<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 25, 2000
REGISTRATION STATEMENT NO. 333-92677
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FAIRMARKET, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7389 04-3351937
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
500 UNICORN PARK DRIVE
WOBURN, MA 01801
(781) 376-5600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
------------------------
SCOTT T. RANDALL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FAIRMARKET, INC.
500 UNICORN PARK DRIVE
WOBURN, MA 01801
(781) 376-5600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID F. DIETZ, P.C. DANIEL S. EVANS, ESQ.
GOODWIN, PROCTER & HOAR LLP DAVID B. WALEK, ESQ.
EXCHANGE PLACE ROPES & GRAY
BOSTON, MASSACHUSETTS 02109-2881 ONE INTERNATIONAL PLACE
(617) 570-1000 BOSTON, MASSACHUSETTS 02110-2624
(617) 951-7000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
CLASS OF SECURITIES OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED PER SHARE OFFERING PRICE(1) FEE(2)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, $.001 par value per share $11.00 $63,250,000 $16,698
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
(2) A registration fee of $10,560 was previously paid and the balance of $6,138
is being filed herewith.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER
TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 25, 2000
[fairmarket LOGO]
- --------------------------------------------------------------------------------
5,000,000 Shares
Common Stock
- --------------------------------------------------------------------------------
This is the initial public offering of FairMarket, Inc. We are offering
5,000,000 shares of our common stock.
Prior to this offering, there has been no public market for FairMarket's common
stock. We currently estimate that the initial public offering price per share
will be between $9.00 and $11.00. We have applied for quotation of the common
stock on the Nasdaq National Market under the symbol "FAIM."
SEE "RISK FACTORS" BEGINNING ON PAGE 4 TO READ ABOUT FACTORS YOU SHOULD CONSIDER
BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Initial public offering price $ $
Underwriting discount $ $
Proceeds, before expenses, to FairMarket $ $
</TABLE>
If the underwriters sell more than 5,000,000 shares of common stock, the
underwriters have the option to purchase up to an additional 750,000 shares from
FairMarket at the initial public offering price less the underwriting discount.
The underwriters expect to deliver the shares to purchasers on , 2000.
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
PROSPECTUS DATED , 2000.
<PAGE> 3
Inside Front Cover Graphics
Text: Who we are. FairMarket provides outsourced, networked online auction
services for companies that desire to develop or enhance their Internet
marketplaces.
[Logo of FairMarket]
Text: What we do. Our primary service offering consists of the development,
hosting and maintenance of private label online auction sites for business
merchants, Internet portal sites and other companies that have a presence on the
web. We host these auction sites on our central operating system, which gives
us the ability to aggregate listings of goods and services available for sale on
each of our customers' auction sites and make those listings available for
display and sale on auction sites of other FairMarket customers. We refer to
this network of customer auction sites as the FairMarket Network.
Gatefold Graphics
Text: The FairMarket Network. The FairMarket Network is designed to provide our
customers with access to a significantly greater number of potential buyers and
a broader range of products than their individual auction sites alone. By
maintaining listings of products and services in a central database, we are able
to make those listing available for display on community auction sites in the
FairMarket Network. For merchants and other sellers, listed items are seen by
more web site visitors, increasing the likelihood that items will be bid on and
sold. For buyers on community sites, this means a broader range of products and
services for purchase, making the community sites more attractive to Internet
users and potentially increasing user traffic to their main web sites.
[Logo of FairMarket in the center of the page. The FairMarket logo is
surrounded by the logos of our clients: New Line Cinema, Multiple Zones
International, TicketMaster Online-CitySearch, Quokka Sports, CompUSA,
SportsLine.com and Lycos.com.]
<PAGE> 4
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and FairMarket's financial statements and the notes to those
statements appearing elsewhere in this prospectus.
FAIRMARKET, INC.
FairMarket provides outsourced, networked online auction services for
companies that desire to develop or enhance their Internet marketplaces. Our
primary service offering consists of the development, hosting and maintenance of
private-label online auction sites for business merchants, Internet portal sites
and other companies that have a presence on the web. We host these auction sites
on our central operating system, which gives us the ability to aggregate
listings of goods and services available for sale on each of our customers'
auction sites and make those listings available for display and sale on auction
sites of other FairMarket customers. We refer to this network of customer
auction sites as the FairMarket Network.
Our primary sources of revenue are service fees and network fees. Service
fees include one-time auction site set-up fees and monthly fees for hosting and
maintaining customers' auction sites and providing customer support services.
Network fees include success fees charged to sellers upon a completed sale,
listing fees charged for the prominent display of particular items for sale, and
merchandising fees.
Today, over 90 businesses, including CompUSA, Outpost.com and
SportsLine.com, Inc., and several top Internet portal sites, including MSN.com,
Excite@Home and Lycos, are members of the FairMarket Network.
Our goal is to become a leading provider of outsourced, networked
e-commerce services. Key elements of our strategy include:
- expanding the number of customers for whom we host e-commerce
applications;
- increasing traffic and transactions across the FairMarket Network of
customer sites;
- continuing to provide new e-commerce service offerings;
- expanding into additional international markets; and
- applying our expertise to further penetrate the business-to-business
market.
We are a Delaware corporation formed in February 1997. Our executive
offices are located at 500 Unicorn Park Drive, Woburn, Massachusetts 01801 and
our telephone number is (781) 376-5600. We were formed in February 1997 and
therefore have a limited operating history in the highly competitive market for
e-commerce services. We have incurred net losses since we were formed. For the
nine months ended September 30, 1999, we recognized total revenue of
approximately $891,000 and incurred a net loss of approximately $5.8 million. We
have not yet achieved profitability and as of September 30, 1999, we had an
accumulated deficit of approximately $7.7 million. Our web site is located at
www.fairmarket.com. The information contained on our web site does not
constitute part of this prospectus.
The names FairMarket, FairMarket Network, AuctionPlace, AutoMarkdown and
our logo are names and service marks that belong to us. We claim rights in other
names and marks. This prospectus also contains the trademarks and trade names of
other entities which are the property of their respective owners.
- --------------------------------------------------------------------------------
1
<PAGE> 5
THE OFFERING
Shares offered by FairMarket....... 5,000,000 shares
Common stock to be outstanding
after this offering................ 31,937,177 shares(1)
Estimated net proceeds to
FairMarket......................... $49,850,000
Use of proceeds.................... For general corporate purposes, including
working capital, hiring personnel, capital
expenditures, expansion of sales and
marketing activities and development of
technology.
Proposed Nasdaq National Market
symbol........................... FAIM
Risk factors....................... See "Risk Factors" for a discussion of
factors you should carefully consider
before deciding to invest in shares of our
common stock.
- -------------------------
(1) The number of shares of our common stock that will be outstanding after this
offering is based on 5,243,226 shares of common stock and 16,312,885 shares
of convertible preferred stock (which will convert into a total of
16,312,885 shares of common stock at the closing of this offering)
outstanding as of December 31, 1999. It excludes:
- any shares of common stock to be issued upon exercise of the
overallotment option granted to the underwriters;
- 3,738,749 shares of common stock issuable upon exercise of employee stock
options outstanding as of December 31, 1999;
- 150,987 shares of common stock available for future grant under our
employee stock option plans as of December 31, 1999;
- 5,225,000 shares of common stock issuable upon exercise of warrants
outstanding as of December 31, 1999 that are currently exercisable; and
- 595,000 shares of common stock issuable upon exercise of a performance
warrant outstanding as of December 31, 1999 that is not currently
exercisable.
2
<PAGE> 6
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The tables below present summary financial data of FairMarket which should
be read together with our financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" presented elsewhere in this prospectus.
