36,282
------ ------- ------- --------
Loss from operations........................................ (360) (1,239) (4,199) (36,768)
Interest and other income (expense), net.................... 1 (3) 84 517
------ ------- ------- --------
Net loss.................................................... (359) (1,242) (4,115) (36,251)
Accretion of mandatorily redeemable convertible preferred
stock..................................................... -- (86) (717) (239)
------ ------- ------- --------
Net loss attributable to common stockholders.............. $ (359) $(1,328) $(4,832) $(36,490)
====== ======= ======= ========
Basic and diluted net loss per common share................. $(0.73) $ (1.08) $ (3.49) $ (23.85)
====== ======= ======= ========
Shares used in calculating basic and diluted net loss per
common share.............................................. 493 1,228 1,383 1,530
====== ======= ======= ========
Pro forma basic and diluted net loss per common share
(unaudited)............................................... $ (4.40)
========
Shares used in calculating pro forma basic and diluted net
loss per share (unaudited)................................ 8,234
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1996 1997 1998 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 20 $ 345 $ 1,676 $45,291
Working capital (deficit)................................... (11) (79) 697 39,891
Total assets................................................ 71 472 2,144 51,134
Long-term obligations and mandatorily redeemable convertible
preferred stock........................................... -- 1,252 6,843 116
Total stockholders' equity (deficit)........................ 40 (1,210) (5,714) 43,862
</TABLE>
See Note 2 of the notes to our consolidated financial statements for an
explanation of the determination of the number of shares used in computing per
share data and for the allocation of stock-based compensation expense by
functional expense category.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Our business started in January 1996 as a regional contractor matching
service, and we spent most of 1996 and 1997 building our service provider
database, developing new services and technology, recruiting personnel and
raising capital. We launched our Web site and homeowner/service provider
matching service on a national scale in August 1997. In December 1998, we began
selling Web site advertising, including SmartLeads services, a way for suppliers
of home improvement products to send e-mails about their products, including
product promotions, to homeowners at the time of purchase and to our network of
service providers. In April 1999, we introduced Powered by ImproveNet, a service
that allows third parties to offer the ImproveNet content and experience on
their Web sites, for national suppliers of home improvement and repair products.
In June 1999, we launched our customized Web site for service providers. We
completed the acquisition of two regional contractor referral companies,
Contractor Referral Service, LLC and The J.L. Price Corporation, in the fall of
1999. We expect these acquisitions will help us build our base of service
providers and establish new products and services for United States residential
real estate brokers.
REVENUES
We generate substantially all of our revenues from service provider referral
services and advertising placed on our Web site. From our inception in January
1996 through 1998, 94% of our total revenues were service revenues and 6% were
advertising revenues. For 1999, 55% of our total revenues were service revenues
and 45% were advertising revenues.
SERVICE REVENUES. We generate service revenues primarily in the form of
lead fees and win fees from our service providers and, to a much lesser extent,
in the form of enrollment fees from service providers and premium service fees
from homeowners. For 1999, lead fees, win fees, enrollment fees and premium
service fees represented 32%, 63%, 4% and 1% of total service revenues. From
inception through October 1999, we charged to our service providers lead fees
ranging from $6 to $10 per lead. In November 1999, we standardized our lead fees
at $10 per lead for all jobs. The win fees that we charge to our service
providers depend on project size and range from 2% to 10% of the estimated cost
of the job, up to a maximum of $995 per job. We charge each new service provider
an enrollment fee of $90 to join our national network; however, in the past we
have generally waived this fee. Our revenue from premium service fees,
consisting of fees charged to homeowners for contract review services and
legal/credit reports on contractors outside the ImproveNet database, has also
been negligible.
Lead fee revenues are recognized at the time the service providers and the
homeowner are first matched, while win fee revenues are recognized at the time
the service provider or the homeowner notifies us that a job has been sold. For
both lead fees and win fees, the recognition of revenues coincides with the
service providers' obligation to pay us. Revenues from new service provider
enrollment fees are recognized as revenue ratably over the expected period they
participate in our contractor matching service, which is initially estimated to
be between one and two years. Revenues from premium service fees to homeowners
are recognized at the time the service is provided. We generally will refund the
lead fee charged if a job is cancelled or the homeowner cannot be reasonably
contacted. We will refund a portion of the initial enrollment fee collected in
the event that the service provider does not pass the ImproveNet screening
process. We do not refund win or premium service fees.
We establish refund reserves and allowances for bad debts at the time the
revenues are recognized. To date, the amounts of these reserves and allowances
have not been significant.
23
<PAGE>
We anticipate that the mix and source of our revenues will change over time.
In the future, we anticipate that service revenues will increase at a greater
rate than advertising revenues as the anticipated number of job submissions
increases, as we attract additional homeowners through our multi-year commercial
contracts and as we expand our network of service providers. We do not expect
enrollment fees to be a significant source of service revenues in the future.
ADVERTISING REVENUES. We generate advertising revenues from the sale of
banner, button and other advertising on our Web sites, and from the sale to
suppliers of SmartLeads generated from the traffic of homeowners visiting our
Web sites. Our advertising revenues generally come from service providers and
suppliers of home improvement products. We first recognized revenues from banner
and other advertising in December 1998, from button advertising in April 1999
and from the sale of SmartLeads services in December 1998.
Advertisers pay us to display their banner, button and other advertisements
on the Web pages we serve when a user is visiting our Web sites. Our advertising
revenues historically have been derived from short-term advertising contracts
based on either a guaranteed minimum number of impressions or a fixed fee per
thousand impressions. Revenues from banner, button and other advertising are
largely a function of:
- the number of Web pages that we serve;
- the percentage of those pages on which we are able to sell advertisements;
and
- the amount we charge per advertisement.
Banner, button and other Web site advertising revenues are recognized at the
lesser of the ratable amount of the order or the percentage of guaranteed
impressions delivered. We only recognize these revenues provided there are no
significant obligations remaining and the collection of the resulting receivable
is probable. SmartLeads revenue is recognized when the e-mails have been
delivered to the customer.
Advertising revenues can also result from bartering. In barter transactions,
we make advertising space on our Web sites available to third parties in
exchange for advertising space on their Web sites. In 1999, barter advertising
revenues accounted for 9% of our total revenues. We had no barter advertising
revenues before 1999. We believe that these barter transactions are a cost
effective means of helping us establish the ImproveNet brand, and we expect to
continue to engage in these transactions in the future.
Revenues from barter transactions are recorded as advertising revenues at
the estimated fair value of the advertisements received or delivered, whichever
is more reliably measurable. These revenues are recognized when the
advertisements are delivered on our Web site. Barter expenses are included as
sales and marketing expenses in the period in which the advertisements are
displayed which is generally in the same period in which we deliver the
advertisements on our Web site.
We have entered into eight multi-year commercial contracts to provide, for a
fixed annual fee, an advertising package that includes a customized mix of
advertising buttons, banners, SmartLeads and other products, plus a guarantee of
continuous presence on our Web sites. These package agreements are for periods
ranging between 3 years and 12 years, including renewal options, and are priced
at a discount to our standard rates for each product. These agreements also
include cooperative marketing arrangements under which we are obligated to fund
co-branded advertisements on television and in the print media with, or on
behalf of, our advertiser. In the agreements to date, we have agreed to spend
50% to 100% of the advertising fees we expect to receive under the agreements on
these co-branded advertisements. In addition, these agreements give us access to
customer databases, direct mail inserts and marketing resources. Since we first
began offering these advertising packages in September 1999, it is difficult to
predict the size of this market, market demand, cancellation rates or renewal
rates. We
24
<PAGE>
believe these advertising agreements provide us with market benefits we could
not secure or otherwise afford in the normal course of business, such as access
to customer databases and marketing resources, and we expect to continue to
offer and sell these advertising packages for the foreseeable future.
Net revenues, if any, from these advertising agreements are recognized over
the term of the agreement once we begin to provide advertising to the customer
and collection of the resulting receivable is deemed to be probable. We
recognize as net revenues the amount by which the amounts invoiced under the
advertising agreements exceed the amount of the obligations we incur under
cooperative advertising arrangements. We have also granted warrants to purchase
our stock to each of these advertising package customers. Accordingly, net
revenues are also reduced by the value of these warrants and, if the warrant
value exceeds the net revenues, no revenues are recorded and the excess is
charged to sales and marketing expense.
In January 2000, the Financial Accounting Standards Board Emerging Issues
Task Force, or EITF, released Issue No. 99-17 "Accounting for Advertising Barter
Transactions", which provides guidance regarding the valuation of advertising
barter agreements. The EITF concluded that such transactions should be recorded
at fair value only when a company has a substantive historical practice of
selling advertising for cash. This guidance affects our accounting and reporting
for revenues and expenses associated with our multi-year commercial contracts.
To recognize revenues in the future, we must have persuasive historical evidence
of fair value, specific to us, of that advertising. The guidance contained in
EITF No. 99-17 assigns accounting fair value only when persuasive evidence of
fair value exists and defines fair value as cash transactions. While we believe
the benefits derived from our advertising packages have substantial economic and
commercial value, under the current guidance we recognize only net revenues on
our advertising packages. We will pursue opportunities to enter into advertising
transactions for cash with appropriate customers and on similar terms to
establish persuasive evidence of fair value that will result in recognition of
revenue and the recording of marketing expenses on a gross basis for future
advertising packages.
The amount invoiced under our multi-year commercial contracts for 1999 was
$473,000, which was offset in full by amounts invoiced and accrued under the
related cooperative advertising arrangement with the customer of $408,000, and
the amortization of warrant stock-based compensation of $65,000. We expect that
for future periods the amounts invoiced by us under these type of arrangements
as well as the amounts incurred by us under the related cooperative advertising
arrangements with the customer will increase significantly as we enter into more
of these agreements.
NET LOSSES. We have incurred substantial losses and negative cash flows
from operations since inception as we have spent substantial amounts on
advertising and other marketing activities, funded the development of our
services and expanded our operations infrastructure. Our net losses were
$359,000 in 1996, approximately $1.2 million in 1997, approximately
$4.1 million in 1998 and approximately $36.3 million in 1999. As of
December 31, 1999, we had an accumulated deficit of approximately
$42.0 million. We intend to continue to invest heavily in sales and marketing,
expansion of our support field organization and in the development and
acquisition of new content on our Web site, new products and technologies. Thus,
we will continue to lose money unless we significantly increase our revenues,
and we cannot predict when, if ever, we will operate profitably.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1999
REVENUES
Total revenues increased from $258,000 in 1998 to approximately
$2.1 million in 1999, an increase of approximately $1.8 million.
25
<PAGE>
Service revenues increased from $238,000 in 1998 to approximately
$1.1 million in 1999, an increase of $901,000. The increase in service revenues
was primarily due to an increased number of visitors to our Web sites and
increased job submissions and sequential quarterly improvement in the number of
jobs matched as a percentage of total job submissions and in the number of jobs
won as a percentage of jobs matched or our match and win rates, respectively,
which led to increased lead and win fee revenues. Revenues from new service
provider enrollment fees and fees charged to homeowners for premium services
were not significant in either period.
Advertising revenues increased from $20,000 in 1998 to $926,000 in 1999. Of
our 1999 advertising revenues, $180,000 constituted barter advertising revenue.
We did not sell advertising space on our Web site until December 1998. Our
advertising revenues in 1999 include amounts invoiced under advertising
arrangements of approximately $1.4 million less $473,000 for amounts invoiced
and accrued under cooperative advertising arrangements with related parties and
amortization of warrant stock-based compensation. There were no adjustments to
advertising revenues in 1998.
Total revenues may be analyzed as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Service revenues............................................ $238 $1,139
Amounts invoiced under contractual advertising
arrangements.............................................. 20 1,399
---- ------
258 2,538
Amounts invoiced and accrued under cooperative advertising
arrangements with related parties......................... -- (408)
Amortization of warrant stock-based compensation............ 258 (65)
---- ------
Total revenues.............................................. $258 $2,065
==== ======
</TABLE>
OPERATING EXPENSES
COST OF REVENUES. Cost of revenues increased from $816,000 for 1998 to
approximately $2.6 million for 1999, an increase of approximately $1.7 million.
Our cost of service revenues consists of payroll and related costs and
occupancy, telecommunications and other administrative costs for our project
service group, which is responsible for all phases of the proprietary matching
services and includes our project advisors. In addition, cost of service
revenues includes an allocation of direct Web site operations costs, consisting
of payroll and related costs, data transmission costs and equipment
depreciation. Cost of service revenues increased from $767,000 for 1998 to
approximately $2.0 million for 1999, an increase of approximately $1.2 million.
The dollar increase in cost of service revenues was attributable to direct Web
site operations costs associated with the increased volume of traffic and job
submissions and accelerated expansion and staffing of our project services
infrastructure, primarily payroll and recruiting expense of $728,000 and
facilities and office expenses of $284,000, in advance of our expanded marketing
campaigns and expected increases in visitors to our Web sites and in job
submissions. Cost of service revenues, expressed as a percentage of service
revenues, improved from 322% in 1998 to 174% in 1999. The percentage improvement
was attributable to increased service revenues and improved utilization of our
project services group and Web site operations.
Cost of advertising revenues includes an allocation of direct Web site
operation costs consisting of payroll and related costs, data transmission costs
and equipment depreciation. Cost of advertising revenues increased from $49,000
in 1998 to $567,000 in 1999, an increase of $518,000. There were few
26
<PAGE>
costs associated with advertising revenues in 1998 as we did not begin
recognizing advertising revenue until December 1998.
SALES AND MARKETING. Our sales and marketing expenses include all of our
online and offline direct advertising, public relations and trade show expenses.
Sales and marketing expenses also include payroll and related costs, support
staff expenses, travel costs and other general expenses of our marketing,
professional services and partnership services departments. Sales and marketing
expenses increased from approximately $1.7 million in 1998 to approximately
$25.8 million in 1999, an increase of approximately $24.1 million. The increase
in sales and marketing expenses from 1998 to 1999 was attributable primarily to
the increase in online and offline direct advertising expenditures of
approximately $15.1 million, an increase in other marketing expenses of
approximately $3.7 million, and an increase in payroll and related costs of
approximately $3.4 million. We expect to increase our level of sales and
marketing expenditures significantly in 2000 and beyond in our effort to build
brand awareness, attract homeowners and service providers to our Web sites and
increase the number of new job submissions.
PRODUCT DEVELOPMENT. Our product development costs include the payroll and
related costs of our editorial and technology staffs, fees for contract content
providers, and other costs of Web site design and new technologies required to
enhance the performance of our Web sites. Product development expenses increased
from $504,000 in 1998 to $665,000 in 1999, an increase of $161,000. The increase
in product development expenses was primarily attributable to increased payroll
and related costs offset in part by reduced consulting fees for contract content
providers. We expect to continue to add to the size of our editorial and
technology groups in anticipation of planned new product introductions, and thus
expect product development expenses to increase in the future.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses include
payroll and related costs and travel, recruiting, professional and advisory
services and other general expenses for our executive, finance and human
resource departments. General and administrative expenses increased from
approximately $1.1 million in 1998 to approximately $4.2 million in 1999, an
increase of approximately $3.1 million. The increase in general and
administrative expenses was attributable primarily to the increase in our
executive management, full-time support staff and contract support staff payroll
costs of $2.4 million and increased lease and occupancy expenses of $271,000
related to our relocation to larger office space. We expect general and
administrative expenses to increase in the future.
STOCK-BASED COMPENSATION. From our inception in January 1996 to
December 31, 1999, we have recorded unearned stock-based compensation of
approximately $28.2 million in connection with stock option and warrant grants.
Unearned stock-based compensation from option grants to employees is initially
calculated as the aggregate difference at the dates of grant between the
respective exercise prices of stock options and the deemed fair values of the
underlying stock. We amortize unearned stock-based compensation from option
grants using an accelerated method over the respective vesting periods of the
options, which are generally four years. This resulted in an expense of $326,000
for 1998 and an expense of approximately $5.2 million in 1999. The remaining
unamortized, unearned stock-based compensation for all option grants through
December 31, 1999 will be amortized as follows: approximately $5.3 million for
2000; approximately $2.4 million for 2001; $1.0 million for 2002; and $162,000
for 2003.
Unearned stock-based compensation from warrants granted is initially
calculated using the Black-Scholes pricing model. Unearned stock-based
compensation from warrants granted is amortized on a straight-line basis over
the term of the corresponding commercial agreements. Amortization of unearned
stock-based compensation from warrants was $517,000 for 1999. There was no
warrant stock-based compensation for 1998. The remaining unamortized unearned
stock-based compensation for all warrants granted through December 31, 1999 will
be amortized as follows: approximately $4.0 million
27
<PAGE>
for 2000; approximately $4.0 million for 2001; approximately $3.7 million for
2002; and approximately $1.6 million thereafter.
INTEREST AND OTHER INCOME (EXPENSE), NET
Net interest income increased from $84,000 in 1998 to $517,000 in 1999, an
increase of $433,000. The increase in net interest income is primarily due to
higher average invested cash balances in 1999 compared to 1998 as we received
approximately $73.2 million in cash from the sale of our preferred stock in
March 1999, September 1999 and December 1999.
INCOME TAXES
We have recorded a 100% valuation allowance against our net deferred tax
assets, which arose primarily as a result of our aggregate operating losses. The
valuation allowance will remain at this level until such time as we believe that
the realization of the net deferred tax assets is more likely than not.
Accordingly, our results of operations do not reflect any tax benefits for our
reported losses. At December 31, 1999, we had approximately $29.0 million and
approximately $17.2 million of net operating loss carryforwards available to
reduce future operating income for federal and California state tax purposes,
which expire between 2005 and 2019 if not utilized.
YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUES
Total revenues increased from $60,000 in 1997 to $258,000 in 1998. Service
revenues increased from $60,000 in 1997 to $238,000 in 1998. The increase in
service revenues was primarily due to an increased number of visitors to our Web
site, increased job submissions and a corresponding increase in lead and win fee
revenue. Revenues from new service provider enrollment fees and fees charged to
homeowners for premium services were not significant.
Advertising revenues were $20,000 in 1998. We did not sell advertising space
on our Web site in 1997 or the first eleven months of 1998.
OPERATING EXPENSES
COST OF REVENUES. Cost of revenues increased from $59,000 in 1997 to
$816,000 in 1998. Cost of service revenues increased from $59,000 in 1997 to
$767,000 in 1998. The dollar increase in cost of service revenues were
attributable to direct Web site operations costs associated with the increased
volume of traffic and job submissions and expansion and staffing of our project
services infrastructure, primarily payroll and recruiting expenses, in advance
of our expanded marketing campaigns and expected increases in visitors to our
Web sites and job submissions. Cost of advertising revenues was not significant
in any period.
SALES AND MARKETING. Sales and marketing expenses increased from $414,000
in 1997 to approximately $1.7 million in 1998. The increase was primarily due to
increased online and offline advertising expenses of $733,000 and increased
marketing expenses of $185,000.
PRODUCT DEVELOPMENT. Product development expenses increased from $288,000
in 1997 to $504,000 in 1998. The increase was primarily due to increases in
payroll and related costs and contract content provider costs of $205,000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $527,000 in 1997 to approximately $1.1 million in 1998. The increase was
primarily due to an increase in our executive management and full-time and
contract support staff payroll and related costs of $438,000 and increased lease
and occupancy expenses of $126,000 related to the relocation to a larger office
space.
28
<PAGE>
STOCK-BASED COMPENSATION. From our inception in January 1996 through
December 31, 1998, we recorded unearned stock-based compensation of
approximately $1.1 million in connection with stock option grants. We amortize
this unearned stock-based compensation using an accelerated method over the
respective vesting periods of the options, which is generally four years. This
resulted in a charge of $11,000 in 1997 and $326,000 in 1998. There was no
warrant-based stock compensation in 1997 or 1998.
INTEREST AND OTHER INCOME (EXPENSE), NET
Net interest income (expense) was $(3,000) in 1997 and $84,000 in 1998. The
increase in net interest income from 1997 to 1998 was primarily due to higher
average invested cash balances, as we received approximately $4.9 million in
cash from the sale of convertible preferred stock and issuance of convertible
bridge loans in 1998.
QUARTERLY RESULTS OF OPERATIONS
The following table presents statement of operations data for each of the
quarters of 1998 and 1999. This information has been derived from our unaudited
financial statements. The unaudited financial statements have been prepared on
substantially the same basis as the audited financial statements included
elsewhere in this prospectus and include all adjustments, consisting only of
normal recurring adjustments, that we consider necessary for a fair presentation
of this information. You should read this information in conjunction with our
audited financial statements and related notes included elsewhere in this
prospectus. We expect our quarterly operating results to vary significantly from
quarter to quarter and you should not draw any conclusions about our future
results from the results of operations for any quarter.
<TABLE>
<CAPTION>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Service revenues..................... $ 31 $ 27 $ 86 $ 94 $ 156 $ 251 $ 312 $ 420
Advertising revenues................. -- -- -- 20 123 175 268 360
----- ------- ----- ------- ------- ------- -------- --------
Total revenues..................... 31 27 86 114 279 426 580 780
----- ------- ----- ------- ------- ------- -------- --------
Cost of revenues:
Cost of service revenues............. 155 155 207 250 192 261 638 893
Cost of advertising revenues......... -- -- -- 49 61 88 158 260
----- ------- ----- ------- ------- ------- -------- --------
Total cost of revenues............. 155 155 207 299 253 349 796 1,153
----- ------- ----- ------- ------- ------- -------- --------
Gross profit (loss).................... (124) (128) (121) (185) 26 77 (216) (373)
Operating expenses:
Sales and marketing.................. 266 413 323 667 1,745 3,748 8,870 11,421
Product development.................. 43 229 116 116 146 120 151 248
General and administrative........... 181 200 284 477 297 475 719 2,723
Stock-based compensation............. -- 109 117 100 466 909 1,460 2,784
----- ------- ----- ------- ------- ------- -------- --------
Total operating expenses........... 490 951 840 1,360 2,654 5,252 11,200 17,176
----- ------- ----- ------- ------- ------- -------- --------
Loss from operations................... (614) (1,079) (961) (1,545) (2,628) (5,175) (11,416) (17,549)
Interest and other income (expense),
net.................................. (3) 41 30 16 2 184 138 193
----- ------- ----- ------- ------- ------- -------- --------
Net loss............................. $(617) $(1,038) $(931) $(1,529) $(2,626) $(4,991) $(11,278) $(17,356)
===== ======= ===== ======= ======= ======= ======== ========
</TABLE>
Our revenues increased sequentially each quarter after the second quarter of
1998. Sales and marketing, product development and general and administrative
expenses increased steadily in each quarter presented, except for sales and
marketing expenses in the second quarter of 1998, product development expenses
in the second quarter of 1998 and first quarter of 1999, and general and
administrative expenses in the fourth quarter of 1998. The increase in sales and
marketing expenses in the second quarter of 1998 related to increased spending
on marketing and advertising activities of $123,000. The increase in product
development expenses in the second quarter of 1998 related primarily to database
expenses of approximately $125,000. The increase in product development
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expenses in the first quarter of 1999 related to an increase in consulting and
other professional services expense of $23,000. The increase in general and
administrative expenses in the fourth quarter of 1998 related primarily to
executive recruiting costs.
Factors that could affect our quarterly operating results in the future
include:
- the number of new service providers we add to our network;
- the amount of service fees we generate and our ability to collect this
revenue;
- the amount and timing of our operating expenses and capital expenditures;
- the cost of commercial relationships;
- the amount and timing of noncash stock-based compensation expenses;
- costs and charges related to acquisitions of businesses or technologies;
and
- seasonality of home improvement projects.
Our limited operating history and rapid growth make it difficult for us to
assess the impact of seasonal factors on our business. However, because our
business depends on the home improvement industry, we expect that our revenues
may be lower during the first and fourth quarters of each calendar year since
more homeowners commit to home improvement projects during the spring and summer
months.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital needs have been to fund our operating losses, prepay our
large media purchases and make capital expenditures. During the three years
ended December 31, 1999, we have financed our operations through private sales
of our convertible preferred stock, convertible notes and common stock for net
proceeds of approximately $79.4 million.
Operating activities used cash of approximately $25.8 million in 1999. This
amount resulted from a net loss of approximately $30.2 million after adding back
noncash stock-based compensation and other charges of approximately
$6.0 million, offset by an increase of approximately $4.7 million in net current
liabilities, primarily increases in accounts payable and accrued liabilities.
Net cash used in operating activities was approximately $1.2 million in 1997 and
approximately $3.2 million in 1998 primarily to fund net losses of approximately
$1.2 million in 1997 and approximately $4.1 million in 1998. In 1998, our net
loss was partially offset by a $618,000 increase in accounts payable and accrued
liabilities, and noncash stock-based compensation charges of $326,000.
Investing activities used cash of $85,000 and $273,000 in the years ended
December 31, 1997 and 1998, respectively, substantially all of which was used to
acquire property and equipment. Investing activities used cash of approximately
$3.5 million in 1999. In addition to purchases of property and equipment, in
1999 our investing activities included an acquisition, an employment-related
loan to our president and chief executive officer and a lease-related security
deposit. Financing activities generated cash of approximately $79.4 million in
the three years ended December 31, 1999 including approximately $73.0 million in
1999, primarily consisting of net proceeds from the issuance of convertible
preferred stock and common stock.
At December 31, 1999, we had approximately $45.3 million in cash and cash
equivalents excluding restricted cash balances of $449,000 related to security
deposits on our leases, approximately $39.9 million in working capital and no
outstanding debt. At December 31, 1999, we had non-cancelable commitments
aggregating approximately $4.4 million in minimum future lease payments
consisting primarily of a seven-year lease for our administrative headquarters.
We expect capital expenditures to increase commensurately with the growth of our
employee base, expansion of our
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professional services infrastructure into local markets and, to a lesser extent,
increased traffic to our Web sites and numbers of job submissions. Capital
expenditures for the next 12 months are currently estimated to approximate
$3.5 million, with no current material commitments for capital expenditures.
Our limited operating history and operating losses have limited our ability
to obtain vendor credit or extended payment terms and bank financing on
favorable terms; accordingly, we depend on our cash and cash equivalent balances
to fund our operations.
We expect to experience significant growth in our operating expenses for the
foreseeable future. Accordingly, we currently anticipate that our operating
expenses, primarily advertising and other marketing expenditures, and payroll
and related costs will constitute a material use of future cash resources. We
anticipate that our current cash and cash equivalent balances, with or without
expected net proceeds from this offering, will be adequate to meet our
foreseeable working capital and operating expense requirements for at least the
next twelve months. Thereafter, however, we may require additional funds to
continue to execute our business plan and to support our ongoing capital
expenditures, working capital and operating expense requirements or for other
corporate purposes. We may seek to raise these additional funds through private
or public debt or equity financings. Additional capital may not be available or,
if available, may not be on terms we deem reasonable. Any future financings may
be dilutive in ownership, preferences, rights or privileges to our stockholders.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. We do not
currently hold any derivative instruments and do not engage in hedging
activities. We will be required to adopt SFAS No. 133 for the year ending
December 31, 2001. We expect the adoption of SFAS No. 133 will not have a
material impact on our financial position, results of operations or cash flow.
In January 2000, EITF No. 99-17 "Accounting for Advertising Barter
Transactions" was issued. The EITF reached a final concensus that such
transactions should be recorded at fair value only when the company has a
substantive historical practice of selling advertising for cash. We have adopted
the provisions of EITF No. 99-17 and as a result, have not recorded revenue for
amounts of $473,000 invoiced to customers during 1999 under contractual
arrangements. These amounts are offset in full by amounts customers invoiced us
under co-operative advertising arrangements of $408,000 and the amortization of
warrant stock-based compensation of $65,000. Additionally, we have not recorded
as a sales and marketing expense amounts of $473,000 for 1999 which have been
invoiced by customers and accrued under co-operative advertising arrangements
and the amortization of warrant stock-based compensation. The adoption of EITF
No. 99-17 has had no impact on our net loss for the year ended December 31, 1999
and does not impact our financial condition.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to increases or decreases in the amount of interest income we can earn on our
investment portfolio and on increases or decreases in the amount of interest
expense we must pay with respect to any outstanding debt instruments. We had no
debt instruments outstanding as of December 31, 1999. The risk associated with
fluctuating interest expense is limited, however, to those debt instruments and
credit facilities that are tied to market rates. We do not plan to use
derivative financial instruments in our investment portfolio. We plan to ensure
the safety and preservation of our invested principal funds by limiting default
risk, market risk and reinvestment risk. We plan to mitigate default risk by
investing in high-credit quality securities.
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BUSINESS
OVERVIEW
We are a leading source on the Internet for home improvement information and
services. Through our ImproveNet.com and ImproveNetPro.com Web sites, matching
services and targeted advertising, we are creating a national marketplace for
home improvement products and services in which homeowners, service providers
and suppliers of home improvement products benefit from an organized and
efficient online flow of information and communication.
We generate job leads for service providers from highly interested
homeowners within their geographic area using our proprietary matching service.
We have processed approximately 143,000 job submissions and have processed job
submissions valued at a total of approximately $3.9 billion since our national
launch in August 1997. We have designed our services to deliver a satisfying
home improvement experience to homeowners and assist them through the four
phases of the home improvement process: dream and design, plan and budget, hire
and build and fix and maintain. We generate revenues from our three
constituents:
- service providers pay us lead fees and win fees for our matching service
that are included in service revenues;
- suppliers of home improvement products and services as well as other
advertisers pay us advertising fees for the purchase of advertising space
on our Web sites that are included in advertising revenues; and
- homeowners pay us fees for our premium home improvement services that are
included in service revenues and that to date have not been significant.
INDUSTRY BACKGROUND
THE HOME IMPROVEMENT INDUSTRY
The home improvement industry is fragmented. According to the National
Association of Home Builders, total expenditures for residential home
improvements for 1999 were $126.7 billion. According to the United States Census
Bureau, there are currently 70.5 million owner-occupied homes out of a total of
120 million housing units.
The participants in the home improvement industry can be grouped into three
categories: homeowners, service providers and suppliers of home improvement
products. These participants face distinct challenges in meeting their
individual objectives.
HOMEOWNERS
The appearance, care, maintenance and general working condition of a home is
highly important to a homeowner. Maintaining and improving the home involve an
ongoing financial and emotional investment in the homeowner's core asset. To
manage a home improvement project, a homeowner needs to design the project, find
service providers, establish a budget for the project and guide it to its
completion. To a large extent, homeowners currently must rely upon word-of-mouth
recommendations, Yellow Pages and local newspaper advertisements, and magazines
and books to accomplish these tasks. None of these resources provides immediate,
objective, reliable and customized information. As a result, homeowners are
generally poorly informed and uncertain about how best to identify and locate a
reputable, experienced and competitively priced service provider and to design
and budget for their projects. Further, homeowners seldom have the time to
manage their home improvement projects or have access to an experienced home
improvement advisor. Because of all these factors, they often pay a high
emotional and financial cost to complete a home improvement project and are not
always satisfied with the results.
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SERVICE PROVIDERS
Based upon a compilation of industry sources, we believe there are up to
900,000 service providers in the United States. The home improvement industry is
characterized by a high rate of turnover among local contractors. These service
providers have few channels to communicate effectively with homeowners or with
one another. There is neither an industry-wide certification based on work
quality nor a code of conduct and ethics for contractors as there is for
architects and designers. As a result, reputable contractors are often unable to
differentiate themselves based on reliability, adequate capitalization and areas
of specialization. Service providers currently rely on word-of-mouth
recommendations, the Yellow Pages and other traditional mass media advertising
that require them to pay upfront fixed costs. Therefore, service providers must
allocate significant time, money and energy to qualifying and verifying the
leads they receive. Typically, small independent contractors experience
difficulty in predicting lead flow, managing staffing and working capital
requirements and, most importantly, systematically building a stable business.
SUPPLIERS OF HOME IMPROVEMENT PRODUCTS
According to REMODELING'S 1998-1999 Buyers Guide, there are approximately
3,000 suppliers of home improvement products in the United States. Although
there are some well-known brand names supplying a wide array of home improvement
products, the broader industry is comprised of local and regional firms with
limited means to distribute and market their products effectively to homeowners.
According to ADVERTISING AGE, approximately $950 million was spent in 1998 on
advertising in the home improvement industry. Currently, the majority of
supplier advertising dollars is spent on co-marketing and co-branding
advertising and print and broadcast advertising. These traditional media lack a
centralized database of information that can be searched based on specified
terms, and the ability to conduct two-way communications. Although suppliers
have often used traditional media effectively to build brand recognition, they
have difficulty using traditional media to target homeowners who are in the
process of making time-critical purchasing decisions regarding home improvement
products.
THE INTERNET HOME IMPROVEMENT OPPORTUNITY
The Internet has fundamentally changed the way that individuals and
businesses communicate, obtain information, advertise, purchase goods and
services and transact business. International Data Corporation estimates that
the number of Internet users will grow to 177.0 million in the United States by
the end of 2003 and projects that commerce revenue on the Internet in the United
States will increase from approximately $37.2 billion in 1998 to $707.9 billion
in 2003. Forrester Research projects that advertising spending on the Internet
in the United States will exceed $2.8 billion in 1999 and grow to more than
$17.2 billion by 2003.
We believe that an opportunity exists for an online home improvement
marketplace that provides a central repository of information for the benefit of
homeowners, service providers and suppliers. This marketplace would enable
homeowners to access design and planning tools, find service providers and
obtain other project management services. This marketplace would also enable
service providers to access job leads, differentiate themselves from competitors
and communicate with fellow professionals. Finally, this marketplace would
enable suppliers to market their products to a targeted audience of homeowners
at the time they are making time-critical purchasing decisions.
THE IMPROVENET SOLUTION
We are a leading source on the Internet of home improvement information and
services. We aggregate and organize information and design tools for homeowners,
generate job leads for service providers and provide home improvement project
information to suppliers. We independently screen and monitor contractors,
designers and architects nationwide to ensure that our homeowners' qualified job
leads are matched with pre-screened service providers. We offer suppliers
coordinated advertising
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to homeowners and service providers while they are making home improvement
purchasing decisions. Through our Web sites, matching and advisory services and
targeted advertising, we are creating a national online marketplace for home
improvement products and services.
Our solution offers the following benefits:
FOR HOMEOWNERS:
- ACCESS TO QUALITY SERVICE PROVIDERS. Our screening process is designed to
identify the leaders in quality and service in each of our local markets.
To pass our screening criteria, service providers must have a clean credit
and legal history, all necessary licenses, appropriate insurance and no
significant negative references from customers or other service providers.
We re-screen the service providers in our database approximately
semi-annually. By creating a national database of screened service
providers, we improve the likelihood that homeowners who contact us will
hire qualified, experienced and reputable service providers.
- COST-EFFECTIVE AND CONVENIENT SERVICES. For projects greater than $500,
our matching process solicits between two and four service providers on
behalf of homeowners who might otherwise settle for a single bid, creating
a competitive marketplace for their home improvement project. We choose
the service providers by matching their geographical, job type and job
size preferences with the homeowner's job specification. We contact
selected service providers by fax, e-mail or by posting to
ImproveNetPro.com. Our goal is to have the selected service providers
contact the homeowner directly to discuss the job in detail within
72 hours of when we provide the homeowner with the service providers'
names, which our service providers currently meet approximately 50% of the
time. In addition, we offer homeowners the ability to search for home
improvement services and to plan their current projects using our
interactive planning tools from home or work 24 hours a day, seven days a
week. We assign a personal project advisor to each home improvement
project. The project advisor is available to guide and advise the
homeowner and the selected service provider throughout the project.
- ONLINE PROJECT ASSISTANCE. We believe our array of online services,
including our product showcase, our design gallery and our planning and
estimating tools, provides answers to homeowners' diverse questions and
needs regarding home improvement and repairs. Our Web site allows each
homeowner to generate ideas from the product showcase and design gallery
and access the personal project folder, an archive of previous project
ideas and communications. For a fee, we provide premium services such as
legal and credit reports on contractors outside the ImproveNet network for
$29 per report and bid and contract assessment assistance for $40 per
contract.
FOR SERVICE PROVIDERS:
- QUALITY JOB LEADS. Our project advisors call each homeowner after we
receive a job to confirm that the homeowner is interested and to assist
with refining the details of the job. Service providers who receive leads
through our proprietary matching service benefit from the likelihood that
the homeowner's interest is real and that the potential project is
correctly characterized. In addition, service providers give us
geographic, job type and job size preferences, which enable us to match
the service provider to a job that meets its preferences and expertise.
Service providers can change their preferences at any time to reflect
their changing needs and circumstances. Through our ImproveNetPro.com
website, we have recently begun to communicate job leads in near real-time
to the selected service providers.
- COMPETITIVE DIFFERENTIATION. We believe service providers can
differentiate themselves from their competitors by successfully completing
our proprietary screening process and joining our network. We identify,
contact and recruit service providers through many public and private
sources. We have used Yellow Pages and licensing and trade association
lists to identify, contact
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and recruit service providers into our network. We have not been able to
screen approximately one-third of all service providers we have
identified. Approximately one-third of the service providers who we have
identified through lists or contacted through our various sources and
roughly 50% of those we have screened have met our selection standards of
professionalism and reliability.
- BUSINESS AND FINANCIAL EFFICIENCIES. Service providers who participate in
our matching service pay only for job leads that they accept and for jobs
that they win, allowing them to reduce their upfront marketing costs. New
job leads from our matching service supplement the flow of work that
contractors, architects and designers receive from their traditional
sources, which allows them to plan and operate their businesses more
efficiently. Furthermore, through our SmartLeads program, service
providers in our network are able to gain efficient and timely access to
the most recent product information available. In addition, service
providers often gain access to special product discounts not available to
their competitors.
FOR SUPPLIERS OF HOME IMPROVEMENT PRODUCTS:
- TARGETED ADVERTISING TO HOMEOWNERS. ImproveNet.com is designed to attract
visitors who are focused on remodeling, repairing and maintaining their
homes. We believe that this audience is a valuable target for suppliers of
home improvement products and services. Banners, buttons and other forms
of advertising allow these suppliers to target their message more
efficiently and cost-effectively to a highly responsive and focused
audience. Moreover, through our SmartLeads program, suppliers are able to
reach service providers and homeowners engaged in home improvement
projects through e-mail messages.
- TARGETED ADVERTISING TO SERVICE PROVIDERS. Through our SmartLeads program,
we offer our suppliers the opportunity to run highly targeted promotions
to our network of service providers based on detailed attributes including
project type, cost, timing and location. This focused advertising offers
suppliers an effective method of selling entire lines and specific
products to highly interested service providers at the time of purchase.
- CO-BRANDED WEB SITES. We offer suppliers the opportunity to place our
content and services on their own Web sites or link to co-branded Web
sites, without having to expend development time or resources. These
co-branded Web sites allow suppliers to offer our content and services to
their customers. In many of these arrangements, the suppliers may share in
the revenues from jobs referred through their site or the co-branded Web
site.
THE IMPROVENET STRATEGY
Our strategy is to become America's home improvement destination on the
Internet. The key elements of our strategy are:
DELIVERING A SATISFYING HOME IMPROVEMENT EXPERIENCE FOR HOMEOWNERS, SERVICE
PROVIDERS AND SUPPLIERS. The core of our strategy is to make it easy for
homeowners, service providers and suppliers to work together on a home
improvement project. We believe that achieving this goal will improve the
perception of the home improvement industry in general and improve the level of
professionalism and reliability among service providers, in particular. The
independence of our matching service allows us to maintain a neutral role in the
home improvement process. In addition, our focus on quick and easy access to
information, improved project and market efficiencies and the creation of a
central marketplace for home improvement products and services allows us to
change the current approach and execution of a home improvement project.
Through our online services, including our Web sites and SmartLeads program,
and our offline services, including our personal advisory service and
professional services group, we seek to provide increased communication between
all parties to a home improvement project and to create new
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efficiencies for the project itself. Access to this marketplace allows service
providers in our network to increase their own business and financial
efficiencies and differentiate themselves from their competitors. Similarly,
this access allows suppliers to market their home improvement products and
services within a cost effective advertising medium. We believe that the
execution of our ongoing strategy requires us to:
- expand and strengthen the pool of high quality information and content on
our Web sites;
- expand and strengthen our network of qualified and interested service
providers;
- improve our personal assistance to homeowners through our advisory
services;
- strengthen our communication with our network of service providers through
ImproveNetPro.com and an enhanced, highly knowledgeable team of local
service personnel; and
- strengthen our relationships with suppliers through enhanced co-branded
opportunities and highly targeted advertising products such as our
SmartLeads program.
INCREASE THE NUMBER OF JOBS SUBMITTED TO US AND THE PERCENTAGE OF JOBS WON
BY SERVICE PROVIDERS IN OUR NETWORK. We define our win rate as the number of
jobs won by service providers in our network divided by the total number of jobs
that we match. For 1999, our win rate was 9.6%. We intend to continue to
increase our number of jobs and our job win rate by:
- extending the breadth and depth of our content to create better quality
jobs;
- increasing participation by interested, responsive high-quality service
providers;
- building a local presence in major markets to work with our service
providers; and
- developing tracking systems and procedures to identify wins that are not
reported to us by either the service provider or the homeowner.
We have invested heavily in the development of content design tools and
services and have refined our submission process to increase the quality of the
homeowner experience and the quality and number of jobs submitted. We intend to
use the service provider databases from suppliers of home improvement products
to augment our service provider base. Our locally based professional services
group recruits service providers, monitors their interest and participation and
oversees their performance. We have embarked on an aggressive hiring program to
expand our professional services group with a goal of increasing our local
presence within the service provider community to 70 major population areas by
the end of 2000.
CREATE NEW COMMERCIAL RELATIONSHIPS AND EXPAND EXISTING ONES WITH SUPPLIERS
OF HOME IMPROVEMENT PRODUCTS AND SERVICES AND RELATED HOME SERVICES. We have
recently entered into multi-year contracts with Armstrong Worldwide Industries,
Cendant Corporation, The Dow Chemical Company, E.I. du Pont de Nemours and
Company, General Electric Appliances, Microsoft Corporation, Owens Corning and
Wickes which have provided these national suppliers of home improvement products
and services with a new advertising and marketing opportunity with the following
benefits:
- highly targeted, cost-efficient advertising to service providers and
homeowners;
- an immediate and enhanced Internet presence in the home improvement
market; and
- a focused Internet strategy including co-branding relationships and shared
content.
In turn, we realize the following benefits from these commercial
relationships:
- access to supplier's databases and co-branding opportunities;
- assistance in attracting homeowners to ImproveNet.com;
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- increased number of job submissions, leads and wins;
- assistance in building stronger relationships with our network of service
providers; and
- additional highly targeted, fully developed content for our Web sites.
Based on the initial financial and strategic success of our existing
multi-year commercial contracts, we are aggressively pursuing additional
nationally recognized suppliers of various home improvement products and
services. Specifically, we plan to target providers of related home services
such as real estate brokers and homeowner finance and insurance companies and
have entered into relationships with Cendant's CompleteHome and Microsoft's
HomeAdvisor.
CONTINUE TO BUILD THE IMPROVENET BRAND. To enhance public awareness of our
home improvement services, we are implementing a brand development program using
mass market and targeted advertising, direct mail, word-of-mouth, promotions and
public relations. Existing and future multi-year commercial contracts with
recognized home improvement brands provide us with new opportunities to promote
our brand through promotions and co-branding initiatives such as Powered by
ImproveNet. In addition, these contracts provide us with the opportunity to
utilize the consumer sales and marketing infrastructure, expertise and consumer
information of these organizations which we could not otherwise access or afford
in our normal course of business. We are also focused on systematically
extending relationships with high traffic Web sites. We believe in focusing our
advertising and promotions on homeowners during the home improvement planning
cycle, the time when we believe homeowners and service providers are most
receptive to brand association.
SERVICES AND INFORMATION
We offer several services including ImproveNet.com, our matching services,
ImproveNetPro.com, SmartLeads and Powered by ImproveNet co-branded services.
This space will contain two graphics.
The first graphic depicts ImproveNet's relationship to its three principal
constituents: homeowners, service providers and suppliers.
The second graphic depicts the ImproveNet matching process from job submission
to job completion.
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IMPROVENET.COM
Our consumer Web site, ImproveNet.com, enables homeowners to browse, free of
charge, our 30,000 pages of ideas and information for use in their home
improvement projects and to use our project tools to help them better understand
their home improvement project. Our design gallery on ImproveNet.com features
color images of the work of leading architects and designers. For most designs,
we provide images, comments from both the designer and our editors and a
detailed list of products used in the design. Our product showcase on
ImproveNet.com contains images of a full range of more than 5,000 distinct home
improvement products and includes brands such as Armstrong, DuPont, General
Electric Appliances, Owens Corning, Price-Pfister and Masco's Kraft Maid and
Merrillat.
We recently introduced our kitchen estimator, the first product in our
project estimator service, which is designed to assist homeowners through the
planning and budgeting stage of the home improvement process. This is an
interactive application that allows homeowners to calculate prices for a project
based on parameters such as physical dimensions, styles and the homeowner's zip
code.
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Homeowners can register as members, without charge, which entitles them
access to additional products and services. As part of the on-site registration
process, we create a customized interface for each registered member, known as
the personal project folder. The personal project folder permanently stores all
information related to that homeowner's project and allows us to present
custom-tailored information to that homeowner. Homeowners can store ideas they
get from our design gallery, product showcase and product estimator, in addition
to their own thoughts, as they plan and design their home improvement project.
In addition, we offer premium services to homeowners for a fee. Our premium
services include screening non-ImproveNet service providers and providing bid
and contract assessment assistance.
Our Web site gives homeowners access to a community of fellow Web site
visitors and to service providers and industry professionals who can respond to
home improvement questions. Visitors may read the more than 6,000 postings
currently on our message boards, and registered members may join in the
discussions or post a new question. This feature gives homeowners who are now in
the home improvement process a friendly environment in which to educate
themselves further and to reduce their anxiety related to home improvement.
Guiding homeowners through every stage of the home improvement process is
central to our strategy of imparting information and personal assistance. Our
project advisors are available to guide and advise the homeowner throughout the
job. By personalizing both our Web site and our interactive communications to
homeowners, we provide homeowners a user-friendly and highly productive
environment in which to manage their projects. Furthermore, we believe that this
personalization increases the likelihood that homeowners will return to us for
all their home improvement needs.
IMPROVENET'S MATCHING SERVICES
We offer homeowners the opportunity to submit to us a home improvement job
that we match with contractors, architects or designers who want to bid on the
job. We currently match approximately half of the jobs submitted to us with
interested service providers. Homeowners who are starting a home improvement
project begin the process by clicking on our homepage links to "Find a
Contractor" or "Find a Designer" and are then asked to complete a detailed
project request form that specifies the type of job the homeowner desires. Based
on the homeowner's project description, the homeowner's job request is then
categorized by size as follows:
- a large project, greater than $5,000 in value;
- a small project, between $5,000 and $500 in value; and
- a micro project, less than $500 in value.
Once a fully qualified job has been submitted to us, we assign a project
advisor to guide the homeowner through the entire home improvement process. We
also notify the homeowner immediately that we will begin our search to match
their project with potential service providers interested in bidding on the
project. Our proprietary matching service uses the homeowner's project
description to select the ImproveNet service providers in the homeowner's
geographic area who do the type of work required. We deliver job leads to
selected service providers by fax, email or by posting the leads on
ImproveNetPro.com. The interested service providers who first contact us get the
opportunity to have their name submitted to the homeowner on the project. We
currently allow up to four service providers to be matched on a large project,
up to two service providers on a small project and one service provider on a
micro project. We then forward the selected names on a first-come, first-served
basis to the homeowner via e-mail, ideally within 72 hours of submission, a goal
that we meet approximately 50% of the time. The service providers who we refer
to the homeowner pay us a fee for the job lead or referral.
Service providers contact the homeowner directly by telephone to discuss the
job in detail, ideally within 72 hours of our e-mail. Once the homeowner and
service provider have been matched, the
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service provider is able to bid on the project at any time after meeting with
the homeowner. If a job does not receive a contact from an interested service
provider within approximately one week of submission, the project advisor works
on behalf of the homeowner to locate available and interested service providers.
The project advisor sends a series of messages to the homeowner that provide
project management advice, offer premium services and market supplier product
offerings. The homeowner is free to contact his or her project advisor as many
times as needed by e-mail or by telephone. Following the completion of the
project, we solicit a quality-assurance survey to determine the outcome of the
matching process and the level of homeowner satisfaction. We invoice service
providers for a win fee based on a predetermined percentage of the job's value
for every job they win through our matching service. These win fees are based on
a non-negotiable, fixed-fee schedule based on estimated job size, as follows:
<TABLE>
<CAPTION>
ESTIMATED JOB SIZE FEE MAXIMUM
- ------------------ --------------- --------
<S> <C> <C>
Less than $5,000.......................................... 10% of job size $250
$5,000 - $10,000.......................................... 5% of job size $300
$10,000 - $35,000......................................... 3% of job size $700
Greater than $35,000...................................... 2% of job size $995
</TABLE>
We ask our service providers not to charge the win fee in the bid quote to
the homeowner. We currently collect our win fees directly from service providers
once the service provider or the homeowner informs us that the homeowner has
hired a service provider through our matching service.
IMPROVENETPRO.COM
Our recently introduced commercial Web site, ImproveNetPro.com, provides new
or enhanced services to our service providers. ImproveNetPro.com allows us to
communicate in near real-time with participating service providers who are
online. ImproveNetPro.com provides our contractors, architects and designers
with immediate access to new job postings. Once a service provider enters the
password-protected section of ImproveNetPro.com, he or she is immediately
presented with the status of new jobs available to the service provider that
match their location, preferences and expertise. We believe that
ImproveNetPro.com will assist us to enhance the loyalty of our contractors,
architects and designers.
SMARTLEADS
In the course of helping homeowners manage home improvement projects, we
obtain timely and specific information from them regarding the nature of their
home improvement projects. With SmartLeads, we offer our suppliers of home
improvement products the opportunity to send direct e-mail messages about their
products to service providers and homeowners who are making purchasing decisions
during the home improvement process. Currently, our service providers cannot opt
out of the SmartLeads program, while homeowners may request that they not be
included in the SmartLeads program. We charge suppliers a fee for each message
sent. We believe this is a targeted and cost-effective means for suppliers to
reach homeowners and service providers near the time of purchase.
POWERED BY IMPROVENET
We provide a customized product superimposing ImproveNet.com content
including our matching services on third-party Web sites so that the content
looks like the third party's own content but is Powered by ImproveNet. This
customized product allows our logo and our products and services to be placed
across a broad spectrum of third-party Web sites related to home improvement,
from online versions of traditional media properties to Web sites related to
manufacturing, finance, real estate and local and regional guides. If a customer
of these third parties uses our matching services, we pay the supplier a portion
of any service revenue from that match.
40
<PAGE>
SALES AND MARKETING
We believe that building awareness of the ImproveNet brand is critical to
our effort to be America's home improvement destination on the Internet. Our
primary means of increasing the number of homeowners who visit ImproveNet.com
and building a broad-based awareness of our brand among homeowners has been
through online advertising arrangements. We have entered into these
arrangements, which are generally one year in length or cancelable with
reasonable notice that obligate us to pay a fixed monthly fee, with:
- frequently visited portals, such as AltaVista, America Online,
Excite@Home, Lycos, Quicken.com and Yahoo!; and
- Web sites related to home improvements, such as Better Homes and Garden,
This Old House, and Microsoft HomeAdvisor.
In addition, starting in the second half of 1999, we began supplementing our
online advertising with offline advertising in Yellow Pages, print media and
national radio and through customary public relations initiatives. We have faced
and will continue to face increased renewal charges for our advertising
arrangements.