The following table sets forth our statement of operations data for the
periods presented. The pro forma information in the following table gives
effect, as of September 30, 1999, to the issuance of 16,312,885 shares of common
stock upon the conversion of all of our outstanding preferred stock into common
stock immediately prior to the closing of this offering.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- -----------------
1997(1) 1998 1998 1999
------- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ 3 $ 4 $ 2 $ 891
Operating expenses:
Cost of revenue, exclusive of $18 reported below as equity
related charges......................................... -- -- -- 422
Sales and marketing, exclusive of $907 reported below as
equity related charges.................................. 232 675 538 1,761
Advertising expense....................................... 47 8 8 1,383
Development and engineering, exclusive of $82 reported
below as equity related charges......................... 94 314 196 1,265
General and administrative, exclusive of $30 reported
below as equity related charges......................... 234 426 273 1,058
Equity related charges.................................... -- -- -- 1,037
------ ------- ------ -------
Total operating expenses................................ 607 1,423 1,015 6,926
------ ------- ------ -------
Loss from operations........................................ (604) (1,419) (1,013) (6,035)
Interest income, net........................................ 3 31 27 279
------ ------- ------ -------
Net loss.................................................... $ (601) $(1,388) $ (986) $(5,756)
====== ======= ====== =======
Basic and diluted net loss per share........................ $(0.15) $ (0.30) $(0.22) $ (1.16)
====== ======= ====== =======
Shares used in computing basic and diluted net loss per
share..................................................... 4,073 4,571 4,527 4,970
Unaudited pro forma basic and diluted net loss per share.... $ (0.21) $ (0.43)
======= =======
Shares used in computing pro forma basic and diluted net
loss per share............................................ 6,764 13,480
</TABLE>
- -------------------------
(1) Period from February 20, 1997 (date of inception) to December 31, 1997.
The following table sets forth a summary of our balance sheet at September 30,
1999:
- on an actual basis;
- on a pro forma basis giving effect to: (1) the issuance of 16,312,885
shares of common stock upon the conversion of all of our outstanding
preferred stock into common stock immediately prior to the closing of
this offering; (2) the expiration of a put option on 2,500,000 shares of
our Series D Convertible Preferred Stock (which will convert into
2,500,000 shares of common stock) upon the closing of this offering; and
(3) the receipt of $5.0 million from Excite, Inc. due upon the closing of
this offering. See Note 6 to the financial statements included elsewhere
in the prospectus; and
- on a pro forma as adjusted basis to reflect the preceding pro forma
adjustments and the sale of 5,000,000 shares of common stock in this
offering, assuming an initial public offering price of $11.00 per share
and after deducting underwriting discounts and commissions and our
estimated offering expenses of $5,150,000.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 (UNAUDITED)
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $18,855 $23,855 $73,905
Working capital............................................. 18,152 23,152 73,202
Total assets................................................ 22,046 27,046 77,096
Total stockholders' equity.................................. 2,992 25,492 75,542
</TABLE>
3
<PAGE> 7
RISK FACTORS
You should carefully consider the following risks and all other information
contained in this prospectus before purchasing our common stock. Although we
have described below all risks we consider material, additional risks and
uncertainties not known to us or that we now believe to be unimportant could
also impair our business. If any of the following risks occur, our business,
results of operations or financial condition could be harmed. In that case, 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 ONLY BEEN IN BUSINESS FOR A SHORT TIME AND YOUR BASIS FOR EVALUATING US
IS LIMITED.
We were formed in February 1997. Because of our limited operating history,
you have limited operating and financial data about our business upon which to
base an evaluation of our performance and an investment in our common stock. An
investor in our common stock should consider the risks, expenses and
difficulties that we will face as a company seeking to develop a new
Internet-based service. Our success will depend in part on our ability to do the
following, among other things:
- maintain and upgrade our technology to keep pace with the rapidly growing
Internet market we serve;
- expand our sales force and attract and retain engineering and other
qualified personnel;
- attract and retain customers; and
- raise additional capital if and when we need it.
There can be no assurance that we will achieve these and other goals necessary
to develop our business.
WE EXPECT TO CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES.
For the nine months ended September 30, 1999, we incurred a net loss of
approximately $5.8 million, which represented approximately 646% of our revenue
for the same period. As of September 30, 1999, we had an accumulated deficit of
approximately $7.7 million. We have not achieved profitability and we will
continue to incur net losses until we can produce sufficient revenues to cover
our costs, which may not occur. Even if we do achieve profitability, we may be
unable to sustain or increase our profitability in the future because we intend
to invest heavily in the marketing and promotion of our service offerings and
further development of our service offerings, technology and operating
infrastructure. Any such investment will depend on the availability of funds.
WE EXPECT TO CONTINUE TO HAVE NEGATIVE OPERATING CASH FLOW WHICH MAY REQUIRE
US TO SEEK ADDITIONAL FINANCING, WHICH COULD BE DIFFICULT TO OBTAIN.
We expect to continue to experience significant negative operating cash
flows for the foreseeable future because we intend to continue hiring personnel,
acquiring equipment and expanding our facilities in anticipation of receiving
revenues in future periods. We also expect that we will increase expenditures
for our sales and marketing efforts and development of technology. We expect
that we will use available cash and the proceeds of this offering to pay for
these expenditures. Depending on future cash flow, we may need to raise
additional capital in the future to meet our cash requirements. We may not be
able to find additional financing, if required, on favorable terms or at all.
Furthermore, if we raise additional funds through the issuance of equity,
equity-related or debt securities, these securities may have rights, preferences
or privileges senior to those of our common stock, and our stockholders may
experience additional dilution to their equity ownership.
4
<PAGE> 8
WE MAY NOT BE ABLE TO CONTINUE ATTRACTING NEW CUSTOMERS.
The success of our business model depends in large part on our continued
ability to increase the number of customers in the FairMarket Network. The
market for our services may grow more slowly than anticipated or become
saturated with competitors. Some potential customers may not want to join the
FairMarket Network because they are concerned about the possibility of their
products being listed together with their competitors' products. If we cannot
continue to bring new customers to the FairMarket Network or maintain our
existing customer base, we may be unable to offer the benefits of the network
model at levels sufficient to attract and retain customers and sustain our
business.
OUR CUSTOMERS MAY NOT SUCCESSFULLY DRIVE USER TRAFFIC FROM THEIR MAIN WEB SITES
TO THEIR AUCTION SITES.
Our success will also depend in part on increasing the amount of traffic
and the number of transactions across the FairMarket Network. For this to occur,
our existing customers must drive sufficient numbers of users to their auction
sites, they must devote sufficient resources to making their sites attractive to
buyers and sellers and there must be demand for the products being offered on
those sites. There can be no assurance that our customers will be successful in
accomplishing any of these objectives and their failure to do so could impede
our growth and adversely affect our business.
BUYERS AND SELLERS MIGHT NOT ADOPT ONLINE AUCTIONS OR OTHER ONLINE PRICING
SOLUTIONS AS A MEANS FOR BUYING AND SELLING GOODS AND SERVICES.
Online auctions and other pricing solutions, such as our AutoMarkdown
service, are relatively new methods of buying and selling that market
participants may not adopt at levels sufficient to sustain our business.
Traditional purchasing is often based on long-standing relationships or
familiarity with sellers. For online auctions and other pricing solutions to
succeed, buyers and sellers must adopt new purchasing practices. Buyers must be
willing to rely less upon traditional relationships in making purchasing
decisions, and merchants and Internet communities must be willing to offer
products for sale through online auctions and other pricing solutions. We cannot
assure you that buyers, merchants or Internet communities will choose to utilize
online market pricing solutions at levels sufficient to sustain our business.
OUR BUSINESS MAY SUFFER IF AUCTION USERS DO NOT MAKE PAYMENTS OR DELIVER GOODS.
Our future success will depend to some extent upon sellers on customer
auction sites reliably delivering and accurately representing their listed goods
and buyers paying the agreed purchase price. Our customers have received in the
past, and we anticipate that they will receive in the future, communications
from sellers and buyers who did not receive the purchase price or the goods that
were to have been exchanged. Neither we nor our customers have the ability to
require end-users to make payments or deliver goods or otherwise make end-users
whole. Our customers also periodically receive complaints from buyers as to the
quality of the goods purchased. We expect that our customers will continue to
receive requests from end-users requesting reimbursement or threatening legal
action if no reimbursement is made. We expect that such requests and complaints
will continue to be made and that customers or their end-users may threaten
legal action against us if no reimbursement is made.
WE MAY HAVE DIFFICULTY MANAGING THE EXPANSION OF OUR OPERATIONS.
We are undergoing rapid growth in the number of our employees and the scope
of our operations and anticipate that further expansion will be required to
address potential growth in our customer base and market opportunities. Such
rapid expansion could place a significant
5
<PAGE> 9
strain on our senior management team and operational and financial resources. To
manage the expected growth of our operations and personnel, we will need to:
- continue to upgrade our business processes and controls;
- expand, train and manage our growing employee base; and
- expand our finance, administrative and operations staff.
There can be no assurance that:
- our current and planned systems, business processes and controls will be
adequate to support our future operations;
- we will be able to hire, train, retain, motivate and manage required
personnel; or
- we will be able to identify, manage and benefit from existing and
potential customer relationships and market opportunities.
Difficulties in effectively managing the budgeting, forecasting and other
process control issues presented by such a rapid expansion could have a material
adverse effect on our business, results of operations and financial condition by
leading to increased costs, reduced margins and lower revenue. If we are unable
to undertake new business due to a shortage of staff or technology resources,
our growth will be impeded. Therefore, there may be times when our opportunities
for revenue growth may be limited by the capacity of our internal resources
rather than by the absence of market demand.
THE LOSS OF OUR CHIEF EXECUTIVE OFFICER WOULD SIGNIFICANTLY DISRUPT OUR
BUSINESS.
We rely on the leadership and vision of our President, Chief Executive
Officer and founder, Scott T. Randall, who created FairMarket and has been
instrumental in the management and growth of our business. The loss of Mr.
Randall could significantly disrupt our growth, result in lost revenues or
otherwise materially adversely affect our business.
BECAUSE OUR INDUSTRY IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO ENTRY, WE MAY
NOT BE ABLE TO EFFECTIVELY COMPETE.
The U.S. market for e-commerce services is extremely competitive. We expect
competition to intensify as current competitors expand their product offerings
and new competitors enter the market. In addition to competition from
internally-developed solutions by individual organizations, our primary direct
competitors are the following providers of hosted auction services:
auctions.net, bid.com, Bidland, DealDeal.com and OpenSite. We also face
competition for customers from third party providers in the following areas:
- software and application service providers: Auction Broker, Moai
Technologies, OpenSite and TradingDynamics;
- destination auction sites: Amazon.com, eBay and Yahoo! Auctions; and
- companies with specific market pricing mechanisms: Mercata and
Respond.com.
The principal competitive factors are the quality and breadth of services
provided, potential for successful transaction activity and price. E-commerce
markets are characterized by rapidly changing technologies and frequent new
product and service introductions. We may fail to introduce new online auction
or other market pricing formats on a timely basis or at all. If we fail to
introduce new service offerings or to improve our existing service offerings in
response to industry developments, or if our prices are not competitive, we
could lose customers, which could lead to a loss of revenues.
6
<PAGE> 10
Because there are relatively low barriers to entry in the e-commerce
market, competition from other established and emerging companies may develop in
the future. Many of our competitors may also have well-established relationships
with our existing and prospective customers. Increased competition is likely to
result in fee reductions, reduced margins, longer sales cycles for our services
and a decrease or loss of our market share, any of which could harm our
business, operating results or financial condition.
Many of our competitors have, and new potential competitors may have, more
experience developing Internet-based software applications and integrated
purchasing solutions, larger technical staffs, larger customer bases, more
established distribution channels, greater brand recognition and greater
financial, marketing and other resources than we have. In addition, competitors
may be able to develop products and services that are superior to ours or that
achieve greater customer acceptance. We cannot assure you that the e-commerce
solutions offered by our competitors now or in the future will not be perceived
as superior to ours by merchants, Internet communities or individual buyers and
sellers.
WE MAY NOT BE ABLE TO SUCCESSFULLY EXPAND INTO INTERNATIONAL MARKETS.
A component of our strategy is to expand internationally by attracting
customers outside the United States. We currently have customers in Australia
and the United Kingdom. We believe that significant opportunities exist in
international markets, and it is our intention to compete in these markets.
Primary target markets include the United Kingdom, Western Europe and Asia
Pacific. Expansion into international markets will require management attention
and resources. We have limited experience in localizing our services, and some
of our competitors are also undertaking expansion into foreign markets. There
can be no assurance that we will be successful in expanding into international
markets.
In addition to the uncertainty regarding our ability to generate revenues
from foreign operations and expand our international presence, there are risks
inherent in doing business internationally, including, among others:
- regulatory requirements;
- difficulties in staffing and managing foreign operations;
- longer payment cycles;
- different accounting practices;
- fluctuating currency exchange rates;
- problems in collecting accounts receivable;
- legal uncertainty regarding liability, ownership and protection of
intellectual property;
- tariffs and other trade barriers;
- seasonal reductions in business activity;
- potentially adverse tax consequences; and
- political instability.
Any of the above factors could adversely affect the success of our
international operations. While we believe that the international risks we
currently face are minimal, to the extent we expand our international
operations, we will become more exposed to the above risks. To the extent we
have increasing portions of our international revenues denominated in foreign
currencies, we will become subject to increased risks relating to foreign
currency exchange rate fluctuations. There can be no assurance that one or more
of the factors discussed above will not have a material adverse effect on our
future international operations and, consequently, on our ability to expand our
business and increase our revenue.
7
<PAGE> 11
WE MAY HAVE TO MAKE MINIMUM PAYMENTS TO TWO OF OUR CUSTOMERS UNDER OUR SERVICE
CONTRACTS.
Our agreements with Microsoft Corporation and Excite, Inc. provide that if
these companies drive more than a specified number of Internet users to the
FairMarket Network through their Internet portal sites, we will guarantee them a
minimum level of transaction revenue regardless of actual transaction fee
revenue earned by the companies.
Actual revenue is determined as follows:
- All auction transactions are recorded in our auction system.
- We collect, on behalf of our customers, transaction fees charged to
end-users of portal and community sites.
- On a monthly or quarterly basis, depending on the contract terms, we
remit the fees collected to the customer, net of any amount owed to us.
The customer's share of all such fees is aggregated and measured against
the minimum annual guarantee.
The agreements with Microsoft and Excite currently provide for aggregate
annual minimum guaranteed revenue starting at up to approximately $5.8 million
in 2000 and increasing to up to approximately $28.4 million in 2004. Our
obligations to make the minimum guaranteed annual payments are directly linked
to the minimum annual traffic guarantees provided by Microsoft and Excite. If
Microsoft and/or Excite meet their minimum annual traffic guarantees but the
increase in traffic does not produce sufficient revenue to meet the minimum
guaranteed revenue, we will have a financial obligation to Microsoft and/or
Excite. This obligation will be an amount equal to the difference between the
minimum guaranteed payment and their portion of the transaction fees actually
collected.
Any payments we have to make to satisfy the minimum guaranteed revenue
levels under these agreements could have a material adverse effect on our
business, financial condition and results of operations.
OUR BUSINESS MAY SUFFER IF WE ARE NOT ABLE TO PROTECT IMPORTANT INTELLECTUAL
PROPERTY.
Our ability to compete effectively against other companies in our industry
will depend, in part, on our ability to protect our proprietary technology and
systems designs relating to our auction and other market pricing technologies
and the FairMarket Network. While we have attempted to safeguard and maintain
our proprietary rights, we do not know whether we have been or will be
completely successful in doing so. Further, our competitors may independently
develop or patent technologies that are substantially equivalent or superior to
ours.
We applied for patents on aspects of our technology and processes in
November 1999 and those applications are pending with the U.S. Patent and
Trademark Office. We do not know whether any patents will be issued. In
addition, even if some or all of these patents are issued, we cannot assure you
that they will not be successfully challenged by others or invalidated, that
they will adequately protect our technology and processes or that they will
result in commercial advantages for us. We have also applied for trademark
registrations for some of our brand names and our marketing materials are
copyrighted, but these protections may not be adequate. In addition, effective
patent, trademark, service mark, copyright and trade secret protection may not
be available in every country where we provide services. We may, at times, have
to incur significant legal costs and spend time defending our copyrights and, if
issued, our service marks and patents. Any defense efforts, whether successful
or not, would divert both time and resources from the operation and growth of
our business.
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WE MAY NOT BE ABLE TO MAINTAIN THE CONFIDENTIALITY OF OUR PROPRIETARY KNOWLEDGE.
We rely, in part, on contractual provisions to protect our trade secrets
and proprietary knowledge. These agreements may be breached, and we may not have
adequate remedies for any breach. Our trade secrets may also be known without
breach of such agreements or may be independently developed by competitors. Our
inability to maintain the proprietary nature of our technology could harm our
business, results of operations and financial condition by adversely affecting
our ability to compete.
OTHERS MAY ASSERT THAT OUR TECHNOLOGY INFRINGES THEIR INTELLECTUAL PROPERTY
RIGHTS.
We believe that we do not infringe the proprietary rights of others and, to
date, no third parties have asserted an infringement claim against us, but we
may be subject to infringement claims in the future. The defense of any claims
of infringement made against us by third parties could involve significant legal
costs and require our management to divert time from our business operations.