Our partnership services group focuses on creating commercial relationships
with companies serving the home improvement industry, including suppliers of
home improvement products and related services. Since August 1999, we have sold
these companies advertising including a continuous presence on our Web sites for
a fixed annual fee. To date, we have entered into multi-year commerical
contracts with the following third parties: Armstrong, Cendant, Dow Chemical,
DuPont, General Electric Appliances, Microsoft, Owens Corning and Wickes.
Our professional services group also focuses on adding new service providers
to our network and decreasing turnover of active service providers in our
network. We believe that a local professional services presence will allow us to
build and maintain a strong network of service providers in each geographic area
that is responsive to our job leads. As of December 31, 1999, we had 69 local
professional advisors on our professional services team.
Our five largest advertisers in 1999 were Armstrong, General Electric
Appliances, Masco's Merrillat, Owens Corning and Whirlpool. No single advertiser
accounted for more than 10% of our total revenues for any period.
PRODUCT DEVELOPMENT
We seek to maintain and advance our market position by continually enhancing
the performance of our Web sites and expanding the features that we offer
homeowners, service providers and suppliers. We expect that enhancements to our
Web sites and services will come from both internally and externally developed
technologies.
Our new product development ideas are stimulated by input from our bulletin
boards, commercial relationships, market surveys and market focus groups. Our
current development efforts focus primarily on identifying, designing and
building proprietary products, features and systems to manage the collection and
organization of information for homeowners, our network of service providers and
suppliers of home improvement products. Additionally, our product development
group is responsible for the ongoing activities related to development of
content for our Web sites and the ability of our systems to handle larger
numbers of visitors, more available pages and our Powered by ImproveNet
interfaces. Future delays or unforeseen problems in these development efforts
could delay the introduction of new products, services or features on our Web
sites.
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<PAGE>
TECHNOLOGY INFRASTRUCTURE
Our Web sites are designed to provide fast, reliable, high quality access to
our online services. Our hardware and software systems must assimilate and
process large volumes of visitor traffic and store, process and disseminate
large amounts of user data, and process interactive applications.
We have implemented a broad array of site management, customer interaction
and processing systems using our own proprietary technologies and, where
appropriate, commercially available licensed technologies. Our systems use
Windows NT and are designed for a high level of automation and performance. We
have redundant power supplies, fail-over machines and fully clustered databases
and Web servers to optimize up-time and user experience. We monitor our network
and machines 24 hours a day for reliability. In 1997, 1998 and 1999, we spent
$288,000, $504,000 and $665,000 on research and development.
Our Web sites are operated using Microsoft tools supplemented by
ImproveNet-specific enhancements and tools to support rapid database/Web
application development. Our ability to successfully receive homeowner job
submissions online, provide high-quality homeowner service, and serve a high
volume of advertisements largely depends on the efficient and uninterrupted
operation of our computer and communications hardware systems. Our Web sites and
databases are hosted by Exodus Communications in Santa Clara, California. All of
our computer, communications systems and database back-ups are located in our
administrative headquarters in Redwood City. We estimate that we are currently
using up to approximately 20% of our Web sites' server capacity. Visitor traffic
to our Web sites varies significantly. Spikes in visitor traffic and user demand
can affect expected performance of our Web sites and could cause outages. Since
we have been keeping logs on our Web sites, our ImproveNet.com Web site has been
unintentionally interrupted for periods ranging from two minutes to one hour,
except that on one occasion, some users experienced interruptions in part of our
service for a period of 48 hours. We have had no interruptions or outages of our
ImproveNetPro.com Web site since its inception in December 1999. The primary
reason for interruptions in service relate to new content introductions onto our
Web sites, such as our visualizer or estimator tools, which involve a complex
code base. As we implement increased security measures, such as additional
firewalls, the installation has caused intentional and unintentional
interruptions in our Internet-based services. We have implemented
around-the-clock security and installed monitoring equipment and personnel to
better prevent and diagnose actual and potential service problems.
COMPETITION
We believe that the critical competitive factors in the online home
improvement industry include:
- the number of visitors to the Web sites, the number of home improvement
jobs submitted by those visitors, the time spent by those visitors at
those Web sites and the resultant loyalty created among those visitors,
the degree to which Web site content and loyalty create allegiance to the
service provider referral service at the Web site, and, ultimately, the
ability to generate repeat customers;
- the ability to recruit and retain a network of quality service providers
that have broad trade and geographical coverage so that a large number of
jobs can be matched with service providers;
- the ability to maintain loyalty of service providers and capture their
capacity for jobs; and
- the ability to generate significant traffic from online homeowners and
qualify their projects so that they can be efficiently handled by service
providers and so that suppliers can effectively market to them.
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We believe that our ability to compete depends on many different factors,
both within and outside our control, including:
- the geographical coverage and completeness of our network of service
providers and the performance of the service providers referred from that
network;
- the strength of our commercial relationships with suppliers of home
improvement products and services and their interest in entering similar
relationships with our competitors;
- the quality of our Web site content and the tools offered to both
homeowners and service providers; and
- the effectiveness of our marketing strategy and its impact on the number
of high quality home improvement projects we are able to generate from
visits to our Web site and through other means.
Our current competitors include:
- LOCAL, PRIMARILY PHONE-BASED, CONTRACTOR REFERRAL BUSINESSES. These are
generally small operations that take phone requests from homeowners that
they attract through Yellow Page advertising or direct marketing
initiatives and that refer projects to contractors with whom they often
have a personal relationship.
- ONLINE REFERRAL COMPANIES. Some of our competitors such as
ServiceMagic.com, iMandi, iCastle, repairnet, HomesSpud and OurHouse.com
offer a publicly accessible online database and other companies such as
Handyman Online, BidExpress, and Contractor.com have matching services but
do not have national coverage. Remodel.com, which was recently launched by
HomeStore.com, also offers a matching service.
- SUPPLIERS OF HOME IMPROVEMENT PRODUCTS. We expect the number of our
competitors to increase in the future. For example, retailers of home
improvement products such as The Home Depot, Lowe's and Sears Roebuck &
Co. could develop competing home improvement Web sites.
In addition, parties with which we have commercial relationships and other
suppliers of home improvement products could choose to develop their own
Internet strategies or competing home improvement Web sites. Many of our
existing and potential competitors have longer operating histories, greater name
recognition, larger homeowner bases and significantly greater financial,
technical and marketing resources than we do. We believe that we and any
competitor seeking to establish home improvement services on the Internet
confront significant challenges, including the need to:
- cost-effectively build a comprehensive network of service providers;
- possess an effective process for handling a large volume of homeowner
requests and delivering a high level of customer service;
- develop and offer project modeling tools;
- develop a communication channel between homeowners and service providers;
and
- develop relationships or alliances with suppliers of home improvement
products and services that have strong brand names and databases of
service providers.
GOVERNMENT REGULATION
Our business is subject to rapidly changing laws and regulations. Although
our operations are currently based in California, the United States government
and the governments of other states and
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foreign countries have attempted to regulate activities on the Internet. The
following are some of the evolving areas of law that are relevant to our
business:
- PRIVACY LAW. Current and proposed federal, state and foreign privacy
regulations and other laws restricting the collection, use and disclosure
of personal information could limit our ability to leverage our databases
to generate revenues.
- SALES AND USE TAX. We do not currently collect sales, use or other taxes
on the sale of goods and services on our Web sites other than on sales in
states where we have a physical presence. However, states or foreign
jurisdictions may seek to impose tax collection obligations on companies
like us that engage in online commerce. If they do, these obligations
could limit the growth of electronic commerce in general.
- BUILDING REQUIREMENTS. The activities of our service providers are subject
to various federal, state and local laws, regulations and ordinances
relating to, among other things, the licensing of home improvement
contractors, OSHA standards, building and zoning regulations and
environmental laws and regulations relating to the disposal of demolition
debris and other solid wastes. In addition, many jurisdictions require the
service provider to obtain a building permit for each home improvement
project.
Because of this rapidly evolving and uncertain regulatory environment, we
cannot predict how these laws and regulations might affect our business. In
addition, these uncertainties make it difficult to ensure compliance with the
laws and regulations governing the Internet. These laws and regulations could
harm us by subjecting us to liability or forcing us to change how we do
business.
INTELLECTUAL PROPERTY RIGHTS
Our success is dependent upon our ability to develop and protect our
proprietary technology and intellectual proprietary rights, including our
databases of homeowners and service providers and our matching criteria and
algorithms. We rely primarily on a combination of contractual provisions,
confidentiality procedures, trade secrets, and copyright and trademark laws to
accomplish these goals. Our databases are trade secrets, and our matching
service is protected by trade secret and copyright laws.
In addition, we seek to avoid disclosure of our trade secrets by requiring
employees, customers and others with access to our proprietary information to
execute confidentiality agreements. We also seek to protect our software,
documentation and other written materials under trade secret and copyright laws.
Despite our efforts to protect our proprietary rights, existing laws afford
only limited protection. Attempts may be made to copy or reverse engineer
aspects of our services or to obtain and use information that we regard as
proprietary. Accordingly, there can be no assurance that we will be able to
protect our proprietary rights against unauthorized third-party copying or use.
Use by others of our proprietary rights could materially harm our business.
Furthermore, policing the authorized use of our product is difficult and
expensive litigation may be necessary in the future to enforce our intellectual
property rights.
It is also possible that third parties will claim that we have infringed
their current or future proprietary rights. Any claims, with or without merit,
could be time-consuming, result in costly litigation, cause delays or require us
to enter into royalty or licensing agreements, any of which could harm our
business. Patent litigation in particular has complex technical issues and
inherent uncertainties. In the event an infringement claim against us was
successful and we could not obtain a license on acceptable terms or license a
substitute technology or redesign to avoid infringement, our business would be
harmed.
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<PAGE>
FACILITIES
Our principal administrative offices and systems operations are located in
Redwood City, California in approximately 16,200 square feet of office space
under a lease that expires in 2006. We also lease approximately 5,300 square
feet of office space in Redwood City, California under a lease that expires in
2002. We operate our project services activities out of approximately 8,000
square feet of office space in Ft. Lauderdale, Florida under a lease that
expires in 2004. In addition, we have entered into leases for regional
professional support offices in Irving, Texas and Livonia, Michigan. We expect
to enter into new leases for office space for additional professional support
offices in six other regions generally on the same terms and conditions as our
current regional office leases. We also anticipate opening an office in the
western United States for our project advisor group. We believe our current
office space including the contemplated lease of the six regional support
offices and our project advisor office is adequate for our current operations
and that additional office space, if required, can be readily obtained.
EMPLOYEES
As of December 31, 1999, we had 198 employees, including 24 in sales and
marketing, 49 in project services, 84 in professional services, 24 in product
development and technology, and 17 in general administration. We consider our
relations with our employees to be good. We have never had a work stoppage, and
no employees are represented under collective bargaining agreements. We believe
that our future success will depend in part on our continued ability to attract,
integrate, retain and motivate highly qualified personnel, and upon the
continued service of our senior management and key technical personnel.
Competition for qualified personnel in our industry and geographical location is
intense, and we cannot assure you that we will be successful in attracting,
integrating, retaining and motivating a sufficient number of qualified personnel
to conduct our business in the future.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations. As of the date of this prospectus, we are not
engaged in any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about our directors and
executive officers as of December 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- ----------------------- ------------------------------------------
<S> <C> <C>
Ronald B. Cooper.......................... 45 President, Chief Executive Officer and
Director
Dennis R. Galloway........................ 52 Senior Vice President, Partnership
Services
Don Gaspar................................ 36 Senior Vice President, Engineering and
Development, and Chief Technology
Officer
William A. Phillips, Jr................... 41 Senior Vice President, Professional
Services
Richard G. Reece.......................... 51 Senior Vice President and Chief Financial
Officer
Richard A. Roof........................... 46 Senior Vice President, Project Services
William E. Crosby......................... 43 Vice President, Editorial and Product
Development
Sonia Solanki............................. 35 Vice President, Human Resources
Robert L. Stevens......................... 52 Chairman of the Board of Directors
Andrew Anker(1)........................... 34 Director
Domenico Cecere(2)........................ 50 Director
Stuart Gannes(2).......................... 50 Director
Brian Graff(2)............................ 34 Director
Garrett Gruener(1)........................ 45 Director
Alex Knight(1)............................ 35 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
RONALD B. COOPER has served as our president and chief executive officer
since March 1999 and as a director since September 1999. From July 1996 to
March 1999, Mr. Cooper was president of Price Pfister, Black and Decker's
plumbing products division. From August 1992 to July 1996, Mr. Cooper was
president of three other Black and Decker divisions: Power Tool Accessories, PRC
Realty Systems and PRC Commercial Systems Group.
DENNIS R. GALLOWAY has served as our senior vice president, partnership
services since November 1999. From July 1999 to November 1999, Mr. Galloway was
our senior vice president, professional services. From February 1996 to June
1999, Mr. Galloway owned Galloway Consulting, an Internet consulting firm. From
February 1994 to January 1996, he was president and chief executive officer of
DialOne, a national network of franchised home services contractors.
DON GASPAR has served as our senior vice president, engineering and
development and chief technology officer since September 1999. From
November 1997 to September 1999, he was vice president of engineering and chief
technology officer at TelePost, an internet telecommunications company. From
March 1996 to November 1997, he was the sole owner of Gigantor Software
Development, Inc., a consulting company, and he is currently Chairman of the
Board of that company. From April 1995 to March 1996, he was project leader and
manager of engineering at Netcom, an online services company. From April 1994 to
April 1995, he was a principal engineer and project leader at Lotus Software
Development, a software company.
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WILLIAM A. PHILLIPS, JR. has served as our senior vice president,
professional services since October 1999. From May 1995 to October 1999,
Mr. Phillips was a vice president at Price Pfister. From December 1994 to
May 1995, he was vice president of sales at DAP, Inc., a caulk and sealant
manufacturer.
RICHARD G. REECE has served as our senior vice president and chief financial
officer since September 1999. From April 1996 to September 1999, Mr. Reece was
the vice president and chief financial officer of Diamond Home Services, Inc., a
home improvement products and services company. From August 1994 to April 1996,
Mr. Reece was vice president and chief financial officer of Globe Building
Materials, Inc., a manufacturer and distributor of roofing products.
RICHARD A. ROOF has served as our senior vice president, project services
since May 1999. From September 1998 to May 1999, Mr. Roof was senior vice
president of operations at QEP/Roberts, a manufacturer of home improvement
tools. From June 1997 to June 1998, he was senior vice president of operations
at Continental Datagraphics, a technical data management and publishing company.
From 1981 to June 1997, Mr. Roof served in a variety of positions, most recently
senior vice president of operations, at Interealty Corp/PRC Realty Systems, a
supplier of information systems to the real estate industry.
WILLIAM E. CROSBY has served as our vice president, editorial and product
development since June 1997. From September 1977 to August 1996, Mr. Crosby
served in a variety of positions at Sunset Magazine, most recently senior
writer.
SONIA SOLANKI has served as our vice president, human resources since July
1999. From May 1996 to January 1999, Ms. Solanki was a human resources manager
and from January 1999 to July 1999, she was a director of product development at
Price Pfister. From January 1995 to January 1996, she was a human resources team
leader at Colgate-Palmolive's Pet Nutrition division.
ROBERT L. STEVENS is one of our co-founders and has served as chairman of
the board of directors since January 1996. Mr. Stevens served as our president
and chief executive officer from January 1996 to March 1999. From January 1990
to April 1995, Mr. Stevens was president and chief executive officer of
MagicQuest, Inc., an educational software company.
ANDREW ANKER has served as a director of ImproveNet since March 1999 as the
nominee of August Capital. Mr. Anker has been at August Capital, a venture
capital company, since April 1998 and has been a partner since March 1999. From
1994 to February 1998, Mr. Anker served as chief executive officer of Wired
Digital, Inc., an Internet-based news and media company. August Capital has had
a contractual right to nominate one member of the board of directors since March
1999 under a voting agreement that will terminate upon the closing of this
offering.
DOMENICO CECERE has served as a director of ImproveNet since December 1999
as the nominee of Owens Corning. Mr. Cecere has been senior vice president and
president of Owens Corning North America Building Materials Systems Business
since January 1999. From January 1998 to December 1998, Mr. Cecere served as
Chief Financial Officer of that division. From January 1996 to December 1997,
Mr. Cecere was president of Owens Corning Roofing Systems division. From January
1994 to December 1995, Mr. Cecere was Corporate Controller of Owens Corning.
Owens Corning has had a contractual right to nominate one member of the board of
directors since November 1999 under a voting agreement that will terminate upon
the termination of the Internet-based Service Agreement that we have with Owens
Corning. The Internet-based Services Agreement has a term of twelve years but
may be cancelled at Owens Corning's option on twelve months notice at any time
following the third year it is in effect.
STUART GANNES has served as a director of ImproveNet since August 1997.
Mr. Gannes has been employed as vice president, internet applications
organization for AT&T Corp., a telecommunications
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<PAGE>
company, since January 1998. From June 1992 to July 1997, he was chief executive
officer of Books That Work, a consumer software company.
BRIAN GRAFF has served as a director of ImproveNet since September 1999 as
the nominee of GE Capital Equity Investments, Inc. Mr. Graff is currently a vice
president of GE Capital Equity Investments, Inc., a financial subsidiary of
General Electric, where he has been employed since August 1997. From September
1995 to August 1997, he was a director of corporate development of Automatic
Data Processing, Inc., an information processing company. From August 1992 to
September 1995, he was a senior associate of corporate finance at Coopers &
Lybrand, a public accounting firm. GE Capital Equity Investments, Inc. has had a
contractual right to nominate one member of the board of directors since
September 1999 under a voting agreement that will terminate upon the closing of
this offering.
GARRETT GRUENER has served as a director of ImproveNet since March 1997 as
the nominee of Alta Partners. Mr. Gruener has been a general partner of Alta
Partners, a venture capital company, since 1996. Since 1992, Mr. Gruener has
been a partner at Burr, Egan, Deleage & Co., a venture capital company.
Mr. Gruener is on the board of directors of Be, Inc., Ask Jeeves, Inc.,
CyberGold, Inc. and ImageX.com, Inc. Alta Partners has had a contractual right
to nominate one member of the board of directors since March 1997 under a voting
agreement that will terminate upon the closing of this offering.
ALEX KNIGHT has served as a director of ImproveNet since February 1999 as
the nominee of ARCH Venture Fund III, L.P. Mr. Knight has been at ARCH Venture
Partners, a venture capital company, since February 1997, and has been a
managing director of ARCH Venture Fund IV, LLC since its formation in February
1999. From March 1996 to February 1997, Mr. Knight was a consultant to several
Internet companies. From May 1995 to March 1996, Mr. Knight was executive vice
president of News/MCI Internet Ventures, an Internet services company. From
September 1993 to May 1995, Mr. Knight was director of business development and
creative affairs at Microsoft Corporation, a software company. ARCH Venture Fund
III, L.P. has had a contractual right to nominate one member of the board of
directors since March 1998 under a voting agreement that will terminate upon the
closing of this offering.
BOARD COMMITTEES
AUDIT COMMITTEE. Our audit committee currently consists of Messrs. Cecere,
Gannes and Graff. The audit committee reviews our internal accounting procedures
and consults with and reviews the services provided by our independent
accountants.
COMPENSATION COMMITTEE. Our compensation committee currently consists of
Messrs. Anker, Gruener and Knight. The compensation committee administers our
stock option plans, reviews and approves the compensation and benefits of all
our officers and establishes and reviews general policies relating to employee
compensation and benefits.
DIRECTOR COMPENSATION
Directors currently receive no cash compensation from us for their services
as members of the board or for attendance at committee meetings. Members of the
board are reimbursed for some expenses in connection with attendance at board
and committee meetings.
In October 1997, Mr. Gannes received an option to purchase 20,000 shares of
our common stock at an exercise price per share of $0.10 in consideration for
consulting services. The exercise price was equal to the fair market value of
the common stock on the date of grant as determined by our board of directors.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.
Messrs. Anker, Gruener and Knight serve as members of the compensation
committee. Investment entities affiliated with Messrs. Anker, Gruener and Knight
have purchased shares of common stock and preferred stock. See "Related Party
Transactions."
BOARD COMPOSITION
Our bylaws currently provide for a board of directors consisting of eight
members. Following the closing of this offering, the directors will be divided
into three classes, each serving a staggered three-year term: class I, whose
term will expire at the first annual meeting of stockholders following this
offering; class II, whose term will expire at the second annual meeting of
stockholders following this offering; and class III, whose term will expire at
the third annual meeting of stockholders following this offering. As a result,
only one class of directors will be elected at each of our annual meetings of
stockholders, with the other classes continuing for the remainder of their
respective terms. Mr. Stevens, Mr. Anker and Mr. Knight have been designated as
class I directors; Mr. Gruener, Mr. Graff and Mr. Gannes have been designated as
class II directors; and Mr. Cooper and Mr. Cecere have been designated as
class III directors. Mr. Cecere was elected to the board of directors pursuant
to a voting agreement that will continue, following this offering, to allow
Owens Corning to designate one nominee to the board provided that it owns at
least 500,000 shares of our common stock and does not terminate the current
Internet-based services agreement with us.
EXECUTIVE COMPENSATION
The following table shows information concerning compensation earned in the
fiscal years ended December 31, 1999 and 1998 for our President and Chief
Executive Officer, our former President and Chief Executive Officer and our five
other most highly compensated executive officers, whose compensation in 1999, as
defined by the Securities and Exchange Commission, exceeded $100,000. These
people are referred to as the "named executive officers." The information in the
table includes salaries, bonuses, stock options granted and other miscellaneous
compensation. We have not granted stock appreciation rights or restricted stock
awards and have no long-term compensation benefits other than stock options.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION SECURITIES ALL
--------------------------------- UNDERLYING OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION
- --------------------------- -------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert L. Stevens....................... 1999 $150,000 -- --
Chairman of the Board and former 1998 148,750 -- -- --
President and Chief Executive Officer
Ronald B. Cooper........................ 1999 228,125 577,102 9,637(1)
President and Chief Executive Officer 1998 -- -- -- --
Dennis R. Galloway...................... 1999 75,000 75,000 48,575(2)
Senior Vice President, Partnership 1998 -- -- 30,000 26,000(2)
Services
Richard A. Roof......................... 1999 96,875 125,000 11,980(3)
Senior Vice President, Project 1998 -- -- -- --
Services
William E. Crosby....................... 1999 114,000 25,000 --
Vice President, Editorial and Product 1998 91,000 -- 10,000 --
Development Services
Jan Sherman............................. 1999 143,335 -- -- --
Former Vice President, Strategic 1998 94,818 -- -- --
Planning
Hunter Madsen........................... 1999 192,789 -- -- 31,450(2)
Former Vice President, Marketing 1998 -- -- -- 20,400(2)
</TABLE>
- --------------------------
(1) Represents reimbursement for personal travel expenditures.
(2) Represents consulting fees.
(3) Includes $10,227 rent reimbursement paid by the Company and $1,753 in
reimbursement for personal travel expenditures.
The following table shows each grant of stock options during the fiscal year
ended December 31, 1999 to the individuals listed on the previous table.
The exercise price of each option was equal to the fair market value of our
common stock as valued by the board of directors on the date of grant. The
exercise price may be paid in cash or by promissory notes.
The potential realizable value is calculated based on the ten-year term of
the option and the market value at the time of grant. Stock price appreciation
of 5% and 10% is assumed pursuant to rules promulgated by the Securities and
Exchange Commission and does not represent our prediction of our stock price
performance. The potential realizable values at 5% and 10% appreciation are
calculated by
- multiplying the number of shares of common stock subject to a given option
by the assumed initial public offering price of $15.00 per share;
- assuming that the total stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table until the
expiration of the options; and
- subtracting from that result the total option exercise price.
The shares listed in the following table under "Number of Securities
Underlying Options Granted" are immediately exercisable at the discretion of our
board of directors. The option has a ten-year term, subject to earlier
termination if the optionee's service with us ceases.
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<PAGE>
Percentages shown under "Percent of Total Options Granted to Employees in
Fiscal 1999" are based on a total of 2,377,302 options granted to our employees
under our stock option plans during 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------------
NAME GRANTED (#) FISCAL 1999 SHARE DATE 5%($) 10%($)
- ---- ----------- ------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Stevens.............. -- -- -- -- -- --
Ronald B. Cooper............... 577,102 24.3% $0.25 03/18/09 13,865,566 22,078,596
Dennis R. Galloway............. 75,000 3.2 1.50 07/12/09 1,649,256 2,626,164
Richard A. Roof................ 75,000 3.2 1.50 05/03/09 1,649,256 2,626,164
50,000 2.1 7.50 11/17/09 610,835 972,653
William E. Crosby.............. 25,000 1.1 7.50 11/17/09 305,418 486,327
Jan Sherman.................... -- -- -- -- -- --
Hunter Madsen.................. -- -- -- -- -- --
</TABLE>
The following table shows information regarding shares acquired upon
exercise of options in fiscal 1999 and the number and value of securities
underlying unexercised options that are held by the named executive officer as
of December 31, 1999.
Amounts shown under the column "Value of Unexercised In-the-Money Options at
December 31, 1999" represent the positive spread between the respective exercise
prices of outstanding stock options and the assumed initial public offering
price of $15.00 per share without taking into account any taxes that may be
payable in connection with the transaction, multiplied by the number of shares
underlying the option. Our stock option plan allows for the early exercise of
options at the discretion of our board of directors. All options exercised early
are subject to repurchase by us at the original exercise price, upon the
optionee's cessation of service before the shares vest.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED DECEMBER 31, 1999 DECEMBER 31, 1999
UPON EXERCISE VALUE REALIZED ----------------------- -----------------------
NAME (#) (1) VESTED UNVESTED VESTED UNVESTED
- ---- --------------- -------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Stevens........ 71,250 $1,058,625 -- -- -- --
Ronald B. Cooper(2)...... 400,000 5,900,000 -- 177,102 -- $2,612,254
Dennis R. Galloway....... 40,000 540,000 -- 75,000 -- 1,012,500
Richard A. Roof.......... 13,333 99,998 -- 111,667 -- 1,287,502
William E. Crosby(3)..... 35,950 436,616 5,300 33,750 $78,814 415,166
Jan Sherman.............. 44,500 667,500 -- -- -- --
Hunter Madsen............ -- -- 35,208 -- 528,120 --
</TABLE>
(1) Based on the assumed initial public offering price of $15.00 per share,
minus the per share exercise price, multiplied by the number of shares
issued upon exercise of the option.
(2) Represents 400,000 shares subject to a right of repurchase in favor of
ImproveNet.
(3) Includes 13,333 shares subject to a right of repurchase in favor of
ImproveNet.
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<PAGE>
EMPLOYEE BENEFIT PLANS
1996 STOCK OPTION PLAN
Our 1996 Stock Option Plan provides for the granting to employees of
incentive stock options within the meaning of section 422 of the Internal
Revenue Code of 1986 and for the granting to employees and consultants of
nonstatutory stock options. As of December 31, 1999, there were outstanding
options to purchase 1,727,317 shares of common stock and 10,106 shares available
for future grant. This plan provides that, if we merge with or into another
corporation or sell substantially all of our assets, each outstanding option
must be assumed or substituted for by the successor corporation. If the
successor corporation refuses to assume or substitute for the ImproveNet
options, the ImproveNet options will accelerate as of the closing of the merger
or sale of assets. Options under this plan are subject to terms substantially
similar to those described below with respect to options to be granted under the
1999 Equity Incentive Plan. The 1996 Stock Option Plan does not provide for
issuance of restricted stock or stock bonus awards.
1999 EQUITY INCENTIVE PLAN
We adopted the 1999 Equity Incentive Plan in December 1999, subject to
stockholder consent.
SHARE RESERVE. A total of 1,300,000 shares have been reserved for issuance
under this plan. Each year, beginning January 1, 2001, the number of shares
reserved for issuance under this plan will automatically be increased by the
lesser of (i) 5% of the total number of common stock then outstanding or
(ii) 1,300,000 shares. However, our board may designate a smaller number of
shares of common stock to be added to the share reserve as of a particular
January 1. As of December 31, 1999, there were outstanding options to purchase
130,750 shares of common stock and 1,169,250 shares available for future grant.
ADMINISTRATION. Our board administers the incentive plan unless it has
delegated administration to a committee. Our board has the authority to
construe, interpret and amend the incentive plan as well as to determine:
- the grant recipients;
- the grant dates;
- the number of shares subject to the award;
- the exercisability of the award;
- the exercise price;
- the type of consideration; and
- the other terms of the award.
ELIGIBILITY. Our board may grant incentive stock options that qualify under
section 422 of the Internal Revenue Code to our employees and officers. The
board may grant nonstatutory stock options, stock bonuses and restricted stock
purchase awards to our employees, officers, directors, consultants or
affiliates. A restricted stock purchase award is an offer to purchase our shares
at a price either at or near the fair market value of the shares. A stock bonus,
on the other hand, is a grant of our shares at no cost to the recipient in
consideration for past services rendered. We may reacquire the shares under
either type of award at the original purchase price, which is zero in the case
of a stock bonus, if the recipient's service to us or an affiliate of ours is
terminated before the shares vest.
Section 162(m) of the Internal Revenue Code, among other things, denies a
deduction to publicly held corporations for compensation paid to specific
employees in a taxable year to the extent that the compensation is more than
$1,000,000. When we become subject to section 162(m), the board may not
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<PAGE>
grant options under the incentive plan to an employee covering a total of more
than 700,000 shares in any calendar year.
OPTIONS. The board may grant incentive stock options with an exercise price
of 100% or more of the fair market value of a share of our common stock on the
grant date. The board may not grant an incentive stock option to any person who,
at the time of the grant, owns, or is deemed to own, stock possessing more than
10% of the total combined voting power of ImproveNet or any affiliate of
ImproveNet, unless the exercise price is at least 110% of the fair market value
of the stock on the grant date. In addition, the total fair market value,
determined at the grant date, of incentive stock option shares that are
exercisable for the first time during a calendar year, under the incentive plan
and all other stock plans of ImproveNet and its affiliates, may not exceed
$100,000 for any person. We may grant nonstatutory stock options with an
exercise price as low as 85% of the fair market value of a share on the grant
date. The options may, but need not, contain provisions for early exercise.
OPTION TERMS. The maximum option term is 10 years. The option term for any
person who, at the time of grant, owns, or is deemed to own, stock possessing
more than 10% of the total combined voting power of ImproveNet or any affiliate
of ImproveNet, is a maximum of five years. The board may provide for exercise
periods of any length in individual option grants, subject to limitations.
However, generally an option terminates three months after the optionholder's
service terminates. If the termination is due to the optionholder's disability,
the exercise period generally is extended to 12 months. If the termination is
due to the optionholder's death or if the optionholder dies within three months
after his or her service terminates, the exercise period generally is extended
to 18 months following death.
OTHER PROVISIONS. The optionholder may designate a beneficiary to exercise
the option following the optionholder's death. Nonstatutory stock options may be
transferable. Otherwise, the option exercise rights will pass by the
optionholder's will or by the laws of descent and distribution.
The board determines the purchase price of other stock awards, but the
purchase price may not be less than 85% of the fair market value of our common
stock on the grant date. However, the board may award stock bonuses in
consideration of past services without a purchase payment. Shares sold or
awarded under the incentive plan may, but need not be, restricted and subject to
a repurchase option in our favor in accordance with a vesting schedule that the
board determines.
Transactions not involving receipt of consideration by ImproveNet, including
a merger, consolidation, reorganization, stock dividend or stock split, may
change the class and number of shares subject to the incentive plan and to
outstanding awards. In that event, the board will appropriately adjust the
incentive plan as to the class and the maximum number of shares subject to the
incentive plan, to the incentive stock option limitation and to the
section 162(m) limitation. It also will adjust outstanding awards as to the
class, number of shares and price per share subject to the awards.
Upon a change in control of ImproveNet, the surviving entity will either
assume or substitute outstanding awards under the incentive plan. Otherwise, the
vesting and exercisability of awards generally will accelerate in full and
terminate if not exercised, if applicable, at or before the event.
This plan will terminate in December 2009 unless the board terminates it
sooner.
1999 EMPLOYEE STOCK PURCHASE PLAN
We adopted our employee stock purchase plan in December 1999.
SHARE RESERVE. We authorized the issuance of 300,000 shares of our common
stock under purchase rights granted to our employees and to employees of our
designated affiliates subject to stockholder approval. On January 1 of each
year, beginning on January 1, 2001, the number of shares in the reserve
automatically will be increased by the lesser of (i) 1% of the total number of
common stock
53
<PAGE>
outstanding on such January 1 or (ii) 300,000 shares. However, the board may
designate a smaller number of shares to be added to the share reserve as of a
particular January 1.
ELIGIBILITY. The purchase plan is intended to qualify as an employee stock
purchase plan within the meaning of section 423 of the Internal Revenue Code.
The purchase plan provides a means by which employees may purchase our common
stock through payroll deductions. We implement this purchase plan by offerings
of purchase rights to eligible employees. Generally, all of our employees and
the employees of any United States affiliate of ours may participate in the
purchase plan, excluding part-time and seasonal employees. However, no employee
may participate in the purchase plan if, immediately after we grant the employee
a purchase right, the employee has voting power over 5% or more of our
outstanding capital stock. As of the date of this prospectus, no shares of
common stock have been purchased under the purchase plan.
ADMINISTRATION. Under the purchase plan, the board may specify offerings of
up to 27 months. The first offering will begin on the effective date of this
initial public offering. Unless the board otherwise determines, our common stock
is purchased for accounts of participating employees at a price per share equal
to the lower of:
- 85% of the fair market value of a share on the first day of the offering,
or
- 85% of the fair market value of a share on the purchase date.
The board may provide that employees who become eligible to participate
after the offering period begins nevertheless may enroll in the offering. These
employees will purchase our stock at the lower of:
- 85% of the fair market value of a share on the day they began
participating in the purchase plan, or
- 85% of the fair market value of a share on the purchase date.
Under the offering that will begin on the effective date of this prospectus,
employees may authorize payroll deductions of up to 15% of their base
compensation, not including sales commissions or bonuses, for the purchase of
stock under the purchase plan and may end their participation in the offering at
any time up to 10 days before a purchase date. Participation ends automatically
on termination of employment with us or our affiliates.
OTHER PROVISIONS. The board may grant eligible employees purchase rights
under the purchase plan only if the purchase rights together with any other
purchase rights granted under other employee stock purchase plans established by
us or our affiliates, if any, do not permit the employee's rights to purchase
our stock to accrue at a rate that exceeds $25,000 of the fair market value of
our stock for each calendar year in which the purchase rights are outstanding.
The board also may limit the number of shares that an employee may purchase on
any purchase date.
Upon a change of control of ImproveNet, the board may provide that the
successor corporation will assume or substitute outstanding purchase rights.
Alternatively, the board may shorten the offering and provide that shares will
be purchased for participants immediately before the change in control.
The employee stock purchase plan will terminate in December 2009 unless the
board terminates it sooner.
401(k) PLAN
Effective January 1, 1999, we adopted a 401(k) plan to provide eligible
employees with a tax preferential savings and investment program. Employees
become eligible to participate in the 401(k) plan on the first day they perform
an hour of service for us, at which point we classify them as participants. They
may elect to reduce their current compensation by up to the lesser of 20% of
eligible
54
<PAGE>
compensation or the statutorily prescribed annual limit, $10,500 in 2000, and
have this reduction contributed to the 401(k) plan. At the direction of each
participant, the trustee of the 401(k) plan invests the assets of the 401(k)
plan in selected investment options. Contributions by participants or by us to
the 401(k) plan, and income earned on plan contributions, are generally not
taxable to the participants until withdrawn.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation and bylaws contain provisions permitted
under Delaware law relating to the liability of directors. These provisions
eliminate a director's personal liability for monetary damages resulting from a
breach of fiduciary duty, except in circumstances involving wrongful acts,
including:
- for any breach of the director's duty of loyalty to ImproveNet or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- for any acts under section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derives an improper personal
benefit.
These provisions do not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief, including an injunction or rescission, in
the event of a breach of the director's fiduciary duty. These provisions will
not alter a director's liability under federal securities laws. In addition, we
intend to enter into separate indemnification agreements with our directors and
executive officers that provide each of them indemnification protection in the
event the amended and restated certificate of incorporation and amended and
restated bylaws are subsequently amended. We believe that these provisions and
agreements will assist us in attracting and retaining qualified individuals to
serve as directors and officers.
55
<PAGE>
RELATED PARTY TRANSACTIONS
PREFERRED STOCK FINANCINGS
In June and July of 1997, we sold 1,207,000 shares of series A preferred
stock at a purchase price of $1.00 per share and warrants to purchase 94,400
shares of series A preferred stock at an exercise price of $1.00 per share. Upon
the closing of this offering, all outstanding shares of series A preferred stock
will automatically convert into shares of common stock on a one-for-one basis.
The following executive officers, directors, holders of more than 5% of our
securities and members of these persons' immediate families purchased shares of
Series A preferred stock.
<TABLE>
<CAPTION>
SHARES OF
SERIES A SERIES A AGGREGATE VALUE OF
PURCHASER PREFERRED STOCK WARRANTS PURCHASE PRICE SHARES (1)
- --------- --------------- --------- -------------- -----------
<S> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Stuart Gannes............................... 10,000 800 $ 10,000 $ 161,200
5% STOCKHOLDERS
Entities affiliated with Alta Partners...... 1,000,000 80,000 1,000,000 16,120,000
</TABLE>
- ------------------------
(1) Based on the assumed initial public offering per share of $15.00 and net of
the warrant exercise price.
In March 1998, we sold 1,934,526 shares of series B preferred stock at a
purchase price of $2.52 per share and warrants to purchase 47,009 shares of
series B preferred stock at an exercise price of $2.52 per share. Upon the
closing of this offering, all outstanding shares of series B preferred stock
will automatically convert into shares of common stock on a one-for-one basis.
The following executive officers, directors, holders of more than 5% of our
securities and members of these persons' immediate families purchased shares of
series B preferred stock.
<TABLE>
<CAPTION>
SHARES OF
SERIES B SERIES B AGGREGATE VALUE OF
PURCHASER PREFERRED STOCK WARRANTS PURCHASE PRICE SHARES (1)
- --------- --------------- --------- -------------- -----------
<S> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Alex Knight................................ 9,921 241 $ 25,000 $ 151,823
5% STOCKHOLDERS
Entities affiliated with Alta Partners..... 555,556 13,500 1,400,001 8,501,820
ARCH Venture Fund III, L.P................. 813,492 19,768 2,049,999 12,449,085
Allstate Insurance Company................. 496,032 12,054 1,250,000 7,590,914
</TABLE>
- ------------------------
(1) Based on the assumed initial public offering per share of $15.00 and net of
the warrant exercise price.
In March 1999, we sold 3,543,190 shares of series C preferred stock at a
purchase price of $6.53 per share. Upon the closing of this offering, all
outstanding shares of series C preferred stock will automatically convert into
shares of common stock on a one-for-one basis. The following executive
56
<PAGE>
officers, directors, holders of more than 5% of our securities and members of
these persons' immediate families purchased shares of series C preferred stock.
<TABLE>
<CAPTION>
SHARES OF
SERIES C AGGREGATE VALUE OF
PURCHASER PREFERRED STOCK PURCHASE PRICE SHARES (1)
- --------- --------------- -------------- -----------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Stuart Gannes........................................ 3,829 $ 25,003 $ 57,435
Alex Knight.......................................... 7,657 50,000 114,855
5% STOCKHOLDERS
Entities affiliated with Alta Partners............... 421,134 1,400,001 6,317,010
ARCH Venture Fund III, L.P........................... 612,558 2,050,000 9,188,370
Allstate Insurance Company........................... 306,278 1,999,995 4,594,170
August Captial II, L.P............................... 1,378,255 9,000,005 20,673,825
</TABLE>
- ------------------------
(1) Based on the assumed initial public offering per share of $15.00.
In September 1999, we sold 2,100,843 shares of Series D preferred stock at a
purchase price of $7.70 per share and warrants to purchase 326,000 shares of
series D preferred stock at an exercise price of $0.01. Upon the closing of this
offering, all outstanding shares of series D preferred stock will automatically
convert into shares of common stock on a one-for-one basis. The following
executive officers, directors, holders of more than 5% of our securities and
members of these persons' immediate families purchased shares of series D
preferred stock.
<TABLE>
<CAPTION>
SHARES OF
SERIES D SERIES D AGGREGATE VALUE OF
PURCHASER PREFERRED STOCK WARRANTS PURCHASE PRICE SHARES (1)
- --------- --------------- --------- -------------- -----------
<S> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Alex Knight................................. 2,597 -- $ 19,997 $ 38,955
5% STOCKHOLDERS
Entities affiliated with Alta Partners...... 259,740 -- 1,999,998 3,896,100
ARCH Venture Fund III, L.P.................. 215,192 -- 1,656,978 3,227,880
August Capital II, L.P...................... 205,137 -- 1,579,555 3,077,055
Entities affiliated with GE Capital Equity
Investments, Inc.......................... 1,298,701 326,000 9,999,998 24,367,255
</TABLE>
- ------------------------
(1) Based on the assumed initial public offering per share of $15.00 and net of
the warrant exercise price.
In November and December 1999, we sold 2,597,135 shares of Series E
preferred stock at a purchase price of $13.50 per share, warrants to purchase
1,087,596 shares of common stock at an exercise price of $0.01 and warrants to
purchase 175,000 shares of common stock at an exercise price of $13.50. Upon the
closing of this offering, all outstanding shares of Series E preferred stock
will automatically convert into shares of common stock on a one-for-one basis.
The following executive
57
<PAGE>
officers, directors, holders of more than 5% of our securities and members of
these persons' immediate families purchased shares of Series E preferred stock.
<TABLE>
<CAPTION>
SHARES OF
SERIES E COMMON AGGREGATE VALUE OF
PURCHASER PREFERRED STOCK WARRANTS PURCHASE PRICE SHARES (1)
- --------- --------------- -------- -------------- -----------
<S> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Alex Knight............................... 1,850 -- $ 24,975 $ 27,750
5% STOCKHOLDERS
ARCH Venture Fund III, L.P................ 74,074 -- 999,999 1,111,110
Microsoft Corporation..................... 555,556 683,333 7,500,006 17,227,502
Owens Corning............................. 740,741 150,000 10,000,004 13,359,615
</TABLE>
- ------------------------
(1) Based on the assumed initial public offering per share of $15.00 and net of
the warrant exercise price.
See the notes on the table on beneficial ownership in "Principal
Stockholders" for information relating to the beneficial ownership of such
shares.
FOURTH AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT. We have entered into
an agreement dated November 23, 1999 with the preferred stockholders described
above that grants these and other preferred stockholders registration rights
with respect to their shares of common stock following this offering. Upon the
completion of this offering, all shares of our outstanding preferred stock will
be automatically converted into an equal number of shares of common stock.
FOURTH AMENDED AND RESTATED VOTING AGREEMENT. We have entered into a voting
agreement dated November 23, 1999 with the preferred stockholders that
terminates upon the closing of a firmly underwritten public offering. However,
the agreement provides that, as long as Owens Corning owns at least 500,000
shares of our common stock, we will nominate one designee of Owens Corning for
election to our board of directors. The Owens Corning designee is currently
Domenico Cecere. The voting agreement will expire upon the termination of the
Internet-based Services Agreement that we have with Owens Corning. The
Internet-based Services Agreement has a term of twelve years but may be
cancelled at Owens Corning's option on twelve months notice at any time
following the third year it is in effect.
INDEMNIFICATION AGREEMENTS. We intend to enter into indemnification
agreements with our directors and executive officers for the indemnification of
and advancement of expenses to these persons to the full extent permitted by
law. We also intend to execute these agreements with our future directors and
officers.
EMPLOYMENT AGREEMENTS. On February 16, 1999, we entered into a letter
agreement with Ronald B. Cooper, our president and chief executive officer. It
provides for an annual base salary of $300,000 and for an annual performance
bonus of up to $100,000.
In March 1999, Mr. Cooper received an option to purchase 577,102 shares of
our common stock at an exercise price per share of $0.25. The exercise price was
equal to the fair market value of the common stock on the date of grant as
determined by the board of directors. 144,275 of the shares subject to the
options vest on the first anniversary of the date of grant with the remaining
shares vesting in equal monthly installments over the following three years. In
August 1999, we loaned Mr. Cooper $500,000. The interest on the loan is 5.25%
per year and all principal and accrued interest will become due and payable on
the earlier of the first day of the month following the one-year anniversary of
the closing of a firm commitment underwritten public offering of the Company's
common stock or within 90 days after the voluntary termination of the officer's
employment or the termination of the officer's employment for cause. If we
terminate Mr. Cooper's employment without
58
<PAGE>
cause before March 29, 2000, 50% of the loan will be forgiven. If we terminate
Mr. Cooper's employment without cause after March 29, 2000 and before the first
anniversary of the closing of this offering, 75% of the loan will be forgiven.
TRANSACTIONS WITH 5% OR GREATER STOCKHOLDERS. In September 1999, we entered
into an Internet Development, Marketing and Distribution Agreement with General
Electric Appliances, a division of the General Electric Company. GE purchased an
advertising package including a private label contractor matching service. In
addition, we purchased cooperative advertising, as defined, and access to GE's
direct mail infrastructure, the fees for which cannot exceed the advertising
package fees collected from GE. The term of the agreement is three years.
In October 1999, we entered into an Internet-based Services Agreement with
Owens Corning. Owens Corning purchased an advertising package that includes a
private-label contractor matching service which provides for an exclusivity
arrangement that prevents us from providing similar private-label services to
Owens Corning's competitors until December 31, 2000. In addition, we purchased
cooperative advertising, as defined, the fees for which cannot exceed a
predetermined portion of the advertising package fees collected from Owens
Corning. Owens Corning also participates in our referral program for which we
pay a predetermined lead fee for direct referrals to ImproveNet.com as long as
Owens Corning owns at least 500,000 shares of our common stock, we will nominate
one designee of Owens Corning for election to our board of directors. The Owens
Corning designee is currently Domenico Cecere. The term of the agreement is 12
years. Following the initial three years of the agreement, Owens Corning may
terminate the agreement upon 12 months prior written notice.
In December 1999, we entered into a Relationship Agreement with Microsoft
Corporation. We purchased a direct link on Microsoft's HomeAdvisor Web site to a
co-branded Web site powered by ImproveNet. The compensation paid for this portal
arrangement is the greater of a predetermined minimum fixed fee or a
predetermined percentage share of the revenue, generated from the operation of
the co-branded Web site. In addition, Web pages on ImproveNet.com visited by
users linked through the HomeAdvisor Web site must not contain any
advertisements, hyperlinks or other content from a special class of HomeAdvisor
competitors. The term of the agreement is three years.
TRANSACTIONS WITH PROMOTERS. From January 1996 through March 1998, we
leased office space from 125 University, a California limited partnership and
101 University, a California limited partnership, in each of which Robert L.
Stevens held an approximately 13% interest. Mr. Stevens was our president and
chief executive officer from January 1996 to March 1999. He has been a director
since January 1996 and is the chairman of the board. The total rent paid was
$30,000 in 1996, $78,000 in 1997 and $23,000 in 1998.
In January 1996, we issued Robert L. Stevens 200,000 shares of our common
stock at a purchase price of $0.01 per share. The purchase price was less than
the fair market value of our common stock of $0.25 as determined by our board on
the date of issuance. In October 1996, we issued to Robert L. Stevens and
Karen L. Stevens, trustees under the Revocable Trust Agreement dated 8/9/78 as
amended, FBO Robert L. Stevens and Karen L. Stevens, 225,835 shares of our
common stock at a purchase price of $0.25 per share. The purchase price was
equal to the fair market value of our common stock as determined by our board on
the date of issuance. In January 1996, we granted Mr. Stevens an option to
purchase 20,000 shares of common stock with an exercise price of $0.25 per
share. In June 1997, we granted Mr. Stevens an option to purchase 51,250 shares
of common stock with an exercise price of $0.10 per share and issued 40,253
shares of common stock upon conversion of a promissory note at a conversion
price of $0.50 per share. The exercise price for each option was equal to the
fair market value of our common stock as determined by our board on the date of
the grant.
In January 1996, we issued Jan Sherman, our former senior vice president,
strategic planning, 200,000 shares of our common stock at a purchase price of
$0.01 per share. The purchase price of $0.01 per share was less than the fair
market value of our common stock of $0.25 as determined by our
59
<PAGE>
board on the date of issuance. In January 1996 we also granted Mr. Sherman an
option to purchase 20,000 shares of common stock with an exercise price of $0.25
per share. In June 1997 we granted Mr. Sherman an option to purchase 24,500
shares of common stock with an exercise price of $0.10 per share. The exercise
price was equal to the fair market value of our common stock as determined by
our board on the date of the grant.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the beneficial
ownership of our common stock as of December 31, 1999, and as adjusted to
reflect the sale of our common stock offered by this prospectus, by:
- each named executive officer;
- each of our directors;
- each person, or group of affiliated persons, who is known by us to own
beneficially five percent or more of our common stock; and
- all current directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently vested or will vest within 60 days of December 31, 1999 are deemed
outstanding. These shares, however, are not deemed outstanding for the purposes
of computing the percentage ownership of any other person.
Except as indicated in the footnotes to this table and under community
property laws, each stockholder named in the table has sole voting and
investment power with respect to the shares shown as beneficially owned by them.
Percentage of ownership is based on 13,719,310 shares of common stock
outstanding on December 31, 1999 and 16,019,310 shares of common stock
outstanding after completion of this offering. This table assumes no exercise of
the underwriters' over-allotment option. Unless otherwise indicated, the address
of each of the individuals and entities named below is: c/o ImproveNet, Inc.,
720 Bay Road, Suite 200, Redwood City, CA 94063.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT BENEFICIALLY OWNED
BENEFICIALLY --------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING
- ------------------------------------ ---------------- --------------- --------------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Ronald B. Cooper (1)............................... 400,000 2.9% 2.5%
Garrett Gruener (2)................................ 2,329,930 16.9 14.5
Andrew Anker (3)................................... 1,583,392 11.5 9.9
Robert L. Stevens (4).............................. 527,338 3.8 3.3
Alex Knight (5).................................... 22,266 * *
Stuart Gannes (6).................................. 21,851 * *
Brian Graff (7).................................... -- * *
Domenico Cecere (8)................................ -- * *
Dennis Galloway.................................... 40,000 * *
William Crosby (9)................................. 38,032 * *
Richard Roof (10).................................. 13,333 * *
Jan Sherman........................................ 244,500 1.8 1.5
Hunter Madsen...................................... 35,208 * *
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT BENEFICIALLY OWNED
BENEFICIALLY --------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING
- ------------------------------------ ---------------- --------------- --------------
<S> <C> <C> <C>
5% STOCKHOLDERS
Alta California Partners, L.P. (11)................ 2,329,930 16.9 14.5
ARCH Venture Fund III, L.P. (12)................... 1,735,084 12.6 10.8
GE Capital Equity Investments, Inc. (13)........... 1,624,701 11.6 9.9
August Capital II, L.P............................. 1,583,392 11.5 9.9
Microsoft Corporation (14)......................... 1,238,889 8.6 7.4
Owens Corning (15)................................. 890,741 6.4 5.5
Allstate Insurance Company (16).................... 814,364 5.9 5.1
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP
(15 PERSONS) (17)................................ 5,036,142 36.3 31.1
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1%.
(1) Represents 400,000 shares subject to a right of repurchase at the purchase
price for such shares.
(2) Represents 2,186,473 shares held by Alta California Partners, L.P., 49,957
shares held by Alta Embarcadero Partners, L.P., 91,411 shares issuable to
Alta California Partners, L.P. at a weighted average exercise price of
$1.22 per share pursuant to warrants which vest within 60 days and 2,089
shares issuable to Alta Embarcadero Partners, L.P. at a weighted average
exercise price of $1.22 per share pursuant to warrants that vest within 60
days. Mr. Gruener is a partner of the general partner of these entities and
disclaims beneficial ownership of the shares held by these entities except
to the extent of his pecuniary interest therein.