Either of these consequences of an infringement claim could have a material
adverse effect on our operating results. If we are unsuccessful in defending any
claims of infringement, we may be forced to obtain licenses or to pay royalties
to continue to use our technology. We may not be able to obtain any necessary
licenses on commercially reasonable terms or at all. If we fail to obtain
necessary licenses or other rights, or if these licenses are costly, our
operating results may suffer either from reductions in revenues through our
inability to serve customers or from increases in costs to license third-party
technologies.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO CONTINUE TO LICENSE
SOFTWARE THAT IS NECESSARY FOR OUR SERVICE OFFERING.
We license a variety of technologies from Microsoft, including our database
software and Internet server software, which is used in our services and systems
to perform key functions. These licenses may not be available to us on
commercially reasonable terms in the future. The loss of or inability to
maintain any of these licenses could result in delays in our services and
systems developments and enhancements.
OUR SYSTEMS INFRASTRUCTURE MAY NOT KEEP PACE WITH THE DEMANDS OF OUR CUSTOMERS.
Interruptions of service as a result of a high volume of traffic and/or
transactions could diminish the attractiveness of our services and our ability
to attract and retain customers. There can be no assurance that we will be able
to accurately project the rate or timing of increases, if any, in the use of our
service, or that we will be able to expand and upgrade our systems and
infrastructure to accommodate such increases in a timely manner. Any failure to
expand or upgrade our systems could have a material adverse effect on our
results of operations and financial condition by reducing or interrupting
revenue flow and by limiting our ability to attract new customers. Any such
failure could also have a material adverse effect on the business of our
customers, which could damage our reputation and expose us to a risk of loss or
litigation and potential liability. The FairMarket Network currently utilizes
approximately 60 computer servers with an additional 10 in reserve to handle
unexpected capacity increases. We currently estimate our total capacity to be
approximately 30 million page views per day. The majority of this capacity is
currently not utilized.
A SYSTEM FAILURE COULD CAUSE DELAYS OR INTERRUPTIONS OF SERVICE TO OUR
CUSTOMERS.
Service offerings involving complex technology often contain errors or
performance problems. Many serious defects are frequently found during the
period immediately following introduction and initial implementation of new
services or enhancements to existing services. Although we attempt to resolve
all errors that we believe would be considered serious by our
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customers before implementation, our systems are not error-free. Errors or
performance problems could result in lost revenues or cancellation of customer
agreements and may expose us to litigation and potential liability. In the past,
we have discovered errors in software used in the FairMarket Network after its
incorporation into the FairMarket Network. We cannot assure you that undetected
errors or performance problems in our existing or future services will not be
discovered or that known errors considered minor by us will not be considered
serious by our customers. We have experienced periodic minor system
interruptions, which may continue to occur from time to time. During October
1999, our system was unavailable to users on account of a significant outage on
two occasions, once for five hours and once for two hours. Both outages resulted
from our installation of enhanced capacity management features. As a result of
these outages, we paid one of our customers $15,000 under our contract with that
customer. To date, 10 of our customers have contracts which specifically allow
them to terminate the contract if we are unable to maintain specified levels of
service. Three of these contracts provide for specified levels of money damages
to the customer based upon network downtime. The potential loss to us if these
contracts are terminated depends on the unexpired portion of the contract.
Aggregate revenue for all 10 of these customers is approximately $134,000 per
month. Errors or defects in our technology would also damage our reputation
which could reduce market acceptance of our services and our revenues.
THE FUNCTIONING OF OUR SYSTEMS OR THE SYSTEMS OF THIRD PARTIES ON WHICH WE RELY
COULD BE DISRUPTED BY FACTORS OUTSIDE OUR CONTROL.
Our success depends on the efficient and uninterrupted operation of our
computer and communications hardware systems. Substantially all of our computer
hardware for operating our service is currently located at the facilities of
NaviSite, Inc. in Andover, Massachusetts. These systems are vulnerable to damage
or interruption from natural disasters, fires, power loss, telecommunication
failures, break-ins, sabotage, computer viruses, intentional acts of vandalism
and similar events. We do not currently have a backup system in place. Despite
any precautions we take or plan to take, the occurrence of a natural disaster or
other unanticipated problems at the NaviSite facility could result in
interruptions in our services. In addition, if NaviSite fails to provide the
data communications capacity we require, as a result of human error, natural
disaster or other operational disruption, interruptions in our service could
result. Any damage to or failure of our systems could result in reductions in,
or terminations of, our service, which could have a material adverse effect on
our business, results of operations and financial condition.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO ATTRACT OR RETAIN KEY PERSONNEL.
Based on our planned expansion, we will require a significant increase in
the number of our employees and outside contractors. Our future success,
therefore, will depend, in part, on attracting and retaining additional
qualified management, marketing and technical personnel. We do not know whether
we will be successful in hiring or retaining qualified personnel. The industry
in which we compete has a high level of employee mobility and aggressive
recruiting of skilled personnel. In particular, we face intense competition for
qualified personnel in the areas of software development, network engineering
and product management. Our inability to hire qualified personnel on a timely
basis, or the departure of key employees, could harm our existing business and
ability to expand our operations.
WE MAY HAVE TO MONITOR OR CONTROL ACTIVITIES ON THE FAIRMARKET NETWORK.
The law relating to the liability of providers of online services for the
activities of users of their services is currently unsettled. Our service
automatically screens by key word all listings submitted by end-users for
pornographic material. We also have notice and take-down procedures related to
infringing and illegal goods. These procedures are not foolproof and goods that
may be subject to regulation by local, state or federal authorities could be
sold through our service. These goods include, for example, firearms, alcohol
and tobacco. There
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can be no assurance that we will be able to prevent the unlawful exchange of
goods on our service or that we will successfully avoid civil or criminal
liability for unlawful activities carried out by users through our service. The
potential imposition of liability for unlawful activities of end-users of our
customers could require us to implement measures to reduce our exposure to such
liability, which may require us, among other things, to spend substantial
resources and/or to discontinue one or more of our service offerings. Any costs
incurred as a result of such liability or asserted liability would harm our
results of operations.
FUTURE GOVERNMENT REGULATION OF AUCTIONS AND AUCTIONEERS MAY ADD TO OUR
OPERATING COSTS.
Numerous jurisdictions have laws and regulations regarding the conduct of
auctions and the liability of auctioneers. We believe that these laws and
regulations, which were enacted for consumer protection many years ago, do not
apply to our online auction services. However, little precedent exists in this
area, and one or more jurisdictions are attempting or may attempt to impose
these laws and regulations to online auction providers and may attempt to impose
these laws and regulations on our operations or the operations of our customers
in the future. The states of Louisiana, New Hampshire, North Carolina and
Tennessee are currently considering whether to apply their auctioneer
regulations to online auctions, but no regulatory or legislative action has been
taken to date. In addition, as the nature of the products listed by our
customers or their end-users changes, we may become subject to new regulatory
restrictions. If we do become subject to these laws and regulations in the
future, it could adversely affect our ability to attract and retain customers
and could adversely affect our results of operations by decreasing activity on
our customers' auction sites.
WE MAY ACQUIRE OTHER BUSINESSES OR TECHNOLOGIES, WHICH COULD RESULT IN DILUTION
TO OUR STOCKHOLDERS, OR OPERATIONAL OR INTEGRATION DIFFICULTIES WHICH COULD
IMPAIR OUR FINANCIAL PERFORMANCE.
If appropriate opportunities present themselves, we may acquire businesses,
technologies, services or products that we believe will be useful in the growth
of our business. We do not currently have any commitments or agreements with
respect to any acquisition. We may not be able to identify, negotiate or finance
any future acquisition successfully. Even if we do succeed in acquiring a
business, technology, service or product, the process of integration may produce
unforeseen operating difficulties and expenditures and may require significant
attention from our management that would otherwise be available for the ongoing
development of our business. Moreover, we have not made any acquisitions, have
no experience in integrating an acquisition into our business and may never
achieve any of the benefits that we might anticipate from a future acquisition.
If we make future acquisitions, we may issue shares of stock that dilute other
stockholders, incur debt, assume contingent liabilities or create additional
expenses related to amortizing goodwill and other intangible assets, any of
which might harm our financial results and cause our stock price to decline. Any
financing that we might need for future acquisitions may only be available to us
on terms that restrict our business or that impose on us costs that reduce our
revenue.
RISKS RELATED TO OUR INDUSTRY
OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH OF THE INTERNET AND ONLINE COMMERCE.
Our future revenues and profits depend upon the widespread acceptance and
use of the Internet and other online services as a medium for commerce by
merchants and consumers. The use of the Internet and e-commerce may not continue
to develop at past rates and a sufficiently broad base of business and
individual customers may not adopt or continue to use the Internet as a medium
of commerce. The market for the sale of goods and services over the Internet is
a new and emerging market. Demand and market acceptance for recently introduced
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services and products over the Internet are subject to a high level of
uncertainty, and there exist few proven services and products. Growth in our
customer base depends on obtaining merchants and consumers who have historically
used traditional means of commerce to purchase goods. For us to be successful,
these market participants must accept and use novel ways of conducting business
and exchanging information.
E-commerce may not prove to be a viable medium for purchasing for the
following reasons, any of which could seriously harm our business:
- the necessary infrastructure for Internet communications may not develop
adequately;
- our potential customers, buyers and suppliers may have security and
confidentiality concerns;
- complementary products, such as high-speed modems and high-speed
communication lines, may not be developed;
- alternative purchasing solutions may be implemented;
- buyers may dislike the reduction in the human contact inherent in
traditional purchasing methods;
- use of the Internet and other online services may not continue to
increase or may increase more slowly than expected;
- the development or adoption of new technology standards and protocols may
be delayed or may not occur; and
- new and burdensome governmental regulations may be imposed.
OUR SUCCESS DEPENDS ON THE CONTINUED RELIABILITY OF THE INTERNET.
The Internet continues to experience significant growth in the number of
users, frequency of use and bandwidth requirements. There can be no assurance
that the infrastructure of the Internet and other online services will be able
to support the demands placed upon them. Furthermore, the Internet has
experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and could face such outages and delays in the
future, including outages and delays resulting from the inability of certain
computers or software to distinguish dates in the 21st century from dates in the
20th century. These outages and delays could adversely affect the level of
Internet usage and also the level of traffic and the processing of transactions.
In addition, the Internet or other online services could lose their viability
due to delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet or other online service
activity, or due to increased governmental regulation. Changes in or
insufficient availability of telecommunications services or other Internet
service providers to support the Internet or other online services also could
result in slower response times and adversely affect usage of the Internet and
other online services generally and our service in particular. If use of the
Internet and other online services does not continue to grow or grows more
slowly than expected, if the infrastructure of the Internet and other online
services does not effectively support growth that may occur, or if the Internet
and other online services do not become a viable commercial marketplace, we will
have to adapt our business model to the new environment, which would materially
affect our results of operations and financial condition.
GOVERNMENT REGULATION OF THE INTERNET MAY IMPEDE OUR GROWTH OR ADD TO OUR
OPERATING COSTS.
Like many Internet-based businesses, we operate in an environment of
tremendous uncertainty as to potential government regulation. We believe that we
are not currently subject to direct regulation of online commerce, other than
regulations applicable to businesses generally. However, the Internet has
rapidly emerged as a commerce medium, and govern-
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mental agencies have not yet been able to adapt all existing regulations to the
Internet environment. Laws and regulations have been introduced or are under
consideration and court decisions have been or may be reached that affect the
Internet or other online services, covering issues such as pricing, user
privacy, freedom of expression, access charges, content and quality of products
and services, advertising, intellectual property rights and information
security. In addition, it is uncertain how existing laws governing issues such
as taxation, property ownership, copyrights and other intellectual property
issues, libel, obscenity and personal privacy will be applied to the Internet.
The majority of these laws were adopted prior to the introduction of the
Internet and, as a result, do not address the unique issues of the Internet.
Recent laws that contemplate the Internet, such as the Digital Millennium
Copyright Act, have not yet been interpreted by the courts and their
applicability is therefore uncertain.
In the area of user privacy, several states have proposed legislation that
would limit the uses of personal user information gathered online or require
online services to establish privacy policies. The Federal Trade Commission also
has become increasingly involved in this area, and recently settled an action
with one online service regarding the manner in which personal information is
collected from users and provided to third parties. The recently adopted
European Union Directive on the Protection of Personal Data may affect our
ability to expand into Europe if we or our customers do not afford adequate
privacy to end-users of our customers' sites.
As online commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as pricing, content, user
privacy, and quality of products and services. Any future regulation may have a
negative impact on our business by restricting our methods of operation or
imposing additional costs. Although many of these regulations may not apply to
our business directly, we anticipate that laws regulating the solicitation,
collection or processing of personal information could indirectly affect our
business.
The Telecommunications Act of 1996 prohibits certain types of information
and content from being transmitted over the Internet. The prohibition's scope
and the liability associated with a Telecommunications Act violation are
currently unsettled. In addition, although substantial portions of the
Communications Decency Act of 1995 have been held to be unconstitutional, we
cannot be certain that similar legislation will not be enacted and upheld in the
future. It is possible that such legislation could expose companies involved in
online commerce to liability, which could limit the growth of online commerce
generally. Legislation like the Telecommunications Act and the Communications
Decency Act could dampen the growth in Internet usage and decrease its
acceptance as a communications and commerce medium.
The worldwide availability of Internet web sites often results in sales of
goods to buyers outside the U.S., and foreign jurisdictions may claim that we
are required to comply with their laws. As an Internet company, it is unclear
which jurisdictions may find that we are conducting business therein. Our
failure to qualify to do business in a jurisdiction that requires us to do so
could subject us to fines or penalties and could result in our inability to
enforce contracts in that jurisdiction.
NEW TAXES MAY BE IMPOSED ON INTERNET COMMERCE.
We do not collect sales or other similar taxes on goods sold by customers
and users through the FairMarket Network or service taxes on fees paid by
end-users of our customers' auction sites. However, one or more states may seek
to impose sales tax collection obligations on out-of-state companies which
engage in or facilitate online commerce, and a number of proposals have been
made at the state and local level that would impose additional taxes on the sale
of goods and services through the Internet. In addition, non-U.S. countries may
seek to impose service tax (such as value-added tax) collection obligations on
companies that engage in or facilitate Internet commerce. Such proposals, if
adopted, could substantially impair the growth of electronic commerce, and could
adversely affect our opportunity to derive financial benefit from such
activities. Moreover, a successful assertion by one or more states or any
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foreign country that we or our customers should collect sales or other taxes on
the exchange of merchandise or auction site usage fees or that we or our
customers should collect Internet-based taxes could impair our revenue and our
ability to acquire and retain customers.
THERE MAY BE SIGNIFICANT SECURITY RISKS AND PRIVACY CONCERNS RELATING TO ONLINE
COMMERCE.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. A compromise or
breach of the technology used to protect our customers' and their end-users'
transaction data could result from, among other things, advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments. Any such compromise could have a material adverse effect on our
reputation and, therefore, on our business, results of operations and financial
condition. Furthermore, a party who is able to circumvent our security measures
could misappropriate proprietary information or cause interruptions in our
operations. In April 1999, unauthorized persons gained access to the
www.fairmarket.com web site and replaced the home page with a web page of their
own. There was no compromise of our auction operating system. We may be required
to expend significant capital and other resources to protect against such
security breaches or to alleviate problems caused by such breaches. Concerns
over the security of transactions conducted on the Internet and other online
services and the privacy of users may also inhibit the growth of the Internet
and other online services generally, especially as a means of conducting
commercial transactions. We currently have practices and procedures in place to
protect the confidentiality of our customers' and their end-users' information.
However, our security procedures to protect against the risk of inadvertent
disclosure or intentional breaches of security might fail to adequately protect
information that we are obligated to keep confidential. We may not be successful
in adopting more effective systems for maintaining confidential information, and
our exposure to the risk of disclosure of the confidential information of others
may grow with increases in the amount of information we possess. To the extent
that our activities involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could damage our
reputation and expose us to a risk of loss or litigation and possible liability.
Our insurance policies may not be adequate to reimburse us for losses caused by
security breaches.
WE COULD BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS AND THIRD PARTY
LIABILITY CLAIMS RELATED TO PRODUCTS AND SERVICES PURCHASED THROUGH OUR
CUSTOMERS' AUCTION SITES.
Any errors, defects or other performance problems in our services and
systems could result in financial or other damages to our customers. Although
our agreements with our customers typically contain provisions designed to limit
our exposure to claims, existing or future laws or unfavorable judicial
decisions could negate these limitation of liability provisions.