(3) Mr. Anker is a partner of August Capital and disclaims beneficial ownership
of the shares held by August Capital II, L.P. except to the extent of his
pecuniary interest therein.
(4) Includes 297,338 shares held pursuant to the Revocable Trust Agreement
dated 8/9/78, of which Robert L. Stevens and Karen L. Stevens are trustees,
15,000 shares held by Karen L. Stevens, Trustee of the Karen L. Stevens
1999 Annuity Trust, 15,000 shares held by Robert L. Stevens, Trustee of the
Robert L. Stevens 1999 Annuity Trust. Does not include 5,000 shares held by
Jason C. Stevens and 5,000 shares held by Kevin M. Stevens, adult children
of Mr. Stevens. Does not include 25,000 shares held by G. Bickley
Stevens II and Sara J. Emerson, 110,000 shares held by G. Bickley
Stevens II, 5,000 shares issuable to G. Bickley Stevens II at a weighted
average per share exercise price of $1.00 pursuant to warrants that vest
within 60 days and 1,500 shares issuable to G. Bickley Stevens II at a
weighted average per share exercise price of $1.00 pursuant to options that
vest within 60 days. Mr. Stevens disclaims beneficial ownership of the
shares held by Jason C. Stevens, Kevin M. Stevens and G. Bickley
Stevens II. G. Bickley Stevens II is the brother of Mr. Stevens.
(5) Includes 241 shares issuable at a weighted average per share exercise price
of $2.52 pursuant to warrants that vest within 60 days. Does not include
1,735,084 shares held by entities affiliated with ARCH Venture Fund III,
L.P. Alex Knight, one of our directors, is a managing director of ARCH
Venture Fund IV, LLC, the general partner of ARCH Venture Fund IV, L.P.,
which does not own any of our shares. Mr. Knight does not have voting
control or investment power over shares held by ARCH Venture Fund III, L.P.
and therefore disclaims beneficial ownership of those shares.
(6) Includes 800 shares issuable at a weighted average per share exercise price
of $2.52 pursuant to warrants that vest within 60 days and 7,222 shares
issuable at a weighted average per share exercise price of $0.10 pursuant
to options that vest within 60 days.
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<PAGE>
(7) Mr. Graff is a vice president of GE Capital Equity Investments, Inc. and
disclaims beneficial ownership of the shares held by GE Capital Equity
Investments, Inc., General Electric Appliances and General Electric
Company.
(8) Mr. Cecere is a vice president of Owens Corning and disclaims beneficial
ownership of the shares held by Owens Corning.
(9) Includes 2,082 shares issuable at a weighted average per share exercise
price of $0.13 pursuant to options that vest within 60 days. Includes
13,333 shares subject to a right of repurchase at the purchase price for
such shares.
(10) Represents 13,333 shares subject to a right of repurchase at the purchase
price for such shares.
(11) Includes 91,411 shares issuable upon exercise of warrants at a weighted
average exercise price of $1.22 per share that vest within 60 days, 49,957
shares held by Alta Embarcadero Partners and 2,089 shares issuable upon
exercise of warrants at a weighted average exercise price of $1.22 per
share that vest within 60 days.
(12) Includes 19,768 shares issuable at a weighted average per share exercise
price of $2.52 pursuant to warrants that vest within 60 days.
(13) Represents 1,298,701 shares held by GE Capital Equity Investments, Inc.,
117,000 shares issuable to GE Capital Equity Investments, Inc. at a
weighted average per share exercise price of $0.01 pursuant to warrants
that vest within 60 days and 209,000 shares issuable to General Electric
Appliances at a weighted average per share exercise price of $0.01
pursuant to warrants that vest within 60 days. GE Capital Equity
Investments, Inc. shares beneficial ownership with General Electric
Capital Corporation and General Electric Company with respect to 1,298,701
shares.
(14) Includes 683,333 shares issuable to Microsoft at a weighted average per
share exercise price of $1.98 pursuant to warrants that vest within
60 days.
(15) Includes 150,000 shares issuable at a weighted average per share exercise
price of $0.01 pursuant to warrants that vest within 60 days.
(16) Includes 12,054 shares issuable at a per share exercise price of $2.52
pursuant to warrants that vest within 60 days.
(17) Includes 94,541 shares issuable at a weighted average per share exercise
price of $1.22 pursuant to warrants that vest within 60 days, 9,304 shares
issuable at a weighted average per share exercise price of $0.11 pursuant
to options that vest within 60 days and 3,913,322 shares held by related
entities.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will consist
of 100,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
preferred stock, $0.001 par value.
COMMON STOCK
As of December 31, 1999, there were 13,719,310 shares of common stock
outstanding that were held of record by approximately 120 stockholders after
giving effect to the conversion of our preferred stock into common stock at a
one-to-one ratio. There will be 16,019,310 shares of common stock outstanding,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options or warrants, after giving effect to the sale of the
shares of common stock in this offering.
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of our stockholders. Subject to preferences that may
apply to any preferred stock outstanding at the time, the holders of outstanding
shares of common stock are entitled to receive any dividends out of assets
legally available as our board of directors may determine. Upon liquidation,
dissolution or winding up of ImproveNet, holders of our common stock are
entitled to share in all assets remaining after payment of liabilities and the
liquidation preference of any then outstanding shares of preferred stock.
Holders of common stock have no preemptive or conversion rights or other
subscription rights. No redemption or sinking fund provisions apply to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable.
PREFERRED STOCK
Upon the closing of this offering, each outstanding share of preferred stock
will be converted into one share of common stock. Following this offering, our
certificate of incorporation provides that our board of directors will have the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series. The board will be able to fix
the rights, preferences, privileges and restrictions of the preferred stock,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of this series. The issuance of
preferred stock could adversely affect the voting power of holders of common
stock, and the likelihood that holders of preferred stock will receive dividend
payments and payments upon liquidation may have the effect of delaying,
deferring or preventing a change in control of ImproveNet, which could depress
the market price of our common stock. We have no present plan to issue any
shares of preferred stock.
WARRANTS
As of December 31, 1999, after giving effect to the conversion of all
outstanding preferred stock into common stock, warrants to purchase a total of
1,087,596 shares of our common stock were outstanding at an exercise price of
$0.01 per share, warrants to purchase a total of 104,400 shares of our common
stock were outstanding at an exercise price of $1.00 per share, warrants to
purchase a total of 47,009 shares of our common stock were outstanding at an
exercise price of $2.52 per share, warrants to purchase 47,167 shares of our
common stock were outstanding at an exercise price of $6.53 per share and
warrants to purchase a total of 175,000 shares of our common stock were
outstanding at an exercise price of $13.50 per share. Each warrant contains
provisions for the adjustment of the exercise price and the number of shares
issuable upon the exercise of the warrant in the event of stock dividends, stock
splits, reorganizations and reclassifications and consolidations.
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<PAGE>
REGISTRATION RIGHTS OF STOCKHOLDERS
On the date 180 days after the completion of this offering, the holders of
11,382,694 shares of common stock and the holders of warrants exercisable for up
to 1,787,172 shares of common stock, or their transferees, will be entitled to
rights to register these shares under the Securities Act of 1933. If we propose
to register any of our securities under the Securities Act, either for our own
account or for the account of other securityholders, the holders of these shares
of common stock and warrants to purchase common stock will be entitled to notice
of the registration and will be entitled to include, at our expense, their
shares of common stock. In addition, the holders of these shares of common stock
may require us, at our expense and on not more than two occasions at any time
beginning 180 days from the date of the closing of this offering, to file a
registration statement under the Securities Act with respect to their shares of
common stock, and we will be required to use our best efforts to effect the
registration upon written request from the holders of more than a majority of
the registrable securities then outstanding, with a net aggregate public
offering price of $20,000,000. Further, the holders of these shares of common
stock may require us at our expense to register their shares on Form S-3 when we
become eligible to use this form for an aggregate public offering of at least
$500,000 of our common stock. The rights of these holders terminate on the
earlier of six years after the effective date of this offering or when the
holder is able to sell its shares pursuant to Rule 144 under the Securities Act
in any 90-day period.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CHARTER PROVISIONS
We are subject to section 203 of the Delaware General Corporation Law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder unless:
- before the date, the board of directors of the corporation approved either
the business combination or the transaction that resulted in the
stockholder's becoming an interested stockholder;
- upon completion of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who are
directors and also officers, and employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or after the date, the business combination is approved by the board of
directors and authorized at a meeting of stockholders, and not by written
consent, by the affirmative vote of at least two-thirds of the outstanding
voting stock that is not owned by the interested stockholder.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; and
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
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<PAGE>
In general, section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Our bylaws provide that candidates for director may be nominated only by the
board of directors or by a stockholder who gives written notice to us at least
90 days but not more than 120 days before the first anniversary of the last
annual meeting of stockholders. Stockholders must give similar advance notice to
raise other business at stockholders' meetings. Between stockholders' meetings,
the board may appoint new directors to fill vacancies or newly created
directorships. Our bylaws also limit the ability of stockholders to call special
meetings.
Our certificate of incorporation requires that upon completion of this
offering, any action required or permitted to be taken by our stockholders must
be taken at a duly called annual or special meeting of stockholders and may not
be effected by a consent in writing. Our certificate of incorporation also
provides that the authorized number of directors may be changed only by
resolution of the board of directors. Delaware law and these charter provisions
may have the effect of deterring hostile takeovers or delaying changes in
control of our management, which could depress the market price of our common
stock.
TRANSFER AGENT
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
NASDAQ NATIONAL MARKET
We have applied to list our common stock on the Nasdaq National Market under
the trading symbol "IMPV."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could adversely affect prevailing market prices and our ability to raise
equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
16,019,310 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options and warrants. Of
these shares, all of the shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
these shares are purchased by affiliates. The remaining 13,719,310 shares of
common stock held by existing stockholders are restricted securities. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration described below under Rules 144,
144(k) or 701 promulgated under the Securities Act.
As a result of the contractual restrictions described below and the
provisions of Rules 144, 144(k) and 701, the restricted shares will be available
for sale in the public market as follows:
- 156,093 shares will be eligible for immediate sale on the date of this
prospectus;
- 30,832 shares will be eligible for sale 90 days from the date of this
prospectus;
- 8,115,045 shares will be eligible for sale upon the expiration of the
lock-up agreements, described below, 180 days after the date of this
prospectus; and
- 5,417,340 shares will be eligible for sale at various times after the
180-day lock-up period.
LOCK-UP AGREEMENTS. All of our officers and directors and substantially all
of our stockholders and optionholders have agreed not to transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for shares of our common stock,
for a period of 180 days after the date of this prospectus. Transfers or
dispositions can be made sooner with the prior written consent of Credit Suisse
First Boston Corporation.
RULE 144. In general, under Rule 144 as currently in effect, beginning
90 days after the date of this prospectus, a person or persons whose shares are
aggregated, who has beneficially owned restricted securities for at least one
year, including the holding period of any prior owner except an affiliate, would
be entitled to sell within any three-month period a number of shares that does
not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately 160,193 shares immediately after this offering;
or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(K). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is entitled
to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
RULE 701. In general, under Rule 701 of the Securities Act as currently in
effect, any of our employees, consultants or advisors, other than affiliates,
who purchases or receives shares from us in connection with a compensatory stock
purchase plan or option plan or other written agreement will be
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<PAGE>
eligible to resell their shares beginning 90 days after the date of this
prospectus, subject only to the manner of sale provisions of Rule 144.
Affiliates who purchase or receive shares from us in connection with a
compensatory stock purchase plan or option plan or other written agreement will
be eligible to sell their shares beginning 90 days after the date of this
prospectus under Rule 701 without compliance with the Rule 144 holding period
requirements.
REGISTRATION RIGHTS. On the date 180 days after the date of this
prospectus, the holders of 11,382,694 shares and the holders of warrants
exercisable for up to an aggregate of 1,787,172 shares, or their transferees,
will be entitled to rights with respect to the registration of their shares
under the Securities Act. Registration of their shares under the Securities Act
would result in the shares becoming freely tradable without restriction under
the Securities Act, except for shares purchased by affiliates, immediately upon
the effectiveness of this registration.
STOCK OPTIONS. We intend to file a registration statement under the
Securities Act covering the 3,037,423 shares reserved for issuance under our
stock option plans and 300,000 shares reserved for issuance under our employee
stock purchase plan. The registration statement is expected to be filed and
become effective as soon as practicable after the closing of this offering.
Accordingly, shares registered under the registration statement will, subject to
Rule 144 volume limitations applicable to affiliates, be available for sale in
the open market, beginning 180 days after the date of this prospectus.
WARRANTS. We have outstanding warrants to purchase 1,787,172 shares. All
the shares issuable upon the exercise of the warrants will be eligible for sale
at various times after the 180-day lock-up period, subject to Rule 144 volume
limitations applicable to affiliates.
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UNDERWRITING
Under the terms and subject to the conditions contained in the underwriting
agreement dated , 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, FleetBoston
Robertson Stephens Inc. and E*OFFERING Corp. are acting as representatives, the
following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ------------
<S> <C>
Credit Suisse First Boston Corporation......................
FleetBoston Robertson Stephens Inc..........................
E*OFFERING Corp.............................................
-------
Total..................................................... 2,300,000
=======
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 345,000 additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and the selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to broker/dealers may be
changed by the representatives.
The following table summarizes the compensation and expenses we will pay.
The underwriting discounts and commissions are equal to the initial public
offering price per share of our common stock, less the amount the underwriters
pay to us per share of our common stock. The underwriting discounts and
commissions will represent % of the initial public offering price.
<TABLE>
<CAPTION>
Per Share Total
------------------------------- -------------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions
paid by us............................ $ $ $ $
Expenses of $1,400,000 payable by us.... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We and our directors, officers and substantially all of our stockholders,
optionholders and warrantholders have agreed not to
- offer, sell, pledge or otherwise dispose of, directly or indirectly,
- file with the Securities and Exchange Commission a registration statement
under the Securities Act for, or
- publicly disclose the intention to make any offer, sale, pledge,
disposition or filing relating to,
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<PAGE>
any additional shares of our common stock or securities convertible into or
exchangeable or exercisable for our common stock, without the prior written
consent of Credit Suisse First Boston Corporation for a period of 180 days after
the date of this prospectus.
In our case we are permitted to issue securities in connection with:
- the exercise of employee stock options granted under our 1996 Stock Option
Plan,
- the grant and exercise of options under our 1999 Equity Incentive Plan,
and
- issuances under our 1999 Employee Stock Purchase Plan.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of the common stock for employees, directors and
other persons associated with us who have expressed an interest in purchasing
common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent these persons
purchase these reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the other
shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act or to contribute to payments that the underwriters may be
required to make in that respect.
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "IMPV."
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined by negotiation between us
and the representatives. The principal factors to be considered in determining
the public offering price include:
- the information in this prospectus or available to the representatives;
- the history of and the prospects for the industry in which we will
compete;
- the ability of our management;
- our prospects for future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in compliance with
Regulation M under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of common stock in the
open market after the distribution has been completed to cover syndicate
short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to cover
syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would be in the
absence of these transactions. These transactions may be effected on The Nasdaq
Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.
In March 1999, two affiliates of Credit Suisse First Boston Corporation each
purchased 1,914 shares of our series C preferred stock for a total purchase
price of $24,996.
In November 1999, an affiliate of Credit Suisse First Boston Corporation
purchased 74,074 shares of our series E preferred stock for a total purchase
price of $999,999.
A copy of the prospectus in electronic format will be made available on the
Web sites hosted by E*OFFERING Corp. and E*TRADE Securities, Inc.
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NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. As a result, any resale of the common stock
in Canada must comply with applicable securities laws, which will vary depending
on the relevant jurisdiction, and which may require resales to be made under
available statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised to
seek legal advice before any resale of the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be considered to represent to us and the dealer from which the
purchase confirmation is received (A) that the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under those securities laws, (B) that, where
required by law, the purchaser is purchasing as principal and not as agent and
(C) that the purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or these persons. All or a substantial portion of the assets of the
issuer and these persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or these persons in
Canada or to enforce a judgment obtained in Canadian courts against the issuer
or these persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the SECURITIES ACT (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within 10 days of the sale of any common
stock acquired by the purchaser in this offering. The report must be in the form
attached to British Columbia Securities Commission Blanket Order BOR #95/17, a
copy of which may be obtained from us. Only one report must be filed for common
stock acquired on the same date and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
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<PAGE>
LEGAL MATTERS
Cooley Godward LLP, Palo Alto, California will pass upon the validity of the
shares of common stock offered by this prospectus. As of the date of this
prospectus, members and associates of Cooley Godward LLP beneficially own an
aggregate of 21,600 shares of common stock through an investment partnership.
Fenwick & West LLP, Palo Alto, California will pass upon the validity of the
shares of common stock offered by this prospectus for the underwriters.
EXPERTS
The consolidated financial statements for ImproveNet, Inc. as of
December 31, 1998 and 1999 and for each of the three years in the period ended
December 31, 1999, included in this prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
their authority as experts in accounting and auditing.
The financial statements for Contractor Referral Service, LLC as of
December 31, 1998 and for the year ended December 31, 1998, included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 with respect to the
shares of common stock offered by our company. This prospectus, which
constitutes a part of the registration statement, does not contain all of the
information set forth in the registration statement, some items of which are
contained in exhibits to the registration statement as permitted by the rules
and regulations of the Commission. For further information with respect to
ImproveNet and the common stock offered, reference is made to the registration
statement, including the exhibits and the financial statements and notes filed
as a part of the registration statement. A copy of the registration statement,
including the exhibits and the financial statements and notes filed as a part of
it, may be inspected without charge at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of all or any part of the registration statement may be
obtained from the Commission upon the payment of fees prescribed by it. You may
call the Commission at 1-800-SEC-0330 for more information on the operation of
the public reference facilities. The Commission maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding companies that file electronically with it.
As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act and, in accordance with this law,
will file periodic reports, proxy statements and other information with the
Commission. These periodic reports, proxy statements and other information will
be available for inspection and copying at the Commission's public reference
room and the Web site of the SEC referred to above.
72
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
IMPROVENET, INC.
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
and Mandatorily Redeemable Convertible Preferred Stock.... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
CONTRACTOR REFERRAL SERVICE, LLC
Report of Independent Accountants........................... F-29
Balance Sheets.............................................. F-30
Statements of Operations.................................... F-31
Statements of Members' Deficit.............................. F-32
Statements of Cash Flows.................................... F-33
Notes to Financial Statements............................... F-34
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Unaudited Pro Forma Combined Financial Information.......... F-37
Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1998.............................. F-38
Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1999.............................. F-39
Notes to Unaudited Pro Forma Combined Statements of
Operations................................................ F-40
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
ImproveNet, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and
mandatorily redeemable convertible preferred stock, and of cash flows present
fairly, in all material respects, the financial position of ImproveNet, Inc. and
its wholly-owned subsidiary at December 31, 1998 and 1999 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States 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
San Jose, California
January 17, 1999
F-2
<PAGE>
IMPROVENET, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY (DEFICIT)
---------------------------- DECEMBER 31,
1998 1999 1999
------------ ------------- ----------------
(SEE NOTE 12)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,676 $ 45,291
Accounts receivable, net of allowance for doubtful
accounts of $8 and $148 in 1998 and 1999,
respectively............................................ 33 615
Prepaid expenses and other current assets................. 3 1,141
------- --------
Total current assets.................................... 1,712 47,047
Property and equipment, net................................. 281 1,970
Other assets................................................ 151 2,117
------- --------
Total assets............................................ $ 2,144 $ 51,134
======= ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities.................. $ 699 $ 7,064
Deferred revenue.......................................... -- 92
Lines of credit........................................... 316 --
------- --------
Total current liabilities............................... 1,015 7,156
Lines of credit, net of current portion..................... 19 --
Other long-term liabilities................................. -- 116
------- --------
Total liabilities....................................... 1,034 7,272
------- --------
Commitments and contingencies (Note 6)
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Mandatorily redeemable convertible preferred stock, $0.001
par value:
Authorized: 5,000,000 shares
Issued and outstanding: 3,139,526 shares in 1998, and none
in 1999................................................. 6,824 --
------- --------
STOCKHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock, $0.001 par value:
Authorized: 12,482,935 shares
Issued and outstanding: none in 1998, 11,382,694 shares in
1999 and none pro forma (unaudited) (liquidation value:
$83,057)................................................ -- 12
Common stock, $0.001 par value:
Authorized: 34,000,000 shares
Issued and outstanding: 1,406,289 shares in 1998,
2,336,616 shares in 1999 and 13,719,310 shares pro forma
(unaudited)............................................. 1 2 $ 14
Additional paid-in capital.................................. 734 108,656 108,656
Notes receivable from stockholders.......................... (4) (633) (633)
Unearned stock-based compensation........................... (729) (22,208) (22,208)
Accumulated deficit......................................... (5,716) (41,967) (41,967)
------- -------- ---------
Total stockholders' equity (deficit).................... (5,714) 43,862 $ 43,862
------- -------- =========
Total liabilities, mandatorily redeemable convertible
preferred stock and stockholders' equity (deficit).... $ 2,144 $ 51,134
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
IMPROVENET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Revenues:
Service revenues.......................................... $ 60 $ 238 $ 1,139
Advertising revenues...................................... -- 20 926
-------- -------- ---------
Total revenues.......................................... 60 258 2,065
Cost of revenues:
Cost of service revenues.................................. 59 767 1,984
Cost of advertising revenues.............................. -- 49 567
-------- -------- ---------
Total cost of revenues.................................. 59 816 2,551
-------- -------- ---------
Gross profit (loss)......................................... 1 (558) (486)
Operating expenses:
Sales and marketing....................................... 414 1,669 25,784
Product development....................................... 288 504 665
General and administrative................................ 527 1,142 4,214
Stock-based compensation.................................. 11 326 5,619
-------- -------- ---------
Total operating expenses................................ 1,240 3,641 36,282
-------- -------- ---------
Loss from operations........................................ (1,239) (4,199) (36,768)
Interest and other income (expense), net.................... (3) 84 517
-------- -------- ---------
Net loss.................................................... (1,242) (4,115) (36,251)
Accretion of mandatorily redeemable convertible preferred
stock..................................................... (86) (717) (239)
-------- -------- ---------
Net loss attributable to common stockholders.............. $ (1,328) $ (4,832) $ (36,490)
======== ======== =========
Basic and diluted net loss per common share................. $ (1.08) $ (3.49) $ (23.85)
======== ======== =========
Shares used in calculating basic and diluted net loss per
common share.............................................. 1,228 1,383 1,530
======== ======== =========
Pro forma basic and diluted net loss per common share (Note
12) (unaudited)........................................... $ (4.40)
=========
Shares used in calculating pro forma basic and diluted net
loss per common share (unaudited)......................... 8,234
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
IMPROVENET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MANDATORILY
REDEEMABLE
CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED NOTES
STOCK STOCK COMMON STOCK ADDITIONAL RECEIVABLE
------------------- ------------------- ------------------- PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS
-------- -------- -------- -------- -------- -------- --------- -----------
BALANCES, JANUARY 1, 1997.......... -- -- -- -- 1,000 1 402 (4)
Issuance of common stock in
exchange for services rendered... -- -- -- -- 112 -- 11 --
Issuance of common stock
subscribed....................... -- -- -- -- 128 -- -- --
Issuance of common stock upon
conversion of bridge notes
payable.......................... -- -- -- -- 134 -- 67 --
Exercise of common stock options... -- -- -- -- 5 -- -- --
Issuance of Series A mandatorily
redeemable convertible preferred
stock net of issuance costs of
$38.............................. 1,205 1,166 -- -- -- -- -- --
Accretion of Series A mandatorily
redeemable convertible preferred
stock............................ -- 86 -- -- -- -- (86) --
Net loss........................... -- -- -- -- -- -- -- --
------ ------- ------ --- ----- --- -------- -----
BALANCES, DECEMBER 31, 1997........ 1,205 1,252 -- -- 1,379 1 394 (4)
Exercise of common stock options... -- -- -- -- 27 -- 2 --
Issuance of Series B mandatorily
redeemable convertible preferred
stock for net of issuance costs
of $20........................... 1,935 4,855 -- -- -- -- -- --
Accretion of Series A mandatorily
redeemable convertible preferred
stock............................ -- 192 -- -- -- -- (192) --
Accretion of Series B mandatorily
redeemable convertible preferred
stock............................ -- 525 -- -- -- -- (525) --
Unearned stock-based compensation
for service providers............ -- -- -- -- -- -- 120 --
Amortization of stock-based
compensation for service
providers........................ -- -- -- -- -- -- -- --
Unearned employee stock-based
compensation..................... -- -- -- -- -- -- 935 --
Amortization of unearned employee
stock-based compensation......... -- -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- -- --
------ ------- ------ --- ----- --- -------- -----
BALANCES, DECEMBER 31, 1998........ 3,140 6,824 -- -- 1,406 1 734 (4)
Exercise of common stock options... -- -- -- -- 706 1 148 --
Issuance of common stock in
exchange for notes receivable.... -- -- -- -- 224 -- 633 (633)
Exercise of Series A convertible
preferred stock warrant.......... -- -- 2 -- -- -- 2 --
Accretion of Series A mandatorily
redeemable convertible preferred
stock............................ -- 52 -- -- -- -- (52) --
Accretion of Series B mandatorily
redeemable convertible preferred
stock............................ -- 187 -- -- -- -- (187) --
Conversion of Series A mandatorily
redeemable convertible preferred
stock into Series A convertible
preferred stock.................. (1,205) (1,496) 1,205 1 -- -- 1,495 --
Conversion of Series B mandatorily
redeemable convertible preferred
stock into Series B convertible
preferred stock.................. (1,935) (5,567) 1,935 2 -- -- 5,565 --
Issuance of Series C convertible
preferred stock, net of issuance
costs of $1,049.................. -- -- 3,538 4 -- -- 22,046 --
Issuance of Series D convertible
preferred stock, net of issuance
costs of $57..................... -- -- 2,101 2 -- -- 16,118 --
Issuance of Series E convertible
preferred stock, net of issuance
costs of $68..................... -- -- 2,597 3 -- -- 34,991 --
Issuance of Series C convertible
preferred stock for services..... -- -- 5 -- -- -- 37 --
Payment received in settlement of
stockholder notes receivable..... -- -- -- -- -- -- -- 4
Issuance of Series D convertible
preferred stock warrant to
strategic stockholders........... -- -- -- -- -- -- 2,507 --
Issuance of common stock warrants
to strategic stockholders........ -- -- -- -- -- -- 11,299 --
Amortization of stock-based
compensation from warrants
granted to strategic
shareholders..................... -- -- -- -- -- -- -- --
Unearned employee stock-based
compensation..................... -- -- -- -- -- -- 13,320 --
Amortization of unearned employee
stock-based compensation......... -- -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- -- --
------ ------- ------ --- ----- --- -------- -----
BALANCES, DECEMBER 31, 1999........ -- $ -- 11,383 $12 2,336 $ 2 $108,656 $(633)
====== ======= ====== === ===== === ======== =====
<CAPTION>
<S> <C> <C> <C>
UNEARNED
STOCK-BASED ACCUMULATED
COMPENSATION DEFICIT TOTAL
------------ ----------- --------
BALANCES, JANUARY 1, 1997.......... -- (359) 40
Issuance of common stock in
exchange for services rendered... -- -- 11
Issuance of common stock
subscribed....................... -- -- --
Issuance of common stock upon
conversion of bridge notes
payable.......................... -- -- 67
Exercise of common stock options... -- -- --
Issuance of Series A mandatorily
redeemable convertible preferred
stock net of issuance costs of
$38.............................. -- -- --
Accretion of Series A mandatorily
redeemable convertible preferred
stock............................ -- -- (86)
Net loss........................... -- (1,242) (1,242)
-------- -------- -------
BALANCES, DECEMBER 31, 1997........ -- (1,601) (1,210)
Exercise of common stock options... -- -- 2
Issuance of Series B mandatorily
redeemable convertible preferred
stock for net of issuance costs
of $20........................... -- -- --
Accretion of Series A mandatorily
redeemable convertible preferred
stock............................ -- -- (192)
Accretion of Series B mandatorily
redeemable convertible preferred
stock............................ -- -- (525)
Unearned stock-based compensation
for service providers............ (120) -- --
Amortization of stock-based
compensation for service
providers........................ 100 -- 100
Unearned employee stock-based
compensation..................... (935) -- --
Amortization of unearned employee
stock-based compensation......... 226 -- 226
Net loss........................... -- (4,115) (4,115)
-------- -------- -------
BALANCES, DECEMBER 31, 1998........ (729) (5,716) (5,714)
Exercise of common stock options... -- -- 149
Issuance of common stock in
exchange for notes receivable.... -- -- --
Exercise of Series A convertible
preferred stock warrant.......... -- -- 2
Accretion of Series A mandatorily
redeemable convertible preferred
stock............................ -- -- (52)
Accretion of Series B mandatorily
redeemable convertible preferred
stock............................ -- -- (187)
Conversion of Series A mandatorily
redeemable convertible preferred
stock into Series A convertible
preferred stock.................. -- -- 1,496
Conversion of Series B mandatorily
redeemable convertible preferred
stock into Series B convertible
preferred stock.................. -- -- 5,567
Issuance of Series C convertible
preferred stock, net of issuance
costs of $1,049.................. -- -- 22,050
Issuance of Series D convertible
preferred stock, net of issuance
costs of $57..................... -- -- 16,120
Issuance of Series E convertible
preferred stock, net of issuance
costs of $68..................... -- -- 34,994
Issuance of Series C convertible
preferred stock for services..... -- -- 37
Payment received in settlement of
stockholder notes receivable..... -- -- 4
Issuance of Series D convertible
preferred stock warrant to
strategic stockholders........... (2,507) -- --
Issuance of common stock warrants
to strategic stockholders........ (11,299) -- --
Amortization of stock-based
compensation from warrants
granted to strategic
shareholders..................... 517 -- 517
Unearned employee stock-based
compensation..................... (13,320) -- --
Amortization of unearned employee
stock-based compensation......... 5,130 -- 5,130
Net loss........................... -- (36,251) (36,251)
-------- -------- -------
BALANCES, DECEMBER 31, 1999........ $(22,208) $(41,967) $43,862
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
IMPROVENET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,242) $(4,115) $(36,251)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 20 52 204
Allowance for doubtful accounts......................... 3 5 140
Amortization of stock-based compensation................ 11 326 5,684
Other................................................... 2 3 --
Changes in operating assets and liabilities, net of
acquired working capital deficit:
Accounts receivable..................................... (8) (33) (656)
Prepaid expenses and other current assets............... (1) (94) (1,019)
Other assets............................................ (5) -- (314)
Accounts payable and accrued liabilities................ 49 618 6,255
Deferred revenue........................................ -- -- 92
Other long-term liabilities............................. -- -- 16
------- ------- --------
Net cash used in operating activities................. (1,171) (3,238) (25,849)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (85) (224) (1,828)
Increase in restricted cash............................... (49) (400)
Issuance of note receivable to related party.............. -- -- (500)
Payments for acquisitions................................. -- -- (792)
------- ------- --------
Net cash used in investing activities................. (85) (273) (3,520)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock................ -- 2 149
Proceeds from the issuance of preferred stock, net........ 1,166 4,705 73,166
Repayment of stockholder notes receivable................. -- -- 4
Proceeds from the issuance of convertible bridge notes.... 65 150 --
Borrowings under lines of credit.......................... 350 298 --
Principal payments under lines of credit.................. -- (313) (335)
------- ------- --------
Net cash provided by financing activities............. 1,581 4,842 72,984
------- ------- --------
Net increase in cash and cash equivalents................... 325 1,331 43,615
Cash and cash equivalents, beginning of period.............. 20 345 1,676
------- ------- --------
Cash and cash equivalents, end of period.................... $ 345 $ 1,676 $ 45,291
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - FORMATION AND BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION
ImproveNet, Inc. (the "Company") (formerly Netelligence, Inc.) was
incorporated in California in January 1996 and reincorporated in Delaware in
September 1998. The Company is a leading destination on the Internet for
residential home improvement market making activities between (1) homeowners,
(2) contractors, architects and designers, and (3) material suppliers. The
Company operates primarily in the United States. The Company aggregates and
organizes information online and ensures that the content is immediately
accessible, easy-to-use and efficient for home improvement information and
services and product buyers and sellers. The Company has a proprietary matching
service that electronically and impartially screens and monitors contractors,
architects and designers to facilitate access by homeowners to reputable,
pre-screened service providers.
During 1998, the Company emerged from the development stage. Although no
longer in the development stage, the Company continues to be subject to risks
and challenges similar to other companies in a comparable stage of development.
These risks include, but are not limited to, dependence on key individuals,
successful development and marketing of products, the ability to obtain adequate
financing to support growth, competition from larger companies with greater
financial, technical, management and marketing resources.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
BASIS OF PRESENTATION
The financial statements include the accounts of the Company and its
wholly-owned subsidiary from the date of acquisition. All significant
intercompany balances and transactions have been eliminated.
CERTAIN RISKS AND UNCERTAINTIES
The Company's services are concentrated in a single segment of the Internet
commerce industry, which is characterized by rapid technological advances,
changes in customer requirements and evolving regulatory requirements and
industry standards. The success of the Company depends on management's ability
to anticipate or to respond quickly and adequately to technological developments
in the industry, changes in customer requirements and changes in regulatory
requirements or industry standards. Any significant delays in the development or
introduction of services could have a material and adverse effect on the
Company's business and operating results.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
or remaining maturities of three months or less to be cash equivalents.
F-7
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTRICTED CASH
At December 31, 1998 and 1999, cash balances of approximately $49,000 and
$449,000, respectively, were restricted from withdrawal and held by a bank in
the form of certificates of deposit. These certificates of deposit serve as
collateral supporting standby letters of credit issued to the Company's
landlords as security deposits and will not be available until the leases for
the Company's facilities expire.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported amounts of certain of the Company's financial instruments,
including cash and cash equivalents, restricted cash, accounts receivable,
accounts payable and other accrued liabilities, approximate fair value due to
their short maturities. Based on borrowing rates available to the Company for
loans with similar terms, the carrying values of the lines of credit approximate
fair value.
LONG-LIVED ASSETS
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated useful
lives of three to seven years. Amortization of leasehold improvements is
computed on a straight-line basis over the shorter of the facility lease term or
the estimated useful lives of the improvements. Major additions and improvements
are capitalized, while replacements, maintenance and repairs that do not improve
or extend the life of the assets are charged to operations. In the period assets
are retired or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts, and any gain or
loss on disposal is included in results of operations.
The Company periodically evaluates the carrying value of property and
equipment to be held and used when events and circumstances warrant such a
review. The carrying value of property and equipment is considered impaired when
the anticipated undiscounted cash flows from the asset are separately
identifiable and are less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the asset. Fair value is determined primarily using the anticipated
cash flows discounted at a rate commensurate with the risk involved. Losses on
assets to be disposed of are determined in a similar manner, except that fair
values are reduced by the estimated disposal costs.
INTANGIBLE ASSETS
Intangible assets include goodwill and non-compete agreements, which are
amortized from the date of acquisition using the straight-line method over the
expected period to be benefited, estimated at three to five years. At
December 31, 1999, the total value assigned to goodwill and non-compete
agreements of $817,000 was offset by accumulated amortization of $65,000. The
Company assesses the recoverability of goodwill, as well as other long-lived
assets, in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," which requires the Company to review the carrying
value of an asset for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset might not be recoverable. When
such an event occurs, the Company estimates the future
F-8
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
undiscounted cash flows expected to result from the use of the asset and its
eventual disposition. If the undiscounted expected future cash flows are less
than the carrying amount of the asset, an impairment loss is recognized.
REVENUE RECOGNITION
Revenues are primarily derived from service provider referral fees and
advertising placed on the Company's Web sites. Service provider revenues include
lead and win fees. Lead fees are recognized at the time a homeowner and
contractor are matched by the Company and the service provider becomes obligated
to pay such fee. Win fees are recognized at the time the service provider or the
homeowner notifies the Company that a job has been sold and the service provider
becomes obligated to pay such fee. SmartLeads revenues are recognized when the
SmartLeads have been delivered to the customer. Enrollment fees from service
providers are recognized as revenue ratably over the expected period they
participate in our contractor matching service, which is initially estimated to
be between one and two years. Payments of enrollment fees received in advance of
providing services are deferred until the period the services are provided. This
deferred revenue is included in current and long-term liabilities. The Company
establishes a refund reserve and allowance for doubtful accounts at the time of
revenue recognition based on the Company's historical experience.
Beginning in December 1998, the Company also derived advertising revenues
from the sale of banner and other Web site advertisements. Advertising revenues
generally are derived from short-term advertising contracts in which the Company
typically guarantees that a minimum number of impressions will be delivered to
its Web site visitors over a specified period of time for a fixed fee.
Advertising revenues are typically recognized at the lesser of the amounts
recorded ratably over the period in which the advertising is delivered or the
percentage of guaranteed impressions delivered. For 1999, advertising revenues
represented 45% of total revenues.
Advertising revenues include barter revenues, which result from the exchange
by the Company of advertising space on the Company's Web sites for reciprocal
advertising space on the Web sites of third parties. Revenues from these barter
transactions are recorded as advertising revenues at the estimated fair value of
the advertisements delivered, as the Company has established a historical
practice of receiving cash for similar advertising transactions. Advertising
barter revenues are recognized at the lesser of the amount recorded ratably over
the period in which the advertising is delivered or the percentage of guaranteed
impressions delivered. Barter expenses are recorded as sales and marketing
expenses in the statements of operations when the Company's advertisements are
delivered on the reciprocal Web sites, which is typically in the same period as
when advertisements are delivered on the Company's Web sites. Advertising barter
revenues represented $180,000 or 9% of total revenues for the year ended
December 31, 1999. There were no barter revenues in 1997 and 1998.
In September 1999, the Company began to enter into multi-year commercial
contracts with a related party stockholders to provide, for a fixed annual fee,
an advertising package that includes a mix of buttons, banners and other
advertising products, plus a continuous presence on the Company's Web sites. The
package represents a discount to the standard rate for each product sold
individually. The agreement requires that the advertising customer refer new
home improvement job submissions that they become aware of to the Company. The
agreement also includes cooperative marketing terms under which the Company is
obligated to fund a variety of co-branded advertisements on television and in
print media with, or on behalf, of the advertising customer.
F-9
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For agreements of this type, the Company measures as net revenues the
amount, if any, by which the total fees payable to it under the advertising
agreement exceed their obligation to pay the customer for cooperative marketing
activities. The net revenues are also reduced by the estimated fair value of
warrants granted to the advertising customer in connection with the advertising
package agreement as measured using the Black Scholes option pricing model. Any
remaining net revenues from these agreements are recognized over the term of the
agreement once advertising is delivered to the customer and collection of the
resulting receivable is deemed to be probable. If the Company's cooperative
advertising obligations under the arrangement, together with the fair value of
any warrants granted in connection with the agreement, exceed the total fees
payable to the Company under the agreement, the excess is recorded as sales and
marketing expense.
Total revenues may be analyzed as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Service revenues............................................ $60 $238 $1,139
Amounts invoiced under contractual advertising
arrangements.............................................. -- 20 1,399
--- ---- ------
60 258 2,538
Amounts invoiced and accrued under co-operative advertising
arrangements with related parties......................... -- -- (408)
Amortization of warrant stock-based compensation............ -- -- (65)
--- ---- ------
Total revenues.............................................. $60 $258 $2,065
=== ==== ======
</TABLE>
Total revenues are reported in the statement of operations net of the
amounts invoiced and accrued under the cooperative advertising arrangements with
related parties as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Service revenues............................................ $60 $238 $1,139
Advertising revenues........................................ -- 20 926
--- ---- ------
Total revenues.............................................. $60 $258 $2,065
=== ==== ======
</TABLE>
PRODUCT DEVELOPMENT COSTS
Product development costs incurred by the Company are expensed as incurred.
Costs incurred in the design, creation and maintenance of content, graphics and
user interface of the Company's web sites are expensed as incurred in accordance
with SOP 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Costs incurred in the development of application and
infrastructure of the web sites are capitalized and amortized over the useful
life of the web sites. In 1999, the costs that could be capitalized were
insignificant.
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
expenses for each of the years in the three year period ended December 31, 1999
were $28,000, $761,000, and $15,887,000,
F-10
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
respectively. Of these total expenses, barter advertising costs represented
$180,000 for the year ended December 31, 1999. There were no barter advertising
expenses for 1997 and 1998.
STOCK-BASED COMPENSATION
The Company follows the disclosure provisions of Financial Accounting
Standards Board ("FASB") SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company has elected to continue accounting for stock-based
compensation issued to employees using Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
pro forma disclosures required under SFAS No. 123 have been presented (see Note
9). Under APB No. 25, compensation expense is based on the difference, if any,
on the date of the grant, between the fair value of the Company's stock and the
exercise price of the option. Stock, stock options and warrants for stock issued
to non-employees have been accounted for in accordance with the provisions of
SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18, "Accounting for
Equity Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."
ALLOCATION OF STOCK-BASED COMPENSATION EXPENSE
The Company presents stock-based compensation expense as a separate line
item in its consolidated statement of operations for the three years ended
December 31, 1999 except to the extent that it is applied against net
advertising revenue. If the stock-based compensation expense for the three years
ended December 31, 1999 were allocated across the relevant functional expense
categories, it would be allocated as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cost of service revenues.................................... $-- $ 55 $ 610
Cost of advertising revenues................................ -- 37 189
Sales and marketing......................................... -- 155 2,608
Product development......................................... -- 14 88
General and administrative.................................. 11 65 2,124
--- ---- ------
Total stock-based compensation expense...................... $11 $326 $5,619
</TABLE>
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to affect taxable income. Valuation allowances are
established when management believes there is uncertainty regarding the recovery
of deferred tax assets.
CONCENTRATION OF CREDIT RISK
The Company's cash, cash equivalents and restricted cash are held with four
banks in the United States, which management believes to be creditworthy.
Deposits with these banks may exceed the amount of insurance provided on such
deposits.
F-11
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's customers consist of homeowners, service providers and
suppliers of home improvement products and related services within the United
States. The Company performs ongoing credit evaluations of its customers'
financial condition. The Company does not require collateral. Two advertising
customers accounted for 12% and 11% of aggregate accounts receivable as of
December 31, 1999. Revenues from these customers represented 8% and 4%,
respectively, of total revenues in 1999. No revenues from these customers were
recorded in 1997 or 1998. There was no customer with a balance that accounted
for greater than 10% of aggregate accounts receivable as of December 31, 1997 or
1998. There was no customer that accounted for greater than 10% of total
revenues for any of the periods presented in the accompanying consolidated
statements of operations.
BUSINESS SEGMENTS
The Company follows SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 requires publicly held
companies to report financial and other information about key revenue segments
of the entity for which this information is available and is utilized by the
chief operating decision maker. The Company conducts its business within one
business segment primarily within the United States. Revenues from customers
outside of the United States were insignificant for all periods presented in the
accompanying consolidated statements of operations.
COMPREHENSIVE INCOME
The Company follows SFAS No. 130, "Reporting Comprehensive Income" ("FAS
130"). FAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
There was no difference between the Company's net loss and its comprehensive
loss for any of the periods presented in the accompanying consolidated statement
of operations.
NET LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing the net loss
attributable to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net loss per
common share is computed by dividing the net loss attributable to common
stockholders for the period by the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares,
composed of common shares issuable upon the exercise of stock options and
warrants and upon conversion of convertible preferred stock, are included in the
diluted net loss per common share calculation to the extent these shares are
dilutive. A
F-12
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reconciliation of the numerator and denominator used in the calculation of basic
and diluted net loss per common share follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Numerator
Net loss attributable to common stockholders.............. $(1,328) $(4,832) $(36,490)
======= ======= ========
Denominator
Weighted average common shares............................ 1,233 1,383 1,560
Weighted average unvested common shares subject to
repurchase.............................................. (5) -- (30)
------- ------- --------
Denominator for basic and diluted calculation............. 1,228 1,383 1,530
======= ======= ========
Basic and diluted net loss per common share............... $ (1.08) $ (3.49) $ (23.85)
======= ======= ========
</TABLE>
The following table summarizes common stock equivalents that are not
included in the denominator used in the diluted net loss per common share
calculation because to do so would be antidilutive for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Weighted average effect of common stock equivalents:
Series A convertible preferred stock...................... 609 1,205 1,206
Series B convertible preferred stock...................... -- 1,536 1,935
Series C convertible preferred stock...................... -- -- 2,689
Series D convertible preferred stock...................... -- -- 645
Series E convertible preferred stock...................... -- -- 229
Options to purchase common stock.......................... 167 429 1,273
Warrants to purchase convertible preferred and common
stock................................................... 51 122 372
Common stock subject to repurchase........................ 5 -- 30
--- ----- -----
832 3,292 8,379
=== ===== =====
</TABLE>
F-13
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. The Company
does not currently hold any derivative instruments and does not engage in
hedging activities. The Company expects the adoption of SFAS No. 133 will not
have a material impact on its financial position, results of operations or cash
flow. The Company will be required to adopt SFAS No. 133 for the year ending
December 31, 2001.
In January 2000, EITF No. 99-17 "Accounting for Advertising Barter
Transactions" was issued. The EITF reached a final concensus that such
transactions should be recorded at fair value only when the Company has a
substantive historical practice of selling advertising for cash. We have adopted
the provisions of EITF No. 99-17 and as a result, have not recorded revenue for
amounts of $408,000 for the year ended December 31, 1999, that have been
invoiced to customers under contractual arrangements as these amounts are offset
by amounts invoiced by customers and accrued under co-operative advertising
arrangements and the amortization of warrant stock based compensation of
$65,000. Additionally, we have not recorded as a sales and marketing expense
amounts of $408,000 for the year ended December 31, 1999, which have been
invoiced by customers and accrued under co-operative advertising arrangements
and the amortization of warrant stock-based compensation. The adoption of
EITF 99-17 has had no impact on our net loss for the year ended December 31,
1999 and does not impact our financial condition.
NOTE 3 - ACQUISITIONS
On September 9, 1999, the Company completed the acquisition of all the
assets and business of Contractor Referral Services, LLC ("CRS"), which operated
a toll-free telephone contractor referral service. The total acquisition cost
was $650,000 and consisted of a cash payment of $550,000 and a holdback of
$100,000 retained by the Company. The acquisition was accounted for using the
purchase method. Accordingly, the results of operations for CRS have been
included in the Company's consolidated statement of operations only from the
date of acquisition. At December 31, 1999, the $100,000 holdback was included in
other long-term liabilities as it is not payable until 2001.
The purchase price was allocated to the acquired assets based on fair values
as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable and other assets........................ $ 64
Licensing right............................................. 125
Non-competition agreement................................... 50
Goodwill.................................................... 411
----
Total..................................................... $650
====
</TABLE>
On November 1, 1999, the Company acquired all of the outstanding shares of
The J.L. Price Corporation, a regional contractor referral service, incorporated
in California. The total acquisition cost was $249,000. The acquisition was
accounted for using the purchase method. Accordingly, the results of operations
for The J.L. Price Corporation have been included in the Company's consolidated
statement of operations only from the date of acquisition.
F-14
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITIONS (CONTINUED)
The purchase price was allocated to the acquired assets and liabilities
based on fair value as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current liabilities......................................... $ (107)
Non-competition agreement................................... 100
Goodwill.................................................... 256
-------
Total..................................................... $ 249
=======
</TABLE>
The following unaudited pro forma consolidated financial information
presents the combined results of operations of the Company, CRS, and The J.L.
Price Corporation as if the acquisitions had occurred on January 1, 1998, after
giving effect to certain adjustments, principally amortization of goodwill and
non-compete agreements. This unaudited pro forma consolidated financial
information does not necessarily reflect the results of operations that would
have occurred had the acquisitions been completed on January 1, 1998 (in
thousands, except per share amounts).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1998 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $ 687 $ 2,451
Net loss attributable to common stockholders................ (5,211) (36,850)
Basic and diluted net loss per common share................. (3.77) (24.08)
</TABLE>
NOTE 4 - BALANCE SHEET COMPONENTS
PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
----------- --------
(IN THOUSANDS)
<S> <C> <C>
Prepaid advertising expenses................................ $ -- $ 595
Prepaid expenses and other current assets................... 3 546
----------- ------
$ 3 $1,141
=========== ======
</TABLE>
Prepaid advertising expenses consist of payments made in advance for online
and offline advertising for advertising services to be delivered in the
following year.
F-15
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - BALANCE SHEET COMPONENTS (CONTINUED)
PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment.......................................... $188 $1,060
Software.................................................... 15 30
Furniture, fixtures and other equipment..................... 47 726
Leasehold improvements...................................... 108 370
---- ------
358 2,186
Less: accumulated depreciation and amortization............. (77) (216)
---- ------
$281 $1,970
==== ======
</TABLE>
Property and equipment depreciation and amortization expenses for each of
the years in the three year period ended December 31, 1999 were $20,000, $52,000
and $139,000, respectively.
OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Goodwill, net of amortization of nil and $38................ $ -- $ 629
Non-competition agreements, net of amortization of nil and
$27....................................................... -- 123
Restricted cash............................................. 49 449
Other assets................................................ 102 916
------ ------
151 2,117
====== ======
</TABLE>
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable............................................ $478 $4,139
Accrued advertising expense................................. 130 807
Accrued payroll costs....................................... 27 1,407
Other....................................................... 64 711
---- ------
$699 $7,064
==== ======
</TABLE>
Accrued advertising expenses consist of online advertising services which
have been delivered prior to year end.
F-16
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - LINES OF CREDIT
In July 1997, the Company entered into a revolving line of credit with a
financial institution under which the Company could borrow up to $350,000. In
March 1998, the Company converted approximately $50,000 of this facility into an
equipment line of credit. Borrowings for equipment purchases under the equipment
line of credit were collateralized by the equipment purchased, accrued interest
at the rate of prime plus 1.25% (9% at December 31, 1998) and were due in 36
equal monthly installments commencing on February 29, 1998. Borrowings under the
revolving line of credit accrued interest at the rate of prime plus 1.25%. The
lines of credit were paid in full and terminated on January 29, 1999.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases a facility under an operating lease agreement expiring
February 2002. In June 1999, the Company entered into a seven-year lease
agreement for another office facility in Redwood City, California. Total future
minimum lease payments for the new facility totaled $3,871,000 at the date the
agreement was signed. Under the terms of the leases, the Company provided
letters of credit as security deposits. In September 1999, the Company assumed
the lease obligation of an office facility in Santa Ana, California in
connection with the purchase of CRS. The remaining term of the lease is two
years. Total future minimum lease payments totaled $54,000 at the date the lease
obligation was assumed. In September 1999, the Company entered into a five-year
lease agreement for an office facility in Fort Lauderdale, Florida. Total future
minimum lease payments totaled $556,000 at the date the agreement was signed.
Future minimum lease payments under operating leases as of December 31, 1999
are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C>
2000........................................................ 723
2001........................................................ 724
2002........................................................ 667
2003........................................................ 673
2004........................................................ 653
Thereafter.................................................. 994
------
$4,434
======
</TABLE>
Rent expense charged to operations for each of the years in the three-year
period ended December 31, 1999 was $78,000, $80,000 and $383,000, respectively.
SALES AND MARKETING AGREEMENTS
The Company has entered into a number of agreements with Internet media
companies to purchase online advertising and linkages. The Company expenses the
amounts as sales and marketing expenses ratably over the respective terms of the
agreements.