In addition, we may not be able to successfully avoid civil or criminal
liability for problems related to the products and services sold on customer
auction sites. Even if we are successful, any such claims or litigation could
still require expenditure of management time and other resources to defend
ourselves. Liability of this sort could require us to implement measures to
reduce our exposure to this liability, which may require us, among other things,
to expend substantial resources or to discontinue service offerings or to take
precautions to ensure that products and services are not available on customer
auction sites.
Moreover, deliveries of products purchased on customer auction sites that
are nonconforming, late or are not accompanied by information required by
applicable law or regulations, could expose us to liability or result in
decreased adoption and use of those sites and therefore our services, which
would lead to decreased revenue.
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RISKS RELATED TO THIS OFFERING OF OUR COMMON STOCK
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price per share will be substantially higher
than the net tangible book value per share immediately after this offering. If
you purchase common stock in this offering, you will incur immediate and
substantial dilution in the net tangible book value per share of the common
stock from the price you paid. We also have a large number of outstanding
warrants and employee stock options to purchase our common stock with exercise
prices significantly below the initial public offering price of the common
stock. To the extent these warrants or options are exercised, there will be
further dilution.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE.
The stock market, and in particular the market for Internet-related stocks,
has, from time to time, experienced extreme price and volume fluctuations. Many
factors may cause the market price for our common stock to decline, perhaps
substantially, following this offering, including:
- failure to meet our development plans;
- the demand for our common stock;
- revenues and operating results failing to meet the expectations of
securities analysts or investors in any quarter;
- downward revisions in securities analysts' estimates or changes in
general market conditions;
- technological innovations by competitors or in competing technologies;
and
- investor perception of our industry or our prospects.
In the past, companies that have experienced volatility in the market price
of their stock have been the subject of securities class action litigation. We
may be involved in securities class action litigation in the future. Such
litigation often results in substantial costs and a diversion of management's
attention and resources and could lead to increased costs and loss of customers
and revenue.
OUR EXISTING STOCKHOLDERS WILL CONTROL ALL MATTERS REQUIRING A STOCKHOLDER VOTE.
Upon the closing of this offering, our management and principal
stockholders will control approximately 82% of our outstanding stock. If all of
these stockholders were to vote together as a group, they would have the ability
to exert significant influence over our Board of Directors and its policies. For
instance, these stockholders would, if they voted together, be able to control
the outcome of all stockholder votes, including votes concerning director
elections, by-law amendments and possible mergers, corporate control contests
and other significant corporate transactions. Accordingly, such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control, impeding a merger, consolidation, takeover or other business
combination involving FairMarket or discouraging a potential acquirer from
making a tender offer or otherwise attempting to obtain control of FairMarket,
which in turn could have an adverse effect on the market price of our common
stock.
PROVISIONS OF DELAWARE LAW AND OF OUR CHARTER AND BY-LAWS MAY MAKE A TAKEOVER
MORE DIFFICULT.
Provisions in our certificate of incorporation and by-laws and in the
Delaware corporate law may make it difficult and expensive for a third party to
pursue a tender offer, change in control
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or takeover attempt which is opposed by our management and Board of Directors.
Public stockholders who might desire to participate in such a transaction may
not have an opportunity to do so. In addition, prior to the closing of this
offering, we will have a staggered Board of Directors, which will make it
difficult for stockholders to change the composition of the Board of Directors
in any one year. These anti-takeover provisions could substantially impede the
ability of public stockholders to change our management and Board of Directors,
which may reduce the market price of our common stock.
FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE.
Sales of substantial amounts of our common stock in the public market
following this offering, or the perception that a large number of shares are
available for sale, could cause the market price of our common stock to decline.
After this offering, shares owned by our current stockholders and holders of
options and warrants to acquire our common stock, on a fully diluted basis
assuming exercise of all options and warrants, including those held by our
executive officers and directors, are expected to constitute approximately 84%
of the outstanding shares of our common stock, or approximately 80% if the
underwriters' over-allotment option is exercised in full. Following the
expiration of a 180-day "lock-up" period to which substantially all of the
shares held by our current stockholders will be subject, the holders of those
shares will in general be entitled to dispose of those shares. Moreover,
Deutsche Bank Securities, Inc. may, in its sole discretion and at any time
without notice, release those holders from the sale restrictions on their
shares. In addition to the adverse effect a price decline could have on holders
of our common stock, such a decline would likely impede our ability to raise
capital through the issuance of additional shares of our common stock or other
equity securities.
After this offering, the holders of approximately 16.3 million shares of
our common stock (including shares issuable upon the exercise of outstanding
warrants) will have rights, subject to some conditions, to require us to file
registration statements covering their shares, or to include their shares in
registration statements that we may file for FairMarket or other stockholders.
By exercising their registration rights and selling a large number of shares,
these holders could cause the price of our common stock to decline. Furthermore,
if we were to include in a FairMarket-initiated registration statement shares
held by those holders pursuant to the exercise of their registration rights,
those sales could impair our ability to raise needed capital by depressing the
price at which we could sell our common stock.
WE MAY SUFFER SERVICE INTERRUPTIONS OR TECHNICAL FAILURES DUE TO THE YEAR 2000
COMPUTER PROBLEM ON OUR OWN SYSTEMS OR SYSTEMS OF THIRD PARTIES.
The failure of our internal systems to be year 2000 compliant could
temporarily prevent us from providing service to our customers, issuing invoices
and developing new services and service enhancements, and could require us to
devote significant resources to correct such problems. Due to the general
uncertainty inherent in the year 2000 computer problem, which results from the
uncertainty of the year 2000 readiness of third-party suppliers and vendors, we
are unable to determine at this time whether the consequences of year 2000
failures will have a material impact on our business, results of operations or
financial condition. To date, neither our internal systems nor the systems of
any third parties on which we rely to provide our services have experienced any
year 2000 failures. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
WE WILL HAVE BROAD DISCRETION AS TO THE USE OF THE PROCEEDS FROM THIS OFFERING.
Our Board of Directors and our management will have broad discretion over
the use of the net proceeds of this offering. Investors will be relying on the
judgment of our Board of Directors and our management regarding the application
of the proceeds of this offering.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any expressed or implied by these forward-looking statements. In
some cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," "continue" or the negative of these terms
or other comparable terminology. 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.
This prospectus contains statistical data regarding Internet usage that we
obtained from industry publications, including reports generated by Forrester
Research and Media Metrix. These industry publications generally indicate that
they have obtained their information from sources believed to be reliable, but
do not guarantee the accuracy and completeness of their information. While we
believe that these publications are reliable, we have not independently verified
their data.
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of our common stock
in this offering will be approximately $49.9 million, at an assumed initial
offering price of $11.00 per share and after deducting the estimated
underwriting discounts and commissions and our estimated offering expenses.
We anticipate that we will use substantially all of the net proceeds for
general corporate purposes, including working capital, hiring personnel, capital
expenditures, expansion of sales and marketing activities and development of
technology. We are not in a position to fix in advance our uses of these
proceeds due to the rapidly changing nature of the market in which we operate.
The amounts we actually spend for general corporate purposes will depend on a
number of factors, including revenue growth, if any, and the amount of cash we
generate from operations. As a result, we will retain broad discretion in the
allocation and use of the net proceeds of this offering. Until allocated for
specific use, we will invest these proceeds in government securities and other
short-term, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We
currently intend to retain our future earnings, if any, to finance the expansion
of our business and do not expect to pay any dividends in the foreseeable
future. Payment of future cash dividends, if any, will be at the discretion of
our Board of Directors after taking into account various factors, including our
financial condition, operating results, current and anticipated cash needs and
plans for expansion, and restrictions imposed by lenders, if any.
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CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
- on an actual basis;
- on a pro forma basis giving effect to: (1) the issuance, as of September
30, 1999, of 16,312,885 shares of common stock in connection with the
conversion of all our outstanding preferred stock into common stock upon
the closing of this offering; (2) the expiration of a put option on
2,500,000 shares of our Series D Convertible Preferred Stock, which
convert into 2,500,000 shares of common stock, upon the closing of this
offering; and (3) the receipt of $5.0 million of stock subscriptions
receivable from Excite, Inc. due upon the closing of this offering; and
- on a pro forma as adjusted basis to reflect the preceding pro forma
adjustments and the sale of 5,000,000 shares of common stock in this
offering at an assumed initial public offering price of $11.00 per share,
after deduction of estimated underwriting discounts and commissions and
our estimated offering expenses and the use of the net proceeds as
described in "Use of Proceeds."
The table excludes 9,046,062 shares of common stock issuable upon exercise
of warrants and employee stock options outstanding at September 30, 1999 at a
weighted average exercise price of $1.14 per share.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Series D Convertible Preferred Stock $0.001 par value,
10,000,000 shares authorized, 2,500,000 shares issued and
outstanding, subject to a put option at $7.00 per share,
actual; none issued and outstanding on a pro forma and pro
forma as adjusted basis................................... $ 17,500 $ -- $ --
Stockholders' equity (deficit)
Series A Convertible Preferred Stock, $0.001 par value;
754,603 shares authorized, 754,603 shares issued and
outstanding, actual; none issued and outstanding on a
pro forma and pro forma as adjusted basis.............. 498 -- --
Series B Convertible Preferred Stock, $0.001 par value;
1,890,000 shares authorized, 1,890,000 issued and
outstanding, actual; none issued and outstanding on a
pro forma and pro forma as adjusted basis.............. 2,083 -- --
Series C Convertible Preferred Stock, $0.001 par value;
6,168,282 shares authorized, 6,168,282 issued and
outstanding, actual; none issued and outstanding on a
pro forma and pro forma as adjusted basis.............. 10,527 -- --
Series D Convertible Preferred Stock, $0.001 par value;
10,000,000 shares authorized, 5,000,000 issued and
outstanding, actual; none issued and outstanding on a
pro forma and pro forma as adjusted basis.............. 34,970 -- --
Common Stock, $0.001 par value; 36,000,000 shares
authorized, 5,049,992 shares issued and outstanding,
actual; 21,362,877 and 26,781,111 shares issued and
outstanding on a pro forma and pro forma as adjusted
basis.................................................. 5 21 26
Additional paid-in capital................................ 33,745 99,307 149,152
Deferred compensation and equity related charges.......... (53,590) (53,590) (53,590)
Stock subscription receivable............................. (17,500) (12,500) (12,500)
Accumulated deficit....................................... (7,746) (7,746) (7,746)
-------- -------- --------
Total stockholders' equity............................. 2,992 25,492 75,342
-------- -------- --------
Total capitalization.............................. $ 20,492 $ 25,492 $ 75,342
======== ======== ========
</TABLE>
18
<PAGE> 22
DILUTION
As of September 30, 1999, we had a pro forma net tangible book value of
$25,492,251, or $1.19 per share of common stock. Pro forma net tangible book
value per share is equal to our total tangible assets less total liabilities,
divided by the pro forma number of shares of our outstanding common stock. After
giving effect to the issuance of 5,000,000 shares of common stock offered hereby
at an assumed initial public offering price of $11.00 per share, and after
deducting the estimated underwriting discounts and commissions and our estimated
offering expenses, our pro forma net tangible book value as adjusted, as of
September 30, 1999, would have been approximately $75,342,251, or approximately
$2.86 per pro forma share of common stock. This represents an immediate increase
in pro forma net tangible book value of $1.67 per share to our existing
stockholders and an immediate dilution of $8.14 per share to new investors in
this offering. If the initial public offering price is higher or lower than
$11.00 per share, the dilution to new stockholders will be higher or lower,
respectively. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share before this
offering.................................................... $1.19
Increase per share attributable to new investors.......... $1.67
-----
Pro forma net tangible book value per share after this
offering.................................................. $ 2.86
------
Dilution per share to new investors......................... $ 8.14
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1999, the difference between existing stockholders and the new investors with
respect to the number of shares of common stock purchased, the total
consideration paid and the average price per share paid. The table assumes that
the initial public offering price will be $11.00. If the underwriters'
over-allotment option is exercised in full, the shares held by existing
stockholders will decrease to 79% of the total number of shares of common stock
outstanding after the offering, and will increase the number of shares held by
new investors to 5,750,000, or 21% of the total number of shares of common stock
outstanding after the offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 21,362,877 81% $25,492,251 36% $ 1.19
New investors............. 5,000,000 19 50,050,000 64 10.01
---------- ----- ----------- -----
Total................... 26,362,877 100.0% $75,542,251 100.0%
========== ===== =========== =====
</TABLE>
The discussion and table exclude:
- shares that may be issued by us upon exercise of the underwriters'
over-allotment option;
- 9,046,062 shares of common stock subject to outstanding warrants and
employee stock options at September 30, 1999 at a weighted average
exercise price of $1.14 per share; and
- an aggregate of 857,987 shares available for future grant under our stock
option plans.
To the extent the warrants and options are exercised and the underlying
shares are issued, there will be further dilution to new investors. If all of
these options and warrants had been exercised as of December 31, 1999, net
tangible book value per share after this offering would be $2.42 and total
dilution per share to new investors would be $8.58.
19
<PAGE> 23
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our financial statements and related notes and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
data included elsewhere in this prospectus.
The following tables present selected financial data for the period from
February 20, 1997 (date of inception) through December 31, 1997, the year ended
December 31, 1998 and the nine-month periods ended September 30, 1998 and 1999.
The statement of operations data for the period from inception through December
31, 1997 and for the year ended December 31, 1998 and the balance sheet data as
of December 31, 1997 and 1998 have been derived from our audited financial
statements included elsewhere in this prospectus. The statement of operations
data for the nine months ended September 30, 1998 and 1999 and the balance sheet
data as of September 30, 1999 are derived from our unaudited financial
statements which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of our results of operations and financial position for those
periods. The data for the nine-month period ended September 30, 1999 are not
necessarily indicative of results for the year ending December 31, 1999 or any
future period.
Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding shares of preferred stock
into common stock as if such shares had converted immediately upon issuance.
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ ------------------
1997(1) 1998 1998 1999
------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................... $ 3 $ 4 $ 2 $ 891
Operating expenses
Cost of revenue, exclusive of $18 reported
below as equity related charges........ -- -- -- 422
Sales and marketing, exclusive of $907
reported below as equity related
charges................................ 232 675 538 1,761
Advertising expense....................... 47 8 8 1,383
Development and engineering, exclusive of
$82 reported below as equity related
charges................................ 94 314 196 1,265
General and administrative, exclusive of
$30 reported below as equity related
charges................................ 234 426 273 1,058
Equity related charges.................... -- -- -- 1,037
------- ------- ------- -------
Total operating expenses............... 607 1,423 1,015 6,926
------- ------- ------- -------
Loss from operations........................ (604) (1,419) (1,013) (6,035)
Interest income, net........................ 3 31 27 279
------- ------- ------- -------
Net loss.................................... $ (601) $(1,388) $ (986) $(5,756)
======= ======= ======= =======
Basic and diluted net loss per share........ $ (0.15) $ (0.30) $ (0.22) $ (1.16)
======= ======= ======= =======
Shares used in computing basic and diluted
net loss per share........................ 4,073 4,571 4,527 4,970
Unaudited pro forma basic and diluted net
loss per share............................ $ (0.21) $ (0.43)
======= =======
Shares used in computing pro forma basic and
diluted net loss per share................ 6,764 13,480
</TABLE>
- -------------------------
(1) Period from February 20, 1997 (date of inception) to December 31, 1997.
20
<PAGE> 24
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
DECEMBER 31, ----------------------
------------------ PRO FORMA
1997 1998 ACTUAL AS ADJUSTED
------- ------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents, net............. $ 1,129 $ 540 $18,855 $73,905
Property, plant and equipment, net......... 49 199 2,340 2,340
Working capital............................ 1,123 458 18,152 73,202
Total assets............................... 1,260 771 22,046 77,096
Series D Convertible Preferred Stock $0.001
par value, 2,500,000 shares issued and
outstanding subject to a put option at $7
per share and none issued and outstanding
on a pro forma as adjusted basis......... -- -- 17,500 --
Total stockholders' equity................. $ 1,172 $ 658 $ 2,992 $75,342
</TABLE>
21
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and the
notes to those statements included elsewhere in this prospectus. This prospectus
contains forward-looking statements that involve risks and uncertainties, such
as statements of our plans, objectives, expectations and intentions. Our actual
results could differ materially from those contained in the forward-looking
statements. Factors that may cause such differences include, but are not limited
to, those discussed in "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
FairMarket, Inc. was formed as a Delaware corporation in February 1997 and
is headquartered in Woburn, Massachusetts. From our inception through May 1998,
we devoted substantially all of our efforts to our initial business model of
matching buyers and sellers of computer products and peripherals utilizing our
own Internet auction web site. Product sales were transacted directly between
the buyer and the seller, with the Company earning a transaction fee based on
the dollar amount of completed sales and, beginning in May 1998, a fee for
listing products on our auction site. In December 1998, we began to execute our
current business model involving the offering of outsourced, private-label
auction solutions as described under "Business." From December 31, 1998 to
December 31, 1999, our employee base has grown from 11 to 139 employees.