F-17
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
In September 1999, the Company began entering into advertising package
agreements under which the Company will exchange advertising services for
advertising services with investors in Series D and Series E convertible
preferred stock. The minimum future payments under sales and marketing and
multi-year commercial contracts are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Year Ending December 31,
2000........................................................ 7,710
2001........................................................ 6,478
2002........................................................ 5,080
2003........................................................ 356
Thereafter.................................................. 352
-------
$19,976
=======
</TABLE>
401(K) PLAN
Effective January 1, 1999, the Company adopted a 401(k) savings plan under
which eligible employees may contribute the lesser of 20% of their eligible
compensation or the annual limit of $10,000 in 1999. In addition, the Company
may make discretionary contributions to the plan, although none has been made in
any of the periods presented.
NOTE 7 - CONVERTIBLE BRIDGE NOTES
During February 1997, the Company raised $65,000 through the issuance of
convertible bridge notes bearing interest at the rate of 1% per month. Total
principal plus accrued interest was converted into 133,604 shares of common
stock during June and July 1997 at a conversion rate of $0.50 per share.
During January 1998, the Company raised $150,000 through the issuance of
convertible bridge notes bearing interest at the rate of 6% per year. Total
principal plus accrued interest was converted into 59,524 shares of Series B
preferred stock in 1998 at a conversion rate of $2.52 per share, which was equal
to the issuance price.
NOTE 8 - CONVERTIBLE PREFERRED STOCK
Under the Company's Certificate of Incorporation, as amended in
November 1999, the Company is authorized to issue 12,482,935 shares of preferred
stock, of which 1,301,400 shares have been designated as Series A preferred
stock, 1,981,535 shares have been designated as Series B preferred stock,
3,700,000 shares have been designated as Series C preferred stock, 2,500,000
shares have been designated as Series D preferred stock and 3,000,000 shares
have been designated as Series E preferred
F-18
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - CONVERTIBLE PREFERRED STOCK (CONTINUED)
stock. From inception through December 31, 1999, the Company issued preferred
stock as follows (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
AMOUNT LIQUIDATION
ORIGINAL NET OF ISSUED PREFERENCE AT
ISSUE ISSUANCE CUMULATIVE TOTAL SHARES AND PAR VALUE DECEMBER 31,
PRICE COST ACCRETION AMOUNT AUTHORIZED OUTSTANDING AMOUNT 1999
-------- -------- ------------ -------- ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Series A.............. $ 1.00 $ 1,166 $ 330 $ 1,496 1,301,400 1,207,000 $ 1 $ 1,397
Series B.............. $ 2.52 4,855 712 5,567 1,981,535 1,934,526 2 5,413
Series C.............. $ 6.53 22,087 -- 22,087 3,700,000 3,543,190 4 24,492
Series D.............. $ 7.70 16,120 -- 16,120 2,500,000 2,100,843 2 16,462
Series E.............. $13.50 34,994 -- 34,994 3,000,000 2,597,135 3 35,293
------- ------ ------- ---------- ---------- --- -------
Total................. $79,222 $1,042 $80,264 12,482,935 11,382,694 $12 $83,057
======= ====== ======= ========== ========== === =======
</TABLE>
DIVIDENDS
All holders of preferred stock are entitled to receive, when and if declared
by the Board of Directors, non-cumulative cash dividends at the rate of 6% of
the original issue price per annum on each outstanding share of preferred stock.
As of December 31, 1999, no dividends had been declared.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company,
all holders of preferred stock are entitled to receive, prior and in preference
to any distribution of any of the assets of the Company to the holders of common
stock, an amount per share equal to the original issue price, plus the greater
of (i) all declared and unpaid dividends on the shares of preferred stock or
(ii) an amount equal to 6%, compounded annually, of the original issue price per
annum from the date that the first share of the series of preferred stock was
issued until the date of payment, less the per share amount of any dividends
previously paid on such shares, for each share of preferred stock held by them.
If the funds available for distribution were insufficient to cover the
liquidation preferences of all the preferred stock, then the entire assets and
funds of the Company legally available for distribution would be distributed
ratably among the preferred stockholders in proportion to the full amounts to
which they would otherwise be entitled.
After payment of the full liquidation preferences of the preferred stock,
the common stockholders would receive, on a pro rata basis, proceeds up to a
total amount per share equal to the preference of the Series B preferred
stockholders.
After the payment of the full liquidation preferences to the preferred and
required payments to the common stockholders, as described above, the assets of
the Company legally available for distribution, if any, would be distributed
ratably to the holders of the common stock and preferred stock on an as-if
converted to common stock basis.
CONVERSION
Each share of preferred stock is convertible, at the option of the holder,
into the number of fully paid and non-assessable shares of common stock
determined by dividing the preferred stock issue price by its conversion price
in effect at the time. The initial conversion prices of Series A, Series B,
Series C, Series D and Series E preferred stock are $1.00, $2.52, $6.53, $7.70
and $13.50, respectively, and are subject to adjustment in accordance with
anti-dilution provisions contained in the Company's
F-19
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - CONVERTIBLE PREFERRED STOCK (CONTINUED)
Certificate of Incorporation. Conversion is automatic immediately upon the
closing of a firm commitment underwritten initial public offering ("IPO") in
which the per share public offering price is at least $9.80 and the aggregate
proceeds raised exceed $20,000,000.
REDEMPTION
The holders of Series A and Series B preferred stock were entitled to
certain rights of redemption until the March 29, 1999 amendment of the Company's
Certificate of Incorporation. At this time, the redemption feature was removed
and accretion to the redemption value ceased.
VOTING RIGHTS
Each holder of preferred stock is entitled to one vote for each share of
common stock into which each share of preferred stock could be converted. The
holders of Series A, B, C, D and E preferred stock are each entitled to elect
one member of the Board of Directors.
NOTE 9 - COMMON STOCK
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 34,000,000 shares of common stock. Each share of common stock
has the right to one vote. The holders of common stock are also entitled to
receive dividends whenever funds are legally available and when declared by the
Board of Directors, subject to the prior rights of holders of preferred stock at
the time outstanding.
At December 31, 1999, the Company had reserved shares of common stock for
future issuance as follows:
<TABLE>
<CAPTION>
<S> <C>
Conversion of Series A convertible preferred stock.......... 1,207,000
Conversion of Series B convertible preferred stock.......... 1,934,526
Conversion of Series C convertible preferred stock.......... 3,543,190
Conversion of Series D convertible preferred stock.......... 2,100,843
Conversion of Series E convertible preferred stock.......... 2,597,135
Exercise of options......................................... 3,037,423
Warrants.................................................... 1,787,172
-----------
16,207,289
===========
</TABLE>
Holders of more than a majority of registrable securities may demand that
the Company file a registration statement having a net aggregate offering price
to the public in excess of $20,000,000, subject to certain limitations.
The Company had not declared or paid cash dividends as of December 31, 1999.
In December 1999, certain employees exercised stock options to purchase
650,381 shares of the Company's common stock at the weighted average exercise
price of $0.99. Under the terms of the options, the Company has the right to
repurchase the unvested shares of common stock at the original issue price. In
the event the employees terminate their employment with the Company, the
repurchase rights lapse 90 days after the date of termination. At December 31,
1999, 630,416 shares of common stock were subject to repurchase rights. As
consideration for the exercise of these options, the Company accepted promissory
notes in the amount of $633,000 from certain officers and employees.
F-20
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - COMMON STOCK (CONTINUED)
These non-recourse promissory notes accrue interest at a rate of 6.2% per annum,
and are payable in full in 2002.
STOCK PLANS
1996 STOCK OPTION PLAN
Under the Company's 1996 Stock Option Plan, as amended, the Company may
issue incentive stock options or non-statutory stock options to purchase up to
2,700,000 shares of common stock. Incentive stock options may be granted to
employees at exercise prices not lower than fair market value at the date of
grant, as determined by the Board of Directors. Non-statutory stock options may
be granted to employees, directors and consultants, at exercise prices not lower
than 85% of fair market value at the date of grant, as determined by the Board
of Directors. The Board also has the authority to set the term of the options up
to a maximum of ten years. Options granted generally vest over four years.
Unexercised options expire three months after termination of employment with the
Company.
1999 STOCK INCENTIVE PLAN
The Company's Board of Directors adopted the 1999 Stock Incentive Plan (the
"Incentive Plan") on December 3, 1999 under which 1,300,000 shares have been
reserved for issuance. The number of shares reserved under the Incentive Plan
will automatically increase on January 1 of each year by the lesser of 5% of the
total number of shares outstanding or 1,300,000 shares. The Incentive Plan,
which has five separate programs, allows non-employee board members, executive
officers and other highly compensated employees to purchase shares using a
portion of their salary or retainer fee. The Incentive Plan allows eligible
employees to be issued shares of common stock directly, upon the attainment of
performance milestones or the completion of services. The Incentive Plan also
allows automatic option grants at periodic intervals to eligible non-employee
board members to purchase shares of common stock.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Board of Directors adopted the Employee Stock Purchase Plan
(the "Purchase Plan") on December 3, 1999 under which 300,000 shares have been
reserved for issuance. The Purchase Plan is subject to the approval of the
Company's stockholders and will be effective upon the effective date of the
Company's initial public offering ("IPO"). The number of shares reserved under
the Purchase Plan will automatically increase on January 1 valued at the lesser
of an amount equal to 1% of the total number of shares outstanding, or 300,000
shares. Under the Purchase Plan, eligible employees may purchase common stock
not to exceed the lesser of $25,000 or 15% of their compensation. The purchase
price per share will be 85% of the common stock fair value at the lower of
certain plan defined dates.
F-21
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - COMMON STOCK (CONTINUED)
Activity under the 1996 stock option plan and the 1999 stock incentive plan
("the Plans") is as follows (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE AGGREGATE EXERCISE
FOR GRANT OF SHARES PRICE PRICE PRICE
---------- --------- ------------- --------- --------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1997..... 1,500 78,500 $0.25-$1.00 $ 33 $0.43
Additional shares
authorized.................. 520,000
Options granted............... (458,433) 458,433 $ 0.10 46 $0.10
Options exercised............. -- (5,000) $ 0.10 -- $0.10
Options canceled.............. 87,778 (87,778) $0.10-$1.00 (27) $0.31
---------- --------- ------
Balances, December 31, 1997... 150,845 444,155 $0.10-$1.00 52 $0.12
Additional shares
authorized.................. 400,000
Options granted............... (643,000) 643,000 $ 0.25 161 $0.25
Options exercised............. -- (27,250) $ 0.10 (2) $0.10
Options canceled.............. 295,937 (295,937) $0.10-$0.25 (50) $0.17
---------- --------- ------
Balances, December 31, 1998... 203,782 763,968 $0.10-$1.00 161 $0.21
Additional shares
authorized.................. 3,000,000
Options granted............... (2,377,302) 2,377,302 $0.25-$12.00 7,698 $3.24
Options exercised............. -- (930,327) $0.10-$12.00 (782) $0.84
Options canceled.............. 352,876 (352,876) $0.25-$4.00 $ (161) $0.46
---------- --------- ------
Balances, December 31, 1999... 1,179,356 1,858,067 $0.10-$12.00 $6,916 $3.72
========== ========= ======
</TABLE>
The following table summarizes information with respect to stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ------------ ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.10 28,980 7.62 $ 0.10 27,105 $ 0.10
$ 0.25 344,053 9.06 $ 0.25 280,924 $ 0.25
$ 1.00 1,500 6.75 $ 1.00 1,500 $ 1.00
$ 1.50 534,750 9.52 $ 1.50 151,905 $ 1.50
$ 4.00 539,200 9.77 $ 4.00 167,000 $ 4.00
$ 7.50 233,334 9.88 $ 7.50 123,334 $ 7.50
$ 12.00 176,250 9.96 $12.00 - $12.00
--------- ---- ------ ------- ------
$0.10-12.00 1,858,067 9.56 $ 3.72 751,768 $ 2.52
========= ==== ====== ======= ======
</TABLE>
F-22
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - COMMON STOCK (CONTINUED)
As of December 31, 1997 and 1998, the number of options exercisable was
168,181 and 248,386, respectively, at weighted average exercise prices of $0.14
and $0.17, respectively.
In December 1999, we amended the terms of our stock options plans to permit
early exercise of the options. Unvested options exercised pursuant to the
foregoing amendment are subject to repurchase until they have vested based on
the original vesting schedule. At December 31, 1999, options to purchase
751,768 shares were outstanding and exercisable, of which 641,541 shares would
be subject to repurchase if the options were exercised.
FAIR VALUE DISCLOSURES
The fair value of each option grant has been estimated on the date of grant
using the minimum value method with the following assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
Weighted average fair values................. $ 0.21 $ 2.06 $ 7.06
Assumptions:
Risk-free interest rates................... 6.12% 4.30-5.59% 4.30-5.99%
Expected lives............................. 4 years 4 years 4 years
Dividend yield............................. -- -- --
</TABLE>
Had compensation cost for the Company's stock option plan been determined
based on the fair market values of these stock options at the grant dates
consistent with the provisions of SFAS No. 123, the Company's net loss would
have changed to the pro forma amounts as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss attributable to common stockholders............. $(1,328) $(4,832) $(36,490)
Net loss attributable to common stockholders--pro
forma.................................................. $(1,328) $(4,837) $(36,826)
Basic and diluted net loss per common share.............. $ (1.08) $ (3.49) $ (23.85)
Basic and diluted net loss per common share--pro forma... $ (1.08) $ (3.50) $ (24.07)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure may not be
indicative of future amounts. Additional awards in future years are anticipated.
UNEARNED STOCK-BASED COMPENSATION
In connection with certain employee and non-employee stock option grants
during 1998 and 1999, the Company recorded unearned stock-based compensation
totaling $13,835,000, which is being amortized over the vesting periods of the
related options, generally four years using the method set out in FASB
Interpretation No. 28 ("FIN 28"). Under the FIN 28 method, each vested tranche
of options is accounted for as a separate option grant awarded for past
services. Accordingly, the compensation expense is recognized over the period
during which the services have been provided. This method results in higher
compensation expense in the earlier vesting periods of the related options.
Amortization of this stock-based compensation recognized during the years ended
December 31, 1998 and 1999 totaled approximately $326,000 and $4,968,000,
respectively.
F-23
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - COMMON STOCK (CONTINUED)
The total unearned stock-based compensation recorded to date will be
amortized as follows: $4,970,000 in 2000; $2,418,000 in 2001; $1,028,000 in
2002; and $162,000 in 2003.
In connection with the acquisition of J.L. Price, the Company will issue
48,592 shares of common stock, of which 24,296 shares will be issued on
November 1, 2000 and 24,296 shares will be issued on November 1, 2001, subject
to the continued employment of the selling stockholder. The Company recorded
$540,000 in unearned stock-based compensation. Amortization of this stock-based
compensation in the year ended December 31, 1999 totaled $199,000. The remaining
balance will be amortized as follows: $312,000 in 2000, and $29,000 in 2001.
NOTE 10 - WARRANTS
In June 1997, the Company issued warrants to purchase 10,000 shares of
common stock, at $1.00 per share, to members of the Board of Directors. In June
1997, the Company also issued warrants to purchase 95,600 shares of series A
convertible preferred stock to non-employees and warrants to purchase 800 shares
of series A convertible preferred stock to a member of the Board of Directors,
at $1.00 per share, in connection with the series A financing.
In March 1998, the Company issued warrants to purchase 47,009 shares of
series B convertible preferred stock to holders of series B convertible
preferred stock, in connection with the series B financing.
In connection with the series C convertible preferred stock financing in
March 1999, the Company issued a warrant to purchase 47,167 shares of series C
convertible preferred stock as consideration for stock issuance costs. In
September 1999, the Company granted a customer and its affiliate warrants to
purchase 209,000 and 117,000 shares of series D convertible preferred stock,
respectively, as consideration for sales and marketing expense.
In connection with the series E convertible stock financing and the
advertising purchase agreements in November and December 1999, the Company
issued warrants to the investors to purchase 420,000 shares of common stock at
$0.01 per share and 842,596 shares of common stock at $13.50 per share.
In 1999, warrants to purchase 2,000 shares of Series A convertible preferred
stock were exercised for cash proceeds of $2,000.
F-24
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - WARRANTS (CONTINUED)
The following summarizes the warrants outstanding at December 31, 1999:
<TABLE>
<CAPTION>
NUMBER
OF EXERCISE TERM
SHARES PRICE (YEARS) EXPIRATION DATE
-------- -------- -------- -----------------
<S> <C> <C> <C> <C>
Series A convertible preferred stock......... 94,400 $ 1.00 4 June 30, 2001
Series B convertible preferred stock......... 47,009 $ 2.52 6 March 28, 2004
Series C convertible preferred stock......... 47,167 $ 6.53 5 March 28, 2004
Series D convertible preferred stock......... 326,000 $ 0.01 3 September 9, 2002
Common stock................................. 10,000 $ 1.00 10 June 16, 2007
Common stock................................. 245,000 $ 0.01 5 November 23, 2004
Common stock................................. 100,000 $ 0.01 5 December 6, 2004
Common stock................................. 583,333 $13.50 5 December 6, 2004
Common stock................................. 75,000 $ 0.01 5 December 12, 2004
Common stock................................. 259,263 $13.50 5 December 12, 2004
</TABLE>
Upon an IPO, the warrants to purchase convertible preferred stock will
automatically convert to warrants to purchase common stock of the Company under
the same terms.
The Company has determined the estimated fair market value of the warrants
issued in the three years ended December 31, 1999 to be $48,000, $80,000 and
$13,806,000, respectively. The Company believes that the fair value of the
warrants issued are a more reliable measure than the services received because
it has recent issuances of its preferred stock to third party investors to
indicate fair value. The fair value of the warrants was estimated using the
Black-Scholes model and was charged to operating expenses and stock issuance
costs in 1997 and 1998. The fair value of the warrants for series C convertible
preferred stock issued in 1999 is simultaneously recorded in additional paid-in
capital and also charged to stock issue costs. The fair value of warrants for
series D convertible preferred stock and for common stock granted in 1999 is
approximately $2.5 million and approximately $11.3 million, respectively.
The amortization of warrant stock-based compensation was nil, nil and
$517,000 for the years ended December 31, 1997, 1998 and 1999, respectively. The
remaining unearned stock-based compensation from preferred and common warrants
granted in 1999 is being charged over the periods of the related co-marketing
agreements, which expire between 2001 and 2011 as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Year Ending December 31,
2000........................................................ $ 3,990
2001........................................................ 3,990
2002........................................................ 3,717
2003........................................................ 334
2003........................................................ 223
Thereafter.................................................. 1,035
-------
$13,289
=======
</TABLE>
F-25
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - WARRANTS (CONTINUED)
The fair value of each warrant has been estimated on the date of issuance
using the term of the warrant and the following assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate.................................. 6.12% 5.36% 5.87%
Expected dividends....................................... -- -- --
Volatility............................................... 70% 70% 70%
</TABLE>
NOTE 11 - RELATED PARTY TRANSACTIONS
During 1997 and 1998, the Company leased office space from a company in
which an executive officer held an ownership interest. The rent paid under this
lease was $78,000 and $23,000 for the years ended December 31, 1997 and 1998,
respectively.
In May 1999, the Company entered into an employment related promissory note
agreement with its Chief Executive Officer, whereby the Company agreed to loan
the officer up to $500,000. The full amount was loaned in August 1999. The note
accrues interest at 5.25% per annum and is due and payable on the earlier of the
first day of the month following the one-year anniversary of the closing of a
firm commitment underwritten public offering of the Company's common stock or
within 90 days after the voluntary termination of the officer's employment or
the termination of the officer's employment for cause. The note is
collateralized by the officer's shares of stock and options to purchase shares
of stock. At December 31, 1999, $500,000 was outstanding under the note. If the
Company terminates the officer's employment without cause prior to March 29,
2000, 50% of the loan will be forgiven. If the Company terminates the officer's
employment without cause after March 29, 2000 and prior to the first anniversary
of the closing of the Company's IPO, 75% of the loan will be forgiven.
Certain strategic investors who participated in the Company's series D and E
convertible preferred stock offerings are also advertising customers of the
Company. In connection with purchase of the convertible preferred stock and the
consummation of the advertising package agreements, the Company issued warrants
to these customers to purchase 326,000 shares of convertible preferred and
1,262,596 shares of common stock.
Six of these strategic stockholders were advertising customers of the
Company during the year ended December 31, 1999. The Company also purchased
securities, primarily advertising from three of
F-26
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - RELATED PARTY TRANSACTIONS (CONTINUED)
these strategic stockholders during 1999 and one during 1998. The Company
recognized the following amounts in advertising revenues, accounts receivable
and deferred revenue (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
---------------------------------- ---------------------------------
SALES AND ACCOUNTS ACCOUNTS PAYABLE AND
REVENUES MARKETING EXPENSE RECEIVABLE ACCRUED LIABILITIES
-------------- ----------------- ---------- --------------------
<S> <C> <C> <C> <C>
General Electric and
affiliates..................... -- 217,000 -- 38,000
Dow Chemical..................... -- -- 18,000 --
Masco............................ 168,000 12,000 71,000 --
Owens Corning.................... 48,000 -- 45,000 --
Armstrong........................ 50,000 -- 11,000 --
Microsoft........................ 20,000 991,000 -- 597,000
</TABLE>
Included in the revenue from Masco was barter revenue of $12,000 for which
the Company recorded an equal amount in sales and marketing expenses. All
revenues from Microsoft were barter revenues for which the Company recorded an
equal amount in sales and marketing expenses. The Company recorded advertising
expenses of nil and $2,000 in the years ended December 31, 1997 and 1998,
respectively, for advertising services purchased from Microsoft and its
affiliate.
NOTE 12 - UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE AND PRO FORMA
STOCKHOLDERS' EQUITY
Upon the closing of the Company's IPO, all outstanding convertible preferred
stock will be converted automatically into common stock. The pro forma effect of
this conversion has been presented as a separate column in the Company's
consolidated balance sheet, assuming the conversion had occurred as of
December 31, 1999.
Pro forma basic and diluted net loss per common share have been computed as
described in Note 2 and also give effect to common equivalent shares from
preferred stock that will automatically convert upon the closing of the
Company's IPO (using the as-if-converted method) for 1998 and 1999.
A reconciliation of the numerator and denominator used in the calculation of
pro forma basic and fully diluted net loss per common share follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
-------------
(UNAUDITED)
<S> <C>
Net loss.................................................... $(36,251)
========
Shares used in computing basic and diluted net loss per
common
share..................................................... 1,530
Adjusted to reflect the effect of the assumed conversion of
convertible preferred stock from the date of issuance:
Series A convertible preferred stock...................... 1,206
Series B convertible preferred stock...................... 1,935
Series C convertible preferred stock...................... 2,689
Series D convertible preferred stock...................... 645
Series E convertible preferred stock...................... 229
--------
Weighted average shares used in computing pro forma basic
and diluted net loss per common share..................... 8,234
========
Pro forma basic and diluted net loss per common share....... $ (4.40)
========
</TABLE>
F-27
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - INCOME TAXES
At December 31, 1999, the Company had net operating loss carryforwards
available to offset future regular and alternative minimum taxable income of
approximately $29,023,000 and $17,187,000 for federal and California purposes,
respectively. These carryforwards expire between 2005 and 2019, if not utilized
before these dates. At December 31, 1999, the Company had approximately $67,000
of federal and $52,000 of state research and development credit carryforwards
available to offset future taxable income, which expire in varying amounts
beginning in 2013 and indefinitely, respectively. Under the Tax Reform Act of
1986, the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances. Events which cause limitations in
the amounts of net operating losses that the Company may utilize in any year
include, but are not limited to, a cumulative ownership change of more than 50%
as defined, over a three-year period.
The Company's deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets (current):
Net operating losses...................................... $ 2,079 $ 11,387
Allowance for doubtful accounts........................... 3 34
Accrued liabilities....................................... 11 1,946
Research and development credit carryforwards............. 89 119
-------- --------
Deferred tax assets..................................... 2,182 13,486
Deferred tax liabilities (non-current):
Depreciation.............................................. (14) (78)
-------- --------
Deferred tax liabilities................................ (14) (78)
-------- --------
Net deferred tax assets................................. 2,168 13,408
Valuation allowance..................................... (2,168) (13,408)
-------- --------
$ -- $ --
======== ========
</TABLE>
Due to uncertainty surrounding the realization of favorable tax attributes
in future tax returns, the Company has placed a valuation allowance against all
of its net deferred tax assets. At such time as it is determined that it is more
likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced.
NOTE 14 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of convertible bridge notes into common
stock................................................... $65 $ -- $ --
Issuance of preferred stock/common stock in exchange for
services rendered....................................... $11 $ -- $ 37
Unearned stock-based compensation relating to employee
stock option grants..................................... $-- $1,055 $13,320
Unearned stock-based compensation relating to Series D
warrant grant to strategic shareholders................. $-- $ -- $ 2,507
Unearned stock-based compensation relating to common stock
warrant grant to strategic shareholder.................. $-- $ -- $11,299
Accretion of Series A mandatorily redeemable convertible
preferred stock......................................... $86 $ 192 $ 52
Accretion of Series B mandatorily redeemable convertible
preferred stock......................................... $-- $ 525 $ 187
Issuance of common stock in exchange for stockholder note
receivable.............................................. $-- $ -- $ 633
Accrued interest converted to common stock................ $ 2 $ -- $ --
Conversion of convertible notes into convertible preferred
stock................................................... $-- $ 150 $ --
Exchange of advertising services for advertising
services................................................ -- -- 653
Working capital acquired in acquisitions.................. -- -- 17
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $14 $ 15 $ 5
Cash paid during the period for taxes..................... $ 1 $ 1 $ 2
</TABLE>
F-28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
Contractor Referral Service, LLC
In our opinion, the accompanying balance sheet and the related statements of
operations and members' deficit and of cash flows present fairly, in all
material respects, the financial position of Contractor Referral Service, LLC at
December 31, 1998 and the results of its operations and its cash flows for the
year 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has recently sold its revenue producing assets
and intangibles and may not be able to generate cash flows from operations which
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 1. The
financial statements do not include any adjustments that may result from the
outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
November 24, 1999
F-29
<PAGE>
CONTRACTOR REFERRAL SERVICE, LLC
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5 $ 8
Accounts receivable, net of allowance for doubtful
accounts of $43 in 1998 and $58 in 1999................. 42 60
Prepaid expenses and other current assets................. 2 4
------- -------
Total current assets.................................. 49 72
Property and equipment, net................................. 2 1
Other assets................................................ 2 2
------- -------
Total assets.......................................... $ 53 $ 75
======= =======
LIABILITIES
Current liabilities:
Accounts payable.......................................... $ 43 $ 77
Accrued liabilities....................................... 2 3
Line of credit............................................ 9 7
Related party loans payable............................... 62 88
------- -------
Total current liabilities............................. 116 175
------- -------
Commitments (Note 5)
MEMBERS' DEFICIT
Shares issued and outstanding: 3,056,827 in 1998 and
1999.................................................... (63) (100)
Total liabilities and members' deficit................ $ 53 $ 75
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
CONTRACTOR REFERRAL SERVICE, LLC
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $ 271 $ 168
Cost of revenue............................................. 63 41
------ ------
Gross profit................................................ 208 127
Costs and expenses:
Sales and marketing....................................... 175 98
General and administrative................................ 65 46
------ ------
Total operating expenses................................ 240 144
------ ------
Loss from operations........................................ (32) (17)
Interest and other income (expense)......................... (12) (20)
------ ------
Net loss................................................ $ (44) $ (37)
====== ======
Basic and diluted net loss per share........................ $ (.01) $ (.01)
====== ======
Shares used in calculating basic and diluted net loss per
share..................................................... 3,048 3,057
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
CONTRACTOR REFERRAL SERVICE, LLC
STATEMENTS OF MEMBERS' DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SHARES
------------------- TOTAL MEMBERS'
NUMBER VALUE CAPITAL (DEFICIT)
-------- -------- -----------------
<S> <C> <C> <C>
Balances, January 1, 1998................................... 3,022 $ (26) $ (26)
Issuance of shares to members............................... 35 $ 7 $ 7
Net loss.................................................... -- (44) (44)
----- ----- -----
Balances, December 31, 1998................................. 3,057 (63) (63)
Net loss (unaudited)........................................ -- (37) (37)
----- ----- -----
Balances, June 30, 1999 (unaudited)......................... 3,057 $(100) $(100)
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
CONTRACTOR REFERRAL SERVICE, LLC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(44) $(37)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... -- 1
Provision for doubtful accounts....................... 24 15
Changes in operating assets and liabilities:
Accounts receivable................................... (31) (33)
Prepaid expenses and other current assets............. (1) (2)
Accounts payable...................................... 15 34
Accrued liabilities................................... 14 1
---- ----
Net cash used in operating activities............. (23) (21)
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ 4 --
---- ----
Net cash used in investing activities............. 4 --
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Members' contributions.................................... 7 --
Borrowings under line of credit........................... 9 --
Principal payments under line of credit................... -- (2)
Related party loans payable............................... -- 26
---- ----
Net cash provided by financing activities......... 16 24
---- ----
Net increase (decrease) in cash and cash equivalents........ (3) 3
Cash and cash equivalents, beginning of period.............. 8 5
---- ----
Cash and cash equivalents, end of period.................... $ 5 $ 8
==== ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
CONTRACTOR REFERRAL SERVICE, LLC
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 IS UNAUDITED
NOTE 1 - GOING CONCERN:
These financial statements are prepared on a going concern basis, which
assumes that Contractor Referral Service, LLC ("CRS") will realize its assets
and discharge its liabilities in the normal course of business. The Company
incurred an operating loss of $44,000 for the year ended December 31, 1998 and
$37,000 for the six months ended June 30, 1999 and reported a deficit on member
capital accounts at December 31, 1998 of $63,000 and $100,000 at June 30, 1999.
The ability of the Company to continue as a going concern is dependent upon
obtaining adequate sources of financing and developing new operations.
On September 9, 1999, the assets and certain intangible assets of the
Company were acquired by ImproveNet, Inc. (Note 7). As required by the asset
purchase agreement, the Company will maintain its legal status and maintain
minimum levels of general liability insurance. Management anticipates that this
transaction will provide sufficient funding to discharge its liabilities.
Nevertheless, there are no assurances that they will be sufficient to meet its
obligations as they become due.
NOTE 2 - FORMATION AND BUSINESS OF THE COMPANY:
Contractor Referral Service, LLC (the "Company") was formed as a Limited
Liability Company under the laws of the state of Illinois. The Company operates
a telephone contractor referral business under the name "1-800 Contractor."
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
or remaining maturities of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported amounts of certain of the Company's financial instruments
including cash and cash equivalents, restricted cash, accounts receivable,
accounts payable and other accrued liabilities approximate fair value due to
their short maturities. Based on borrowing rates currently available to the
Company for loans with similar terms, the carrying value of the lines of credit
approximate fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on a straight
line basis over their estimated useful lives of three to seven years. Major
additions and improvements are capitalized, while replacements, maintenance, and
repairs that do not improve or extend the life of the assets are charged to
operations. In the period assets are retired or otherwise disposed of, the costs
and related
F-34
<PAGE>
CONTRACTOR REFERRAL SERVICE, LLC
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 IS UNAUDITED
(CONTINUED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
accumulated depreciation and amortization are removed from the accounts, and any
gain or loss on disposal is included in results of operations.
REVENUE RECOGNITION
Revenues are derived from contractor referral fees that are recognized once
the homeowner and contractor are matched by the Company. Payments received in
advance of providing services are deferred until the period such services are
provided. The Company establishes a sales reserve at the time of revenue
recognition based on the Company's historical experience.
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
expense for the years ended December 31, 1998 and the six months ended June 30,
1999 was $91,000 and $48,000 (unaudited), respectively.
INCOME TAXES
The Company is treated as a partnership for federal and state income tax
purposes. Consequently federal income taxes are not payable or provided for by
the Company. Members are taxed individually on their share of the Company's
earnings. The Company's net income or loss is allocated among the members in
accordance with the Company's articles of organization.
CONCENTRATION OF CREDIT RISK
The Company's cash and cash equivalents are held with one major bank in the
United States. The Company's customers consist of contractors in southern
California. The Company performs ongoing credit evaluations of its customers'
financial condition. The Company does not require collateral.
NOTE 4 - BANK LINE OF CREDIT:
On January 22, 1997 the Company obtained a $25,000 line of credit from a
bank, bearing interest at a fluctuating interest rate per annum equal to the
Bank's Reference Rate plus 5.75 percentage points (14.0% at December 31, 1998).
NOTE 5 - COMMITMENTS AND CONTINGENCIES:
OPERATING LEASE
The Company leases a facility under an operating lease agreement expiring
April 2001. In March 1999, the Company entered into a two lease agreement for a
new office facility in Santa Ana, California. Total future minimum lease
payments totaled $54,000 at the date the agreement was signed. Under the terms
of the lease, the Company is required to pay $2,000 as a security deposit.
F-35
<PAGE>
CONTRACTOR REFERRAL SERVICE, LLC
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 IS UNAUDITED
(CONTINUED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Future minimum lease payments under the operating leases as of December 31,
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,:
<S> <C>
1999........................................................ $20
2000........................................................ 27
2001........................................................ 7
---
$54
===
</TABLE>
NOTE 6 - RELATED PARTY TRANSACTIONS:
At December 31, 1998 and June 30, 1999 the Company owed a total of $62,000
and $88,000 (unaudited), respectfully to the founders and directors. These
amounts represent loans to the Company which include interest of $12,000 that
has been compounded annually at a weighted average rate of 17%.
At June 30, 1999 the Company owed a total of $88,000 to the founders and
directors. These amounts represent loans to the Company which include interest
of $31,000 that has been compounded annually at a weighted average rate of 40%.
NOTE 7 - SUBSEQUENT EVENTS:
On August 27, 1999, the Company entered into an agreement to sell
substantially all the assets and business of the Company to ImproveNet, Inc. The
acquisition was consummated on September 9, 1999, for total consideration of
$650,000 payable in cash. A holdback of $100,000 will be released in fiscal
2000.
F-36
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
On September 9, 1999, ImproveNet, Inc. (the "Company") acquired
substantially all of the assets and business of Contractor Referral Service, LLC
("CRS"), in exchange for total cash consideration of $650,000. The transaction
was accounted for using the purchase method of accounting and the results of CRS
were included in the results of the Company from September 9, 1999, the closing
date of the transaction.
The following unaudited Pro Forma Combined Statements of Operations for the
years ended December 31, 1998 and 1999 give effect to the acquisition by the
Company of CRS as if it had occurred on January 1, 1998. The statements have
been derived from the statements of operations of the Company for the years
ended December 31, 1998 and 1999 appearing elsewhere in this Prospectus and the
audited statement of operations of CRS for the year ended December 31, 1998 and
the unaudited statement of operations for the nine months ended September 30,
1999. The unaudited pro forma financial data are not necessarily indicative of
the results of operations of the Company had the transactions assumed therein
occurred at the beginning of the periods presented, nor are they necessarily
indicative of the results of operations which may be expected to occur in the
future. The unaudited Pro Forma Combined Statements of Operations should be read
in conjunction with the historical financial statements and notes thereto of the
Company and CRS included elsewhere in this Prospectus.
F-37
<PAGE>
IMPROVENET, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
----------------------
ACQUISITION
IMPROVENET CRS ADJUSTMENTS COMBINED
---------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Service revenues................................... $ 238 $ 271 $ -- $ 509
Advertising revenues............................... 20 -- -- 20
------- ------ ----- -------
Total revenues................................. 258 271 -- 529
Cost of Revenues:
Cost of service revenues........................... 767 63 -- 830
Cost of advertising revenues....................... 49 -- -- 49
------- ------ ----- -------
Total cost of revenues......................... 816 63 -- 879
------- ------ ----- -------
Gross profit (loss).......................... (558) 208 -- (350)
Operating expenses:
Sales and marketing................................ 1,669 175 -- 1,844
Product development................................ 504 -- -- 504
General and administrative......................... 1,142 65 -- 1,207
Amortization of goodwill........................... -- -- 82A 82
Stock-based compensation........................... 326 -- -- 326
------- ------ ----- -------
Total operating expenses....................... 3,641 240 82 3,963
------- ------ ----- -------
Loss from operations................................. (4,199) (32) (82) (4,313)
Interest and other income (expense), net............. 84 (12) -- 72
------- ------ ----- -------
Net loss............................................. (4,115) (44) (82) (4,241)
Accretion of mandatorily redeemable convertible
preferred stock.................................... (717) -- -- (717)
------- ------ ----- -------
Net loss attributable to common stockholders......... $(4,832) $ (44) $ (82) $(4,958)
======= ====== ===== =======
Basic and diluted net loss per share................. $ (3.49) $ (3.58)
======= =======
Shares used in calculating basic and diluted net loss
per share.......................................... 1,383 1,383
======= =======
</TABLE>
See accompanying notes to unaudited Pro Forma Statements of Operations
for explanation of Pro Forma acquisition adjustments.
F-38
<PAGE>
IMPROVENET INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CRS
IMPROVENET FOR THE
FOR THE YEAR PERIOD FROM PRO FORMA
ENDED JANUARY 1, 1999 ----------------------
DECEMBER 31, TO ACQUISITION
1999 SEPTEMBER 30, 1999 ADJUSTMENTS COMBINED
------------- ------------------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Service revenues......................... $ 1,139 $ 215 $ -- $ 1,354
Advertising revenues..................... 926 -- -- 926
-------- ------ ---- --------
Total revenues......................... 2,065 215 -- 2,280
Cost of revenues:
Cost of service revenues................. 1,984 66 -- 2,050
Cost of advertising revenues............. 567 -- -- 567
-------- ------ ---- --------
Total cost of revenues................. 2,551 66 -- 2,617
-------- ------ ---- --------
Gross profit (loss).................. (486) 149 -- (337)
Operating expenses:
Sales and marketing...................... 25,784 144 -- 25,928
Product development...................... 665 -- -- 665
General and administrative............... 4,214 84 -- 4,298
Amortization of goodwill................. -- -- 82(A) 82
Stock-based compensation................. 5,619 -- -- 5,619
-------- ------ ---- --------
Total operating expenses............. 36,282 228 82 36,592
-------- ------ ---- --------
Loss from operations....................... (36,768) (79) (82) (36,929)
Interest and other income (expense), net... 517 (41) -- 476
-------- ------ ---- --------
Net loss................................... (36,251) (120) (82) (36,453)
Accretion of mandatorily redeemable
preferred convertible stock.............. (239) -- -- (239)
-------- ------ ---- --------
Net loss attributable to common
stockholders............................. $(36,490) $ (120) $(82) $(36,692)
======== ====== ==== ========
Basic and diluted net loss per share....... $ (23.85) $ (23.98)
======== ========
Shares used basic and diluted net loss per
share:................................... 1,530 1,530
======== ========
</TABLE>
See accompanying notes to unaudited Pro Forma Statements of Operations
for explanation of Pro Forma acquisition adjustments.
F-39
<PAGE>
IMPROVENET INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
NOTE A - GOODWILL AMORTIZATION
Reflects additional goodwill amortization expense related to the acquisition
of CRS. Goodwill is being amortized over a period of five years.
NOTE B - ALLOCATION OF PURCHASE PRICE TO INTANGIBLE ASSETS
The purchase price of CRS was allocated to tangible net assets and
identifiable intangible assets with the remaining unallocated purchase price
attributed to goodwill. The fair value of tangible assets approximated their
historical book value at September 9, 1999. The identifiable intangible assets
and goodwill, along with their estimated lives for amortization, are as follows
(in thousands):
<TABLE>
<CAPTION>
FAIR
VALUE LIFE (YEARS)
-------- -------------
<S> <C> <C>
Licensing right........................................ $ 125 1.2
Non-competition agreement.............................. 50 2
Goodwill............................................... 411 5
</TABLE>
NOTE C - UNAUDITED PRO FORMA COMBINED NET LOSS PER SHARE
Pro forma net loss reflects the impact of the adjustments above. Basic and
diluted net loss per common share (pro forma) is computed using ImproveNet's
weighted-average number of shares of common stock outstanding.
F-40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the common stock being registered. All of the
amounts shown are estimates, except for the SEC registration fee, the NASD
filing fee and the Nasdaq National Market application fee.
<TABLE>
<CAPTION>
AMOUNT TO BE PAID
-----------------
<S> <C>
SEC Registration Fee........................................ $ 15,180
NASD Filing Fee............................................. 6,250
Nasdaq National Market Listing Application Fee.............. 95,000
Blue Sky Qualification Fees and Expenses.................... 5,000
Printing and Engraving Expenses............................. 200,000
Legal Fees and Expenses..................................... 400,000
Accounting Fees and Expenses................................ 400,000
Transfer Agent and Registrar Fees........................... 25,000
Miscellaneous............................................... 253,570
----------
Total....................................................... $1,400,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").
The Registrant's Restated Certificate of Incorporation and Bylaws include
provisions to (i) eliminate the personal liability of its directors and officers
for monetary damages resulting from breaches of their fiduciary duty to the
extent permitted by Section 102(b)(7) of the General Corporation Law of Delaware
(the "Delaware Law") and (ii) require the Registrant to indemnify its directors
and officers to the fullest extent permitted by Section 145 of the Delaware Law,
including circumstances in which indemnification is otherwise discretionary.
Pursuant to Section 145 of the Delaware Law, a corporation generally has the
power to indemnify its present and former directors, officers, employees and
agents against expenses incurred by them in connection with any suit to which
they are or are threatened to be made, a party by reason of their serving in
such positions so long as they acted in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Registrant believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers. These provisions do not eliminate the directors' duty of care,
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware Law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for acts or omissions that the director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from which
the director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the director's duty to the Registrant or its
stockholders when the director was aware or should have been aware of a risk of
serious injury to the Registrant or its stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the Registrant or its stockholders, for improper
transactions between the director and the Registrant and for improper
II-1
<PAGE>
distributions to stockholders and loans to directors and officers. The provision
also does not affect a director's responsibilities under any other law, such as
the federal securities law or state or federal environmental laws.
The Registrant intends to enter into indemnity agreements with each of its
directors and officers that require the Registrant to indemnify such persons
against expenses, judgments, fines, settlements and other amounts incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was a director or an officer of the
Registrant or any of its affiliated enterprises, provided that such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Registrant and, with respect to any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. The indemnification agreements also set forth certain procedures that
will apply in the event of a claim for indemnification thereunder.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
The Registrant has an insurance policy covering the officers and directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since the Registrant's inception on January 4, 1996, the Company has issued
and sold the following unregistered securities:
(1) In January 1996, the Company issued 420,000 shares of its common stock
at a purchase price of $0.01 per share for an aggregate price of $4,200
pursuant to founders stock agreements by and between the Company and
Robert L. Stevens, Jan Sherman and Rachel McNamara. These sales were made
in reliance on Rule 701.
(2) In June 1997, the Company issued 133,604 shares of its common stock at a
purchase price of $0.50 per share for an aggregate purchase price of
$66,802 pursuant to convertible promissory notes by and between the
Company and Robert L. Stevens, Thomas Fortman, The Kenyon Trust, William
Smith and The Weil Family Trust. These sales were made in reliance on
Section 4(2).
(3) From March 1996 through June 1997, the Company issued 707,835 shares of
its common stock at a weighted average purchase price of approximately
$0.56 per share for an aggregate purchase price of $398,458.75 pursuant
to subscription agreements by and between the Company and Robert L.
Stevens, G. Bickley Stevens II and nineteen other investors. These sales
were made in reliance on Section 4(2).
(4) In June 1997, the Company issued 112,600 shares of its common stock at a
purchase price of $0.10 per share in consideration of $11,260 in
consulting services rendered pursuant to a consulting agreement by and
between the Company and G. Bickley Stevens II and one other consultant.
These sales were made in reliance on Rule 701.
(5) From inception through December 31, 1999, the Company granted options to
purchase 3,557,235 shares of common stock at a weighted average exercise
price of $2.23 per share to employees, consultants, directors and other
service providers pursuant to its 1996 Stock Option Plan and issued an
aggregate of 962,577 shares of its common stock at a weighted average
exercise price of $0.82 per share to employees, consultants, directors
and other service
II-2
<PAGE>
providers for an aggregate purchase price of $117,798.14 pursuant to
exercises of options granted under the 1996 Stock Option Plan. These
sales were made in reliance on Rule 701.
(6) From June 1997 to July 1997, the Company issued 1,207,000 shares of its
series A preferred stock at a purchase price of $1.00 per share for an
aggregate purchase price of $1,207,000 and warrants to purchase 94,400
shares of series A preferred stock to Alta California Partners, L.P.,
Alta Embarcadero Partners, LLC, Stuart Gannes, GC&H Investments and five
other investors. The warrants have a per share exercise price of $1.00
per share. These sales were made in reliance on Rule 506 of
Regulation D.
(7) In January 1998, the Company issued a convertible promissory note in the
principal amount of $150,000 to Alta California Partners, L.P. and Alta
Embarcadero Partners, LLC. This sale was made in reliance on Rule 506 of
Regulation D.
(8) In March 1998, the Company issued 1,934,526 shares of its series B
preferred stock at a purchase price of $2.52 per share for an aggregate
purchase price of $4,875,005.52 and warrants to purchase 47,009 shares
of series B preferred stock to Alta California Partners, L.P., Alta
Embarcadero Partners, LLC, Allstate Insurance Company, ARCH Venture Fund
III, L.P., Alex Knight and three other investors. The warrants have a
per share exercise price of $2.52 per share. These sales were made in
reliance on Rule 506 of Regulation D.
(9) In June 1997, the Company issued warrants to purchase 10,000 shares of
common stock to two investors. The warrants have an exercise price of
$1.00 per share.
(10) In March 1999 and September 1999, the Company issued 3,543,190 shares of
its series C preferred stock at a purchase price of $6.53 per share to
Allstate Insurance Company, Alta California Partners, L.P., Alta
Embarcadero Partners, LLC, ARCH Venture Fund III, L.P., Alex Knight,
Stuart Gannes and thirty other investors for an aggregate purchase price
of $23,137,030.70 and warrants to purchase 47,167 shares of series C
preferred stock to a consultant. The warrants have an exercise price of
$6.53 per share. These sales were made in reliance on Rule 506 of
Regulation D.
(11) In September 1999, the Company issued 2,100,843 shares of its series D
preferred stock at a purchase price of $7.70 per share for an aggregate
purchase price of $16,176,491.10 and warrants to purchase 326,000 shares
of series D preferred stock to Alta California Partners, L.P., Alta
Embarcadero Partners, LLC, ARCH Venture Fund III, L.P., August Capital
II, L.P., GE Capital Equity Investments, Alex Knight and ten other
investors. The warrants have a per share exercise price of $0.01 per
share. These sales were made in reliance on Rule 506 of Regulation D.
(12) In November and December 1999, the Company issued 2,597,135 shares of
its series E preferred stock at a purchase price of $13.50 per share to
ARCH Venture Fund III, L.P., Microsoft Corporation, Owens Corning, Alex
Knight, QBB Management I, L.L.C., and eleven other investors for an
aggregate purchase price of $35,061,322.50, warrants to purchase 175,000
shares of common stock to Cendant Finance Holding Corporation and
Microsoft Corporation at a per share exercise price of $13.50 and
warrants to purchase 420,000 shares of common stock to Owens Corning,
Microsoft, Cendant, The Dow Chemical Company, DuPont and Armstrong at a
per share exercise price of $0.01. These sales were made in reliance on
Rule 506 of Regulation D.
(13) In November, 1999, the Company became obligated to issue 24,296 shares
of common stock on each of November 1, 2000 and November 1, 2001 in
consideration of, among other things, all of the outstanding stock of
The J.L. Price Corporation, pursuant to the Stock Purchase Agreement by
and between the Company, The J.L. Price Corporation and James L. Price.
This sale was made in reliance on Section 4(2).
II-3
<PAGE>
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving any public
offering or transactions pursuant to benefit plans and contracts relating to
compensation as provided under Rule 701. The recipients of securities in each of
these transactions represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were placed upon the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with us, to information about ImproveNet.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1** Stock Purchase Agreement by and between the Registrant and
The J.L. Price Corporation.
2.2** Asset Purchase Agreement by and between the Registrant and
Contractor Referral Service, LLC.
3.1** Form of Third Amended and Restated Certificate of
Incorporation of the Registrant.
3.2** Form of Fourth Amended and Restated Certificate of
Incorporation of the Registrant to be filed on the closing
of the offering made hereby.
3.3** Bylaws of the Registrant.
3.4** Bylaws of the Registrant to be filed on the closing of the
offering made hereby.
4.1* Specimen Stock Certificate.
4.2 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4 hereof.
5.1 Opinion of Cooley Godward LLP.
10.1** Amended and Restated 1996 Stock Option Plan.
10.2** Form of 1999 Equity Incentive Plan.
10.3** Form of 1999 Employee Stock Purchase Plan.
10.4** Commercial Office Lease by and between Florcor I Limited
Partnership and the Registrant.
10.5** Commercial Office Lease by and between Chestnut Bay LLC and
the Registrant.
10.6** Employment agreement by and between the Registrant and
Ronald Cooper.
10.7** Series A Preferred Stock and Warrant Purchase Agreement by
and between the Registrant and certain investors of the
Registrant dated June 30, 1997.
10.8** Series B Preferred Stock and Warrant Purchase Agreement by
and between the Registrant and certain investors of the
Registrant dated March 17, 1998.
10.9** Series C Preferred Stock Agreement by and between the
Registrant and certain investors of the Registrant dated
March 29, 1999.
10.10** Series D Preferred Stock Purchase Agreement by and between
the Registrant and certain investors of the Registrant
dated September 10, 1999.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
10.11** First Series E Preferred Stock Purchase Agreement by and
between the Registrant and certain investors of the
Registrant dated November 23, 1999.
10.12** Second Series E Preferred Stock Purchase Agreement by and
between the Registrant and certain investors of the
Registrant dated November 23, 1999.
10.13** Form of Warrant Purchase Agreement by and between the
Registrant and certain investors of the Registrant dated
December 7, 1999.
10.14** Fourth Amended and Restated Voting Agreement by and between
the Registrant and certain investors of the Registrant
dated November 23, 1999.
10.15** Form of Indemnity Agreement by and between the Registrant
and each of its directors and executive officers.
10.16+** Internet-based Service Agreement between the Registrant and
Owens Corning dated October 1, 1999.
10.17+** Collaboration Agreement between the Registrant and E.I. du
Pont de Nemours and Company dated December 3, 1999.
10.18+** Internet Development, Marketing and Distribution Agreement
between the Registrant and General Electric Appliances
dated September 10, 1999.
10.19+** Relationship Agreement between the Registrant and Microsoft
HomeAdvisor dated December 7, 1999.
10.20+** Agreement between the Registrant and CompleteHome
Operations, Inc. dated December 13, 1999.
10.21 Form of 1996 Stock Option Plan Grant Notice.
10.22 Form of 1999 Equity Incentive Plan Stock Option Agreement.
10.23 Form of Warrant to Purchase an aggregate of 1,087,596 shares
of common stock.
10.24 Form of Warrant to Purchase an aggregate of 10,000 shares of
common stock.
10.25 Form of Warrant to Purchase an aggregate of 175,000 shares
of common stock.
10.26 Form of Warrant to Purchase an aggregate of 96,400 shares of
Series A preferred stock.
10.27 Form of Warrant to Purchase an aggregate of 47,009 shares of
Series B preferred stock.
10.28 Form of Warrant to purchase 47,167 shares of Series C
preferred stock.
10.29 Form of Warrant to purchase an aggregate of 326,000 shares
of Series D preferred stock.
10.30 Fourth Amended and Restated Investor Rights Agreement by and
between the Registrant and certain investors of the
Registrant dated November 23, 1999.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- ------------------------
+ Confidential treatment requested with respect to certain portions of this
exhibit. Omitted portions have been filed separately with the Securities and
Exchange Commission.
* To be filed by amendment.
** Previously Filed
II-5
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions described in Item 14 or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Redwood City, County of San Mateo, State of California, on January 25, 2000.
<TABLE>
<S> <C> <C>
By: /s/ RICHARD G. REECE
-----------------------------------------
Richard G. Reece
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
President, Chief Executive
* Officer and Director
------------------------------------------- (PRINCIPAL EXECUTIVE January 25, 2000
Ronald B. Cooper OFFICER)
Senior Vice President and
/s/ RICHARD G. REECE Chief Financial Officer
------------------------------------------- (PRINCIPAL FINANCIAL AND January 25, 2000
Richard G. Reece ACCOUNTING OFFICER)
*
------------------------------------------- Chairman of the Board of January 25, 2000
Robert L. Stevens Directors
*
------------------------------------------- Director January 25, 2000
Andrew Anker
------------------------------------------- Director
Domenico Cecere
*
------------------------------------------- Director January 25, 2000
Stuart Gannes
*
------------------------------------------- Director January 25, 2000
Brian Graff
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
*
------------------------------------------- Director January 25, 2000
Garrett Gruener
*
------------------------------------------- Director January 25, 2000
Alex Knight
* /s/ RICHARD G. REECE
-------------------------------------------
Richard G. Reece
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1** Stock Purchase Agreement by and between the Registrant and
The J.L. Price Corporation.
2.2** Asset Purchase Agreement by and between the Registrant and
Contractor Referral Service, LLC.
3.1** Form of Third Amended and Restated Certificate of
Incorporation of the Registrant.
3.2** Form of Fourth Amended and Restated Certificate of
Incorporation of the Registrant to be filed on the closing
of the offering made hereby.
3.3** Bylaws of the Registrant.
3.4** Bylaws of the Registrant to be filed on the closing of the
offering made hereby.
4.1* Specimen Stock Certificate
4.2 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
5.1 Opinion of Cooley Godward LLP.
10.1** Amended and Restated 1996 Stock Option Plan.
10.2** Form of 1999 Equity Incentive Plan.
10.3** Form of 1999 Employee Stock Purchase Plan.
10.4** Commercial Office Lease by and between Florcor I Limited
Partnership and the Registrant.
10.5** Commercial Office Lease by and between Chestnut Bay LLC and
the Registrant.
10.6** Employment agreement by and between the Registrant and
Ronald Cooper.
10.7** Series A Preferred Stock and Warrant Purchase Agreement by
and between the Registrant and certain investors of the
Registrant dated June 30, 1997.
10.8** Series B Preferred Stock and Warrant Purchase Agreement by
and between the Registrant and certain investors of the
Registrant dated March 17, 1998.
10.9** Series C Preferred Stock Agreement by and between the
Registrant and certain investors of the Registrant dated
March 29, 1999.
10.10** Series D Preferred Stock Purchase Agreement by and between
the Registrant and certain investors of the Registrant
dated September 10, 1999.
10.11** First Series E Preferred Stock Purchase Agreement by and
between the Registrant and certain investors of the
Registrant dated November 23, 1999.
10.12** Second Series E Preferred Stock Purchase Agreement by and
between the Registrant and certain investors of the
Registrant dated November 23, 1999.
10.13** Form of Warrant Purchase Agreement by and between the
Registrant and certain investors of the Registrant dated
December 7, 1999.
10.14** Fourth Amended and Restated Voting Agreement by and between
the Registrant and certain investors of the Registrant
dated November 23, 1999.
10.15** Form of Indemnity Agreement by and between the Registrant
and each of its directors and executive officers.
10.16+** Internet-based Service Agreement between the Registrant and
Owens Corning dated October 1, 1999.
10.17+** Collaboration Agreement between the Registrant and E.I. du
Pont de Nemours and Company dated December 3, 1999.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
10.18+** Internet Development, Marketing and Distribution Agreement
between the Registrant and General Electric Appliances
dated September 10, 1999.
10.19+** Relationship Agreement between the Registrant and Microsoft
HomeAdvisor dated December 7, 1999.
10.20+** Agreement between the Registrant and CompleteHome
Operations, Inc. dated December 13, 1999.
10.21 Form of 1996 Stock Option Plan Grant Notice.
10.22 Form of 1999 Equity Incentive Plan Stock Option Agreement.
10.23 Form of Warrant to Purchase an aggregate of 1,087,596 shares
of common stock.
10.24 Form of Warrant to Purchase an aggregate of 10,000 shares of
common stock.
10.25 Form of Warrant to Purchase an aggregate of 175,000 shares
of common stock.
10.26 Form of Warrant to Purchase an aggregate of 96,400 shares of
Series A preferred stock.
10.27 Form of Warrant to Purchase an aggregate of 47,009 shares of
Series B preferred stock.
10.28 Form of Warrant to purchase 47,167 shares of Series C
preferred stock.
10.29 Form of Warrant to purchase an aggregate of 326,000 shares
of Series D preferred stock.
10.30 Fourth Amended and Restated Investor Rights Agreement by and
between the Registrant and certain investors of the
Registrant dated November 23, 1999.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- ------------------------
+ Confidential treatment requested with respect to certain portions of this
exhibit. Omitted portions have been filed separately with the Securities and
Exchange Commission.
* To be filed by amendment.
** Previously Filed
<PAGE>
EXHIBIT 5.1
[COOLEY GODWARD LLP LETTERHEAD]
January 25, 2000
ImproveNet, Inc.
720 Bay Road, Suite 200
Redwood City, CA 94063-2469
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by ImproveNet, Inc. (the "Company") of a Registration Statement
on Form S-1 (the "Registration Statement") with the Securities and Exchange
Commission (the "Commission"), covering an underwritten public offering of up to
two million three hundred thousand (2,300,000) (plus up to three hundred
forty-five thousand (345,000) additional shares of Common Stock for which the
underwriters have been granted an over allotment option) shares of the Company's
common stock (the "Common Stock").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Certificate of
Incorporation and Bylaws and the originals or copies certified to our
satisfaction of such records, documents, certificates, memoranda and other
instruments as in our judgment are necessary or appropriate to enable to render
the opinion expressed below and (ii) assumed that the shares of the Common Stock
will be sold by the underwriters at a price established by the Pricing Committee
of the Board of Directors of the Company.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold and issued in accordance with the Registration
Statement and related Prospectus, will be validly issued, fully paid and
nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in the
Prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By: /S/ MARK P. TANOURY
------------------------------------
MARK P. TANOURY
<PAGE>
IMPROVENET, INC.
STOCK OPTION GRANT NOTICE
1996 STOCK OPTION PLAN
ImproveNet, Inc. (the "COMPANY"), pursuant to its 1996 Stock Option Plan, as
amended (the "PLAN"), hereby grants to Optionholder an option to purchase the
number of shares of the Company's common stock set forth below (the "COMMON
STOCK"). This option is subject to all of the terms and conditions as set
forth herein and in the Stock Option Agreement, the Plan and the Notice of
Exercise, all of which are attached hereto and incorporated herein in their
entirety.
OPTIONHOLDER: < < NAME > >
DATE OF GRANT: < < GRANTDATE > >
VESTING COMMENCEMENT DATE: < < VCD > >
NUMBER OF SHARES SUBJECT TO OPTION: < < NUMBEROFSHARES > >
EXERCISE PRICE PER SHARE: < < TOTALPRICE > >
EXPIRATION DATE: < < EXPIRATIONDATE > >
TYPE OF GRANT: / / Incentive Stock Option / / Nonstatutory Stock Option
EXERCISE SCHEDULE: / / Same as Vesting Schedule / / Early Exercise Permitted
VESTING SCHEDULE: Vest over 4 years with 25% vesting after 1 year of
service and 1/48th vesting after each month of service
thereafter.
PAYMENT: By one or a combination of the following items (described
in the Stock Option Agreement):
By cash or check
Pursuant to a Regulation T Program if the Shares
are publicly traded
By delivery of already-owned shares if the
Shares are publicly traded
ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionholder acknowledges
receipt of, and understands and agrees to, this Grant Notice, the Stock
Option Agreement and the Plan. Optionholder further acknowledges that as of
the Date of Grant, this Grant Notice, the Option Agreement and the Plan set
forth the entire understanding between Optionholder and the Company regarding
the acquisition of stock in the Company and supersede all prior oral and
written agreements on that subject with the exception of (i) options
previously granted and delivered to Optionholder under the Plan, and (ii) the
following agreements only:
OTHER AGREEMENTS: --------------------------------------------------
--------------------------------------------------
IMPROVENET, INC. OPTIONHOLDER:
By:
------------------------------ -------------------------------------
Title: Date:
---------------------------- --------------------------------
Date:
----------------------------
ATTACHMENTS: Stock Option Agreement, 1996 Stock Option Plan and Notice of
Exercise
<PAGE>
IMPROVENET, INC.
1999 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
(INCENTIVE AND NONSTATUTORY STOCK OPTIONS)
Pursuant to your Stock Option Grant Notice ("Grant Notice") and this
Stock Option Agreement, IMPROVENET, INC. (the "Company") has granted you an
option under its 1999 EQUITY INCENTIVE PLAN (the "Plan") to purchase the
number of shares of the Company's Common Stock indicated in your Grant Notice
at the exercise price indicated in your Grant Notice. Defined terms not
explicitly defined in this Stock Option Agreement but defined in the Plan
shall have the same definitions as in the Plan.
The details of your option are as follows:
1. VESTING. Subject to the limitations contained herein, your
option will vest as provided in your Grant Notice, provided that vesting will
cease upon the termination of your Continuous Service.
2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of
Common Stock subject to your option and your exercise price per share
referenced in your Grant Notice may be adjusted from time to time for
Capitalization Adjustments, as provided in the Plan.
3. EXERCISE PRIOR TO VESTING ("EARLY EXERCISE"). If permitted in
your Grant Notice (i.e., the "Exercise Schedule" indicates that "Early
Exercise" of your option is permitted) and subject to the provisions of your
option, you may elect at any time that is both (i) during the period of your
Continuous Service and (ii) during the term of your option, to exercise all
or part of your option, including the nonvested portion of your option;
provided, however, that:
(a) a partial exercise of your option shall be deemed to cover
first vested shares of Common Stock and then the earliest vesting installment
of unvested shares of Common Stock;
(b) any shares of Common Stock so purchased from installments
that have not vested as of the date of exercise shall be subject to the
purchase option in favor of the Company as described in the Company's form of
Early Exercise Stock Purchase Agreement;
(c) you shall enter into the Company's form of Early Exercise
Stock Purchase Agreement with a vesting schedule that will result in the same
vesting as if no early exercise had occurred; and
(d) if your option is an incentive stock option, then, as
provided in the Plan, to the extent that the aggregate Fair Market Value
(determined at the time of grant) of the shares of Common Stock with respect
to which your option plus all other incentive stock options you hold are
exercisable for the first time by you during any calendar year (under all
plans of the
1
<PAGE>
Company and its Affiliates) exceeds one hundred thousand dollars ($100,000),
your option(s) or portions thereof that exceed such limit (according to the
order in which they were granted) shall be treated as nonstatutory stock
options.
4. METHOD OF PAYMENT. Payment of the exercise price is due in full
upon exercise of all or any part of your option. You may elect to make
payment of the exercise price in cash or by check or in any other manner
PERMITTED BY YOUR GRANT NOTICE, which may include one or more of the
following:
(a) In the Company's sole discretion at the time your option is
exercised and provided that at the time of exercise the Common Stock is
publicly traded and quoted regularly in THE WALL STREET JOURNAL, pursuant to
a program developed under Regulation T as promulgated by the Federal Reserve
Board that, prior to the issuance of Common Stock, results in either the
receipt of cash (or check) by the Company or the receipt of irrevocable
instructions to pay the aggregate exercise price to the Company from the
sales proceeds.
(b) Provided that at the time of exercise the Common Stock is
publicly traded and quoted regularly in THE WALL STREET JOURNAL, by delivery
of already-owned shares of Common Stock either that you have held for the
period required to avoid a charge to the Company's reported earnings
(generally six months) or that you did not acquire, directly or indirectly
from the Company, that are owned free and clear of any liens, claims,
encumbrances or security interests, and that are valued at Fair Market Value
on the date of exercise. "Delivery" for these purposes, in the sole
discretion of the Company at the time you exercise your option, shall include
delivery to the Company of your attestation of ownership of such shares of
Common Stock in a form approved by the Company. Notwithstanding the
foregoing, you may not exercise your option by tender to the Company of
Common Stock to the extent such tender would violate the provisions of any
law, regulation or agreement restricting the redemption of the Company's
stock.
5. WHOLE SHARES. You may exercise your option only for whole shares
of Common Stock.
6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the
contrary contained herein, you may not exercise your option unless the shares
of Common Stock issuable upon such exercise are then registered under the
Securities Act or, if such shares of Common Stock are not then so registered,
the Company has determined that such exercise and issuance would be exempt
from the registration requirements of the Securities Act. The exercise of
your option must also comply with other applicable laws and regulations
governing your option, and you may not exercise your option if the Company
determines that such exercise would not be in material compliance with such
laws and regulations.
7. TERM. You may not exercise your option before the commencement
of its term or after its term expires. The term of your option commences on
the Date of Grant and expires upon the EARLIEST of the following:
2
<PAGE>
(a) three (3) months after the termination of your Continuous
Service for any reason other than your Disability or death, provided that if
during any part of such three (3) month period your option is not exercisable
solely because of the condition set forth in the preceding paragraph relating
to "Securities Law Compliance," your option shall not expire until the
earlier of the Expiration Date or until it shall have been exercisable for an
aggregate period of three (3) months after the termination of your Continuous
Service;
(b) twelve (12) months after the termination of your Continuous
Service due to your Disability;
(c) eighteen (18) months after your death if you die either
during your Continuous Service or within three (3) months after your
Continuous Service terminates;
(d) the Expiration Date indicated in your Grant Notice; or
(e) the day before the tenth (10th) anniversary of the Date of
Grant.
If your option is an incentive stock option, note that, to obtain
the federal income tax advantages associated with an "incentive stock
option," the Code requires that at all times beginning on the date of grant
of your option and ending on the day three (3) months before the date of your
option's exercise, you must be an employee of the Company or an Affiliate,
except in the event of your death or "disability" within the meaning of
Section 422 of the Code. The Company has provided for extended
exercisability of your option under certain circumstances for your benefit
but cannot guarantee that your option will necessarily be treated as an
"incentive stock option" if you continue to provide services to the Company
or an Affiliate as a Consultant or Director after your employment terminates
or if you otherwise exercise your option more than three (3) months after the
date your employment terminates.
8. EXERCISE.
(a) You may exercise the vested portion of your option (and the
unvested portion of your option if your Grant Notice so permits) during its
term by delivering a Notice of Exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require.
(b) By exercising your option you agree that, as a condition to
any exercise of your option, the Company may require you to enter into an
arrangement providing for the payment by you to the Company of any tax
withholding obligation of the Company arising by reason of (1) the exercise
of your option, (2) the lapse of any substantial risk of forfeiture to which
the shares of Common Stock are subject at the time of exercise, or (3) the
disposition of shares of Common Stock acquired upon such exercise.
(c) If your option is an incentive stock option, by exercising
your option you agree that you will notify the Company in writing within
fifteen (15) days after the date of any disposition of any of the shares of
the Common Stock issued upon exercise of your option that
3
<PAGE>
occurs within two (2) years after the date of your option grant or within one
(1) year after such shares of Common Stock are transferred upon exercise of
your option.
(d) By exercising your option you agree that the Company (or a
representative of the underwriter(s)) may, in connection with the first
underwritten registration of the offering of any securities of the Company
under the Securities Act, require that you not sell, dispose of, transfer,
make any short sale of, grant any option for the purchase of, or enter into
any hedging or similar transaction with the same economic effect as a sale,
any shares of Common Stock or other securities of the Company held by you,
for a period of time specified by the underwriter(s) (not to exceed one
hundred eighty (180) days) following the effective date of the registration
statement of the Company filed under the Securities Act. You further agree
to execute and deliver such other agreements as may be reasonably requested
by the Company and/or the underwriter(s) that are consistent with the
foregoing or that are necessary to give further effect thereto. In order to
enforce the foregoing covenant, the Company may impose stop-transfer
instructions with respect to your shares of Common Stock until the end of
such period.
9. TRANSFERABILITY. Your option is not transferable, except by will
or by the laws of descent and distribution, and is exercisable during your
life only by you. Notwithstanding the foregoing, by delivering written
notice to the Company, in a form satisfactory to the Company, you may
designate a third party who, in the event of your death, shall thereafter be
entitled to exercise your option.
10. OPTION NOT A SERVICE CONTRACT. Your option is not an employment
or service contract, and nothing in your option shall be deemed to create in
any way whatsoever any obligation on your part to continue in the employ of
the Company or an Affiliate, or of the Company or an Affiliate to continue
your employment. In addition, nothing in your option shall obligate the
Company or an Affiliate, their respective shareholders, Boards of Directors,
Officers or Employees to continue any relationship that you might have as a
Director or Consultant for the Company or an Affiliate.
11. WITHHOLDING OBLIGATIONS.
(a) At the time you exercise your option, in whole or in part,
or at any time thereafter as requested by the Company, you hereby authorize
withholding from payroll and any other amounts payable to you, and otherwise
agree to make adequate provision for (including by means of a "cashless
exercise" pursuant to a program developed under Regulation T as promulgated
by the Federal Reserve Board to the extent permitted by the Company), any
sums required to satisfy the federal, state, local and foreign tax
withholding obligations of the Company or an Affiliate, if any, which arise
in connection with your option.
(b) Upon your request and subject to approval by the Company, in
its sole discretion, and compliance with any applicable conditions or
restrictions of law, the Company may withhold from fully vested shares of
Common Stock otherwise issuable to you upon the exercise of your option a
number of whole shares of Common Stock having a Fair Market Value, determined
by the Company as of the date of exercise, not in excess of the minimum
amount of tax required to be withheld by law. If the date of determination
of any tax withholding
4
<PAGE>
obligation is deferred to a date later than the date of exercise of your
option, share withholding pursuant to the preceding sentence shall not be
permitted unless you make a proper and timely election under Section 83(b) of
the Code, covering the aggregate number of shares of Common Stock acquired
upon such exercise with respect to which such determination is otherwise
deferred, to accelerate the determination of such tax withholding obligation
to the date of exercise of your option. Notwithstanding the filing of such
election, shares of Common Stock shall be withheld solely from fully vested
shares of Common Stock determined as of the date of exercise of your option
that are otherwise issuable to you upon such exercise. Any adverse
consequences to you arising in connection with such share withholding
procedure shall be your sole responsibility.
(c) You may not exercise your option unless the tax withholding
obligations of the Company and/or any Affiliate are satisfied. Accordingly,
you may not be able to exercise your option when desired even though your
option is vested, and the Company shall have no obligation to issue a
certificate for such shares of Common Stock or release such shares of Common
Stock from any escrow provided for herein.
12. NOTICES. Any notices provided for in your option or the Plan
shall be given in writing and shall be deemed effectively given upon receipt
or, in the case of notices delivered by mail by the Company to you, five (5)
days after deposit in the United States mail, postage prepaid, addressed to
you at the last address you provided to the Company.
13. GOVERNING PLAN DOCUMENT. Your option is subject to all the
provisions of the Plan, the provisions of which are hereby made a part of
your option, and is further subject to all interpretations, amendments, rules
and regulations which may from time to time be promulgated and adopted
pursuant to the Plan. In the event of any conflict between the provisions of
your option and those of the Plan, the provisions of the Plan shall control.
5
<PAGE>
NO. CW-____
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
WARRANT TO PURCHASE _______ SHARES
OF COMMON STOCK OF
IMPROVENET, INC.
(VOID AFTER NOVEMBER 23, 2003)
This certifies that ______________ or its assigns (the "HOLDER"), for value
received, is entitled to purchase from IMPROVENET, INC., a Delaware corporation
(the "COMPANY"), having a place of business at 720 Bay Road, Suite 200, Redwood
City, California, a maximum of ________ fully paid and nonassessable shares of
the Company's Common Stock ("COMMON STOCK") for cash at a price equal to $0.01
per share (the "STOCK PURCHASE PRICE") at any time or from time to time up to
and including 5:00 p.m. (Pacific time) five years from the date of this Warrant,
(the "EXPIRATION DATE"), upon surrender to the Company at its principal office
(or at such other location as the Company may advise the Holder in writing) of
this Warrant properly endorsed with the Form of Subscription attached hereto
duly filled in and signed and, if applicable, upon payment in cash or by check
of the aggregate Stock Purchase Price for the number of shares for which this
Warrant is being exercised determined in accordance with the provisions hereof.
The Stock Purchase Price and the number of shares purchasable hereunder are
subject to adjustment as provided in Section 3 of this Warrant.
This Warrant is subject to the following terms and conditions:
1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
1.1 GENERAL. This Warrant is exercisable at the option of the
holder of record hereof, at any time or from time to time, up to the Expiration
Date or as specified in Section 3.3 hereto for all or any part of the shares of
Common Stock (but not for a fraction of a share) which may be purchased
hereunder. The Company agrees that the shares of Common Stock purchased under
this Warrant shall be and are deemed to be issued to the Holder hereof as the
record owner of such shares as of the close of business on the date on which
this Warrant shall have been surrendered, properly endorsed, the completed,
executed Form of Subscription delivered and payment made for such shares.
Certificates for the shares of Common Stock so purchased, together with any
other securities or property to which the Holder hereof is entitled upon such
exercise, shall be delivered to the Holder hereof by the Company at the
Company's expense within a reasonable time after the rights represented by this
Warrant have been so exercised. In case of a purchase of less than all the
shares which may be purchased under this Warrant, the Company shall cancel this
Warrant and execute and deliver a new Warrant or Warrants of like tenor for the
balance of the shares purchasable under the Warrant surrendered upon such
purchase to the Holder hereof within a reasonable time. Each stock certificate
so delivered shall be in such denominations of Common Stock as may be requested
by the Holder hereof and shall be registered in the name of such Holder.
<PAGE>
1.2 NET ISSUE EXERCISE. Notwithstanding any provisions herein to
the contrary, if the fair market value of one share of the Company's Common
Stock is greater than the Stock Purchase Price (at the date of calculation as
set forth below), in lieu of exercising this Warrant for cash, the Holder may
elect to receive shares equal to the value (as determined below) of this Warrant
(or the portion thereof being canceled) by surrender of this Warrant at the
principal office of the Company together with the properly endorsed Form of
Subscription and notice of such election in which event the Company shall issue
to the Holder a number of shares of Common Stock computed using the following
formula:
X = Y (A-B)
-------
A
Where X = the number of shares of
Common Stock to be issued to the
Holder
Y = the number of shares of Common
Stock purchasable under the Warrant
or, if only a portion of the Warrant
is being exercised, the portion of
the Warrant being canceled (at the
date of such calculation)
A = the fair market value of one
share of the Company's Common Stock
(at the date of such calculation)
B = Stock Purchase Price (as
adjusted to the date of such
calculation)
For purposes of the above calculation, fair market value of one share
of Common Stock shall be determined by the Company's Board of Directors in good
faith; provided, however, that in the event the Company makes an initial public
offering of its common stock the fair market value per share shall be the per
share offering price to the public of the Company's initial public offering if
this Warrant is exercised prior to or upon the closing of such initial public
offering, and if exercised after the closing of the initial public offering the
fair market value of one share shall be the average of the closing prices quoted
on the Nasdaq National Market or any other exchange in which the Common Stock is
listed, for the five trading dates prior to the date of exercise.
2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company
covenants and agrees that all shares of Common Stock which may be issued upon
the exercise of the rights represented by this Warrant will, upon issuance, be
duly authorized, validly issued, fully paid and nonassessable and free from all
preemptive rights of any stockholder and free of all taxes, liens and charges
with respect to the issue thereof. The Company further covenants and agrees
that, during the period within which the rights represented by this Warrant may
be exercised, the Company will at all times have authorized and reserved, for
the purpose of issue or transfer upon exercise of the subscription rights
evidenced by this Warrant, a sufficient number of shares of authorized but
unissued Common Stock, or other securities and property, when and as required to
provide for the exercise of the rights represented by this Warrant. The Company
will take all such action as may be necessary to assure that such shares of
Common Stock may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of any domestic securities
exchange upon which the Common Stock may be listed; provided, however, that the
Company shall not be required to effect a registration under federal or state
securities laws with respect to such exercise. The Company will not take any
action which would result
2.
<PAGE>
in any adjustment of the Stock Purchase Price (as set forth in Section 3
hereof) if the total number of shares of Common Stock issuable after such
action upon exercise of all outstanding warrants, together with all shares of
Common Stock then outstanding and all shares of Common Stock then issuable
upon exercise of all options and upon the conversion of all convertible
securities then outstanding, would exceed the total number of shares of
Common Stock then authorized by the Company's Third Restated Certificate of
Incorporation.
3. ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The Stock
Purchase Price and the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 3. Upon each adjustment of the Stock
Purchase Price, the Holder of this Warrant shall thereafter be entitled to
purchase, at the Stock Purchase Price resulting from such adjustment, the number
of shares obtained by multiplying the Stock Purchase Price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant hereto
immediately prior to such adjustment, and dividing the product thereof by the
Stock Purchase Price resulting from such adjustment.
3.1 SUBDIVISION OR COMBINATION OF STOCK. In case the Company shall
at any time subdivide its outstanding shares of Common Stock into a greater
number of shares, the Stock Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the Stock Purchase Price in effect immediately prior
to such combination shall be proportionately increased.
3.2 DIVIDENDS IN COMMON STOCK, OTHER STOCK, PROPERTY,
RECLASSIFICATION. If at any time or from time to time the Holders of Common
Stock (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received or become entitled to receive,
without payment therefor,
(a) Common Stock or any shares of stock or other securities
which are at any time directly or indirectly convertible into or exchangeable
for Common Stock, or any rights or options to subscribe for, purchase or
otherwise acquire any of the foregoing by way of dividend or other distribution,
(b) any cash paid or payable otherwise than as a cash
dividend, or
(c) Common Stock or additional stock or other securities or
property (including cash) by way of spinoff, split-up, reclassification,
combination of shares or similar corporate rearrangement, (other than shares of
Common Stock issued as a stock split or adjustments in respect of which shall be
covered by the terms of Section 3.1 above),
then and in each such case, the Holder hereof shall, upon the exercise of this
Warrant, be entitled to receive, in addition to the number of shares of Common
Stock receivable thereupon, and without payment of any additional consideration
therefor, the amount of stock and other securities and property (including cash
in the cases referred to in clauses (b) and (c)) which such Holder would hold on
the date of such exercise had he been the holder of record of such Common Stock
as of the date on which holders of Common Stock received or became entitled to
receive such shares or all other additional stock and other securities and
property.
3.
<PAGE>
3.3 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE. If any recapitalization, reclassification or reorganization of the capital
stock of the Company, or any consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets or other
transaction shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities, or other assets or property (an
"ORGANIC CHANGE"), then, as a condition of such Organic Change, lawful and
adequate provisions shall be made by the Company whereby the Holder hereof shall
thereafter have the right to purchase and receive (in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby) such shares of stock,
securities or other assets or property as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such Common Stock equal
to the number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby; provided,
however, that in the event the value of the stock, securities or other assets or
property (determined in good faith by the Board of Directors of the Company)
issuable or payable with respect to one share of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby is in excess of the Stock Purchase Price hereof
effective at the time of a merger and securities received in such
reorganization, if any, are publicly traded, then this Warrant shall expire
unless exercised prior to such Organic Change. In the event of any Organic
Change, appropriate provision shall be made by the Company with respect to the
rights and interests of the Holder of this Warrant to the end that the
provisions hereof (including, without limitation, provisions for adjustments of
the Stock Purchase Price and of the number of shares purchasable and receivable
upon the exercise of this Warrant) shall thereafter be applicable, in relation
to any shares of stock, securities or assets thereafter deliverable upon the
exercise hereof. The Company will not effect any such consolidation, merger or
sale unless, prior to the consummation thereof, the successor corporation (if
other than the Company) resulting from such consolidation or the corporation
purchasing such assets shall assume by written instrument reasonably
satisfactory in form and substance to the Holders of a majority of the warrants
to purchase Common Stock then outstanding, executed and mailed or delivered to
the registered Holder hereof at the last address of such Holder appearing on the
books of the Company, the obligation to deliver to such Holder such shares of
stock, securities or assets as, in accordance with the foregoing provisions,
such Holder may be entitled to purchase.
3.4 CERTAIN EVENTS. If any change in the outstanding Common Stock
of the Company or any other event occurs as to which the other provisions of
this Section 3 are not strictly applicable or if strictly applicable would not
fairly protect the purchase rights of the Holder of the Warrant in accordance
with such provisions, then the Board of Directors of the Company shall make an
adjustment in the number and class of shares available under the Warrant, the
Stock Purchase Price or the application of such provisions, so as to protect
such purchase rights as aforesaid. The adjustment shall be such as will give the
Holder of the Warrant upon exercise for the same aggregate Stock Purchase Price
the total number, class and kind of shares as he would have owned had the
Warrant been exercised prior to the event and had he continued to hold such
shares until after the event requiring adjustment.
4.
<PAGE>
3.5 NOTICES OF CHANGE.
(a) Immediately upon any adjustment in the number or class of
shares subject to this Warrant and of the Stock Purchase Price, the Company
shall give written notice thereof to the Holder, setting forth in reasonable
detail and certifying the calculation of such adjustment.
(b) The Company shall give written notice to the Holder at
least ten business days prior to the date on which the Company closes its books
or takes a record for determining rights to receive any dividends or
distributions.
(c) The Company shall also give written notice to the Holder
at least thirty (30) business days prior to the date on which an Organic Change
shall take place.
4. ISSUE TAX. The issuance of certificates for shares of Common Stock
upon the exercise of the Warrant shall be made without charge to the Holder of
the Warrant for any issue tax (other than any applicable income taxes) in
respect thereof; provided, however, that the Company shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the then
Holder of the Warrant being exercised.
5. MARKET STAND-OFF AGREEMENT. The Company (or a representative of the
underwriters) may, in connection with an underwritten registration of the
offering of any securities of the Company under the Act, require that the Holder
not sell, dispose of (other than to donees who agree to be similarly bound),
transfer, make any short sale of, grant any option for the purchase of, or enter
into any hedging or similar transaction with the same economic effect as a sale,
any common stock or other securities of the Company held by the undersigned (the
"RESTRICTED SECURITIES"), for a period of time specified by the underwriters(s)
(not to exceed one hundred eighty (180) days) following the effective date of
the registration statement of the Company filed under the Act relating to the
Company's initial public offering. The Holder agrees to enter into any
agreements as may be reasonably requested by the Company and/or the
underwriter(s) which are consistent with the foregoing or which are necessary to
give further effect thereto. In order to enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to the Restricted
Securities held by the Holder until the end of such period.
6. CLOSING OF BOOKS. The Company will at no time close its transfer
books against the transfer of any warrant or of any shares of Common Stock
issued or issuable upon the exercise of any warrant in any manner which
interferes with the timely exercise of this Warrant.
7. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing
contained in this Warrant shall be construed as conferring upon the Holder
hereof the right to vote or to consent or to receive notice as a stockholder of
the Company or any other matters or any rights whatsoever as a stockholder of
the Company. No dividends or interest shall be payable or accrued in respect of
this Warrant or the interest represented hereby or the shares purchasable
hereunder until, and only to the extent that, this Warrant shall have been
exercised. No provisions hereof, in the absence of affirmative action by the
holder to purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such Holder for the Stock Purchase Price or as a stockholder of the Company,
whether such liability is asserted by the Company or by its creditors.
5.
<PAGE>
8. WARRANTS TRANSFERABLE. Subject to compliance with applicable federal
and state securities laws, this Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the holder hereof (except
for transfer taxes), upon surrender of this Warrant properly endorsed. Each
taker and holder of this Warrant, by taking or holding the same, consents and
agrees that this Warrant, when endorsed in blank, shall be deemed negotiable,
and that the holder hereof, when this Warrant shall have been so endorsed, may
be treated by the Company, at the Company's option, and all other persons
dealing with this Warrant as the absolute owner hereof for any purpose and as
the person entitled to exercise the rights represented by this Warrant, or to
the transfer hereof on the books of the Company any notice to the contrary
notwithstanding; but until such transfer on such books, the Company may treat
the registered owner hereof as the owner for all purposes.
9. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights and
obligations of the Company, of the holder of this Warrant and of the holder of
shares of Common Stock issued upon exercise of this Warrant, shall survive the
exercise of this Warrant.
10. MODIFICATION AND WAIVER. This Warrant and any provision hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
11. NOTICES. Any notice, request or other document required or
permitted to be given or delivered to the holder hereof or the Company shall be
delivered or shall be sent by certified mail, postage prepaid, to each such
holder at its address as shown on the books of the Company or to the Company at
the address indicated therefor in the first paragraph of this Warrant or such
other address as either may from time to time provide to the other.
12. BINDING EFFECT ON SUCCESSORS. Except as specified in Section 3.3
hereof, this Warrant shall be binding upon any corporation succeeding the
Company by merger, consolidation or acquisition of all or substantially all of
the Company's assets. All of the obligations of the Company relating to the
Common Stock issuable upon the exercise of this Warrant shall survive the
exercise and termination of this Warrant. All of the covenants and agreements of
the Company shall inure to the benefit of the successors and assigns of the
holder hereof.
13. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of
the several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of New York. Each party hereto hereby
irrevocably and unconditionally submits to the exclusive jurisdiction of the
state and federal courts located in the State of New York for any actions, suits
or proceedings arising out of or relating to this Warrant and the transactions
contemplated hereby. Each party hereto agrees not to commence any action, suit
or proceeding relating thereto except in such courts. The parties hereto
irrevocably and unconditionally waive any objection to the laying of venue in
any action, suit or proceeding arising out of this Warrant or the transactions
contemplated hereby, in such state or federal courts aforesaid and hereby
further irrevocably and unconditionally waive and agree not to plead or claim in
any such court that any such action, suit or proceeding brought in any such
court has been brought in an inconvenient forum.
6.
<PAGE>
THE PARTIES HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING TO
WHICH THEY ARE PARTIES INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY
ARISING OUT OF, RELATED TO OR CONNECTED WITH THIS WARRANT.
14. LOST WARRANTS. The Company represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Company, at its expense, will
make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant.
15. FRACTIONAL SHARES. No fractional shares shall be issued upon
exercise of this Warrant. The Company shall, in lieu of issuing any fractional
share, pay the holder entitled to such fraction a sum in cash equal to such
fraction multiplied by the then effective Stock Purchase Price.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
7.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its officers, thereunto duly authorized this ____ day of November,
1999.
IMPROVENET, INC.
a Delaware corporation
By:
--------------------------
President
ATTEST:
- -----------------------------
Secretary
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
Date: _________________, 19___
ImproveNet, Inc.
720 Bay Road, Suite 200
Redwood City, CA 94063-2469
Attn: President
Ladies and Gentlemen:
/ / The undersigned hereby elects to exercise the warrant issued to it by
ImproveNet, Inc. (the "Company") and dated November , 1999 Warrant No.
CW-4 (the "WARRANT") and to purchase thereunder ______________________
__________________________________ shares of the Common Stock of the
Company (the "SHARES") at a purchase price of $0.01 per Share or an
aggregate purchase price of __________________________________ Dollars
($__________) (the "PURCHASE PRICE").
/ / The undersigned hereby elects to convert _______________________
percent (____%) of the value of the Warrant pursuant to the provisions
of Section 1.2 of the Warrant.
Pursuant to the terms of the Warrant the undersigned has delivered the
Purchase Price herewith in full in cash or by certified check or wire transfer.
Very truly yours,
----------------------------
By:
--------------------------
Title:
-----------------------
<PAGE>
SCHEDULE OF COMMON STOCK WARRANTS
<TABLE>
<CAPTION>
-----------------------------------------------
NAME SHARES
<S> <C>
-----------------------------------------------
Owens Corning 150,000
-----------------------------------------------
Microsoft Corporation 583,333
-----------------------------------------------
Cendant Finance Holding Corporation 259,263
-----------------------------------------------
The Dow Chemical Company 35,000
-----------------------------------------------
E.I. du Pont deNemours and Company 35,000
-----------------------------------------------
Armstrong.com Holding Corporation 25,000
-----------------------------------------------
</TABLE>
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY
STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
WARRANT TO PURCHASE __________ SHARES
OF COMMON STOCK OF IMPROVENET, INC.
(VOID AFTER JUNE 16, 2007)
This certifies that ______________, or his assigns (the "Holder"), for
value received, is entitled to purchase from IMPROVENET, INC., a California
corporation (the "Company"), a maximum of ____________ fully paid and
nonassessable shares of the Company's Common Stock (the "Common Stock") for cash
at a price of $1.00 per share (the "Stock Purchase Price") at any time or from
time to time up to and including 5:00 p.m. (Pacific time) on June 16, 2007 (the
"Expiration Date"), upon surrender to the Company at its principal office (or at
such other location as the Company may advise the Holder in writing) of this
Warrant properly endorsed with the Form of Subscription attached hereto duly
filled in and signed and, if applicable, upon payment in cash or by check of the
aggregate Stock Purchase Price for the number of shares for which this Warrant
is being exercised determined in accordance with the provisions hereof. The
Stock Purchase Price and the number of shares purchasable hereunder are subject
to adjustment as provided in Section 3 of this Warrant.
This Warrant is subject to the following terms and conditions:
1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
1.1 GENERAL. This Warrant is exercisable at the option of the
Holder of record hereof, at any time or from time to time, up to the Expiration
Date for all or any part of the shares of (but not for a fraction of a share)
which may be purchased hereunder. The Company agrees that the shares of Common
Stock purchased under this Warrant shall be and are deemed to be issued to the
Holder hereof as the record owner of such shares as of the close of business on
the date on which this Warrant shall have been surrendered, properly endorsed,
the completed, executed Form of Subscription delivered and payment made for such
shares. Certificates for the shares of Common Stock so purchased, together with
any other securities or property to which the Holder hereof is entitled upon
such exercise, shall be delivered to the Holder hereof by the Company at the
Company's expense within a reasonable time after the rights represented by this
Warrant have been so exercised. In case of a purchase of less than all the
shares which may be purchased under this Warrant, the Company shall cancel this
Warrant and execute and deliver a new Warrant or Warrants of like tenor for the
balance of the shares purchasable under the Warrant surrendered upon such
purchase to the Holder hereof within a reasonable time. Each
1.
<PAGE>
stock certificate so delivered shall be in such denominations of Common Stock
as may be requested by the Holder hereof and shall be registered in the name
of such Holder.
1.2 NET ISSUE EXERCISE. Notwithstanding any provisions herein
to the contrary, if the fair market value of one share of the Company's Common
Stock is greater than the Stock Purchase Price (at the date of calculation as
set forth below), in lieu of exercising this Warrant for cash, the Holder may
elect to receive shares equal to the value (as determined below) of this Warrant
(or the portion thereof being canceled) by surrender of this Warrant at the
principal office of the Company together with the properly endorsed Form of
Subscription and notice of such election in which event the Company shall issue
to the Holder a number of shares of Common Stock computed using the following
formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock
to be issued to the Holder
Y = the number of shares of Common
Stock purchasable under the Warrant
or, if only a portion of the Warrant
is being exercised, the portion of
the Warrant being canceled (at the
date of such calculation)
A = the fair market value of one share
of the Company's Common Stock (at
the date of such calculation)
B = Stock Purchase Price (as adjusted to
the date of such calculation)
For purposes of the above calculation, fair market value of one share
of Common Stock shall be determined by the Company's Board of Directors in good
faith; provided, however, that in the event this Warrant is being exercised upon
the initial public offering of the Company (the "Initial Public Offering"), the
fair market value per share shall be the per share offering price to the public
of the Initial Public Offering.
2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company
covenants and agrees that all shares of Common Stock which may be issued upon
the exercise of the rights represented by this Warrant will, upon issuance, be
duly authorized, validly issued, fully paid and nonassessable and free from all
preemptive rights of any shareholder and free of all taxes, liens and charges
with respect to the issue thereof. The Company further covenants and agrees
that, during the period within which the rights represented by this Warrant may
be exercised, the Company will at all times have authorized and reserved, for
the purpose of issue or transfer upon exercise of the subscription rights
evidenced by this Warrant, a sufficient number of shares of authorized but
unissued Common Stock, or other securities and property, when and as required to
provide for the exercise of the rights represented by this Warrant. The Company
will take all such action as may be necessary to assure that such shares of
Common Stock may be
2.
<PAGE>
issued as provided herein without violation of any applicable law or
regulation, or of any requirements of any domestic securities exchange upon
which the Common Stock may be listed; provided, however, that the Company
shall not be required to effect a registration under Federal or State
securities laws with respect to such exercise.
3. ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The Stock
Purchase Price and the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 3. Upon each adjustment of the Stock
Purchase Price, the Holder of this Warrant shall thereafter be entitled to
purchase, at the Stock Purchase Price resulting from such adjustment, the number
of shares obtained by multiplying the Stock Purchase Price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant hereto
immediately prior to such adjustment, and dividing the product thereof by the
Stock Purchase Price resulting from such adjustment.
3.1 SUBDIVISION OR COMBINATION OF STOCK. In case the Company
shall at any time subdivide its outstanding shares of Common Stock into a
greater number of shares, the Stock Purchase Price in effect immediately prior
to such subdivision shall be proportionately reduced, and conversely, in case
the outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the Stock Purchase Price in effect immediately prior
to such combination shall be proportionately increased.
3.2 DIVIDENDS IN STOCK, OTHER STOCK, PROPERTY,
RECLASSIFICATION. If at any time or from time to time the holders of Common
Stock (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received or become entitled to receive,
without payment therefor,
(a) Common Stock or any shares of stock or other securities
which are at any time directly or indirectly convertible into or exchangeable
for Common Stock, or any rights or options to subscribe for, purchase or
otherwise acquire any of the foregoing by way of dividend or other distribution;
(b) any cash paid or payable otherwise than as a cash
dividend; or
(c) Common Stock or additional stock or other securities or
property (including cash) by way of spinoff, split-up, reclassification,
combination of shares or similar corporate rearrangement, (other than shares of
Common Stock issued as a stock split or adjustments in respect of which shall be
covered by the terms of Section 3.1 above);
then and in each such case, the Holder hereof shall, upon the exercise of this
Warrant, be entitled to receive, in addition to the number of shares of Common
Stock receivable thereupon, and without payment of any additional consideration
therefor, the amount of stock and other securities and property (including cash
in the cases referred to in clauses (b) and (c) above) which such Holder would
hold on the date of such exercise had he been the holder of record of such
Common Stock as of the date on which holders of Common Stock received or became
entitled to receive such shares or all other additional stock and other
securities and property.
3.
<PAGE>
3.3 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE. If any recapitalization, reclassification or reorganization of the capital
stock of the Company, or any consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets or other
transaction shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities, or other assets or property (an
"Organic Change"), then, as a condition of such Organic Change, lawful and
adequate provisions shall be made by the Company whereby the Holder hereof shall
thereafter have the right to purchase and receive (in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby) such shares of stock,
securities or other assets or property as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such Common Stock equal
to the number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby; provided,
however, that in the event the value of the stock, securities or other assets or
property (determined in good faith by the Board of Directors of the Company)
issuable or payable with respect to one share of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby is in excess of the Stock Purchase Price hereof
effective at the time of a merger and securities received in such
reorganization, if any, are publicly traded, then this Warrant shall expire
unless exercised prior to such Organic Change. In the event of any Organic
Change, appropriate provision shall be made by the Company with respect to the
rights and interests of the Holder of this Warrant to the end that the
provisions hereof (including, without limitation, provisions for adjustments of
the Stock Purchase Price and of the number of shares purchasable and receivable
upon the exercise of this Warrant) shall thereafter be applicable, in relation
to any shares of stock, securities or assets thereafter deliverable upon the
exercise hereof.
3.4 CERTAIN EVENTS. If any change in the outstanding Common
Stock of the Company or any other event occurs as to which the other provisions
of this Section 3 are not strictly applicable or if strictly applicable would
not fairly protect the purchase rights of the Holder of the Warrant in
accordance with such provisions, then the Board of Directors of the Company
shall make an adjustment in the number and class of shares available under the
Warrant, the Stock Purchase Price or the application of such provisions, so as
to protect such purchase rights as aforesaid. The adjustment shall be such as
will give the Holder of the Warrant upon exercise for the same aggregate Stock
Purchase Price the total number, class and kind of shares as he would have owned
had the Warrant been exercised prior to the event and had he continued to hold
such shares until after the event requiring adjustment.
3.5 NOTICES OF CHANGE.
(a) Immediately upon any adjustment in the number or class of
shares subject to this Warrant and of the Stock Purchase Price, the Company
shall give written notice thereof to the Holder, setting forth in reasonable
detail and certifying the calculation of such adjustment.
(b) The Company shall give written notice to the Holder at
least 10 business days prior to the date on which the Company closes its books
or takes a record for determining rights to receive any dividends or
distributions.
4.
<PAGE>
(c) The Company shall also give written notice to the Holder
at least 20 business days prior to the date on which an Organic Change shall
take place.
4. ISSUE TAX. The issuance of certificates for shares of Common Stock
upon the exercise of the Warrant shall be made without charge to the Holder of
the Warrant for any issue tax (other than any applicable income taxes) in
respect thereof; provided, however, that the Company shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the then
Holder of the Warrant being exercised.
5. CLOSING OF BOOKS. The Company will at no time close its transfer
books against the transfer of any warrant or of any shares of Common Stock
issued or issuable upon the exercise of any warrant in any manner which
interferes with the timely exercise of this Warrant.
6. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing
contained in this Warrant shall be construed as conferring upon the Holder
hereof the right to vote or to consent or to receive notice as a shareholder of
the Company or any other matters or any rights whatsoever as a shareholder of
the Company. No dividends or interest shall be payable or accrued in respect of
this Warrant or the interest represented hereby or the shares purchasable
hereunder until, and only to the extent that, this Warrant shall have been
exercised. No provisions hereof, in the absence of affirmative action by the
Holder to purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the Holder hereof, shall give rise to any liability of
such Holder for the Stock Purchase Price or as a shareholder of the Company,
whether such liability is asserted by the Company or by its creditors.
7. WARRANTS TRANSFERABLE. Subject to compliance with applicable federal
and state securities laws, this Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the Holder hereof (except
for transfer taxes), upon surrender of this Warrant properly endorsed. Each
taker and holder of this Warrant, by taking or holding the same, consents and
agrees that this Warrant, when endorsed in blank, shall be deemed negotiable,
and that the Holder hereof, when this Warrant shall have been so endorsed, may
be treated by the Company, at the Company's option, and all other persons
dealing with this Warrant as the absolute owner hereof for any purpose and as
the person entitled to exercise the rights represented by this Warrant, or to
the transfer hereof on the books of the Company any notice to the contrary
notwithstanding; but until such transfer on such books, the Company may treat
the registered owner hereof as the owner for all purposes.
8. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights and
obligations of the Company, of the Holder of this Warrant and of the holder of
shares of Common Stock issued upon exercise of this Warrant, shall survive the
exercise of this Warrant.
9. MODIFICATION AND WAIVER. This Warrant and any provision hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
5.
<PAGE>
10. NOTICES. Any notice, request or other document required or
permitted to be given or delivered to the Holder hereof or the Company shall be
delivered or shall be sent by certified mail, postage prepaid, to each such
Holder at its address as shown on the books of the Company or to the Company at
the address indicated therefor in the first paragraph of this Warrant or such
other address as either may from time to time provide to the other.
11. BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding upon
any corporation succeeding the Company by merger, consolidation or acquisition
of all or substantially all of the Company's assets. All of the obligations of
the Company relating to the Common Stock issuable upon the exercise of this
Warrant shall survive the exercise and termination of this Warrant. All of the
covenants and agreements of the Company shall inure to the benefit of the
successors and assigns of the Holder hereof.
12. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of
the several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of California.
13. LOST WARRANTS. The Company represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Company, at its expense, will
make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant.
14. FRACTIONAL SHARES. No fractional shares shall be issued upon
exercise of this Warrant. The Company shall, in lieu of issuing any fractional
share, pay the Holder entitled to such fraction a sum in cash equal to such
fraction multiplied by the then effective Stock Purchase Price.
15. RELEASE OF CLAIMS. Holder hereby releases, acquits and forever
discharges the Company, and where applicable, its officers, directors, agents,
servants, attorneys, employees, shareholders, successors, assigns and
affiliates, of and from any and all claims, liabilities, demands, causes of
action, costs, expenses, attorneys' fees, damages, indemnities and obligations
of every kind and nature, in law, equity, or otherwise, known and unknown,
suspected and unsuspected, disclosed and undisclosed, arising out of or in any
way related to any and all claims and demands directly or indirectly arising out
of or in any way related to salary, bonuses, commissions, vacation pay, fringe
benefits, expense reimbursements, or any other form of compensation.
6.
<PAGE>
16. SECTION 1542 WAIVER. Holder acknowledges that he has read and
understands Section 1542 of the Civil Code of the State of California, which
reads as follows:
A GENERAL RELEASE DOES NOT EXTEND CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
Holder hereby expressly waives and relinquishes all rights and benefits under
that section and any law or legal principle of similar effect in any
jurisdiction with respect to the release granted herein.
[THIS SPACE INTENTIONALLY LEFT BLANK]
7.
<PAGE>
WARRANT
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its officers, thereunto duly authorized this 16th day of June, 1997.
IMPROVENET, INC.
By:
---------------------------------
Title:
-------------------------------
ATTEST:
By:
----------------------------------
Title:
--------------------------------
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
Date:_________________, 19___
ImproveNet, Inc.
- --------------------
- --------------------
Attn: President
Ladies and Gentlemen:
/ / The undersigned hereby elects to exercise the warrant issued to it by
ImproveNet, Inc. (the "Company") and dated June _____, 1997 Warrant No.
W-1 (the "Warrant") and to purchase thereunder
__________________________________ shares of the Common Stock of the
Company (the "Shares") at a purchase price of
___________________________________________ Dollars ($__________) per
Share or an aggregate purchase price of
__________________________________ Dollars ($__________) (the "Purchase
Price").
/ / The undersigned hereby elects to convert _______________________
percent (____%) of the value of the Warrant pursuant to the provisions
of Section 1.2 of the Warrant.
Pursuant to the terms of the Warrant the undersigned has delivered the
Purchase Price herewith in full in cash or by certified check or wire transfer.
The undersigned also makes the representations set forth on the attached Exhibit
B of the Warrant.
Very truly yours,
-------------------------------------
By:
----------------------------------
Title:
-------------------------------
<PAGE>
EXHIBIT B
INVESTMENT REPRESENTATION
THIS AGREEMENT MUST BE COMPLETED, SIGNED AND RETURNED ALONG WITH THE
SUBSCRIPTION FORM BEFORE THE STOCK ISSUABLE UPON EXERCISE OF THE WARRANT DATED
JUNE ____, 1997, WILL BE ISSUED.
_____________________, 19__
ImproveNet, Inc.
- -------------------
- -------------------
Attn: President
Ladies and Gentlemen:
The undersigned, _________________________ ("Purchaser"), intends to
acquire up to ______________ shares of the Common Stock (the "Stock") of
ImproveNet, Inc. (the "Company") from the Company pursuant to the exercise or
conversion of certain Warrants to purchase Stock held by Purchaser. The Stock
will be issued to Purchaser in a transaction not involving a public offering and
pursuant to an exemption from registration under the Securities Act of 1933, as
amended (the "1933 Act") and applicable state securities laws. In connection
with such purchase and in order to comply with the exemptions from registration
relied upon by the Company, Purchaser represents, warrants and agrees as
follows:
Purchaser is acquiring the Stock for its own account, to hold for
investment, and Purchaser shall not make any sale, transfer or other disposition
of the Stock in violation of the 1933 Act or the General Rules and Regulations
promulgated thereunder by the Securities and Exchange Commission (the "SEC") or
in violation of any applicable state securities law.
Purchaser has been advised that the Stock has not been registered under
the 1933 Act or state securities laws on the ground that this transaction is
exempt from registration, and that reliance by the Company on such exemptions is
predicated in part on Purchaser's representations set forth in this letter.
Purchaser has been informed that under the 1933 Act, the Stock must be
held indefinitely unless it is subsequently registered under the 1933 Act or
unless an exemption from such registration (such as Rule 144) is available with
respect to any proposed transfer or disposition by Purchaser of the Stock.
Purchaser further agrees that the Company may refuse to permit Purchaser to
sell, transfer or dispose of the Stock (except as permitted under Rule 144)
unless there is in effect a registration statement under the 1933 Act and any
applicable state securities laws covering such transfer, or unless Purchaser
furnishes an opinion of counsel reasonably satisfactory to counsel for the
Company, to the effect that such registration is not required.
<PAGE>
Purchaser also understands and agrees that there will be placed on the
certificate(s) for the Stock, or any substitutions therefor, a legend stating in
substance:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities laws. These shares have been
acquired for investment and may not be sold or otherwise transferred in
the absence of an effective registration statement for these shares
under the Securities Act and applicable state securities laws, or an
opinion of counsel satisfactory to the Company that registration is not
required and that an applicable exemption is available."
Purchaser has carefully read this letter and has discussed its
requirements and other applicable limitations upon Purchaser's resale of the
Stock with Purchaser's counsel.
Very truly yours,
----------------------------------------
By:
-------------------------------------
Title:
----------------------------------
<PAGE>
SCHEDULE OF COMMON STOCK WARRANTS
<TABLE>
<CAPTION>
-----------------------------------------------
NAME SHARES
<S> <C>
-----------------------------------------------
Steve Jacobs 5,000*
-----------------------------------------------
G. Bickley Stevens, II 5,000
-----------------------------------------------
</TABLE>
* previously exercised
<PAGE>
NO. CW-___
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
WARRANT TO PURCHASE ___________ SHARES
OF COMMON STOCK OF
IMPROVENET, INC.
(VOID AFTER ___________, 2004)
This certifies that ___________________ or its assigns (the "HOLDER"), for value
received, is entitled to purchase from IMPROVENET, INC., a Delaware corporation
(the "COMPANY"), having a place of business at 720 Bay Road, Suite 200, Redwood
City, California, a maximum of __________ fully paid and nonassessable shares of
the Company's Common Stock ("COMMON STOCK") for cash at a price equal to $13.50
per share (the "STOCK PURCHASE PRICE") at any time or from time to time up to
and including 5:00 p.m. (Pacific time) five years from the date of this Warrant,
(the "EXPIRATION DATE"), upon surrender to the Company at its principal office
(or at such other location as the Company may advise the Holder in writing) of
this Warrant properly endorsed with the Form of Subscription attached hereto
duly filled in and signed and, if applicable, upon payment in cash or by check
of the aggregate Stock Purchase Price for the number of shares for which this
Warrant is being exercised determined in accordance with the provisions hereof.
The Stock Purchase Price and the number of shares purchasable hereunder are
subject to adjustment as provided in Section 3 of this Warrant.
This Warrant is subject to the following terms and conditions:
1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
1.1 GENERAL. This Warrant is exercisable at the option of the
holder of record hereof, at any time or from time to time, up to the Expiration
Date or as specified in Section 3.3 hereto for all or any part of the shares of
Common Stock (but not for a fraction of a share) which may be purchased
hereunder. The Company agrees that the shares of Common Stock purchased under
this Warrant shall be and are deemed to be issued to the Holder hereof as the
record owner of such shares as of the close of business on the date on which
this Warrant shall have been surrendered, properly endorsed, the completed,
executed Form of Subscription delivered and payment made for such shares.
Certificates for the shares of Common Stock so purchased, together with any
other securities or property to which the Holder hereof is entitled upon such
exercise, shall be delivered to the Holder hereof by the Company at the
Company's expense within a reasonable time after the rights represented by this
Warrant have been so exercised. In case of a purchase of less than all the
shares which may be purchased under this Warrant, the Company shall cancel this
Warrant and execute and deliver a new Warrant or Warrants of like tenor for the
balance of the shares purchasable under the Warrant surrendered upon such
purchase to the Holder hereof within a reasonable time. Each stock certificate
so delivered shall be in such denominations of Common Stock as may be requested
by the Holder hereof and shall be registered in the name of such Holder.
<PAGE>
1.2 NET ISSUE EXERCISE. Notwithstanding any provisions herein to
the contrary, if the fair market value of one share of the Company's Common
Stock is greater than the Stock Purchase Price (at the date of calculation as
set forth below), in lieu of exercising this Warrant for cash, the Holder may
elect to receive shares equal to the value (as determined below) of this Warrant
(or the portion thereof being canceled) by surrender of this Warrant at the
principal office of the Company together with the properly endorsed Form of
Subscription and notice of such election in which event the Company shall issue
to the Holder a number of shares of Common Stock computed using the following
formula:
X = Y (A-B)
-------
A
Where X = the number of shares of
Common Stock to be issued to the
Holder
Y = the number of shares of Common
Stock purchasable under the Warrant
or, if only a portion of the Warrant
is being exercised, the portion of
the Warrant being canceled (at the
date of such calculation)
A = the fair market value of one
share of the Company's Common Stock
(at the date of such calculation)
B = Stock Purchase Price (as
adjusted to the date of such
calculation)
For purposes of the above calculation, fair market value of one share
of Common Stock shall be determined by the Company's Board of Directors in good
faith; provided, however, that in the event the Company makes an initial public
offering of its common stock the fair market value per share shall be the per
share offering price to the public of the Company's initial public offering if
this Warrant is exercised prior to or upon the closing of such initial public
offering, and if exercised after the closing of the initial public offering the
fair market value of one share shall be the average of the closing prices quoted
on the Nasdaq National Market or any other exchange in which the Common Stock is
listed, for the five trading dates prior to the date of exercise.
2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company
covenants and agrees that all shares of Common Stock which may be issued upon
the exercise of the rights represented by this Warrant will, upon issuance, be
duly authorized, validly issued, fully paid and nonassessable and free from all
preemptive rights of any stockholder and free of all taxes, liens and charges
with respect to the issue thereof. The Company further covenants and agrees
that, during the period within which the rights represented by this Warrant may
be exercised, the Company will at all times have authorized and reserved, for
the purpose of issue or transfer upon exercise of the subscription rights
evidenced by this Warrant, a sufficient number of shares of authorized but
unissued Common Stock, or other securities and property, when and as required to
provide for the exercise of the rights represented by this Warrant. The Company
will take all such action as may be necessary to assure that such shares of
Common Stock may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of any domestic securities
exchange upon which the Common Stock may be listed; provided, however, that the
Company shall not be required to effect a registration under federal or state
securities laws with respect to such exercise. The Company will not take any
action which would result in any adjustment of the Stock Purchase Price (as set
forth in Section 3 hereof) if the total number of
2.
<PAGE>
shares of Common Stock issuable after such action upon exercise of all
outstanding warrants, together with all shares of Common Stock then
outstanding and all shares of Common Stock then issuable upon exercise of all
options and upon the conversion of all convertible securities then
outstanding, would exceed the total number of shares of Common Stock then
authorized by the Company's Third Restated Certificate of Incorporation.
3. ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The Stock
Purchase Price and the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 3. Upon each adjustment of the Stock
Purchase Price, the Holder of this Warrant shall thereafter be entitled to
purchase, at the Stock Purchase Price resulting from such adjustment, the number
of shares obtained by multiplying the Stock Purchase Price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant hereto
immediately prior to such adjustment, and dividing the product thereof by the
Stock Purchase Price resulting from such adjustment.
3.1 SUBDIVISION OR COMBINATION OF STOCK. In case the Company shall
at any time subdivide its outstanding shares of Common Stock into a greater
number of shares, the Stock Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the Stock Purchase Price in effect immediately prior
to such combination shall be proportionately increased.
3.2 DIVIDENDS IN COMMON STOCK, OTHER STOCK, PROPERTY,
RECLASSIFICATION. If at any time or from time to time the Holders of Common
Stock (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received or become entitled to receive,
without payment therefor,
(a) common stock or any shares of stock or other securities
which are at any time directly or indirectly convertible into or exchangeable
for Common Stock, or any rights or options to subscribe for, purchase or
otherwise acquire any of the foregoing by way of dividend or other
distribution,
(b) any cash paid or payable otherwise than as a cash
dividend, or
(c) Common Stock or additional stock or other securities or
property (including cash) by way of spinoff, split-up, reclassification,
combination of shares or similar corporate rearrangement, (other than shares
of Common Stock issued as a stock split or adjustments in respect of which
shall be covered by the terms of Section 3.1 above),
then and in each such case, the Holder hereof shall, upon the exercise of this
Warrant, be entitled to receive, in addition to the number of shares of Common
Stock receivable thereupon, and without payment of any additional consideration
therefor, the amount of stock and other securities and property (including cash
in the cases referred to in clauses (b) and (c)) which such Holder would hold on
the date of such exercise had he been the holder of record of such Common Stock
as of the date on which holders of Common Stock received or became entitled to
receive such shares or all other additional stock and other securities and
property.
3.3 ANTIDILUTION. In the event the Series E Preferred Conversion
Price (as defined in Section 4(c)(5)(c) of the Company's Third Amended and
Restated Certificate of Incorporation (the
3.
<PAGE>
"Restated Certificate")), is less than the then effective Stock Purchase
Price, then the Stock Purchase Price shall be adjusted to equal the then
effective Series E Conversion Price PROVIDED, HOWEVER, that no further
adjustment shall be made pursuant to this Section 3.3 following the closing
of a firm commitment underwritten public offering of the Company's Common
Stock pursuant to an effective registration statement under the Securities
Act of 1933, as amended, in which all outstanding preferred stock has
converted into common stock.
3.4 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE. If any recapitalization, reclassification or reorganization of the capital
stock of the Company, or any consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets or other
transaction shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities, or other assets or property (an
"ORGANIC CHANGE"), then, as a condition of such Organic Change, lawful and
adequate provisions shall be made by the Company whereby the Holder hereof shall
thereafter have the right to purchase and receive (in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby) such shares of stock,
securities or other assets or property as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such Common Stock equal
to the number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby. In the event of
any Organic Change, appropriate provision shall be made by the Company with
respect to the rights and interests of the Holder of this Warrant to the end
that the provisions hereof (including, without limitation, provisions for
adjustments of the Stock Purchase Price and of the number of shares purchasable
and receivable upon the exercise of this Warrant) shall thereafter be
applicable, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise hereof. The Company will not effect any such
consolidation, merger or sale unless, prior to the consummation thereof, the
successor corporation (if other than the Company) resulting from such
consolidation or the corporation purchasing such assets shall assume by written
instrument reasonably satisfactory in form and substance to the Holders of a
majority of the warrants to purchase Common Stock then outstanding, executed and
mailed or delivered to the registered Holder hereof at the last address of such
Holder appearing on the books of the Company, the obligation to deliver to such
Holder such shares of stock, securities or assets as, in accordance with the
foregoing provisions, such Holder may be entitled to purchase.
3.5 CERTAIN EVENTS. If any change in the outstanding Common Stock
of the Company or any other event occurs as to which the other provisions of
this Section 3 are not strictly applicable or if strictly applicable would not
fairly protect the purchase rights of the Holder of the Warrant in accordance
with such provisions, then the Board of Directors of the Company shall make an
adjustment in the number and class of shares available under the Warrant, the
Stock Purchase Price or the application of such provisions, so as to protect
such purchase rights as aforesaid. The adjustment shall be such as will give the
Holder of the Warrant upon exercise for the same aggregate Stock Purchase Price
the total number, class and kind of shares as he would have owned had the
Warrant been exercised prior to the event and had he continued to hold such
shares until after the event requiring adjustment.
4.
<PAGE>
3.6 NOTICES OF CHANGE.
(a) Immediately upon any adjustment in the number or class
of shares subject to this Warrant and of the Stock Purchase Price, the
Company shall give written notice thereof to the Holder, setting forth in
reasonable detail and certifying the calculation of such adjustment.
(b) The Company shall give written notice to the Holder at
least ten business days prior to the date on which the Company closes its
books or takes a record for determining rights to receive any dividends or
distributions.
(c) The Company shall also give written notice to the
Holder at least thirty (30) business days prior to the date on which an
Organic Change shall take place.
4. ISSUE TAX. The issuance of certificates for shares of Common Stock
upon the exercise of the Warrant shall be made without charge to the Holder of
the Warrant for any issue tax (other than any applicable income taxes) in
respect thereof; provided, however, that the Company shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the then
Holder of the Warrant being exercised.
5. MARKET STAND-OFF AGREEMENT. The Company (or a representative of the
underwriters) may, in connection with an underwritten registration of the
offering of any securities of the Company under the Act, require that the Holder
not sell, dispose of (other than to donees who agree to be similarly bound),
transfer, make any short sale of, grant any option for the purchase of, or enter
into any hedging or similar transaction with the same economic effect as a sale,
any common stock or other securities of the Company held by the undersigned (the
"RESTRICTED SECURITIES"), for a period of time specified by the underwriters(s)
(not to exceed one hundred eighty (180) days) following the effective date of
the registration statement of the Company filed under the Act relating to the
Company's initial public offering. The Holder agrees to enter into any
agreements as may be reasonably requested by the Company and/or the
underwriter(s) which are consistent with the foregoing or which are necessary to
give further effect thereto. In order to enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to the Restricted
Securities held by the Holder until the end of such period.
6. CLOSING OF BOOKS. The Company will at no time close its transfer
books against the transfer of any warrant or of any shares of Common Stock
issued or issuable upon the exercise of any warrant in any manner which
interferes with the timely exercise of this Warrant.
7. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing
contained in this Warrant shall be construed as conferring upon the Holder
hereof the right to vote or to consent or to receive notice as a stockholder of
the Company or any other matters or any rights whatsoever as a stockholder of
the Company. No dividends or interest shall be payable or accrued in respect of
this Warrant or the interest represented hereby or the shares purchasable
hereunder until, and only to the extent that, this Warrant shall have been
exercised. No provisions hereof, in the absence of affirmative action by the
holder to purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such Holder for the Stock Purchase Price or as a stockholder of the Company,
whether such liability is asserted by the Company or by its creditors.
5.
<PAGE>
8. WARRANTS TRANSFERABLE. Subject to compliance with applicable
federal and state securities laws, this Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the holder hereof
(except for transfer taxes), upon surrender of this Warrant properly
endorsed. Each taker and holder of this Warrant, by taking or holding the
same, consents and agrees that this Warrant, when endorsed in blank, shall be
deemed negotiable, and that the holder hereof, when this Warrant shall have
been so endorsed, may be treated by the Company, at the Company's option, and
all other persons dealing with this Warrant as the absolute owner hereof for
any purpose and as the person entitled to exercise the rights represented by
this Warrant, or to the transfer hereof on the books of the Company any
notice to the contrary notwithstanding; but until such transfer on such
books, the Company may treat the registered owner hereof as the owner for all
purposes.
9. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights and
obligations of the Company, of the holder of this Warrant and of the holder of
shares of Common Stock issued upon exercise of this Warrant, shall survive the
exercise of this Warrant.
10. MODIFICATION AND WAIVER. This Warrant and any provision hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
11. NOTICES. Any notice, request or other document required or
permitted to be given or delivered to the holder hereof or the Company shall be
delivered or shall be sent by certified mail, postage prepaid, to each such
holder at its address as shown on the books of the Company or to the Company at
the address indicated therefor in the first paragraph of this Warrant or such
other address as either may from time to time provide to the other.
12. BINDING EFFECT ON SUCCESSORS. Except as specified in Section 3.3
hereof, this Warrant shall be binding upon any corporation succeeding the
Company by merger, consolidation or acquisition of all or substantially all of
the Company's assets. All of the obligations of the Company relating to the
Common Stock issuable upon the exercise of this Warrant shall survive the
exercise and termination of this Warrant. All of the covenants and agreements of
the Company shall inure to the benefit of the successors and assigns of the
holder hereof.
13. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of
the several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of New York. Each party hereto hereby
irrevocably and unconditionally submits to the exclusive jurisdiction of the
state and federal courts located in the State of New York for any actions, suits
or proceedings arising out of or relating to this Warrant and the transactions
contemplated hereby. Each party hereto agrees not to commence any action, suit
or proceeding relating thereto except in such courts. The parties hereto
irrevocably and unconditionally waive any objection to the laying of venue in
any action, suit or proceeding arising out of this Warrant or the transactions
contemplated hereby, in such state or federal courts aforesaid and hereby
further irrevocably and unconditionally waive and agree not to plead or claim in
any such court that any such action, suit or proceeding brought in any such
court has been brought in an inconvenient forum.
THE PARTIES HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING TO
WHICH THEY ARE PARTIES INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY
ARISING OUT OF, RELATED TO OR CONNECTED WITH THIS WARRANT.
6.
<PAGE>
14. LOST WARRANTS. The Company represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Company, at its expense, will
make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant.
15. FRACTIONAL SHARES. No fractional shares shall be issued upon
exercise of this Warrant. The Company shall, in lieu of issuing any fractional
share, pay the holder entitled to such fraction a sum in cash equal to such
fraction multiplied by the then effective Stock Purchase Price.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
7.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its officers, thereunto duly authorized this ____ day of December,
1999.
IMPROVENET, INC.
a Delaware corporation
By:__________________________
President
ATTEST:
___________________________
Secretary
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
Date: _________________, 19___
ImproveNet, Inc.
720 Bay Road, Suite 200
Redwood City, CA 94063-2469
Attn: President
Ladies and Gentlemen:
/ / The undersigned hereby elects to exercise the warrant issued to it by
ImproveNet, Inc. (the "COMPANY") and dated December , 1999 Warrant No.
CW-___ (the "WARRANT") and to purchase thereunder
__________________________________ shares of the Common Stock of the
Company (the "SHARES") at a purchase price of $13.50 per Share or an
aggregate purchase price of __________________________________ Dollars
($__________) (the "PURCHASE PRICE").
/ / The undersigned hereby elects to convert _______________________
percent (____%) of the value of the Warrant pursuant to the provisions
of Section 1.2 of the Warrant.
Pursuant to the terms of the Warrant the undersigned has delivered the
Purchase Price herewith in full in cash or by certified check or wire transfer.
Very truly yours,
_____________________________
By:__________________________
Title:_______________________
<PAGE>
SCHEDULE OF COMMON STOCK WARRANTS
<TABLE>
<CAPTION>
-----------------------------------------------
NAME SHARES
<S> <C>
-----------------------------------------------
Microsoft Corporation 100,000
-----------------------------------------------
Cendant Finance Holding Corporation 75,000
-----------------------------------------------
</TABLE>
<PAGE>
NO. PDW-______
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM
UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
WARRANT TO PURCHASE _______ SHARES
OF SERIES A PREFERRED STOCK OF IMPROVENET, INC.
(VOID AFTER JUNE 30, 2001)
This certifies that ______________, or its assigns (the "Holder"),
for value received, is entitled to purchase from IMPROVENET, INC., a
California corporation (the "Company"), having a place of business at 444
High Street, Suite 275, Palo Alto, California 94301, a maximum of
________________ fully paid and nonassessable shares of the Company's Series
A Preferred Stock ("Series A Preferred Stock") for cash at a price of $1.00
per share (the "Stock Purchase Price") at any time or from time to time up to
and including 5:00 p.m. (Pacific time) on the earlier of (i) the closing of
the initial public offering of the Company's Common Stock pursuant to a
registration statement under the Securities Act of 1933, as amended, with net
cash proceeds to the Company (before underwriting discounts, commissions and
fees) (the "Initial Public Offering") in excess of ten million dollars
($10,000,000) or, (ii) June 30, 2001, such earlier date being referred to
herein as the "Expiration Date", upon surrender to the Company at its
principal office (or at such other location as the Company may advise the
Holder in writing) of this Warrant properly endorsed with the Form of
Subscription attached hereto duly filled in and signed and, if applicable,
upon payment in cash or by check of the aggregate Stock Purchase Price for
the number of shares for which this Warrant is being exercised determined in
accordance with the provisions hereof. The Company shall deliver notice of an
Initial Public Offering to the Holder at least 20 days prior to the closing
thereof. The Stock Purchase Price and the number of shares purchasable
hereunder are subject to adjustment as provided in Section 3 of this Warrant.
This Warrant is subject to the following terms and conditions:
1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
1.1 GENERAL. This Warrant is exercisable at the option of
the Holder of record hereof, at any time or from time to time, up to the
Expiration Date for all or any part of the shares of Series A Preferred Stock
(but not for a fraction of a share) which may be purchased hereunder. The
Company agrees that the shares of Series A Preferred Stock purchased under
this Warrant shall be and are deemed to be issued to the Holder hereof as the
record owner of such shares as of the close of business on the date on which
this Warrant shall have been surrendered, properly endorsed, the completed,
executed Form of Subscription delivered and payment made for such
1.
<PAGE>
shares. Certificates for the shares of Series A Preferred Stock so purchased,
together with any other securities or property to which the Holder hereof is
entitled upon such exercise, shall be delivered to the Holder hereof by the
Company at the Company's expense within a reasonable time after the rights
represented by this Warrant have been so exercised. In case of a purchase of
less than all the shares which may be purchased under this Warrant, the
Company shall cancel this Warrant and execute and deliver a new Warrant or
Warrants of like tenor for the balance of the shares purchasable under the
Warrant surrendered upon such purchase to the Holder hereof within a
reasonable time. Each stock certificate so delivered shall be in such
denominations of Series A Preferred Stock as may be requested by the Holder
hereof and shall be registered in the name of such Holder.
1.2 NET ISSUE EXERCISE. Notwithstanding any provisions
herein to the contrary, if the fair market value of one share of the
Company's Series A Preferred Stock is greater than the Stock Purchase Price
(at the date of calculation as set forth below), in lieu of exercising this
Warrant for cash, the Holder may elect to receive shares equal to the value
(as determined below) of this Warrant (or the portion thereof being canceled)
by surrender of this Warrant at the principal office of the Company together
with the properly endorsed Form of Subscription and notice of such election
in which event the Company shall issue to the Holder a number of shares of
Series A Preferred Stock computed using the following formula:
X = Y (A-B)
-----
A
Where X = the number of shares of Series A Preferred
Stock to be issued to the Holder
Y = the number of shares of Series A
Preferred Stock purchasable under
the Warrant or, if only a portion of
the Warrant is being exercised, the
portion of the Warrant being
canceled (at the date of such
calculation)
A = the fair market value of one share
of the Company's Series A Preferred
Stock (at the date of such
calculation)
B = Stock Purchase Price (as adjusted to the
date of such calculation)
For purposes of the above calculation, fair market value of one share of
Series A Preferred Stock shall be determined by the Company's Board of
Directors in good faith; provided, however, that in the event this Warrant is
being exercised upon the Initial Public Offering, the fair market value per
share shall be the product of (i) the per share offering price to the public
of the Initial Public Offering, and (ii) the number of shares of Common Stock
into which each share of Series A Preferred Stock is convertible at the time
of such exercise.
2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company
covenants and agrees that all shares of Series A Preferred Stock which may be
issued upon the
2.
<PAGE>
exercise of the rights represented by this Warrant will, upon issuance, be
duly authorized, validly issued, fully paid and nonassessable and free from
all preemptive rights of any shareholder and free of all taxes, liens and
charges with respect to the issue thereof. The Company further covenants and
agrees that, during the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized and
reserved, for the purpose of issue or transfer upon exercise of the
subscription rights evidenced by this Warrant, a sufficient number of shares
of authorized but unissued Series A Preferred Stock, or other securities and
property, when and as required to provide for the exercise of the rights
represented by this Warrant. The Company will take all such action as may be
necessary to assure that such shares of Series A Preferred Stock may be
issued as provided herein without violation of any applicable law or
regulation, or of any requirements of any domestic securities exchange upon
which the Series A Preferred Stock may be listed; provided, however, that the
Company shall not be required to effect a registration under Federal or State
securities laws with respect to such exercise. The Company will not take any
action which would result in any adjustment of the Stock Purchase Price (as
set forth in Section 3 hereof) if the total number of shares of Series A
Preferred Stock issuable after such action upon exercise of all outstanding
warrants, together with all shares of Series A Preferred Stock then
outstanding and all shares of Series A Preferred Stock then issuable upon
exercise of all options and upon the conversion of all convertible securities
then outstanding, would exceed the total number of shares of Series A
Preferred Stock then authorized by the Company's Restated Articles of
Incorporation.
3. ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The
Stock Purchase Price and the number of shares purchasable upon the exercise
of this Warrant shall be subject to adjustment from time to time upon the
occurrence of certain events described in this Section 3. Upon each
adjustment of the Stock Purchase Price, the Holder of this Warrant shall
thereafter be entitled to purchase, at the Stock Purchase Price resulting
from such adjustment, the number of shares obtained by multiplying the Stock
Purchase Price in effect immediately prior to such adjustment by the number
of shares purchasable pursuant hereto immediately prior to such adjustment,
and dividing the product thereof by the Stock Purchase Price resulting from
such adjustment.
3.1 SUBDIVISION OR COMBINATION OF STOCK. In case the
Company shall at any time subdivide its outstanding shares of Series A
Preferred Stock into a greater number of shares, the Stock Purchase Price in
effect immediately prior to such subdivision shall be proportionately
reduced, and conversely, in case the outstanding shares of Series A Preferred
Stock of the Company shall be combined into a smaller number of shares, the
Stock Purchase Price in effect immediately prior to such combination shall be
proportionately increased.
3.2 DIVIDENDS IN SERIES A PREFERRED STOCK, OTHER STOCK,
PROPERTY, RECLASSIFICATION. If at any time or from time to time the Holders
of Series A Preferred Stock (or any shares of stock or other securities at
the time receivable upon the exercise of this Warrant) shall have received or
become entitled to receive, without payment therefor,
(a) Series A Preferred Stock or any shares of stock or
other securities which are at any time directly or indirectly convertible
into or exchangeable for Series A Preferred
3.
<PAGE>
Stock, or any rights or options to subscribe for, purchase or otherwise
acquire any of the foregoing by way of dividend or other distribution;
(b) any cash paid or payable otherwise than as a cash
dividend; or
(c) Series A Preferred Stock or additional stock or other
securities or property (including cash) by way of spinoff, split-up,
reclassification, combination of shares or similar corporate rearrangement,
(other than shares of Series A Preferred Stock issued as a stock split or
adjustments in respect of which shall be covered by the terms of Section 3.1
above);
then and in each such case, the Holder hereof shall, upon the exercise of
this Warrant, be entitled to receive, in addition to the number of shares of
Series A Preferred Stock receivable thereupon, and without payment of any
additional consideration therefor, the amount of stock and other securities
and property (including cash in the cases referred to in clauses (b) and (c)
above) which such Holder would hold on the date of such exercise had he been
the holder of record of such Series A Preferred Stock as of the date on which
holders of Series A Preferred Stock received or became entitled to receive
such shares or all other additional stock and other securities and property.
3.3 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER
OR SALE. If any recapitalization, reclassification or reorganization of the
capital stock of the Company, or any consolidation or merger of the Company
with another corporation, or the sale of all or substantially all of its
assets or other transaction shall be effected in such a way that holders of
Series A Preferred Stock shall be entitled to receive stock, securities, or
other assets or property (an "Organic Change"), then, as a condition of such
Organic Change, lawful and adequate provisions shall be made by the Company
whereby the Holder hereof shall thereafter have the right to purchase and
receive (in lieu of the shares of the Series A Preferred Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby) such shares of stock, securities or other assets
or property as may be issued or payable with respect to or in exchange for a
number of outstanding shares of such Series A Preferred Stock equal to the
number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby; provided,
however, that in the event the value of the stock, securities or other assets
or property (determined in good faith by the Board of Directors of the
Company) issuable or payable with respect to one share of the Series A
Preferred Stock of the Company immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby is in excess of
the Stock Purchase Price hereof effective at the time of a merger and
securities received in such reorganization, if any, are publicly traded, then
this Warrant shall expire unless exercised prior to such Organic Change. In
the event of any Organic Change, appropriate provision shall be made by the
Company with respect to the rights and interests of the Holder of this
Warrant to the end that the provisions hereof (including, without limitation,
provisions for adjustments of the Stock Purchase Price and of the number of
shares purchasable and receivable upon the exercise of this Warrant) shall
thereafter be applicable, in relation to any shares of stock, securities or
assets thereafter deliverable upon the exercise hereof.
4.
<PAGE>
3.4 CERTAIN EVENTS. If any change in the outstanding Series
A Preferred Stock of the Company or any other event occurs as to which the
other provisions of this Section 3 are not strictly applicable or if strictly
applicable would not fairly protect the purchase rights of the Holder of the
Warrant in accordance with such provisions, then the Board of Directors of
the Company shall make an adjustment in the number and class of shares
available under the Warrant, the Stock Purchase Price or the application of
such provisions, so as to protect such purchase rights as aforesaid. The
adjustment shall be such as will give the Holder of the Warrant upon exercise
for the same aggregate Stock Purchase Price the total number, class and kind
of shares as he would have owned had the Warrant been exercised prior to the
event and had he continued to hold such shares until after the event
requiring adjustment.
3.5 NOTICES OF CHANGE.
(a) Immediately upon any adjustment in the number or class
of shares subject to this Warrant and of the Stock Purchase Price, the
Company shall give written notice thereof to the Holder, setting forth in
reasonable detail and certifying the calculation of such adjustment.
(b) The Company shall give written notice to the Holder at
least 10 business days prior to the date on which the Company closes its
books or takes a record for determining rights to receive any dividends or
distributions.
(C) The Company shall also give written notice to the
Holder at least 20 business days prior to the date on which an Organic Change
shall take place.
4. ISSUE TAX. The issuance of certificates for shares of Series A
Preferred Stock upon the exercise of the Warrant shall be made without charge
to the Holder of the Warrant for any issue tax (other than any applicable
income taxes) in respect thereof; provided, however, that the Company shall
not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any certificate in a name
other than that of the then Holder of the Warrant being exercised.
5. CLOSING OF BOOKS. The Company will at no time close its transfer
books against the transfer of any warrant or of any shares of Series A
Preferred Stock issued or issuable upon the exercise of any warrant in any
manner which interferes with the timely exercise of this Warrant.
6. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing
contained in this Warrant shall be construed as conferring upon the Holder
hereof the right to vote or to consent or to receive notice as a shareholder
of the Company or any other matters or any rights whatsoever as a shareholder
of the Company. No dividends or interest shall be payable or accrued in
respect of this Warrant or the interest represented hereby or the shares
purchasable hereunder until, and only to the extent that, this Warrant shall
have been exercised. No provisions hereof, in the absence of affirmative
action by the Holder to purchase shares of Series A Preferred Stock, and no
mere enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of such Holder for the Stock Purchase Price
or as a
5.
<PAGE>
shareholder of the Company, whether such liability is asserted by the Company
or by its creditors.
7. WARRANTS TRANSFERABLE. Subject to compliance with applicable
federal and state securities laws, this Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the Holder hereof
(except for transfer taxes), upon surrender of this Warrant properly
endorsed. Each taker and holder of this Warrant, by taking or holding the
same, consents and agrees that this Warrant, when endorsed in blank, shall be
deemed negotiable, and that the Holder hereof, when this Warrant shall have
been so endorsed, may be treated by the Company, at the Company's option, and
all other persons dealing with this Warrant as the absolute owner hereof for
any purpose and as the person entitled to exercise the rights represented by
this Warrant, or to the transfer hereof on the books of the Company any
notice to the contrary notwithstanding; but until such transfer on such
books, the Company may treat the registered owner hereof as the owner for all
purposes.
8. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights
and obligations of the Company, of the Holder of this Warrant and of the
holder of shares of Series A Preferred Stock issued upon exercise of this
Warrant, shall survive the exercise of this Warrant.
9. MODIFICATION AND WAIVER. This Warrant and any provision hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
10. NOTICES. Any notice, request or other document required or
permitted to be given or delivered to the Holder hereof or the Company shall
be delivered or shall be sent by certified mail, postage prepaid, to each
such Holder at its address as shown on the books of the Company or to the
Company at the address indicated therefor in the first paragraph of this
Warrant or such other address as either may from time to time provide to the
other.
11. BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding upon
any corporation succeeding the Company by merger, consolidation or
acquisition of all or substantially all of the Company's assets. All of the
obligations of the Company relating to the Series A Preferred Stock issuable
upon the exercise of this Warrant shall survive the exercise and termination
of this Warrant. All of the covenants and agreements of the Company shall
inure to the benefit of the successors and assigns of the Holder hereof.
12. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings
of the several sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. This Warrant
shall be construed and enforced in accordance with, and the rights of the
parties shall be governed by, the laws of the State of California.
13. LOST WARRANTS. The Company represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Company
of the loss, theft, destruction, or mutilation of this Warrant and, in the
case of any such loss, theft or destruction, upon receipt of an indemnity
reasonably satisfactory to the Company, or in the case of any such mutilation
upon surrender and cancellation of such Warrant, the Company, at its expense,
will
6.
<PAGE>
make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant.
14. FRACTIONAL SHARES. No fractional shares shall be issued upon
exercise of this Warrant. The Company shall, in lieu of issuing any
fractional share, pay the Holder entitled to such fraction a sum in cash
equal to such fraction multiplied by the then effective Stock Purchase Price.
[THIS SPACE INTENTIONALLY LEFT BLANK]
7.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its officers, thereunto duly authorized this ______ day of July,
1997.
IMPROVENET, INC.
By:
---------------------------------
Robert L. Stevens, President
ATTEST:
By:
----------------------------------
Jan Sherman, Secretary
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
Date: _________________, 19___
ImproveNet, Inc.
- -------------------
- -------------------
Attn: President
Ladies and Gentlemen:
/ / The undersigned hereby elects to exercise the warrant issued to it by
ImproveNet, Inc. (the "Company") and dated July _____, 1997 Warrant No.
PDW-___ (the "Warrant") and to purchase thereunder
__________________________________ shares of the Series A Preferred
Stock of the Company (the "Shares") at a purchase price of
___________________________________________ Dollars ($__________) per
Share or an aggregate purchase price of
__________________________________ Dollars ($__________) (the "Purchase
Price").
/ / The undersigned hereby elects to convert _______________________
percent (____%) of the value of the Warrant pursuant to the provisions
of Section 1.2 of the Warrant.
Pursuant to the terms of the Warrant the undersigned has delivered
the Purchase Price herewith in full in cash or by certified check or wire
transfer. The undersigned also makes the representations set forth on the
attached Exhibit B of the Warrant.
Very truly yours,
--------------------------------------
By:
--------------------------------
Title:
--------------------------------
<PAGE>
EXHIBIT B
INVESTMENT REPRESENTATION
THIS AGREEMENT MUST BE COMPLETED, SIGNED AND RETURNED ALONG WITH THE
SUBSCRIPTION FORM BEFORE THE SERIES A PREFERRED STOCK ISSUABLE UPON EXERCISE
OF THE WARRANT DATED JULY ___, 1997, WILL BE ISSUED.
_____________________, 19__
ImproveNet, Inc.
- -------------------
- -------------------
Attn: President
Ladies and Gentlemen:
The undersigned, _________________________ ("Purchaser"), intends to
acquire up to ______________ shares of the Series A Preferred Stock (the
"Series A Preferred Stock") of ImproveNet, Inc. (the "Company") from the
Company pursuant to the exercise or conversion of certain Warrants to
purchase Series A Preferred Stock held by Purchaser. The Series A Preferred
Stock will be issued to Purchaser in a transaction not involving a public
offering and pursuant to an exemption from registration under the Securities
Act of 1933, as amended (the "1933 Act") and applicable state securities
laws. In connection with such purchase and in order to comply with the
exemptions from registration relied upon by the Company, Purchaser
represents, warrants and agrees as follows:
Purchaser is acquiring the Series A Preferred Stock for its own
account, to hold for investment, and Purchaser shall not make any sale,
transfer or other disposition of the Series A Preferred Stock in violation of
the 1933 Act or the General Rules and Regulations promulgated thereunder by
the Securities and Exchange Commission (the "SEC") or in violation of any
applicable state securities law.
Purchaser has been advised that the Series A Preferred Stock has not
been registered under the 1933 Act or state securities laws on the ground
that this transaction is exempt from registration, and that reliance by the
Company on such exemptions is predicated in part on Purchaser's
representations set forth in this letter.
Purchaser has been informed that under the 1933 Act, the Series A
Preferred Stock must be held indefinitely unless it is subsequently
registered under the 1933 Act or unless an exemption from such registration
(such as Rule 144) is available with respect to any proposed transfer or
disposition by Purchaser of the Series A Preferred Stock. Purchaser further
agrees that the Company may refuse to permit Purchaser to sell, transfer or
dispose of the Series A Preferred Stock (except as permitted under Rule 144)
unless there is in effect a registration statement under the 1933 Act and any
applicable state securities laws covering such transfer, or
<PAGE>
unless Purchaser furnishes an opinion of counsel reasonably satisfactory to
counsel for the Company, to the effect that such registration is not required.
Purchaser also understands and agrees that there will be placed on
the certificate(s) for the Series A Preferred Stock, or any substitutions
therefor, a legend stating in substance:
"The shares represented by this certificate have not
been registered under the Securities Act of 1933, as amended
(the "Securities Act"), or any state securities laws. These
shares have been acquired for investment and may not be sold
or otherwise transferred in the absence of an effective
registration statement for these shares under the Securities
Act and applicable state securities laws, or an opinion of
counsel satisfactory to the Company that registration is not
required and that an applicable exemption is available."
Purchaser has carefully read this letter and has discussed its
requirements and other applicable limitations upon Purchaser's resale of the
Series A Preferred Stock with Purchaser's counsel.
Very truly yours,
--------------------------------------
By:
--------------------------------
Title:
--------------------------------
<PAGE>
SCHEDULE OF SERIES A PREFERRED WARRANTS
<TABLE>
<CAPTION>
-----------------------------------------------
NAME SHARES
<S> <C>
-----------------------------------------------
Alta California Partners, L.P. 78,213
-----------------------------------------------
Alta Embarcadero Partners, LLC 1,787
-----------------------------------------------
William Egan 4,000
-----------------------------------------------
Charles Finnie 2,000
-----------------------------------------------
David S. Smith & Louise H. Smith, 4,000
Trustees for the David S. &
Louise H. Smith Family Trust
dated 5/4/84
-----------------------------------------------
GC&H Investments 1,600
-----------------------------------------------
Lynn Brown Kargman and 2,000
William M. Kargman
-----------------------------------------------
Thomas W. Brugger 2,000*
-----------------------------------------------
Stuart Gannes 800
-----------------------------------------------
</TABLE>
* previously exercised
<PAGE>
NO. PBW_______
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY
STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
WARRANT TO PURCHASE ______ SHARES
OF SERIES B PREFERRED STOCK OF IMPROVENET, INC.
(VOID AFTER MARCH 17, 2004)
This certifies that ________ or its assigns (the "Holder"), for value
received, is entitled to purchase from IMPROVENET, INC., a California
corporation (the "Company"), having a place of business at 125 University
Avenue, Palo Alto, California 94301, a maximum of ____________ fully paid and
nonassessable shares of the Company's Series B Preferred Stock ("Series B
Preferred Stock") for cash at a price of $2.52 per share (the "Stock Purchase
Price") at any time or from time to time up to and including 5:00 p.m. (Pacific
time) on the earlier of (i) the closing of the initial public offering of the
Company's Common Stock pursuant to a registration statement under the Securities
Act of 1933, as amended, in which (a) the price per share is at least $6.00
(adjusted for any stock dividends, combinations, splits, recapitalization and
the like with respect to such shares), and (b) the net cash proceeds to the
Company (before underwriting discounts, commissions and fees) (the "Initial
Public Offering") in excess of twenty million dollars ($20,000,000) or, (ii)
March 17, 2004, such earlier date being referred to herein as the "Expiration
Date", upon surrender to the Company at its principal office (or at such other
location as the Company may advise the Holder in writing) of this Warrant
properly endorsed with the Form of Subscription attached hereto duly filled in
and signed and, if applicable, upon payment in cash or by check of the aggregate
Stock Purchase Price for the number of shares for which this Warrant is being
exercised determined in accordance with the provisions hereof or by Net Issue
Exercise (as defined in Section 1.2 hereof). The Company shall deliver notice of
an Initial Public Offering to the Holder at least 20 days prior to the closing
thereof. The Stock Purchase Price and the number of shares purchasable hereunder
are subject to adjustment as provided in Section 3 of this Warrant.
This Warrant is subject to the following terms and conditions:
1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
1.1 GENERAL. This Warrant is exercisable at the option of the
Holder of record hereof, at any time or from time to time, up to the Expiration
Date for all or any part of the shares of Series B Preferred Stock (but not for
a fraction of a share) which may be purchased hereunder. The Company agrees that
the shares of Series B Preferred Stock purchased under this Warrant shall be and
are deemed to be issued to the Holder hereof as the record owner of such shares
as of the close of business on the date on which this Warrant shall have been
surrendered, properly endorsed, the completed, executed Form of Subscription
delivered and payment made for such shares. Certificates for the shares of
Series B Preferred Stock so purchased, together with any other securities or
property to which the Holder hereof is entitled upon such exercise, shall be
delivered to the Holder hereof by the Company at the Company's expense within a
reasonable time after the rights represented by this Warrant
1.
<PAGE>
have been so exercised. In case of a purchase of less than all the shares which
may be purchased under this Warrant, the Company shall cancel this Warrant and
execute and deliver a new Warrant or Warrants of like tenor for the balance of
the shares purchasable under the Warrant surrendered upon such purchase to the
Holder hereof within a reasonable time. Each stock certificate so delivered
shall be in such denominations of Series B Preferred Stock as may be requested
by the Holder hereof and shall be registered in the name of such Holder.
1.2 NET ISSUE EXERCISE. Notwithstanding any provisions herein
to the contrary, if the fair market value of one share of the Company's Series B
Preferred Stock is greater than the Stock Purchase Price (at the date of
calculation as set forth below), in lieu of exercising this Warrant for cash,
the Holder may elect to receive shares equal to the value (as determined below)
of this Warrant (or the portion thereof being canceled) by surrender of this
Warrant at the principal office of the Company together with the properly
endorsed Form of Subscription and notice of such election in which event the
Company shall issue to the Holder a number of shares of Series B Preferred Stock
computed using the following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Series B
Preferred Stock to be issued to the
Holder
Y = the number of shares of Series B
Preferred Stock purchasable under
the Warrant or, if only a portion of
the Warrant is being exercised, the
portion of the Warrant being
canceled (at the date of such
calculation)
A = the fair market value of one share
of the Company's Series B Preferred
Stock (at the date of such
calculation)
B = Stock Purchase Price (as adjusted to the
date of such calculation)
For purposes of the above calculation, fair market value of one share of Series
B Preferred Stock shall be determined by the Company's Board of Directors in
good faith; provided, however, that in the event this Warrant is being exercised
upon the Initial Public Offering, the fair market value per share shall be the
product of (i) the per share offering price to the public of the Initial Public
Offering, and (ii) the number of shares of Common Stock into which each share of
Series B Preferred Stock is convertible at the time of such exercise.
2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company
covenants and agrees that all shares of Series B Preferred Stock which may be
issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be duly authorized, validly issued, fully paid and nonassessable and
free from all preemptive rights of any shareholder and free of all taxes, liens
and charges with respect to the issue thereof. The Company further covenants and
agrees that, during the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized and
reserved, for the purpose of issue or transfer upon exercise of the subscription
rights evidenced by this Warrant, a sufficient number of shares of authorized
but unissued Series B Preferred Stock, or other securities and property, when
and as required to provide for the exercise of the
2.
<PAGE>
rights represented by this Warrant. The Company will take all such action as may
be necessary to assure that such shares of Series B Preferred Stock may be
issued as provided herein without violation of any applicable law or regulation,
or of any requirements of any domestic securities exchange upon which the Series
B Preferred Stock may be listed; provided, however, that the Company shall not
be required to effect a registration under Federal or State securities laws with
respect to such exercise. The Company will not take any action which would
result in any adjustment of the Stock Purchase Price (as set forth in Section 3
hereof) if the total number of shares of Series B Preferred Stock issuable after
such action upon exercise of all outstanding warrants, together with all shares
of Series B Preferred Stock then outstanding and all shares of Series B
Preferred Stock then issuable upon exercise of all options and upon the
conversion of all convertible securities then outstanding, would exceed the
total number of shares of Series B Preferred Stock then authorized by the
Company's Restated Articles of Incorporation.
3. ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The Stock
Purchase Price and the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 3. Upon each adjustment of the Stock
Purchase Price, the Holder of this Warrant shall thereafter be entitled to
purchase, at the Stock Purchase Price resulting from such adjustment, the number
of shares obtained by multiplying the Stock Purchase Price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant hereto
immediately prior to such adjustment, and dividing the product thereof by the
Stock Purchase Price resulting from such adjustment.
3.1 SUBDIVISION OR COMBINATION OF STOCK. In case the Company
shall at any time subdivide its outstanding shares of Series B Preferred Stock
into a greater number of shares, the Stock Purchase Price in effect immediately
prior to such subdivision shall be proportionately reduced, and conversely, in
case the outstanding shares of Series B Preferred Stock of the Company shall be
combined into a smaller number of shares, the Stock Purchase Price in effect
immediately prior to such combination shall be proportionately increased.
3.2 DIVIDENDS IN SERIES B PREFERRED STOCK, OTHER STOCK,
PROPERTY, RECLASSIFICATION. If at any time or from time to time the Holders of
Series B Preferred Stock (or any shares of stock or other securities at the time
receivable upon the exercise of this Warrant) shall have received or become
entitled to receive, without payment therefor,
(a) Series B Preferred Stock or any shares of stock
or other securities which are at any time directly or indirectly convertible
into or exchangeable for Series B Preferred Stock, or any rights or options to
subscribe for, purchase or otherwise acquire any of the foregoing by way of
dividend or other distribution;
(b) any cash paid or payable otherwise than as a cash
dividend; or
(c) Series B Preferred Stock or additional stock or
other securities or property (including cash) by way of spinoff, split-up,
reclassification, combination of shares or similar corporate rearrangement,
(other than shares of Series B Preferred Stock issued as a stock split or
adjustments in respect of which shall be covered by the terms of Section 3.1
above); then and in each such case, the Holder hereof shall, upon the exercise
of this Warrant, be entitled to receive, in addition to the number of shares of
Series B Preferred Stock receivable thereupon, and without payment of any
additional consideration therefor, the amount of stock and other securities and
property (including cash in the cases referred to in clauses (b) and (c) above)
which such Holder would hold on the date of such exercise had it been the holder
of record of such Series B Preferred Stock as of the date on which holders
3.
<PAGE>
of Series B Preferred Stock received or became entitled to receive such shares
or all other additional stock and other securities and property.
3.3 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE. If any recapitalization, reclassification or reorganization of the capital
stock of the Company, or any consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets or other
transaction shall be effected in such a way that holders of Series B Preferred
Stock shall be entitled to receive stock, securities, or other assets or
property (an "Organic Change"), then, as a condition of such Organic Change,
lawful and adequate provisions shall be made by the Company whereby the Holder
hereof shall thereafter have the right to purchase and receive (in lieu of the
shares of the Series B Preferred Stock of the Company immediately theretofore
purchasable and receivable upon the exercise of the rights represented hereby)
such shares of stock, securities or other assets or property as may be issued or
payable with respect to or in exchange for a number of outstanding shares of
such Series B Preferred Stock equal to the number of shares of such stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby; provided, however, that in the event the value of the
stock, securities or other assets or property (determined in good faith by the
Board of Directors of the Company) issuable or payable with respect to one share
of the Series B Preferred Stock of the Company immediately theretofore
purchasable and receivable upon the exercise of the rights represented hereby is
in excess of the Stock Purchase Price hereof effective at the time of a merger
and securities received in such reorganization, if any, are publicly traded,
then this Warrant shall expire unless exercised prior to such Organic Change. In
the event of any Organic Change, appropriate provision shall be made by the
Company with respect to the rights and interests of the Holder of this Warrant
to the end that the provisions hereof (including, without limitation, provisions
for adjustments of the Stock Purchase Price and of the number of shares
purchasable and receivable upon the exercise of this Warrant) shall thereafter
be applicable, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise hereof.
3.4 CERTAIN EVENTS. If any change in the outstanding Series B
Preferred Stock of the Company or any other event occurs as to which the other
provisions of this Section 3 are not strictly applicable or if strictly
applicable would not fairly protect the purchase rights of the Holder of the
Warrant in accordance with such provisions, then the Board of Directors of the
Company shall make an adjustment in the number and class of shares available
under the Warrant, the Stock Purchase Price or the application of such
provisions, so as to protect such purchase rights as aforesaid. The adjustment
shall be such as will give the Holder of the Warrant upon exercise for the same
aggregate Stock Purchase Price the total number, class and kind of shares as it
would have owned had the Warrant been exercised prior to the event and had it
continued to hold such shares until after the event requiring adjustment.
3.5 NOTICES OF CHANGE.
(a) Immediately upon any adjustment in the number or
class of shares subject to this Warrant and of the Stock Purchase Price, the
Company shall give written notice thereof to the Holder, setting forth in
reasonable detail and certifying the calculation of such adjustment.
(b) The Company shall give written notice to the
Holder at least ten (10) business days prior to the date on which the Company
closes its books or takes a record for determining rights to receive any
dividends or distributions.
(c) The Company shall also give written notice to the
Holder at least thirty (30) business days prior to the date on which an Organic
Change shall take place.
4.
<PAGE>
4. ISSUE TAX. The issuance of certificates for shares of Series B
Preferred Stock upon the exercise of the Warrant shall be made without charge to
the Holder of the Warrant for any issue tax (other than any applicable income
taxes) in respect thereof; provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer involved
in the issuance and delivery of any certificate in a name other than that of the
then Holder of the Warrant being exercised.
5. CLOSING OF BOOKS. The Company will at no time close its transfer
books against the transfer of any warrant or of any shares of Series B Preferred
Stock issued or issuable upon the exercise of any warrant in any manner which
interferes with the timely exercise of this Warrant.
6. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing
contained in this Warrant shall be construed as conferring upon the Holder
hereof the right to vote or to consent or to receive notice as a shareholder of
the Company or any other matters or any rights whatsoever as a shareholder of
the Company. No dividends or interest shall be payable or accrued in respect of
this Warrant or the interest represented hereby or the shares purchasable
hereunder until, and only to the extent that, this Warrant shall have been
exercised. No provisions hereof, in the absence of affirmative action by the
Holder to purchase shares of Series B Preferred Stock, and no mere enumeration
herein of the rights or privileges of the Holder hereof, shall give rise to any
liability of such Holder for the Stock Purchase Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by its creditors.
7. WARRANTS TRANSFERABLE. Subject to compliance with applicable federal
and state securities laws, this Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the Holder hereof (except
for transfer taxes), upon surrender of this Warrant properly endorsed. Each
taker and holder of this Warrant, by taking or holding the same, consents and
agrees that this Warrant, when endorsed in blank, shall be deemed negotiable,
and that the Holder hereof, when this Warrant shall have been so endorsed, may
be treated by the Company, at the Company's option, and all other persons
dealing with this Warrant as the absolute owner hereof for any purpose and as
the person entitled to exercise the rights represented by this Warrant, or to
the transfer hereof on the books of the Company any notice to the contrary
notwithstanding; but until such transfer on such books, the Company may treat
the registered owner hereof as the owner for all purposes.
8. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights and
obligations of the Company, of the Holder of this Warrant and of the holder of
shares of Series B Preferred Stock issued upon exercise of this Warrant, shall
survive the exercise of this Warrant.
9. MODIFICATION AND WAIVER. This Warrant and any provision hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
10. NOTICES. Any notice, request or other document required or
permitted to be given or delivered to the Holder hereof or the Company shall be
delivered or shall be sent by certified mail, postage prepaid, to each such
Holder at its address as shown on the books of the Company or to the Company at
the address indicated therefor in the first paragraph of this Warrant or such
other address as either may from time to time provide to the other.
11. BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding upon
any corporation succeeding the Company by merger, consolidation or acquisition
of all or substantially all of the
5.
<PAGE>
Company's assets unless such Warrant expires prior to such an Organic Change
pursuant to Section 3.3 hereof. All of the obligations of the Company relating
to the Series B Preferred Stock issuable upon the exercise of this Warrant shall
survive the exercise and termination of this Warrant. All of the covenants and
agreements of the Company shall inure to the benefit of the successors and
assigns of the Holder hereof.
12. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of
the several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of California.
13. LOST WARRANTS. The Company represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Company, at its expense, will
make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant.
14. FRACTIONAL SHARES. No fractional shares shall be issued upon
exercise of this Warrant. The Company shall, in lieu of issuing any fractional
share, pay the Holder entitled to such fraction a sum in cash equal to such
fraction multiplied by the then effective Stock Purchase Price.
[THIS SPACE INTENTIONALLY LEFT BLANK]
6.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its officers, thereunto duly authorized this 17th day of March,
1998.
IMPROVENET, INC.
By:
----------------------------------
Robert L. Stevens, President
ATTEST:
By:
----------------------------------
Jan Sherman, Secretary
WARRANT
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
Date: _________________, 19___
ImproveNet, Inc.
125 University Avenue
Palo Alto, CA 94301
Attn: President
Ladies and Gentlemen:
| | The undersigned hereby elects to exercise the warrant issued to it by
ImproveNet, Inc. (the "Company"), dated March 17, 1998, Warrant No.
PBW- < < one > > (the "Warrant") and to purchase thereunder
__________________________________ shares of the Series B Preferred
Stock of the Company (the "Shares") at a purchase price of
___________________________________________ Dollars ($__________) per
Share or an aggregate purchase price of
__________________________________ Dollars ($__________) (the "Purchase
Price").
| | The undersigned hereby elects to convert _______________________
percent (____%) of the value of the Warrant pursuant to the provisions
of Section 1.2 of the Warrant.
Pursuant to the terms of the Warrant the undersigned has delivered the
Purchase Price herewith in full in cash or by certified check or wire transfer.
The undersigned also makes the representations set forth on the attached Exhibit
B of the Warrant.
Very truly yours,
---------------------------------------------
By:
------------------------------------------
Title:
----------------------------------------
WARRANT
<PAGE>
EXHIBIT B
INVESTMENT REPRESENTATION
THIS AGREEMENT MUST BE COMPLETED, SIGNED AND RETURNED ALONG WITH THE
SUBSCRIPTION FORM BEFORE THE SERIES B PREFERRED STOCK ISSUABLE UPON EXERCISE OF
THE WARRANT DATED ___________ , 1998, WILL BE ISSUED.
_____________________, 19__
ImproveNet, Inc.
125 University Avenue
Palo Alto, CA 94301
Attn: President
Ladies and Gentlemen:
The undersigned, _________________________ ("Purchaser"), intends to
acquire up to ______________ shares of the Series B Preferred Stock (the "Series
B Preferred Stock") of ImproveNet, Inc. (the "Company") from the Company
pursuant to the exercise or conversion of certain Warrants to purchase Series B
Preferred Stock held by Purchaser. The Series B Preferred Stock will be issued
to Purchaser in a transaction not involving a public offering and pursuant to an
exemption from registration under the Securities Act of 1933, as amended (the
"1933 Act") and applicable state securities laws. In connection with such
purchase and in order to comply with the exemptions from registration relied
upon by the Company, Purchaser represents, warrants and agrees as follows:
Purchaser is acquiring the Series B Preferred Stock for its own
account, to hold for investment, and Purchaser shall not make any sale, transfer
or other disposition of the Series B Preferred Stock in violation of the 1933
Act or the General Rules and Regulations promulgated thereunder by the
Securities and Exchange Commission (the "SEC") or in violation of any applicable
state securities law.
Purchaser has been advised that the Series B Preferred Stock has not
been registered under the 1933 Act or state securities laws on the ground that
this transaction is exempt from registration, and that reliance by the Company
on such exemptions is predicated in part on Purchaser's representations set
forth in this letter.
Purchaser has been informed that under the 1933 Act, the Series B
Preferred Stock must be held indefinitely unless it is subsequently registered
under the 1933 Act or unless an exemption from such registration (such as Rule
144) is available with respect to any proposed transfer or disposition by
Purchaser of the Series B Preferred Stock. Purchaser further agrees that the
Company may refuse to permit Purchaser to sell, transfer or dispose of the
Series B Preferred Stock (except as permitted under Rule 144) unless there is in
effect a registration statement under the 1933 Act and any applicable state
securities laws covering such transfer, or unless Purchaser furnishes an opinion
of counsel reasonably satisfactory to counsel for the Company, to the effect
that such registration is not required.
Purchaser also understands and agrees that there will be placed on the
certificate(s) for the Series B Preferred Stock, or any substitutions therefor,
a legend stating in substance:
<PAGE>
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities laws. These shares have been
acquired for investment and may not be sold or otherwise transferred in
the absence of an effective registration statement for these shares
under the Securities Act and applicable state securities laws, or an
opinion of counsel satisfactory to the Company that registration is not
required and that an applicable exemption is available."
Purchaser has carefully read this letter and has discussed its
requirements and other applicable limitations upon Purchaser's resale of the
Series B Preferred Stock with Purchaser's counsel.
Very truly yours,
---------------------------------------------
By:
------------------------------------------
Title:
----------------------------------------
WARRANT
<PAGE>
SCHEDULE OF SERIES B PREFERRED WARRANTS
<TABLE>
<CAPTION>
-----------------------------------------------
NAME SHARES
<S> <C>
-----------------------------------------------
Allstate Insurance Company 12,054
-----------------------------------------------
Alta California Partners, L.P. 13,198
-----------------------------------------------
Alta Embarcadero Partners, LLC 302
-----------------------------------------------
ARCH Venture Fund III, L.P. 19,768
-----------------------------------------------
Harold Kawaguchi 241
-----------------------------------------------
Alex Knight 241
-----------------------------------------------
Madrona Investment Group, LLP 964
-----------------------------------------------
Anthony Glaves 241
-----------------------------------------------
</TABLE>
<PAGE>
NO. PCW-1
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM
UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
WARRANT TO PURCHASE 47,167 SHARES
OF SERIES C PREFERRED STOCK OF
IMPROVENET, INC.
(VOID AFTER MARCH 28, 2004)
This certifies that Hambrecht & Quist LLC or its assigns (the "HOLDER"), for
value received, is entitled to purchase from IMPROVENET, INC., a Delaware
corporation (the "COMPANY"), having a place of business at 1286 Oddstad
Drive, Redwood City, California, a maximum of 47,167 fully paid and
nonassessable shares of the Company's Series C Preferred Stock ("PREFERRED
STOCK") for cash at a price equal to $6.53 per share (the "STOCK PURCHASE
PRICE") at any time or from time to time up to and including 5:00 p.m.
(Pacific time) on the earlier of (i) the closing of the initial public
offering of the Company's common stock pursuant to a registration statement
under the Securities Act of 1933, as amended (the "INITIAL PUBLIC OFFERING")
or (ii) five years from the date of this Warrant, such earlier day being
referred to herein as the "EXPIRATION DATE," upon surrender to the Company at
its principal office (or at such other location as the Company may advise the
Holder in writing) of this Warrant properly endorsed with the Form of
Subscription attached hereto duly filled in and signed and, if applicable,
upon payment in cash or by check of the aggregate Stock Purchase Price for
the number of shares for which this Warrant is being exercised determined in
accordance with the provisions hereof. The Company shall deliver notice of
the Initial Public Offering to the Holder at least thirty (30) days prior to
the closing thereof. The Stock Purchase Price and the number of shares
purchasable hereunder are subject to adjustment as provided in Section 3 of
this Warrant.
This Warrant is subject to the following terms and conditions:
1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
1.1 GENERAL. This Warrant is exercisable at the option of the
holder of record hereof, at any time or from time to time, up to the
Expiration Date or as specified in Section 3.3 hereto for all or any part of
the shares of Preferred Stock (but not for a fraction of a share) which may
be purchased hereunder. The Company agrees that the shares of Preferred
Stock purchased under this Warrant shall be and are deemed to be issued to
the Holder hereof as the record owner of such shares as of the close of
business on the date on which this Warrant shall have been surrendered,
properly endorsed, the completed, executed Form of Subscription delivered and
payment made for such shares. Certificates for the shares of Preferred Stock
so purchased, together with any other securities or property to which the
Holder hereof is entitled upon such exercise, shall be delivered to the
Holder hereof by the Company at the Company's expense within a reasonable
time after the rights represented by this Warrant have been so exercised. In
case of a purchase of less than all the shares which may be purchased under
this Warrant, the Company shall cancel this Warrant and execute and deliver a
new Warrant or Warrants of like tenor for the balance of the shares
purchasable under the Warrant surrendered upon such purchase
<PAGE>
to the Holder hereof within a reasonable time. Each stock certificate so
delivered shall be in such denominations of Preferred Stock as may be
requested by the Holder hereof and shall be registered in the name of such
Holder.
1.2 NET ISSUE EXERCISE. Notwithstanding any provisions herein to the
contrary, if the fair market value of one share of the Company's Preferred Stock
is greater than the Stock Purchase Price (at the date of calculation as set
forth below), in lieu of exercising this Warrant for cash, the Holder may elect
to receive shares equal to the value (as determined below) of this Warrant (or
the portion thereof being canceled) by surrender of this Warrant at the
principal office of the Company together with the properly endorsed Form of
Subscription and notice of such election in which event the Company shall issue
to the Holder a number of shares of Preferred Stock computed using the following
formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Preferred
Stock to be issued to the Holder
Y = the number of shares of Preferred Stock
purchasable under the Warrant or, if only a
portion of the Warrant is being exercised, the
portion of the Warrant being canceled (at the
date of such calculation)
A = the fair market value of one share of the
Company's Preferred Stock (at the date of such
calculation)
B = Stock Purchase Price (as adjusted to the
date of such calculation)
For purposes of the above calculation, fair market value of one share of
Preferred Stock shall be determined by the Company's Board of Directors in
good faith; provided, however, that in the event the Company makes an Initial
Public Offering of its common stock the fair market value per share shall be
the product of (i) the per share offering price to the public of the
Company's Initial Public Offering, and (ii) the number of shares of common
stock into which each share of Preferred Stock is convertible at the time of
such exercise.
2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company
covenants and agrees that all shares of Preferred Stock which may be issued
upon the exercise of the rights represented by this Warrant will, upon
issuance, be duly authorized, validly issued, fully paid and nonassessable
and free from all preemptive rights of any stockholder and free of all taxes,
liens and charges with respect to the issue thereof. The Company further
covenants and agrees that, during the period within which the rights
represented by this Warrant may be exercised, the Company will at all times
have authorized and reserved, for the purpose of issue or transfer upon
exercise of the subscription rights evidenced by this Warrant, a sufficient
number of shares of authorized but unissued Preferred Stock, or other
securities and property, when and as required to provide for the exercise of
the rights represented by this Warrant. The Company will take all such
action as may be necessary to assure that such shares of Preferred Stock may
be issued as provided herein without violation of any applicable law or
regulation, or of any requirements of any domestic securities exchange upon
which the Preferred Stock may be listed;
2.
<PAGE>
provided, however, that the Company shall not be required to effect a
registration under Federal or State securities laws with respect to such
exercise. The Company will not take any action which would result in any
adjustment of the Stock Purchase Price (as set forth in Section 3 hereof) (a)
if the total number of shares of Preferred Stock issuable after such action
upon exercise of all outstanding warrants, together with all shares of
Preferred Stock then outstanding and all shares of Preferred Stock then
issuable upon exercise of all options and upon the conversion of all
convertible securities then outstanding, would exceed the total number of
shares of Preferred Stock then authorized by the Company's Restated
Certificate of Incorporation, or (b) if the total number of shares of common
stock issuable after such action upon the conversion of all such shares of
Preferred Stock, together with all shares of common stock then issuable upon
exercise of all options and upon the conversion of all such shares of
Preferred Stock, together with all shares of common stock then outstanding
and all shares of common stock then issuable upon exercise of all options and
upon the conversion of all convertible securities then outstanding would
exceed the total number of shares of common stock then authorized by the
Company's Restated Certificate of Incorporation.
3. ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The Stock
Purchase Price and the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence
of certain events described in this Section 3. Upon each adjustment of the
Stock Purchase Price, the Holder of this Warrant shall thereafter be entitled
to purchase, at the Stock Purchase Price resulting from such adjustment, the
number of shares obtained by multiplying the Stock Purchase Price in effect
immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment, and dividing the
product thereof by the Stock Purchase Price resulting from such adjustment.
3.1 SUBDIVISION OR COMBINATION OF STOCK. In case the Company
shall at any time subdivide its outstanding shares of Preferred Stock into a
greater number of shares, the Stock Purchase Price in effect immediately
prior to such subdivision shall be proportionately reduced, and conversely,
in case the outstanding shares of Preferred Stock of the Company shall be
combined into a smaller number of shares, the Stock Purchase Price in effect
immediately prior to such combination shall be proportionately increased.
3.2 DIVIDENDS IN PREFERRED STOCK, OTHER STOCK, PROPERTY,
RECLASSIFICATION. If at any time or from time to time the Holders of
Preferred Stock (or any shares of stock or other securities at the time
receivable upon the exercise of this Warrant) shall have received or become
entitled to receive, without payment therefor,
(a) Preferred Stock or any shares of stock or other
securities which are at any time directly or indirectly convertible into or
exchangeable for Preferred Stock, or any rights or options to subscribe for,
purchase or otherwise acquire any of the foregoing by way of dividend or
other distribution,
(b) any cash paid or payable otherwise than as a cash
dividend, or
(c) Preferred Stock or additional stock or other securities
or property (including cash) by way of spinoff, split-up, reclassification,
combination of shares or similar corporate rearrangement, (other than shares
of Preferred Stock issued as a stock split or adjustments in respect of which
shall be covered by the terms of Section 3.1 above), then and in each such
case, the Holder hereof
3.
<PAGE>
shall, upon the exercise of this Warrant, be entitled to receive, in addition
to the number of shares of Preferred Stock receivable thereupon, and without
payment of any additional consideration therefor, the amount of stock and
other securities and property (including cash in the cases referred to in
clause (b) above and this clause (c)) which such Holder would hold on the
date of such exercise had he been the holder of record of such Preferred
Stock as of the date on which holders of Preferred Stock received or became
entitled to receive such shares or all other additional stock and other
securities and property.
3.3 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE. If any recapitalization, reclassification or reorganization of the
capital stock of the Company, or any consolidation or merger of the Company
with another corporation, or the sale of all or substantially all of its
assets or other transaction shall be effected in such a way that holders of
Preferred Stock shall be entitled to receive stock, securities, or other
assets or property (an "ORGANIC CHANGE"), then, as a condition of such
Organic Change, lawful and adequate provisions shall be made by the Company
whereby the Holder hereof shall thereafter have the right to purchase and
receive (in lieu of the shares of the Preferred Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby) such shares of stock, securities or other assets
or property as may be issued or payable with respect to or in exchange for a
number of outstanding shares of such Preferred Stock equal to the number of
shares of such stock immediately theretofore purchasable and receivable upon
the exercise of the rights represented hereby; provided, however, that in the
event the value of the stock, securities or other assets or property
(determined in good faith by the Board of Directors of the Company) issuable
or payable with respect to one share of the Preferred Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby is in excess of the Stock Purchase Price hereof
effective at the time of a merger and securities received in such
reorganization, if any, are publicly traded, then this Warrant shall expire
unless exercised prior to such Organic Change. In the event of any Organic
Change, appropriate provision shall be made by the Company with respect to
the rights and interests of the Holder of this Warrant to the end that the
provisions hereof (including, without limitation, provisions for adjustments
of the Stock Purchase Price and of the number of shares purchasable and
receivable upon the exercise of this Warrant) shall thereafter be applicable,
in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise hereof. The Company will not effect any such
consolidation, merger or sale unless, prior to the consummation thereof, the
successor corporation (if other than the Company) resulting from such
consolidation or the corporation purchasing such assets shall assume by
written instrument reasonably satisfactory in form and substance to the
Holders of a majority of the warrants to purchase Preferred Stock then
outstanding, executed and mailed or delivered to the registered Holder hereof
at the last address of such Holder appearing on the books of the Company, the
obligation to deliver to such Holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such Holder may be
entitled to purchase.
3.4 CERTAIN EVENTS. If any change in the outstanding Preferred
Stock of the Company or any other event occurs as to which the other
provisions of this Section 3 are not strictly applicable or if strictly
applicable would not fairly protect the purchase rights of the Holder of the
Warrant in accordance with such provisions, then the Board of Directors of
the Company shall make an adjustment in the number and class of shares
available under the Warrant, the Stock Purchase Price or the application of
such provisions, so as to protect such purchase rights as aforesaid. The
adjustment shall be such as will give the Holder of the Warrant upon exercise
for the same aggregate Stock Purchase Price the total number, class and kind
of shares as he would have owned had the Warrant been exercised prior to the
event and had he continued to hold such shares until after the event
requiring adjustment.
4.
<PAGE>
3.5 NOTICES OF CHANGE.
(a) Immediately upon any adjustment in the number or class of
shares subject to this Warrant and of the Stock Purchase Price, the Company
shall give written notice thereof to the Holder, setting forth in reasonable
detail and certifying the calculation of such adjustment.
(b) The Company shall give written notice to the Holder at
least ten business days prior to the date on which the Company closes its
books or takes a record for determining rights to receive any dividends or
distributions.
(c) The Company shall also give written notice to the Holder
at least thirty (30) business days prior to the date on which an Organic
Change shall take place.
4. ISSUE TAX. The issuance of certificates for shares of Preferred
Stock upon the exercise of the Warrant shall be made without charge to the
Holder of the Warrant for any issue tax (other than any applicable income
taxes) in respect thereof; provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any certificate in a name other than
that of the then Holder of the Warrant being exercised.
5. MARKET STAND-OFF AGREEMENT. The Company (or a representative of
the underwriters) may, in connection with an underwritten registration of the
offering of any securities of the Company under the Act, require that the
Holder not sell, dispose of (other than to donees who agree to be similarly
bound), transfer, make any short sale of, grant any option for the purchase
of, or enter into any hedging or similar transaction with the same economic
effect as a sale, any common stock or other securities of the Company held by
the undersigned (the "RESTRICTED SECURITIES"), for a period of time specified
by the underwriters(s) (not to exceed one hundred eighty (180) days)
following the effective date of the registration statement of the Company
filed under the Act relating to the Company's Initial Public Offering. The
Holder agrees to enter into any agreements as may be reasonably requested by
the Company and/or the underwriter(s) which are consistent with the foregoing
or which are necessary to give further effect thereto. In order to enforce
the foregoing covenant, the Company may impose stop-transfer instructions
with respect to the Restricted Securities held by the Holder until the end of
such period.
6. CLOSING OF BOOKS. The Company will at no time close its transfer
books against the transfer of any warrant or of any shares of Preferred Stock
issued or issuable upon the exercise of any warrant in any manner which
interferes with the timely exercise of this Warrant.
7. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing
contained in this Warrant shall be construed as conferring upon the Holder
hereof the right to vote or to consent or to receive notice as a stockholder
of the Company or any other matters or any rights whatsoever as a stockholder
of the Company. No dividends or interest shall be payable or accrued in
respect of this Warrant or the interest represented hereby or the shares
purchasable hereunder until, and only to the extent that, this Warrant shall
have been exercised. No provisions hereof, in the absence of affirmative
action by the holder to purchase shares of Preferred Stock, and no mere
enumeration herein of the rights or privileges of the holder hereof, shall
give rise to any liability of such Holder for the Stock Purchase
5.
<PAGE>
Price or as a stockholder of the Company, whether such liability is asserted
by the Company or by its creditors.
8. WARRANTS TRANSFERABLE. Subject to compliance with applicable
federal and state securities laws, this Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the holder hereof
(except for transfer taxes), upon surrender of this Warrant properly
endorsed. Each taker and holder of this Warrant, by taking or holding the
same, consents and agrees that this Warrant, when endorsed in blank, shall be
deemed negotiable, and that the holder hereof, when this Warrant shall have
been so endorsed, may be treated by the Company, at the Company's option, and
all other persons dealing with this Warrant as the absolute owner hereof for
any purpose and as the person entitled to exercise the rights represented by
this Warrant, or to the transfer hereof on the books of the Company any
notice to the contrary notwithstanding; but until such transfer on such
books, the Company may treat the registered owner hereof as the owner for all
purposes.
9. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights and
obligations of the Company, of the holder of this Warrant and of the holder
of shares of Preferred Stock issued upon exercise of this Warrant, shall
survive the exercise of this Warrant.
10. MODIFICATION AND WAIVER. This Warrant and any provision hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
11. NOTICES. Any notice, request or other document required or
permitted to be given or delivered to the holder hereof or the Company shall
be delivered or shall be sent by certified mail, postage prepaid, to each
such holder at its address as shown on the books of the Company or to the
Company at the address indicated therefor in the first paragraph of this
Warrant or such other address as either may from time to time provide to the
other.
12. BINDING EFFECT ON SUCCESSORS. Except as specified in Section 3.3
hereof, this Warrant shall be binding upon any corporation succeeding the
Company by merger, consolidation or acquisition of all or substantially all
of the Company's assets. All of the obligations of the Company relating to
the Preferred Stock issuable upon the exercise of this Warrant shall survive
the exercise and termination of this Warrant. All of the covenants and
agreements of the Company shall inure to the benefit of the successors and
assigns of the holder hereof.
13. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings
of the several sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. This Warrant
shall be construed and enforced in accordance with, and the rights of the
parties shall be governed by, the laws of the State of California.
14. LOST WARRANTS. The Company represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Company
of the loss, theft, destruction, or mutilation of this Warrant and, in the
case of any such loss, theft or destruction, upon receipt of an indemnity
reasonably satisfactory to the Company, or in the case of any such mutilation
upon surrender and cancellation of such Warrant, the Company, at its expense,
will make and deliver a new Warrant, of like tenor, in lieu of the lost,
stolen, destroyed or mutilated Warrant.
6.
<PAGE>
15. FRACTIONAL SHARES. No fractional shares shall be issued upon
exercise of this Warrant. The Company shall, in lieu of issuing any
fractional share, pay the holder entitled to such fraction a sum in cash
equal to such fraction multiplied by the then effective Stock Purchase Price.
7.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its officers, thereunto duly authorized this ______ day of March,
1999.
IMPROVENET, INC.
a Delaware corporation
By:________________________________________
Title:_____________________________________
ATTEST:
____________________________
Secretary
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM Date: _________________, 19___
ImproveNet, Inc.
1286 Oddstad Drive
Redwood City, CA 94063
Attn: President
Ladies and Gentlemen:
/ / The undersigned hereby elects to exercise the warrant issued to it by
ImproveNet, Inc. (the "COMPANY") and dated March 29, 1999 Warrant No.
PCW-1 (the "WARRANT") and to purchase thereunder
__________________________________ shares of the Series C Preferred
Stock of the Company (the "SHARES") at a purchase price of $6.53 per
Share or an aggregate purchase price of
__________________________________ Dollars ($__________) (the "PURCHASE
PRICE").
/ / The undersigned hereby elects to convert _______________________ percent
(____%) of the value of the Warrant pursuant to the provisions of
Section 1.2 of the Warrant.
Pursuant to the terms of the Warrant the undersigned has delivered the
Purchase Price herewith in full in cash or by certified check or wire
transfer.
Very truly yours,
_________________________________
By:______________________________
Title:___________________________
<PAGE>
SCHEDULE OF SERIES C PREFERRED WARRANTS
<TABLE>
<CAPTION>
-----------------------------------------------
NAME SHARES
<S> <C>
-----------------------------------------------
Hambrecht & Quist California 47,167
-----------------------------------------------
</TABLE>
<PAGE>
NO. PDW-______
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
WARRANT TO PURCHASE ________ SHARES
OF SERIES D PREFERRED STOCK OF
IMPROVENET, INC.
(VOID AFTER SEPTEMBER 9, 2003)
This certifies that ________________ or its assigns (the "HOLDER"), for value
received, is entitled to purchase from IMPROVENET, INC., a Delaware corporation
(the "COMPANY"), having a place of business at 1286 Oddstad Drive, Redwood City,
California, a maximum of __________ fully paid and nonassessable shares of the
Company's Series D Preferred Stock ("PREFERRED STOCK") for cash at a price equal
to $0.01 per share (the "STOCK PURCHASE PRICE") at any time or from time to time
up to and including 5:00 p.m. (Pacific time) three years from the date of this
Warrant, such earlier day being referred to herein as the "EXPIRATION DATE,"
upon surrender to the Company at its principal office (or at such other location
as the Company may advise the Holder in writing) of this Warrant properly
endorsed with the Form of Subscription attached hereto duly filled in and signed
and, if applicable, upon payment in cash or by check of the aggregate Stock
Purchase Price for the number of shares for which this Warrant is being
exercised determined in accordance with the provisions hereof. The Stock
Purchase Price and the number of shares purchasable hereunder are subject to
adjustment as provided in Section 3 of this Warrant.
This Warrant is subject to the following terms and conditions:
1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
1.1 GENERAL. This Warrant is exercisable at the option of the
holder of record hereof, at any time or from time to time, up to the Expiration
Date or as specified in Section 3.3 hereto for all or any part of the shares of
Preferred Stock (but not for a fraction of a share) which may be purchased
hereunder. The Company agrees that the shares of Preferred Stock purchased under
this Warrant shall be and are deemed to be issued to the Holder hereof as the
record owner of such shares as of the close of business on the date on which
this Warrant shall have been surrendered, properly endorsed, the completed,
executed Form of Subscription delivered and payment made for such shares.
Certificates for the shares of Preferred Stock so purchased, together with any
other securities or property to which the Holder hereof is entitled upon such
exercise, shall be delivered to the Holder hereof by the Company at the
Company's expense within a reasonable time after the rights represented by this
Warrant have been so exercised. In case of a purchase of less than all the
shares which may be purchased under this Warrant, the Company shall cancel this
Warrant and execute and deliver a new Warrant or Warrants of like tenor for the
balance of the shares purchasable under the Warrant surrendered upon such
purchase to the Holder hereof within a reasonable time. Each stock certificate
so delivered shall be in such denominations of Preferred Stock as may be
requested by the Holder hereof and shall be registered in the name of such
Holder.
<PAGE>
1.2 NET ISSUE EXERCISE. Notwithstanding any provisions herein to
the contrary, if the fair market value of one share of the Company's Preferred
Stock is greater than the Stock Purchase Price (at the date of calculation as
set forth below), in lieu of exercising this Warrant for cash, the Holder may
elect to receive shares equal to the value (as determined below) of this Warrant
(or the portion thereof being canceled) by surrender of this Warrant at the
principal office of the Company together with the properly endorsed Form of
Subscription and notice of such election in which event the Company shall issue
to the Holder a number of shares of Preferred Stock computed using the following
formula:
X = Y (A-B)
-------
A
Where X = the number of shares of
Preferred Stock to be issued to the
Holder
Y = the number of shares of
Preferred Stock purchasable under
the Warrant or, if only a portion of
the Warrant is being exercised, the
portion of the Warrant being
canceled (at the date of such
calculation)
A = the fair market value of one
share of the Company's Preferred
Stock (at the date of such
calculation)
B = Stock Purchase Price (as
adjusted to the date of such
calculation)
For purposes of the above calculation, fair market value of one share
of Preferred Stock shall be determined by the Company's Board of Directors in
good faith; provided, however, that in the event the Company makes an initial
public offering of its common stock the fair market value per share shall be the
product of (i) the per share offering price to the public of the Company's
initial public offering, and (ii) the number of shares of common stock into
which each share of Preferred Stock is convertible at the time of such exercise.
2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company
covenants and agrees that all shares of Preferred Stock which may be issued upon
the exercise of the rights represented by this Warrant will, upon issuance, be
duly authorized, validly issued, fully paid and nonassessable and free from all
preemptive rights of any stockholder and free of all taxes, liens and charges
with respect to the issue thereof. The Company further covenants and agrees
that, during the period within which the rights represented by this Warrant may
be exercised, the Company will at all times have authorized and reserved, for
the purpose of issue or transfer upon exercise of the subscription rights
evidenced by this Warrant, a sufficient number of shares of authorized but
unissued Preferred Stock, or other securities and property, when and as required
to provide for the exercise of the rights represented by this Warrant. The
Company will take all such action as may be necessary to assure that such shares
of Preferred Stock may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of any domestic securities
exchange upon which the Preferred Stock may be listed; provided, however, that
the Company shall not be required to effect a registration under federal or
state securities laws with respect to such exercise. The Company will not take
any action which would result in any adjustment of the Stock Purchase Price (as
set forth in Section 3 hereof) (a) if the total number of shares of Preferred
Stock issuable after such action upon exercise of all outstanding warrants,
together
2
<PAGE>
with all shares of Preferred Stock then outstanding and all shares of
Preferred Stock then issuable upon exercise of all options and upon the
conversion of all convertible securities then outstanding, would exceed the
total number of shares of Preferred Stock then authorized by the Company's
Second Restated Certificate of Incorporation, or (b) if the total number of
shares of common stock issuable after such action upon the conversion of all
such shares of Preferred Stock, together with all shares of common stock then
issuable upon exercise of all options and upon the conversion of all such shares
of Preferred Stock, together with all shares of common stock then outstanding
and all shares of common stock then issuable upon exercise of all options and
upon the conversion of all convertible securities then outstanding would exceed
the total number of shares of common stock then authorized by the Company's
Second Restated Certificate of Incorporation.
3. ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The Stock
Purchase Price and the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 3. Upon each adjustment of the Stock
Purchase Price, the Holder of this Warrant shall thereafter be entitled to
purchase, at the Stock Purchase Price resulting from such adjustment, the number
of shares obtained by multiplying the Stock Purchase Price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant hereto
immediately prior to such adjustment, and dividing the product thereof by the
Stock Purchase Price resulting from such adjustment.
3.1 SUBDIVISION OR COMBINATION OF STOCK. In case the Company shall
at any time subdivide its outstanding shares of Preferred Stock into a greater
number of shares, the Stock Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Preferred Stock of the Company shall be combined into a
smaller number of shares, the Stock Purchase Price in effect immediately prior
to such combination shall be proportionately increased.
3.2 DIVIDENDS IN PREFERRED STOCK, OTHER STOCK, PROPERTY,
RECLASSIFICATION. If at any time or from time to time the Holders of Preferred
Stock (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received or become entitled to receive,
without payment therefor,
(a) Preferred Stock or any shares of stock or other securities
which are at any time directly or indirectly convertible into or exchangeable
for Preferred Stock, or any rights or options to subscribe for, purchase or
otherwise acquire any of the foregoing by way of dividend or other distribution,
(b) any cash paid or payable otherwise than as a cash
dividend, or
(c) Preferred Stock or additional stock or other securities or
property (including cash) by way of spinoff, split-up, reclassification,
combination of shares or similar corporate rearrangement, (other than shares of
Preferred Stock issued as a stock split or adjustments in respect of which shall
be covered by the terms of Section 3.1 above), then and in each such case, the
Holder hereof shall, upon the exercise of this Warrant, be entitled to receive,
in addition to the number of shares of Preferred Stock receivable thereupon, and
without payment of any additional consideration therefor, the amount of stock
and other securities and property (including cash in the cases referred to in
clause (b) above and this clause (c)) which such Holder would hold on the date
of such exercise had he been the
3
<PAGE>
holder of record of such Preferred Stock as of the date on which holders of
Preferred Stock received or became entitled to receive such shares or all
other additional stock and other securities and property.
3.3 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE. If any recapitalization, reclassification or reorganization of the
capital stock of the Company, or any consolidation or merger of the Company
with another corporation, or the sale of all or substantially all of its
assets or other transaction shall be effected in such a way that holders of
Preferred Stock shall be entitled to receive stock, securities, or other
assets or property (an "ORGANIC CHANGE"), then, as a condition of such
Organic Change, lawful and adequate provisions shall be made by the Company
whereby the Holder hereof shall thereafter have the right to purchase and
receive (in lieu of the shares of the Preferred Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby) such shares of stock, securities or other assets
or property as may be issued or payable with respect to or in exchange for a
number of outstanding shares of such Preferred Stock equal to the number of
shares of such stock immediately theretofore purchasable and receivable upon
the exercise of the rights represented hereby; provided, however, that in the
event the value of the stock, securities or other assets or property
(determined in good faith by the Board of Directors of the Company) issuable
or payable with respect to one share of the Preferred Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby is in excess of the Stock Purchase Price hereof
effective at the time of a merger and securities received in such
reorganization, if any, are publicly traded, then this Warrant shall expire
unless exercised prior to such Organic Change. In the event of any Organic
Change, appropriate provision shall be made by the Company with respect to
the rights and interests of the Holder of this Warrant to the end that the
provisions hereof (including, without limitation, provisions for adjustments
of the Stock Purchase Price and of the number of shares purchasable and
receivable upon the exercise of this Warrant) shall thereafter be applicable,
in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise hereof. The Company will not effect any such
consolidation, merger or sale unless, prior to the consummation thereof, the
successor corporation (if other than the Company) resulting from such
consolidation or the corporation purchasing such assets shall assume by
written instrument reasonably satisfactory in form and substance to the
Holders of a majority of the warrants to purchase Preferred Stock then
outstanding, executed and mailed or delivered to the registered Holder hereof
at the last address of such Holder appearing on the books of the Company, the
obligation to deliver to such Holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such Holder may be
entitled to purchase.
3.4 CERTAIN EVENTS. If any change in the outstanding Preferred
Stock of the Company or any other event occurs as to which the other provisions
of this Section 3 are not strictly applicable or if strictly applicable would
not fairly protect the purchase rights of the Holder of the Warrant in
accordance with such provisions, then the Board of Directors of the Company
shall make an adjustment in the number and class of shares available under the
Warrant, the Stock Purchase Price or the application of such provisions, so as
to protect such purchase rights as aforesaid. The adjustment shall be such as
will give the Holder of the Warrant upon exercise for the same aggregate Stock
Purchase Price the total number, class and kind of shares as he would have owned
had the Warrant been exercised prior to the event and had he continued to hold
such shares until after the event requiring adjustment.
4
<PAGE>
3.5 NOTICES OF CHANGE.
(a) Immediately upon any adjustment in the number or class of
shares subject to this Warrant and of the Stock Purchase Price, the Company
shall give written notice thereof to the Holder, setting forth in reasonable
detail and certifying the calculation of such adjustment.
(b) The Company shall give written notice to the Holder at
least ten business days prior to the date on which the Company closes its books
or takes a record for determining rights to receive any dividends or
distributions.
(c) The Company shall also give written notice to the Holder
at least thirty (30) business days prior to the date on which an Organic Change
shall take place.
4. ISSUE TAX. The issuance of certificates for shares of Preferred
Stock upon the exercise of the Warrant shall be made without charge to the
Holder of the Warrant for any issue tax (other than any applicable income taxes)
in respect thereof; provided, however, that the Company shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the then
Holder of the Warrant being exercised.
5. MARKET STAND-OFF AGREEMENT. The Company (or a representative of the
underwriters) may, in connection with an underwritten registration of the
offering of any securities of the Company under the Act, require that the Holder
not sell, dispose of (other than to donees who agree to be similarly bound),
transfer, make any short sale of, grant any option for the purchase of, or enter
into any hedging or similar transaction with the same economic effect as a sale,
any common stock or other securities of the Company held by the undersigned (the
"RESTRICTED SECURITIES"), for a period of time specified by the underwriters(s)
(not to exceed one hundred eighty (180) days) following the effective date of
the registration statement of the Company filed under the Act relating to the
Company's initial public offering. The Holder agrees to enter into any
agreements as may be reasonably requested by the Company and/or the
underwriter(s) which are consistent with the foregoing or which are necessary to
give further effect thereto. In order to enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to the Restricted
Securities held by the Holder until the end of such period.
6. CLOSING OF BOOKS. The Company will at no time close its transfer
books against the transfer of any warrant or of any shares of Preferred Stock
issued or issuable upon the exercise of any warrant in any manner which
interferes with the timely exercise of this Warrant.
7. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing
contained in this Warrant shall be construed as conferring upon the Holder
hereof the right to vote or to consent or to receive notice as a stockholder of
the Company or any other matters or any rights whatsoever as a stockholder of
the Company. No dividends or interest shall be payable or accrued in respect of
this Warrant or the interest represented hereby or the shares purchasable
hereunder until, and only to the extent that, this Warrant shall have been
exercised. No provisions hereof, in the absence of affirmative action by the
holder to purchase shares of Preferred Stock, and no mere enumeration herein of
the rights or privileges of the holder hereof, shall give rise to any liability
of such Holder for the Stock Purchase Price or as a stockholder of the Company,
whether such liability is asserted by the Company or by its creditors.
5
<PAGE>
8. WARRANTS TRANSFERABLE. Subject to compliance with applicable federal
and state securities laws, this Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the holder hereof (except
for transfer taxes), upon surrender of this Warrant properly endorsed. Each
taker and holder of this Warrant, by taking or holding the same, consents and
agrees that this Warrant, when endorsed in blank, shall be deemed negotiable,
and that the holder hereof, when this Warrant shall have been so endorsed, may
be treated by the Company, at the Company's option, and all other persons
dealing with this Warrant as the absolute owner hereof for any purpose and as
the person entitled to exercise the rights represented by this Warrant, or to
the transfer hereof on the books of the Company any notice to the contrary
notwithstanding; but until such transfer on such books, the Company may treat
the registered owner hereof as the owner for all purposes.
9. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights and
obligations of the Company, of the holder of this Warrant and of the holder of
shares of Preferred Stock issued upon exercise of this Warrant, shall survive
the exercise of this Warrant.
10. MODIFICATION AND WAIVER. This Warrant and any provision hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
11. NOTICES. Any notice, request or other document required or
permitted to be given or delivered to the holder hereof or the Company shall be
delivered or shall be sent by certified mail, postage prepaid, to each such
holder at its address as shown on the books of the Company or to the Company at
the address indicated therefor in the first paragraph of this Warrant or such
other address as either may from time to time provide to the other.
12. BINDING EFFECT ON SUCCESSORS. Except as specified in Section 3.3
hereof, this Warrant shall be binding upon any corporation succeeding the
Company by merger, consolidation or acquisition of all or substantially all of
the Company's assets. All of the obligations of the Company relating to the
Preferred Stock issuable upon the exercise of this Warrant shall survive the
exercise and termination of this Warrant. All of the covenants and agreements of
the Company shall inure to the benefit of the successors and assigns of the
holder hereof.
13. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of
the several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of New York. Each party hereto hereby
irrevocably and unconditionally submits to the exclusive jurisdiction of the
state and federal courts located in the State of New York for any actions, suits
or proceedings arising out of or relating to this Warrant and the transactions
contemplated hereby. Each party hereto agrees not to commence any action, suit
or proceeding relating thereto except in such courts. The parties hereto
irrevocably and unconditionally waive any objection to the laying of venue in
any action, suit or proceeding arising out of this Warrant or the transactions
contemplated hereby, in such state or federal courts aforesaid and hereby
further irrevocably and unconditionally waive and agree not to plead or claim in
any such court that any such action, suit or proceeding brought in any such
court has been brought in an inconvenient forum.
6
<PAGE>
THE PARTIES HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING TO
WHICH THEY ARE PARTIES INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY
ARISING OUT OF, RELATED TO OR CONNECTED WITH THIS WARRANT.
14. LOST WARRANTS. The Company represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Company, at its expense, will
make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant.
15. FRACTIONAL SHARES. No fractional shares shall be issued upon
exercise of this Warrant. The Company shall, in lieu of issuing any fractional
share, pay the holder entitled to such fraction a sum in cash equal to such
fraction multiplied by the then effective Stock Purchase Price.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
7
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its officers, thereunto duly authorized this 10th day of September,
1999.
IMPROVENET, INC.
a Delaware corporation
By:
-------------------------
President
ATTEST:
- -----------------------------
Secretary
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
Date: _________________, 19___
ImproveNet, Inc.
1286 Oddstad Drive
Redwood City, CA 94063
Attn: President
Ladies and Gentlemen:
/ / The undersigned hereby elects to exercise the warrant issued to it by
ImproveNet, Inc. (the "COMPANY") and dated September ____, 1999
Warrant No. PDW-1 (the "WARRANT") and to purchase thereunder
__________________________________ shares of the Series D Preferred
Stock of the Company (the "SHARES") at a purchase price of $0.01 per
Share or an aggregate purchase price of
__________________________________ Dollars ($__________) (the "PURCHASE
PRICE").
/ / The undersigned hereby elects to convert _______________________
percent (____%) of the value of the Warrant pursuant to the provisions
of Section 1.2 of the Warrant.
Pursuant to the terms of the Warrant the undersigned has delivered the
Purchase Price herewith in full in cash or by certified check or wire transfer.
Very truly yours,
-------------------------------
By:
---------------------------
Title:
-------------------------
<PAGE>
SCHEDULE OF SERIES D PREFERRED WARRANTS
<TABLE>
<CAPTION>
-----------------------------------------------
NAME SHARES
<S> <C>
-----------------------------------------------
General Electric Appliances 209,000
-----------------------------------------------
GE Capital Equity Investments, Inc. 117,000
-----------------------------------------------
</TABLE>
<PAGE>
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IMPROVENET, INC.
FOURTH AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
DATED NOVEMBER 23, 1999
==============================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
SECTION 1. TERMINATION OF PRIOR AGREEMENT.. . . . . . . . . . . . . . . . . . . . .1
1.1 Termination of Prior Agreement . . . . . . . . . . . . . . . . . . . . .1
SECTION 2. GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
SECTION 3. REGISTRATION; RESTRICTIONS ON TRANSFER.. . . . . . . . . . . . . . . . .3
3.1 Restrictions on Transfer.. . . . . . . . . . . . . . . . . . . . . . . .3
3.2 Demand Registration. . . . . . . . . . . . . . . . . . . . . . . . . . .4
3.3 Piggyback Registrations. . . . . . . . . . . . . . . . . . . . . . . . .5
3.4 Form S-3 Registration. . . . . . . . . . . . . . . . . . . . . . . . . .6
3.5 Expenses of Registration.. . . . . . . . . . . . . . . . . . . . . . . .7
3.6 Obligations of the Company.. . . . . . . . . . . . . . . . . . . . . . .8
3.7 Termination of Registration Rights.. . . . . . . . . . . . . . . . . . .9
3.8 Delay of Registration; Furnishing Information. . . . . . . . . . . . . .9
3.9 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
3.10 Assignment of Registration Rights. . . . . . . . . . . . . . . . . . . 11
3.11 Amendment of Registration Rights.. . . . . . . . . . . . . . . . . . . 11
3.12 Limitation on Subsequent Registration Rights.. . . . . . . . . . . . . 11
3.13 "Market Stand-Off" Agreement.. . . . . . . . . . . . . . . . . . . . . 12
3.14 Rule 144 Reporting.. . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 4. COVENANTS OF THE COMPANY.. . . . . . . . . . . . . . . . . . . . . . . 12
4.1 Basic Financial Information and Reporting. . . . . . . . . . . . . . . 12
4.2 Additional Information and Rights. . . . . . . . . . . . . . . . . . . 13
4.3 Inspection Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.4 Confidentiality of Records.. . . . . . . . . . . . . . . . . . . . . . 14
4.5 Reservation of Common Stock. . . . . . . . . . . . . . . . . . . . . . 14
4.6 Stock Vesting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.7 Key Man Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.8 Proprietary Information and Inventions Agreement.. . . . . . . . . . . 14
4.9 Corporate Existence. . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.10 Corporate Properties.. . . . . . . . . . . . . . . . . . . . . . . . . 14
4.11 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.12 Material Obligations.. . . . . . . . . . . . . . . . . . . . . . . . . 15
4.13 Laws and Regulations.. . . . . . . . . . . . . . . . . . . . . . . . . 15
i.
<PAGE>
TABLE OF CONTENTS, CONT.
4.14 Indebtedness.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.15 Hiring of Key Employees. . . . . . . . . . . . . . . . . . . . . . . . 15
4.16 Observer Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.17 Board and Observer Compensation. . . . . . . . . . . . . . . . . . . . 15
4.18 Board Meetings.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.19 Directors' and Officers' Liability Insurance.. . . . . . . . . . . . . 16
4.20 Budget.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.21 Small Business Concern.. . . . . . . . . . . . . . . . . . . . . . . . 16
4.22 Patent Diligence.. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.23 Nonsolicitation Convenant. . . . . . . . . . . . . . . . . . . . . . . 16
4.24 Termination of Covenants.. . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 5. RIGHTS OF FIRST OFFER. . . . . . . . . . . . . . . . . . . . . . . . . 16
5.1 Subsequent Offerings.. . . . . . . . . . . . . . . . . . . . . . . . . 16
5.2 Exercise of Rights.. . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.3 Issuance of Equity Securities to Other Persons.. . . . . . . . . . . . 17
5.4 Termination of Rights of First Offer.. . . . . . . . . . . . . . . . . 17
5.5 Transfer of Rights of First Offer. . . . . . . . . . . . . . . . . . . 17
5.6 Excluded Securities. . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 6. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.1 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.2 Survival.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.3 Successors and Assigns.. . . . . . . . . . . . . . . . . . . . . . . . 19
6.4 Entire Agreement.. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.5 Severability.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.6 Amendment and Waiver.. . . . . . . . . . . . . . . . . . . . . . . . . 19
6.7 Delays or Omissions. . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.8 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.9 Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.10 Titles and Subtitles.. . . . . . . . . . . . . . . . . . . . . . . . . 20
6.11 Additional Investors.. . . . . . . . . . . . . . . . . . . . . . . . . 20
6.12 Counterparts.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
ii.
<PAGE>
IMPROVENET, INC.
FOURTH AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
THIS FOURTH AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (the
"AGREEMENT") is entered into as of the 23rd day of November, 1999, by and
among IMPROVENET, INC., a Delaware corporation (the "COMPANY"), and the
holders of the Company's Series A Preferred Stock ("SERIES A STOCK"), the
holders of the Company's Series B Preferred Stock (the "SERIES B STOCK"), the
holders of the Company's Series C Preferred Stock (the "SERIES C STOCK"), the
holders of the Company's Series D Preferred Stock (the "SERIES D STOCK") and
the purchasers of the Company's Series E Preferred Stock (the "SERIES E
STOCK"), all as set forth on EXHIBIT A hereto. The holders of the Series A
Stock, Series B Stock, Series C Stock, and Series D Stock and purchasers of
the Series E Stock shall be referred to collectively hereinafter as the
"INVESTORS" and each individually as an "INVESTOR."
RECITALS
WHEREAS, the Company issued Series D Stock to certain Investors and
entered into a Third Amended and Restated Investor Rights Agreement dated
September 10, 1999 (the "PRIOR AGREEMENT") by and between the Company, the
holders of Series A Stock, Series B Stock and Series C Stock and the
purchasers of Series D Stock. The holders of Series A Stock, Series B Stock,
Series C Stock and Series D Stock possess certain registration rights,
information rights and other rights under such Prior Agreement;
WHEREAS, the Company and the undersigned holders of Series A Stock,
Series B Stock, Series C Stock and Series D Stock desire to terminate the
Prior Agreement and to accept the rights and obligations created pursuant
hereto in lieu of the rights granted to them under the Prior Agreement;
WHEREAS, the Company proposes to sell and issue up to three million
(3,000,000) shares of its Series E Stock pursuant to the First Series E
Preferred Stock and Warrant Purchase Agreement and the Second Series E
Preferred Stock and Warrant Purchase Agreement (the "PURCHASE AGREEMENTS");
and
WHEREAS, as a condition of entering into the Purchase Agreements, the
purchasers of Series E Stock have requested that the Company extend to them
registration rights, information rights and other rights as set forth below.
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement and in the Purchase Agreements, the parties mutually agree as
follows:
SECTION 1. TERMINATION OF PRIOR AGREEMENT.
1.1 TERMINATION OF PRIOR AGREEMENT. The Prior Agreement is terminated
in its entirety and restated herein. Such termination and restatement is
effective upon execution of this Agreement by the holders of at least a
majority in interest of the Registrable Securities (as the term is defined in
the Prior Agreement). Upon such execution, all provisions of, rights granted
and covenants made in the Prior Agreement are hereby waived, released and
terminated in their entirety and shall have no further force or effect. The
rights and covenants contained in this Agreement set forth the sole and
entire agreement
1.
<PAGE>
among the Company and the Investors on the subject matter hereof and
supersede any and all rights granted and covenants made under any prior
agreements.
SECTION 2. GENERAL.
2.1 DEFINITIONS. As used in this Agreement the following terms shall
have the following respective meanings:
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"HOLDER" means (i) any person owning of record Registrable
Securities (as hereinafter defined) that have not been sold to the public or
(ii) any assignee of record of such Registrable Securities in accordance with
Section 3.10 hereof.
"INITIAL OFFERING" means the Company's first firm commitment
underwritten public offering of its common stock registered under the
Securities Act (as hereinafter defined).
"QUALIFIED PUBLIC OFFERING" means the Company's first underwritten
public offering of its common stock registered under the Securities Act
pursuant to which all outstanding shares of preferred stock have converted
into common stock of the Company.
"REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of
effectiveness of such registration statement or document.
"REGISTRABLE SECURITIES" means (i) common stock of the Company
issued or issuable upon conversion of the Shares (as hereinafter defined) or
pursuant to exercise of warrants held by GE Capital Equity Investments, Inc.
and General Electric Appliances; and (ii) any common stock of the Company
issued as (or issuable upon the conversion or exercise of any warrant, right
or other security which is issued as) a dividend or other distribution with
respect to, or in exchange for or in replacement of, such any securities
described in subsection (i) above. Notwithstanding the foregoing,
Registrable Securities shall not include any securities sold by a person to
the public either pursuant to a registration statement, Rule 144 or sold in a
private transaction in which the transferor's rights under Section 3 of this
Agreement are not assigned.
"REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number of
shares determined by calculating the total number of shares of the Company's
common stock that are Registrable Securities and either (1) are then issued
and outstanding or (2) are issuable pursuant to then exercisable or
convertible securities.
"REGISTRATION EXPENSES" shall mean all expenses incurred by the
Company in complying with Sections 3.2, 3.3 and 3.4 hereof, including,
without limitation, all registration and filing fees, printing expenses, fees
and disbursements of counsel for the Company, reasonable fees and
disbursements not to exceed twenty-five thousand dollars ($25,000) of a
single special counsel for the Holders, blue sky fees and expenses and the
expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the
Company which shall be paid in any event by the Company).
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
2.
<PAGE>
"SELLING EXPENSES" shall mean all underwriting discounts and
selling commissions applicable to the sale.
"SHARES" shall mean the Company's Series A Stock issued pursuant to
the Series A Preferred Stock and Warrant Purchase Agreement dated June 30,
1997 and shares of Series A Stock issued upon exercise of Warrants to
purchase Series A Stock held by the Investors listed on EXHIBIT A hereto and
their permitted assigns, the Company's Series B Stock issued pursuant to the
Series B Preferred Stock and Warrant Purchase Agreement dated March 17, 1997
and shares of Series B Stock issued upon exercise of the Warrants to purchase
Series B Stock held by the Investors listed on EXHIBIT A hereto and their
permitted assigns, the Company's Series C Stock held by the Investors listed
on EXHIBIT A hereto, the Company's Series D Stock held by the Investors
listed on EXHIBIT A hereto and the Company's Series E Stock held by the
Investors listed on EXHIBIT A hereto and Shares of Common Stock issued upon
the exercise of the Warrants to purchase Common Stock held by the Investors
listed on EXHIBIT A hereto.
"FORM S-3" means such form under the Securities Act as in effect on
the date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC (as hereinafter defined) which permits
inclusion or incorporation of substantial information by reference to other
documents filed by the Company with the SEC.
"SEC" or "COMMISSION" means the Securities and Exchange Commission.
SECTION 3. REGISTRATION; RESTRICTIONS ON TRANSFER.
3.1 RESTRICTIONS ON TRANSFER.
(a) Each Holder agrees not to make any disposition of all or any
portion of the Shares or Registrable Securities unless and until:
(i) There is then in effect a registration statement under
the Securities Act covering such proposed disposition and such disposition is
made in accordance with such registration statement; or
(ii) (A) The transferee has agreed in writing to be bound by
the terms of this Agreement, (B) such Holder shall have notified the Company
of the proposed disposition and (C) if reasonably requested by the Company,
such Holder shall have furnished the Company with an opinion of counsel,
reasonably satisfactory to the Company, that such disposition will not
require registration of such shares under the Securities Act. It is agreed
that the Company will not require opinions of counsel for transactions made
pursuant to Rule 144.
(iii) Notwithstanding the provisions of paragraphs (i) and
(ii) above, no such registration statement or opinion of counsel shall be
necessary for a transfer by a Holder which is (A) a partnership to its
partners or former partners in accordance with partnership interests, (B) a
corporation to its shareholders in accordance with their interest in the
corporation, (C) a limited liability company to its members or former members
in accordance with their interest in the limited liability company or (D) to
a Holder's family member or trust for the benefit of an individual Holder;
provided that in each case the transferee will be subject to the terms of
this Agreement to the same extent as if he were an original Holder hereunder,
or (E) an affiliate of a Holder.
3.
<PAGE>
(b) Each certificate representing Shares or Registrable Securities
shall (unless otherwise permitted by the provisions of the Agreement) be
stamped or otherwise imprinted with a legend substantially similar to the
following (in addition to any legend required under applicable state
securities laws or as provided elsewhere in this Agreement):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE "ACT")
AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
(c) The Company shall be obligated to reissue promptly unlegended
certificates at the request of any Holder thereof if the Holder shall have
obtained an opinion of counsel (which counsel may be counsel to the Company
or in-house counsel of a Holder) reasonably acceptable to the Company to the
effect that the securities proposed to be disposed of may lawfully be so
disposed of without registration, qualification or legend.
(d) Any legend endorsed on an instrument pursuant to applicable
state securities laws and the stop-transfer instructions with respect to such
securities shall be removed upon receipt by the Company of an order of the
appropriate blue sky authority authorizing such removal.
3.2 DEMAND REGISTRATION.
(a) Subject to the conditions of this Section 3.2, if the Company
shall receive a written request from the Holders of more than a majority of
the Registrable Securities then outstanding (the "INITIATING HOLDERS") that
the Company file a registration statement under the Securities Act covering
the registration of Registrable Securities having a net aggregate offering
price to the public in excess of twenty million dollars ($20,000,000), then
the Company shall, within thirty (30) days of the receipt thereof, give
written notice of such request to all Holders, and subject to the limitations
of this Section 3.2, use its best efforts to effect, as soon as practicable,
the registration under the Securities Act of all Registrable Securities that
the Holders request to be registered.
(b) If the Initiating Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall
so advise the Company as a part of their request made pursuant to this
Section 3.2 or any request pursuant to Section 3.4 and the Company shall
include such information in the written notice referred to in Section 3.2(a)
or Section 3.4(a), as applicable. In such event, the right of any Holder to
include its Registrable Securities in such registration shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of
such Holder's Registrable Securities in the underwriting (unless otherwise
mutually agreed by a majority in interest of the Initiating Holders and such
Holder) to the extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall enter into an underwriting
agreement in customary form with the underwriter or underwriters selected for
such underwriting by a majority in interest of the Initiating Holders (which
underwriter or underwriters shall be reasonably acceptable to the Company).
Notwithstanding any other provision of this Section 3.2 or Section 3.4, if
the underwriter advises the Company that marketing factors require a
limitation of the number of securities to be underwritten
4.
<PAGE>
(including Registrable Securities) then the Company shall so advise all
Holders of Registrable Securities which would otherwise be underwritten
pursuant hereto, and the number of shares that may be included in the
underwriting shall be allocated to the Holders of such Registrable Securities
on a pro rata basis based on the number of Registrable Securities held by all
such Holders (including the Initiating Holders). Any Registrable Securities
excluded or withdrawn from such underwriting shall be withdrawn from the
registration.
(c) The Company shall not be required to effect a registration
pursuant to this Section 3.2:
(i) prior to the earlier of (i) March 17, 2001 or (ii) six
months after the closing of the Initial Offering; or
(ii) after the Company has effected three (3) registrations
pursuant to this Section 3.2, and such registrations have been declared or
ordered effective; or
(iii) during the period starting with the date of filing of,
and ending on the date one hundred eighty (180) days following the effective
date of the registration statement pertaining to the Initial Offering;
provided that the Company makes reasonable good faith efforts to cause such
registration statement to become effective;
(iv) if within thirty (30) days of receipt of a written
request from Initiating Holders pursuant to Section 3.2(a), the Company gives
notice to the Holders of the Company's intention to file a registration
statement with the SEC in connection with its Initial Offering within ninety
(90) days and the Company shall make reasonable good faith efforts to cause
such registration statement to become effective within ninety (90) days of
such filing with the SEC; provided that such right to delay a request shall
be exercised by the Company not more than once in any twelve (12) month
period; or
(v) if the Company shall furnish to Holders requesting a
registration statement pursuant to this Section 3.2, a certificate signed by
the Chairman of the Board stating that in the good faith judgment of the
Board of Directors of the Company, it would be seriously detrimental to the
Company and its stockholders for such registration statement to be effected
at such time, in which event the Company shall have the right to defer such
filing for a period of not more than sixty (60) days after receipt of the
request of the Initiating Holders; provided that such right to delay a
request shall be exercised by the Company not more than once in any twelve
(12) month period.
3.3 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders of
Registrable Securities in writing at least thirty (30) days prior to the
filing of any registration statement under the Securities Act for purposes of
a public offering of securities of the Company (including, but not limited
to, registration statements relating to secondary offerings of securities of
the Company, but excluding registration statements relating to employee
benefit plans or with respect to corporate reorganizations or other
transactions under Rule 145 of the Securities Act) and will afford each such
Holder an opportunity to include in such registration statement all or part
of such Registrable Securities held by such Holder. Each Holder desiring to
include in any such registration statement all or any part of the Registrable
Securities held by it shall, within twenty (20) days after the
above-described notice from the Company, so notify the Company in writing.
Such notice shall state the intended method of disposition of the Registrable
Securities by such Holder. If a Holder decides not to include all of its
Registrable Securities in any registration statement thereafter filed by the
Company, such Holder shall nevertheless continue to have the right to include
any Registrable Securities in any subsequent registration statement or
5.
<PAGE>
registration statements as may be filed by the Company with respect to
offerings of its securities, all upon the terms and conditions set forth
herein.
(a) UNDERWRITING. If the registration statement under which the
Company gives notice under this Section 3.3 is for an underwritten offering,
the Company shall so advise the Holders of Registrable Securities. In such
event, the right of any such Holder to be included in a registration pursuant
to this Section 3.3 shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of such Holder's Registrable Securities
in the underwriting to the extent provided herein. All Holders proposing to
distribute their Registrable Securities through such underwriting shall enter
into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by the Company. Notwithstanding
any other provision of the Agreement, if the underwriter determines in good
faith that marketing factors require a limitation of the number of shares to
be underwritten, the number of shares that may be included in the
underwriting shall be allocated, first, to the Company; second, to the
Holders on a pro rata basis based on the total number of Registrable
Securities held by the Holders; and third, to any stockholder of the Company
(other than a Holder) on a pro rata basis. No such reduction shall (i)
reduce the securities being offered by the Company for its own account to be
included in the registration and underwriting, or (ii) reduce the amount of
securities of the selling Holders included in the registration below
thirty-three percent (33%) of the total amount of securities included in such
registration, unless such offering is the Initial Offering and such
registration does not include shares of any other selling stockholders, in
which event any or all of the Registrable Securities of the Holders may be
excluded in accordance with the immediately preceding sentence. In no event
will shares of any other selling stockholder be included in any such
registration which would reduce the number of shares which may be included by
Holders without the written consent of holders of not less than a majority of
the Registrable Securities proposed to be sold in the offering. For purposes
of pro rata apportionment pursuant to this Section 3.3, for any Holder that
is a partnership or corporation, the partners, retired partners and
shareholders of such Holder, or the estates and family members of any such
partners and retired partners and any trusts for the benefit of any of the
foregoing persons shall be deemed to be a single "selling Holder," and any
pro rata reduction with respect to such "selling Holder" shall be based upon
the aggregate amount of Registrable Securities owned by all such related
entities and individuals.
(b) RIGHT TO TERMINATE REGISTRATION. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 3.3 prior to the effectiveness of such registration whether or not
any Holder has elected to include securities in such registration. The
Registration Expenses of such withdrawn registration shall be borne by the
Company in accordance with Section 3.5 hereof.
3.4 FORM S-3 REGISTRATION. In case the Company shall receive from any
Holder or Holders of Registrable Securities a written request or requests
that the Company effect a registration on Form S-3 or any similar short-form
registration statement and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such Holder
or Holders, the Company will:
(a) promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Holders of Registrable
Securities; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such
6.
<PAGE>
request as are specified in a written request given within twenty (20) days
after receipt of such written notice from the Company; PROVIDED, HOWEVER,
that the Company shall not be obligated to effect any such registration,
qualification or compliance pursuant to this Section 3.4:
(i) if Form S-3 is not available for such offering by the
Holders;
(ii) if the Holders, together with the holders of any other
securities of the Company entitled to inclusion in such registration, propose
to sell Registrable Securities and such other securities (if any) at an
aggregate price to the public of less than five hundred thousand dollars
($500,000);
(iii) if the Company shall furnish to the Holders a
certificate signed by the Chairman of the Board of Directors of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its
stockholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form
S-3 registration statement for a period of not more than sixty (60) days
after receipt of the request of the Holder or Holders under this Section 3.4;
provided, that such right to delay a request shall be exercised by the
Company not more than once in any twelve (12) month period;
(iv) if the Company has within the twelve (12) month period
preceding the date of such request, already effected one (1) such
registration on Form S-3 for the Holders pursuant to this Section 3.4; or
(v) in any particular jurisdiction in which the Company
would be required to qualify to do business or to execute a general consent
to service of process in effecting such registration, qualification or
compliance.
(c) Subject to the foregoing, the Company shall file a Form S-3
registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable after receipt
of the request or requests of the Holders. All such Registration Expenses
incurred in connection with registrations requested pursuant to this Section
3.4 after the first three (3) registrations shall be paid by the selling
Holders pro rata in proportion to the number of shares sold by each.
3.5 EXPENSES OF REGISTRATION. Except as specifically provided herein,
all Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 3.2 or the first three
registrations under each of Section 3.3 and Section 3.4 herein shall be borne
by the Company. All Selling Expenses incurred in connection with any
registrations hereunder, shall be borne by the holders of the securities so
registered pro rata on the basis of the number of shares so registered. The
Company shall not, however, be required to pay for expenses of any
registration proceeding begun pursuant to Section 3.2 or 3.4, the request of
which has been subsequently withdrawn by the Holders unless (a) the
withdrawal is based upon material adverse information concerning the Company
of which the Initiating Holders or Holders, as applicable, were not aware at
the time of such request or (b) the Holders of a majority of Registrable
Securities agree to forfeit their right to one requested registration
pursuant to Section 3.2 or Section 3.4, as applicable, in which event such
right shall be forfeited by all Holders. If the Holders are required to pay
the Registration Expenses, such expenses shall be borne by the holders of
securities (including Registrable Securities) requesting such registration in
proportion to the number of shares for which registration was requested. If
the Company is required to pay the Registration Expenses of a withdrawn
offering pursuant to clause (a) above, then the Holders shall not
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forfeit their rights pursuant to Section 3.2 or Section 3.4 to a demand
registration pursuant to the limitations of Section 3.2 and Section 3.4,
respectively.
3.6 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use all reasonable efforts to
cause such registration statement to become effective, and, upon the request
of the Holders of a majority of the Registrable Securities registered
thereunder, keep such registration statement effective for up to one hundred
twenty (120) days or, if earlier, until the Holder or Holders have completed
the distribution related thereto.
(b) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with
such registration statement as may be necessary to comply with the provisions
of the Securities Act with respect to the disposition of all securities
covered by such registration statement.
(c) Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of
the Securities Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by
them.
(d) Use all reasonable efforts to register and qualify the
securities covered by such registration statement under such other securities
or blue sky laws of such jurisdictions as shall be reasonably requested by
the Holders, provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter(s) of such offering. Each
Holder participating in such underwriting shall also enter into and perform
its obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary
to make the statements therein not misleading in the light of the
circumstances then existing.
(g) Furnish, at the request of a majority of the Holders
participating in the registration, on the date that such Registrable
Securities are delivered to the underwriters for sale, if such securities are
being sold through underwriters, or, if such securities are not being sold
through underwriters, on the date that the registration statement with
respect to such securities becomes effective, (i) an opinion, dated as of
such date, of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters
in an underwritten public offering and reasonably satisfactory to a majority
in interest of the Holders requesting registration, addressed to the
underwriters, if any, and to the Holders requesting registration of
Registrable Securities and (ii) a letter dated as of such date, from the
independent certified public accountants of the Company,
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in form and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering and reasonably
satisfactory to a majority in interest of the Holders requesting
registration, addressed to the underwriters, if any, and if permitted by
applicable accounting standards, to the Holders requesting registration of
Registrable Securities.
3.7 TERMINATION OF REGISTRATION RIGHTS. A Holder's registration rights
shall expire if (a) the Company has completed its Initial Offering and is
subject to the provisions of the Exchange Act, (b) such Holder (together
with its affiliates, partners and former partners) holds less than 1% of the
Company's outstanding Common Stock (treating all shares of convertible
Preferred Stock on an as converted basis) and (c) all Registrable Securities
held by and issuable to such Holder (and its affiliates, partners and former
partners) may be sold under Rule 144 during any ninety (90) day period.
3.8 DELAY OF REGISTRATION; FURNISHING INFORMATION.
(a) No Holder shall have any right to obtain or seek an injunction
restraining or otherwise delaying any such registration as the result of any
controversy that might arise with respect to the interpretation or
implementation of this Section 3.
(b) It shall be a condition precedent to the obligations of the
Company to take any action pursuant to Section 3.2, 3.3 or 3.4 that the
selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them and the intended method
of disposition of such securities as shall reasonably be required to effect
the registration of their Registrable Securities.
(c) The Company shall have no obligation with respect to any
registration requested pursuant to Section 3.2 or Section 3.4 if, due to the
operation of subsection 3.2(b), the number of shares or the anticipated
aggregate offering price of the Registrable Securities to be included in the
registration does not equal or exceed the number of shares or the anticipated
aggregate offering price required to originally trigger the Company's
obligation to initiate such registration as specified in Section 3.2 or
Section 3.4, whichever is applicable.
3.9 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under Sections 3.2, 3.3 or 3.4:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the partners, officers, affiliates, shareholders
and directors of each Holder, any underwriter (as defined in the Securities
Act) for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages, or liabilities (joint or several) to
which they may become subject under the Securities Act, the Exchange Act or
other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
any of the following statements, omissions or violations (collectively a
"VIOLATION") by the Company: (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto; (ii) the omission or alleged omission
to state therein a material fact required to be stated therein, or necessary
to make the statements therein not misleading; or (iii) any violation or
alleged violation by the Company of the Securities Act, the Exchange Act, any
state securities law or any rule or regulation promulgated under the
Securities Act, the Exchange Act or any state securities law in connection
with the offering covered by such registration statement; and the Company
will reimburse each such Holder, partner,
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affiliate, shareholder, officer, director, underwriter or controlling person
for any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability or
action; PROVIDED HOWEVER, that the indemnity agreement contained in this
Section 3.9(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected
without the consent of the Company, which consent shall not be unreasonably
withheld, nor shall the Company be liable in any such case for any such loss,
claim, damage, liability or action to the extent that it arises out of or is
based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by such Holder, partner, officer, director, legal counsel,
underwriter or controlling person of such Holder.
(b) To the extent permitted by law, each Holder will severally,
but not jointly, if Registrable Securities held by such Holder are included
in the securities as to which such registration, qualification or compliance
is being effected, indemnify and hold harmless the Company, each of its
directors, its officers, and legal counsel and each person, if any, who
controls the Company within the meaning of the Securities Act, any
underwriter and any other Holder selling securities under such registration
statement or any of such other Holder's partners, directors or officers or
any person who controls such Holder, against any losses, claims, damages or
liabilities (joint or several) to which the Company or any such director,
officer, controlling person, underwriter or other such Holder, or partner,
director, officer or controlling person of such other Holder may become
subject under the Securities Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs in reliance
upon and in conformity with written information furnished by such Holder
under an instrument duly executed by such Holder and stated to be
specifically for use in connection with such registration; and each such
Holder will reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer, controlling person, underwriter or
other Holder, or partner, officer, director or controlling person of such
other Holder in connection with investigating or defending any such loss,
claim, damage, liability or action if it is judicially determined that there
was such a Violation; PROVIDED, HOWEVER, that the indemnity agreement
contained in this Section 3.9(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld; provided further, that in no event shall any
indemnity under this Section 3.9(b) exceed the net proceeds from the offering
received by such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 3.9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 3.9,
deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in,
and, to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with
counsel mutually satisfactory to the parties; PROVIDED, HOWEVER, that an
indemnified party shall have the right to retain its own counsel, with the
fees and expenses to be paid by the indemnifying party, if representation of
such indemnified party by the counsel retained by the indemnifying party
would be inappropriate due to actual or potential differing interests between
such indemnified party and any other party represented by such counsel in
such proceeding. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action, if
materially prejudicial to its ability to defend such action, shall relieve
such indemnifying party of any liability to the indemnified party under this
Section 3.9, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to
any indemnified party otherwise than under this Section 3.9.
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(d) If the indemnification provided for in this Section 3.9 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any losses, claims, damages or liabilities referred to
herein, the indemnifying party, in lieu of indemnifying such indemnified
party thereunder, shall to the extent permitted by applicable law contribute
to the amount paid or payable by such indemnified party as a result of such
loss, claim, damage or liability in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand and of
the indemnified party on the other in connection with the Violation(s) that
resulted in such loss, claim, damage or liability, as well as any other
relevant equitable considerations. The relative fault of the indemnifying
party and of the indemnified party shall be determined by a court of law by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates
to information supplied by the indemnifying party or by the indemnified party
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission; provided, that
in no event shall any contribution by a Holder hereunder exceed the net
proceeds from the offering received by such Holder.
(e) The obligations of the Company and Holders under this Section
3.9 shall survive completion of any offering of Registrable Securities in a
registration statement and the termination of this Agreement. No
indemnifying party, in the defense of any such claim or litigation, shall,
except with the consent of each indemnified party, consent to entry of any
judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation.
3.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company
to register Registrable Securities pursuant to this Section 3 may be assigned
by a Holder to a transferee or assignee of Registrable Securities which (a)
is a subsidiary, parent, affiliate, general partner, limited partner or
retired partner of a Holder, (b) is a Holder's family member or trust for the
benefit of an individual Holder, or (c) acquires at least twenty-five
thousand (25,000) shares of Registrable Securities (as adjusted for stock
splits and combinations); PROVIDED, HOWEVER, (A) the transferor shall, within
ten (10) days after such transfer, furnish to the Company written notice of
the name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned and (B) such
transferee shall agree to be subject to all restrictions set forth in this
Agreement.
3.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Section 3
may be amended and the observance thereof may be waived (either generally or
in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the Holders of at least a
majority of the Registrable Securities then outstanding. Notwithstanding the
foregoing, any amendment adversely affecting the rights or privileges of a
particular series of preferred stock will require the consent of a majority
in interest of the holders of such series so affected. Any amendment or
waiver effected in accordance with this Section 3.11 shall be binding upon
each Holder and the Company. By acceptance of any benefits under this
Section 3, Holders of Registrable Securities hereby agree to be bound by the
provisions hereunder.
3.12 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. After the date of
this Agreement, the Company shall not, without the prior written consent of
the Holders of a majority of the Registrable Securities then outstanding,
enter into any agreement with any holder or prospective holder of any
securities of the Company that would grant such holder registration rights
senior to or pari passu or otherwise conflict with those granted to the
Holders hereunder.
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3.13 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that such
Holder shall not sell or otherwise transfer, dispose of, make any short sale
of, grant any option for the purpose of, or enter into any hedging or similar
transaction with the same economic effect as a sale, any common stock (or
other securities) of the Company held by such Holder (other than those
included in the registration) for a period specified by the representative of
the underwriters of common stock (or other securities) of the Company not to
exceed one hundred eighty (180) days following the effective date of a
registration statement of the Company filed under the Securities Act,
provided that:
(i) such agreement shall apply only to the Company's Initial
Offering; and
(ii) all officers and directors of the Company and holders of
at least one percent (1%) of the Company's voting securities enter into
similar agreements.
Each Holder agrees to execute and deliver such other agreements as may
be reasonably requested by the Company or the underwriter which are
consistent with the foregoing or which are necessary to give further effect
thereto. The obligations described in this Section 3.13 shall not apply to a
registration relating solely to employee benefit plans on Form S-8 or similar
forms that may be promulgated in the future, or a registration relating
solely to a Commission Rule 145 transaction on Form S-4 or similar forms that
may be promulgated in the future. The Company may impose stop-transfer
instructions with respect to the shares of common stock (or other securities)
subject to the foregoing restriction until the end of said one hundred eighty
(180) day period.
3.14 RULE 144 REPORTING. With a view to making available to the Holders
the benefits of certain rules and regulations of the SEC which may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144 or any similar or analogous rule
promulgated under the Securities Act, at all times after the effective date
of the first registration filed by the Company for an offering of its
securities to the general public;
(b) File with the SEC, in a timely manner, all reports and other
documents required of the Company under the Exchange Act; and
(c) So long as a Holder owns any Registrable Securities, furnish
to such Holder forthwith upon request: a written statement by the Company as
to its compliance with the reporting requirements of said Rule 144 of the
Securities Act, and of the Exchange Act (at any time after it has become
subject to such reporting requirements); a copy of the most recent annual or
quarterly report of the Company; and such other reports and documents as a
Holder may reasonably request in availing itself of any rule or regulation of
the SEC allowing it to sell any such securities without registration.
SECTION 4. COVENANTS OF THE COMPANY.
4.1 BASIC FINANCIAL INFORMATION AND REPORTING.
(a) The Company will maintain true books and records of account in
which full and correct entries will be made of all its business transactions
pursuant to a system of accounting established and administered in accordance
with generally accepted accounting principles consistently applied and
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will set aside on its books all such proper accruals and reserves as shall be
required under generally accepted accounting principles consistently applied.
(b) As soon as practicable after the end of each fiscal year of
the Company, and in any event within sixty (60) days thereafter, the Company
will furnish each Investor a balance sheet of the Company, as at the end of
such fiscal year, and a statement of income and a statement of cash flows of
the Company, for such year, all prepared in accordance with generally
accepted accounting principles consistently applied and setting forth in each
case in comparative form the figures for the previous fiscal year, all in
reasonable detail. Such financial statements shall be accompanied by a
report and opinion thereon by independent public accountants of national
standing selected by the Company's Board of Directors.
(c) The Company will furnish each Investor, as soon as practicable
after the end of the first, second and third quarterly accounting periods in
each fiscal year of the Company, and in any event within thirty (30) days
thereafter, a balance sheet of the Company as of the end of each such
quarterly period, and a statement of income and a statement of cash flows of
the Company for such period and for the current fiscal year to date, prepared
in accordance with generally accepted accounting principles, with the
exception that no notes need be attached to such statements and year-end
audit adjustments may not have been made.
4.2 ADDITIONAL INFORMATION AND RIGHTS.
(a) So long as an Investor (with its affiliates) shall own not
less than one hundred thousand (100,000) shares of Registrable Securities (as
adjusted for stock splits and combinations) (a "MAJOR INVESTOR"), the Company
will furnish each such Major Investor at least thirty (30) days prior to the
beginning of each fiscal year an annual budget and operating plans for such
fiscal year (and as soon as available, any subsequent revisions thereto).
(b) The Company will provide to each Major Investor as soon as
practical after the end of the month and in any event within twenty (20) days
thereafter, a consolidated balance sheet of the Company and its subsidiaries,
if any, as at the end of the month and consolidated statements of income and
cash flows of the Company and its subsidiaries, for each month and for the
current fiscal year of the Company to date, all subject to normal year-end
adjustments, prepared in accordance with generally accepted accounting
principles consistently applied and certified by the principal financial or
accounting officer of the Company, together with a comparison of such
statements to the corresponding periods of the prior fiscal year and to the
Company's operating plan then in effect and approved by the Board of
Directors.
(c) The Company will furnish other information reasonably
requested by a Major Investor, including, but not limited to, a monthly
report regarding the Company's key metrics.
4.3 INSPECTION RIGHTS. Each Major Investor shall have the right to
visit and inspect any of the properties of the Company or any of its
subsidiaries, and to discuss the affairs, finances and accounts of the
Company or any of its subsidiaries with its officers, and to review such
information as is reasonably requested all at such reasonable times and as
often as may be reasonably requested; PROVIDED, HOWEVER, that the Company
shall not be obligated under this Section 4.3 with respect to a competitor of
the Company or with respect to information which the Board of Directors
determines in good faith is confidential and should not, therefore, be
disclosed.
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4.4 CONFIDENTIALITY OF RECORDS. Each Investor agrees to use, and to
use commercially reasonable efforts to ensure that its authorized
representatives use, the same degree of care as such Investor uses to protect
its own confidential information to keep confidential any information
furnished to it which the Company identifies as being confidential or
proprietary (so long as such information is not in the public domain), except
that such Investor may disclose such proprietary or confidential information
(a) to any partner, subsidiary, parent, affiliate, attorney, accountant or
other professional advisor of such Investor for the purpose of evaluating its
investment in the Company as long as such partner, subsidiary or parent is
advised of the confidentiality provisions of this Section 4.4, (b) in any
statement or testimony pursuant to a subpoena or order by any court,
governmental body or other agency asserting jurisdiction over any Investor or
upon the request or demand of any regulatory agency or authority having
jurisdiction over any Investor or as may otherwise be required by law
(provided that such Investor shall give the Company prior notice of the
disclosure permitted by this clause unless such notice is prohibited by the
subpoena, order or law), and (c) as may be required, to any rating agency
that rates the financial condition or claims paying ability of Allstate
Insurance Company.
4.5 RESERVATION OF COMMON STOCK. The Company will at all times reserve
and keep available, solely for issuance and delivery upon the conversion of
the Shares, all common stock issuable from time to time upon such conversion.
4.6 STOCK VESTING. Unless otherwise approved by the Board of
Directors, all stock options and other stock equivalents issued after the
date of this Agreement to employees, directors, consultants and other service
providers shall be subject to vesting as follows: (a) twenty-five percent
(25%) of such stock shall vest at the end of the first year following the
date of issuance or such person's services commencement date with the
Company, as applicable, and (b) seventy-five percent (75%) of such stock
shall vest over the remaining three (3) years. With respect to any unvested
shares of stock purchased by any such person, the Company's repurchase option
shall provide that upon such person's termination of employment or service
with the Company, with or without cause, the Company or its assignee (to the
extent permissible under applicable securities laws and other laws) shall
have the option to purchase at cost any unvested shares of stock held by such
person.
4.7 KEY MAN INSURANCE. For so long as any shares of Series A Stock,
Series B Stock, Series C Stock, Series D Stock or Series E Stock remain
outstanding and subject to the approval of the Board of Directors, the
Company will use its best efforts to obtain and maintain in full force and
effect term life insurance in an amount to be determined by the Board of
Directors, on each of the lives of Robert L. Stevens and Ronald B. Cooper,
naming the Company as beneficiary; provided, however, the amount covering
Robert Stevens shall be no less than $1 million and the amount covering
Ronald Cooper shall be no less than $2 million and the Company shall have
thirty (30) days from the date hereof to put such a policy in place.
4.8 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. The Company
shall require all employees and consultants to execute and deliver a
Proprietary Information and Inventions Agreement in the form attached to the
Purchase Agreements.
4.9 CORPORATE EXISTENCE. The Company shall at all times cause to be
done all things necessary to maintain, preserve and renew its corporate
existence and all material licenses and permits necessary for the conduct of
its business.
4.10 CORPORATE PROPERTIES. The Company shall maintain and keep its
properties in good repair, working order and condition, reasonable wear and
tear excepted, and from time to time make all
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necessary or desirable repairs, renewals and replacements, so that its
business may be properly and advantageously conducted at all times.
4.11 TAXES. The Company shall pay and discharge, when payable, all
taxes, assessments and governmental charges imposed upon its properties or
upon the income or profits therefrom (in each case before the same become
delinquent and before penalties accrue thereon) and all claims for labor,
materials or supplies which if unpaid might by law become a lien upon any of
its property, unless and to the extent that the same are being contested in
good faith and by appropriate proceedings and adequate reserves, determined
in accordance with generally accepted accounting principles, have been set
aside on its books with respect thereto.
4.12 MATERIAL OBLIGATIONS. The Company shall comply with all other
material obligations which it incurs pursuant to any contract or agreement,
whether oral or written, express or implied, as such obligations become due,
unless and to the extent that the same are being contested in good faith and
by appropriate proceedings.
4.13 LAWS AND REGULATIONS. The Company shall comply with all applicable
laws, rules and regulations of all foreign and domestic governmental
authorities (and, to the extent the Company is subject to the laws thereof,
any foreign jurisdiction), the violation of which would have a material
adverse effect upon its businesses or financial condition.
4.14 INDEBTEDNESS. The Company shall not, without the prior approval of
the Board of Directors, have indebtedness at any given time in excess of
three hundred fifty thousand dollars ($350,000) (the "MAXIMUM INDEBTEDNESS"),
unless the Board of Directors has previously approved an increase of the
permitted Maximum Indebtedness.
4.15 HIRING OF KEY EMPLOYEES. The Company shall as soon as possible
after the date hereof initiate a search for and use its best efforts to hire
a Chief Financial Officer, subject to the approval of the Board of Directors.
4.16 OBSERVER RIGHTS. Each Major Investor (or its representative) shall
have the right to attend all meetings of the Board of Directors in a
nonvoting observer capacity (an "OBSERVER"), to receive notice of such
meetings and to receive the information provided by the Company to the Board
of Directors; provided, however, that the Company may require as a condition
precedent to any Holder's rights under this Section 4.16 that each person
proposing to attend any meeting of the Board of Directors and each person to
have access to any of the information provided by the Company to the Board of
Directors shall agree to hold in confidence and trust all information so
received during such meetings or otherwise; and, provided further, that the
Company reserves the right not to provide information and to exclude such
Observer from any meeting or portion thereof if delivery of such information
or attendance at such meeting by such Observer would result in disclosure of
trade secrets to such Observer or its representative or would adversely
affect the attorney-client privilege between the Company and its counsel or
if such Observer is a direct competitor of the Company.
4.17 BOARD AND OBSERVER COMPENSATION. The Company shall reimburse the
reasonable travel and out-of-pocket expenses of each Board member and
Observer against documented receipts incurred in connection with (a) such
Board member's and Observer's attendance at any meeting of the Company's
Board of Directors and (b) such Board member's duties in connection with
representation of the Company.
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4.18 BOARD MEETINGS. The Company shall hold at least six (6) Board of
Directors' meetings each calendar year with at least one (1) such meeting per
calendar quarter.
4.19 DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The Company will
obtain and keep directors' and officers' liability insurance for all
directors and key officers of at least the current level of coverage at all
times.
4.20 BUDGET. The Company agrees to prepare and submit a proposed budget
to the Board of Directors of the Company and each of the Major Investors at
least 30 days prior to the beginning of each fiscal year (the "BUDGET"). The
Budget shall be accepted as the Budget for such fiscal year when it has been
approved by the Board of Directors of the Company. The Budget shall be
reviewed by the Company periodically and all material changes therein and all
material deviations therefrom which are proposed to be made by the Company
shall be resubmitted and approved in accordance with procedures established
by the Board of Directors, and the Company shall not make any such changes or
material deviations to or from the Budget without compliance with such
procedures.
4.21 SMALL BUSINESS CONCERN. So long as any Small Business Investment
Company (an "SBIC INVESTOR") is an investor in the Company, the Company will
provide the SBIC Investor any information that is reasonably requested by the
Small Business Administration (the "SBA"). The Company will provide SBA
examiners access to its books and records for SBA audit purposes in
accordance with normal SBA procedures.
4.22 PATENT DILIGENCE. The Company agrees within forty-five (45) days
of the date hereof to engage Cooley Godward LLP to perform a website audit
and related patent diligence regarding the Company's intellectual property
(the "AUDIT") within a scope mutually agreed upon by GE Capital Equity
Investments, Inc. and the Company and to prepare a report to the Board of
Directors regarding its findings in the course of such Audit. The Company
agrees within forty-five (45) days of the date that such report is delivered
to the Board of Directors to take commercially reasonable efforts to
implement those items from such Audit that the Board of Directors deems
appropriate. The cost that the Company shall incur in connection with such
Audit shall not exceed an amount deemed reasonable by the Board of Directors.
4.23 NONSOLICITATION COVENANT. Within thirty (30) days of the date
hereof, the Company agrees to enter into non-solicitation agreements with
director level employees and higher to the extent permitted by California law.
4.24 TERMINATION OF COVENANTS. All covenants contained in this Section
4 shall expire and terminate as to each Investor on the effective date of the
registration statement pertaining to the Company's Qualified Public Offering.
Notwithstanding the foregoing, Section 4.21 hereto shall terminate upon the
expiration or termination of the Internet Development, Marketing and
Distribution Agreement attached hereto as Exhibit B.
SECTION 5. RIGHTS OF FIRST OFFER.
5.1 SUBSEQUENT OFFERINGS. Each Major Investor shall have a right of
first offer to purchase its pro rata share of all Equity Securities, as
defined below, that the Company may, from time to time, propose to sell and
issue after the date of this Agreement, other than the Equity Securities
excluded by Section 5.6 hereof. Each Investor's pro rata share is equal to
the ratio of (a) the number of shares of the Company's common stock
(including all shares of common stock issued or issuable upon conversion of
16.
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the Shares) which such Investor is deemed to hold immediately prior to the
issuance of such Equity Securities to (b) the total number of shares of the
Company's outstanding common stock (including all shares of common stock
issued or issuable upon conversion of the Shares or upon the exercise of any
outstanding warrants or options) immediately prior to the issuance of the
Equity Securities. The term "EQUITY SECURITIES" shall mean (i) any common
stock, preferred stock or other security of the Company, (ii) any security
convertible, with or without consideration, into any common stock, preferred
stock or other security (including any option to purchase such a convertible
security), (iii) any security carrying any warrant or right to subscribe to
or purchase any common stock, preferred stock or other security or (iv) any
such warrant or right.
5.2 EXERCISE OF RIGHTS. If the Company proposes to issue any Equity
Securities, it shall give each Major Investor written notice of its
intention, describing the Equity Securities, the price and the terms and
conditions upon which the Company proposes to issue the same. Each Major
Investor shall have twenty (20) days from the giving of such notice to agree
to purchase its pro rata share of the Equity Securities for the cash
equivalent price and upon the terms and conditions specified in the notice by
giving written notice to the Company and stating therein the quantity of
Equity Securities to be purchased. Notwithstanding the foregoing, the Company
shall not be required to offer or sell such Equity Securities to any Investor
who would cause the Company to be in violation of applicable federal or state
securities laws by virtue of such offer or sale through no fault of the
Company.
5.3 ISSUANCE OF EQUITY SECURITIES TO OTHER PERSONS. If not all of the
Major Investors elect to purchase their pro rata share of the Equity
Securities, then the Company shall promptly notify in writing the Major
Investors who do so elect and shall offer such Major Investors the right to
acquire such unsubscribed shares. Such Major Investors shall have five (5)
days after receipt of such notice to notify the Company of their election to
purchase all or a portion thereof of the unsubscribed shares. If the
Investors fail to exercise in full the rights of first offer, the Company
shall have ninety (90) days thereafter to sell the Equity Securities in
respect of which the Major Investors' rights were not exercised, at a price
and upon general terms and conditions materially no more favorable to the
purchasers thereof than specified in the Company's notice to the Major
Investors pursuant to Section 5.2 hereof. If the Company has not sold such
Equity Securities within ninety (90) days of the notice provided pursuant to
Section 5.2, the Company shall not thereafter issue or sell any Equity
Securities, without first offering such securities to the Major Investors in
the manner provided above.
5.4 TERMINATION OF RIGHTS OF FIRST OFFER. The rights of first offer
established by this Section 5 shall not apply to and shall terminate upon the
effective date of the registration statement pertaining to the Company's
Qualified Public Offering.
5.5 TRANSFER OF RIGHTS OF FIRST OFFER. The rights of first offer of
each Major Investor under this Section 5 may be transferred to the same
parties, subject to the same restrictions as any transfer of registration
rights pursuant to Section 3.10.
5.6 EXCLUDED SECURITIES. The rights of first offer established by this
Section 5 shall have no application to any of the following Equity Securities:
(a) shares of common stock (and/or options, warrants or other
common stock purchase rights issued pursuant to such options, warrants or
other rights) issued or to be issued to employees, officers or directors of,
or consultants or advisors to the Company or any subsidiary, pursuant to
stock purchase or stock option plans or other arrangements that are approved
in good faith by the Board of Directors including the representatives
designated by the holders of the Shares;
17.
<PAGE>
(b) stock issued pursuant to any rights or agreements outstanding
as of the date of this Agreement, options and warrants outstanding as of the
date of this Agreement as set forth on EXHIBIT G of the Purchase Agreement[s];
and stock issued pursuant to any such rights or agreements granted after
the date of this Agreement, provided that the rights of first offer
established by this Section 5 applied with respect to the initial sale or
grant by the Company of such rights or agreements;
(c) any Equity Securities issued for consideration other than cash
pursuant to a merger, consolidation, acquisition or similar business
combination unanimously approved by the Board of Directors;
(d) shares of common stock issued in connection with any stock
split, stock dividend or recapitalization by the Company;
(e) shares of common stock issued upon conversion of the Shares;
(f) shares of Series A Stock issued upon exercise of certain
Warrants to purchase Series A Stock held by certain Investors;
(g) shares of Series B Stock issued upon exercise of certain
Warrants to purchase Series B Stock held by certain Investors;
(h) shares of common stock or preferred stock and/or options,
warrants or other common stock or preferred stock purchase rights issued
pursuant to any equipment leasing arrangement, debt financing from a bank or
similar financial institution or strategic transaction approved by the Board
(so long as Board approval constitutes consent by at least a majority of the
members of the Board representing holders of preferred stock);
(i) shares of Series D Stock issued upon exercise of certain
warrants to purchase Series D Stock held by certain Investors;
(j) 5,666 shares of Series C Stock issued to Ramsey Beirne in
connection with recruiting services rendered to the Company or Series D Stock
issued by the Company; and
(k) any Equity Securities that are issued by the Company pursuant
to a registration statement filed under the Securities Act.
(l) shares of Common Stock issued upon exercise of certain
warrants to purchase Common Stock held by certain Investors.
SECTION 6. MISCELLANEOUS.
6.1 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of New York as applied to agreements among New
York residents entered into and to be performed entirely within New York
Each party hereto hereby irrevocably and unconditionally submits to the
exclusive jurisdiction of the state and federal courts located in the State
of New York for any actions, suits or proceedings arising out of or relating
to this Agreement or any of the Related Agreements (as defined in the
Purchase Agreements) and the transactions contemplated hereby or thereby.
Each party hereto agrees not to commence any action, suit or proceeding
relating thereto except in such courts. The parties hereto irrevocably and
unconditionally waive any objection to the laying of
18.
<PAGE>
venue in any action, suit or proceeding arising out of this Agreement or any
of the Related Agreements or the transactions contemplated hereby or thereby,
in such state or federal courts aforesaid and hereby further irrevocably and
unconditionally waive and agree not to plead or claim in any such court that
any such action, suit or proceeding brought in any such court has been
brought in an inconvenient forum.
THE PARTIES HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING TO
WHICH THEY ARE PARTIES INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY
WAY ARISING OUT OF, RELATED TO OR CONNECTED WITH THIS AGREEMENT OR ANY OF THE
RELATED AGREEMENTS.
6.2 SURVIVAL. The representations, warranties, covenants, and
agreements made herein shall survive any investigation made by any Holder and
the closing of the transactions contemplated hereby. All statements as to
factual matters contained in any certificate or other instrument delivered by
or on behalf of the Company pursuant hereto in connection with the
transactions contemplated hereby shall be deemed to be representations and
warranties by the Company hereunder solely as of the date of such certificate
or instrument.
6.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of Registrable Securities from time to time;
PROVIDED, HOWEVER, that prior to the receipt by the Company of adequate
written notice of the transfer of any Registrable Securities specifying the
full name and address of the transferee, the Company may deem and treat the
person listed as the holder of such shares in its records as the absolute
owner and holder of such shares for all purposes, including the payment of
dividends or any redemption price.
6.4 ENTIRE AGREEMENT. This Agreement, the Exhibits hereto, the Related
Agreements (as defined in the Purchase Agreements) and the other documents
delivered pursuant thereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and no party
shall be liable or bound to any other in any manner by any representations,
warranties, covenants and agreements except as specifically set forth herein
and therein.
6.5 SEVERABILITY. In case any provision of the Agreement shall be
invalid, illegal, or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
6.6 AMENDMENT AND WAIVER.
(a) Except as otherwise expressly provided, this Agreement may be
amended or modified only upon the written consent of the Company and the
Holders of at least a majority of the Registrable Securities.
(b) Except as otherwise expressly provided, the obligations of the
Company and the rights of the Holders under this Agreement may be waived only
with the written consent of the Holders of at least a majority of the
Registrable Securities; provided that any amendment adversely affecting the
rights or privileges of a particular series of preferred stock will require
consent of a majority in interest of the holders of such series so affected.
19.
<PAGE>
(c) Notwithstanding the foregoing, this Agreement may be amended
with only the written consent of the Company to include additional purchasers
of Shares as Investors, Holders and parties hereto.
6.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power, or remedy accruing to any Holder, upon any breach,
default or noncompliance of the Company under this Agreement shall impair any
such right, power, or remedy, nor shall it be construed to be a waiver of any
such breach, default or noncompliance, or any acquiescence therein, or of any
similar breach, default or noncompliance thereafter occurring. It is further
agreed that any waiver, permit, consent, or approval of any kind or character
on any Holder's part of any breach, default or noncompliance under the
Agreement or any waiver on such Holder's part of any provisions or conditions
of this Agreement must be in writing and shall be effective only to the
extent specifically set forth in such writing. All remedies, either under
this Agreement, by law, or otherwise afforded to Holders, shall be cumulative
and not alternative.
6.8 NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (a) upon personal delivery to
the party to be notified; (b) when sent by confirmed telex or facsimile if
sent during normal business hours of the recipient; if not, then on the next
business day; (c) five (5) days after having been sent by registered or
certified mail, return receipt requested, postage prepaid; or (d) one (1) day
after deposit with a nationally recognized overnight courier, specifying next
day delivery, with written verification of receipt. All communications shall
be sent to the party to be notified at the address as set forth on EXHIBIT A
hereto or at such other address as such party may designate by ten (10) days
advance written notice to the other parties hereto.
6.9 ATTORNEYS' FEES. In the event that any dispute among the parties
to this Agreement should result in litigation, the prevailing party in such
dispute shall be entitled to recover from the losing party all fees, costs
and expenses of enforcing any right of such prevailing party under or with
respect to this Agreement, including without limitation, such reasonable fees
and expenses of attorneys and accountants, which shall include, without
limitation, all fees, costs and expenses of appeals.
6.10 TITLES AND SUBTITLES. The titles of the sections and subsections
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
6.11 ADDITIONAL INVESTORS. Notwithstanding anything to the contrary
contained herein, if the Company shall issue additional shares of its Series
E Stock and warrants to purchase additional shares of its Common Stock
pursuant to the Purchase Agreements, any purchaser of such shares of Series E
Stock or Warrants, as the case may be may become a party to this Agreement by
executing and delivering an additional counterpart signature page to this
Agreement and shall be deemed an "INVESTOR" hereunder.
6.12 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
20.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this FOURTH AMENDED
AND RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first
paragraph hereof.
COMPANY: INVESTORS:
/s/ All Preferred Stock Investors
IMPROVENET, INC. ----------------------------------
NAME OF INVESTOR ENTITY
By: /s/ Ron Cooper By:
------------------------------------ -------------------------------
Ronald Cooper, President and Chief
Executive Officer
Title:
----------------------------
FOURTH AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
SIGNATURE PAGE
<PAGE>
EXHIBIT A
LIST OF INVESTORS
NAME AND ADDRESS
- ----------------------------------------------
Allstate Insurance Company
2775 Sanders Road
Suite A3
Northbrook, IL 60062
c/o Michael Curran
Alta California Partners, L.P.
One Embarcadero Center, Suite 4050
San Francisco, CA 94111
Alta Embarcadero Partners, L.P.
One Embarcadero Center, Suite 4050
San Francisco, CA 94111
ARCH Venture Fund III, L.P.
8735 Higgins Road
Suite 225
Chicago, IL 60631
August Capital II, L.P.
2480 Sand Hill Road, Suite 101
Menlo Park, CA 94025
Anthony Glaves
1030 Parkinson
Palo Alto, CA 94301
William Egan
Burr, Egan, Deleage & Co.
One Post Office Square, #3800
Boston, MA 02109
Charles H. Finnie
Volpe Brown Whelan & Company, LLC
One Maritime Plaza
San Francisco, CA 94111
EXHIBIT A-1
FOURTH AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE>
GC&H Investments
Cooley Godward LLP
One Maritime Plaza
20th Floor
San Francisco, CA 94111-3580
Alex Knight
1116 Harvard Avenue East
Seattle, WA 98102
Harold Kawaguchi
626 38th Avenue
Seattle, WA 98122
Madrona Investment Group, LLC
1000 Second Avenue, Suite 3700
Seattle, WA 98104
David S. Smith and Louise H. Smith, Trustees for the David H. Smith
and Louise H. Smith Family Trust Dated 5/4/84
Post Office Box 475
Graton, CA 95444
Lynn Brown Kargman and William M. Kargman
221 Mount Auburn Street
Cambridge, MA 02138
Thomas W. Brugger
805 Bay View Way
Redwood City, CA 94062
Stuart Gannes
1160 Bryant Street
Palo Alto, CA 94301
Zero Stage Capital VI, L.P.
101 Main Street, 17th Floor
Cambridge, MA 02142-1519
MGN Opportunity Group LLC
801 Second Avenue
13th Floor
Seattle, WA 98104
MGN Opportunity LLC
801 Second Avenue
13th Floor
Seattle, WA 98104
EXHIBIT A-1
FOURTH AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE>
Norman D. Colbert
One Bush Street
San Francisco, CA 94104
Robert A. Keller
One Bush Street
San Francisco, CA 94104
Paul W. Noglows
One Bush Street
San Francisco, CA 94104
Hambrecht & Quist California
One Bush Street
San Francisco, CA 94104
Hambrecht & Quist Employee Venture Fund, L.P. II
One Bush Street
San Francisco, CA 94104
H&Q ImproveNet Investors, LLC
c/o Hambrecht & Quist
One Bush Street
San Francisco, CA 94104
Access Technology Partners, L.P.
One Bush Street
San Francisco, CA 94104
Access Technology Partners Brokers Fund, L.P.
One Bush Street
San Francisco, CA 94104
Gary Sledge
200 Galleria Parkway
Suite 1800
Atlanta, GA 30339
Kellett Partners, L.P.
200 Galleria Parkway
Suite 1800
Atlanta, GA 30339
Clear Fir Partners, LP
4303 54th Avenue, N.E.
Seattle, WA 98105
GG-JS Joint Venture, LLC
2000 First Avenue, Suite 1001
EXHIBIT A-6
THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE>
Seattle, WA 98121
J2 JV, LLC
2000 First Avenue, Suite 1001
Seattle, WA 98121
Heidorn-Staenberg Joint Venture, LLC
2000 First Avenue, Suite 1001
Seattle, WA 98121
Staenberg Private Capital, LLC
2000 First Avenue, Suite 1001
Seattle, WA 98121
KFIT-JRS Joint Venture, LLC
2000 First Avenue, Suite 1001
Seattle, WA 98121
Lum-Staenberg Joint Venture, LLC
2000 First Avenue, Suite 1001
Seattle, WA 98121
Carmel Fund LLC
2000 First Avenue, Suite 1001
Seattle, WA 98121
Blackshirts Joint Venture, LLC
2000 First Avenue, Suite 1001
Seattle, WA 98121
JR-JS JV, LLC
2000 First Avenue, Suite 1001
Seattle, WA 98121
Alco JV, LLC
2000 First Avenue, Suite 1001
Seattle, WA 98121
GT-JS JV, LLC
2000 First Avenue, Suite 1001
Seattle, WA 98121
ANV Joint Venture, LLC
2000 First Avenue, Suite 1001
Seattle, WA 98121
With a copy to:
Randall L. Price
Karr Tuttle Campbell
1201 Third Avenue, Suite 2900
Seattle, WA 98101
EXHIBIT A-6
THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE>
Lise Buyer
164 Selby Lane
Atherton, CA 94027
Danielle Iuliano
2400 Hanover Street
Palo Alto, CA 94304
Stanford University
2770 Sand Hill Road
Menlo Park, CA 94025
Charles M. Brown
P.O. Box 222e
785 Shiloh Road
Adamsville, TN 38310
Charles Fenton
4010 Cloverland Drive
Phoenix, MD 21131
GE Capital Equity Investments, Inc.
120 Long Ridge Road
Stamford, CT 06927
Owens Corning
One Owens Corning Boulevard
Toledo, OH 43659
The Dow Chemical Company
2030 Dow Center
Midland, MI 48674
E.I. du Pont de Nemours and Company
1007 Market Street
Wilmington, DE 19898
Attn: Global Financial Manager
Armstrong.Com Holding Co.
2500 Columbia Avenue
Lancaster, PA 17604
Attn: Marco Alvarez
QBB MGMT I, L.L.C.
11 Madison Avenue
New York, NY 10010
Attn: John Carroll
EXHIBIT A-6
THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated January 17, 2000, relating to the consolidated financial
statements of ImproveNet, Inc., and of our report dated November 24, 1999
relating to the financial statements of Contractor Referral Service, LLC, which
appear in such Registration Statement. We also consent to the references to us
under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Jose, CA
January 24, 2000