FairMarket provides outsourced, networked online auction services for
companies that desire to develop or enhance their Internet marketplaces. Our
primary service offering consists of the development, hosting and maintenance of
private-label online auction sites for business merchants, Internet portal sites
and other companies that have a presence on the web. We host these auction sites
on our central operating system, which gives us the ability to aggregate
listings of goods and services available for sale on each of our customers'
auction sites and make those listings available for display and sale on auction
sites of other FairMarket customers. We refer to this network of customer
auction sites as the FairMarket Network.
From December 31, 1998 to December 31, 1999, the number of auction sites
developed and hosted by FairMarket grew from 0 to more than 90 auction sites.
We derive revenue from service fees, which consist of site implementation,
monthly operating and support fees and professional service fees, and network
fees. For the nine months ended September 30, 1999, service fees represented
approximately $787,527, or 88% of our total revenue, while network fees
represented $103,895, or 12% of our total revenue. We do not expect the
proportion of service to network fees to change significantly during the next
year. We generally charge a one time set-up fee for the design, development and
implementation of an auction site. The set-up fee varies depending on the nature
of the auction site, the anticipated complexity of the auction site and whether
standard or expedited implementation is requested. The set-up fee is deferred
and recorded as revenue over the term of the related agreement. Monthly service
fees are generally charged to customers and cover hosting services, direct
customer support services, end-user customer support services, services for
online billing and collection of fees, and fraud protection services. Service
fees vary by customer depending on the required level of services and
anticipated level of auction site activity. We also offer additional services to
our customers for which we charge a consulting fee, such as redesigning the user
interface of a customer's existing auction site.
Network fees consist of our share of transaction, listing and merchandizing
fees charged to our customers or their end-users. Merchant customers pay
transaction fees at varying
22
<PAGE> 26
percentages based on the gross proceeds from the sale of their listed products
and services, whether sold on their auction sites or on other FairMarket Network
sites. Community customers pay transaction fees based on the gross proceeds from
the sale of the items that are listed through the community auction site and are
sold either on their auction sites or on other FairMarket Network sites. The fee
percentages vary by customer depending on the anticipated level of auction
activity on the customer's site and the level of the monthly service fees.
Communities receive a percentage of the gross proceeds from the sale of items
that are listed directly through other auction sites in the FairMarket Network
and sold through the community auction site. We record revenue net of amounts
shared with our customers.
At no point during the auction process do we take possession of either the
products being sold or the buyers' payment for the item. Because merchants and
individual sellers, rather than FairMarket, sell the items listed, we have no
cost of goods sold, procurement, or carrying or shipping costs and no inventory
risk related to the items sold at auction. Our rate of expense growth is
primarily driven by increases in personnel, increases in advertising and
promotional activities and increases in product development and engineering
costs.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain
unaudited quarterly data from our statements of operations. The quarterly
information has been derived from our unaudited financial statements which, in
management's opinion, have been prepared on a basis consistent with the
financial statements contained elsewhere in this prospectus and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information for the periods presented. This
information should be read in conjunction with our financial statements and
related notes included elsewhere in this prospectus. The operating results for
any quarter are not necessarily indicative of the results that may be expected
for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1998 1998 1999 1999 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue................. $ 1,419 $ 1,336 $ 55,150 $ 164,269 $ 672,003
Operating expenses:
Cost of revenue..... -- -- 46,719 89,205 286,518
Sales and
marketing........ 96,988 137,318 211,604 836,511 2,096,372
Development and
engineering...... 80,201 117,405 196,071 403,379 665,163
General and
administrative... 84,152 153,513 152,418 373,978 531,136
Equity related
charges.......... -- -- 1,993 48,033 987,227
----------- ----------- ----------- ----------- -----------
Total operating
expenses....... 261,341 408,236 608,805 1,751,106 4,566,416
----------- ----------- ----------- ----------- -----------
Loss from operations.... (259,922) (406,900) (553,655) (1,586,837) (3,894,413)
Interest income, net.... 6,834 4,275 47,162 108,386 123,511
----------- ----------- ----------- ----------- -----------
Net loss................ $ (253,088) $ (402,625) $ (506,493) $(1,478,451) $(3,770,902)
=========== =========== =========== =========== ===========
</TABLE>
REVENUES
Our revenues did not materially change during the last two quarters of the
year ended December 31, 1998 and increased during each of the first three
quarters of 1999. During the last two quarters of 1998, our revenue was derived
primarily from transaction fees from the sale of computer equipment and
peripherals on our former auction web site. In December 1998,
23
<PAGE> 27
we began offering an outsourced, private-label auction solution. Service and
network revenue increased for the nine months ended September 30, 1999 primarily
as a result of the addition of approximately 90 customers during the period.
COST OF REVENUE
Cost of revenue consists of costs of providing direct customer services
(which includes costs associated with the implementation of a customer's auction
site and the cost of ongoing direct customer support services), end-user
customer support services, depreciation of network equipment, fees paid to
network providers for bandwidth, and monthly fees paid to third-party network
providers. Cost of revenue increased substantially between the first and second
quarters of 1999 in absolute dollars but decreased over such period as a
percentage of revenue. In the third quarter of 1999, cost of revenue increased
substantially both in absolute dollars and as a percentage of revenue compared
to the second quarter of 1999. The increases in cost of revenue during 1999 are
primarily due to increases in personnel-related expenses relating to increased
hiring to support our anticipated growth and, to a lesser extent, an increase in
costs for the provision and maintenance of the FairMarket Network.
SALES AND MARKETING
Our sales and marketing expenses primarily consist of compensation for
sales and marketing personnel, advertising, trade show and other promotional
costs, expenses for creative design of advertising and marketing programs, and
related overhead costs. Sales and marketing expenses have increased
substantially from the third quarter of 1998 through the third quarter of 1999,
primarily due to increases in compensation associated with additional sales and
marketing personnel and, in the third quarter of 1999, due to increases in
advertising and promotional expenses. Compensation associated with sales and
marketing increased from $46,575 for the third quarter of 1998 to $87,720 for
the fourth quarter of 1998, and $126,178, $395,256, and $668,654 for the first,
second and third quarters of 1999, respectively. In the first quarter of 1999,
advertising and promotional expense was not material, and in the second and
third quarter of 1999 advertising and promotional expense was $235,686 and
approximately $1.1 million, respectively. We expect to continue to substantially
increase our sales and marketing activities in future quarters, particularly our
advertising and promotional activities, and to substantially increase our sales
force over the next year, and therefore anticipate that sales and marketing
expenses will continue to increase substantially over the near term. We also
anticipate that sales and marketing expenses will increase as a result of our
auction services agreement with Excite, Inc., pursuant to which we have
committed to purchase online banner and other advertising services from Excite
in an amount equal to $2.5 million during each of the first eight calendar
quarters under the contract, beginning with the fourth quarter of 1999, for a
total of $20 million, of which $17.5 million has been prepaid to Excite through
Excite's withholding the payment for 2,500,000 shares of our Series D
Convertible Preferred Stock.
DEVELOPMENT AND ENGINEERING
Our development and engineering expenses primarily consist of compensation
for development and engineering personnel, payments to outside contractors and,
to a lesser extent, depreciation of equipment and related overhead costs. We
expense development and engineering costs as they are incurred. Development and
engineering costs have increased substantially during each quarter since the
third quarter of 1998 primarily as a result of increases in the number of our
development and engineering personnel. We expect that development and
engineering expenses will continue to increase in future quarters, primarily as
a result of the hiring of additional development and engineering personnel to
support our anticipated growth.
24
<PAGE> 28
GENERAL AND ADMINISTRATIVE
Our general and administrative expenses primarily consist of compensation
for general and administrative personnel and fees for outside contractors.
General and administrative expenses have increased significantly since the third
quarter of 1998. The increases have primarily resulted from an increase in fees
for outside contractors used in recruiting personnel across all functional
areas. We expect that general and administrative expenses will continue to
increase in future quarters as we continue to build our infrastructure.
EQUITY RELATED CHARGES
Equity related charges consist of the amortization of (1) deferred stock
compensation resulting from the grant of stock options to employees at exercise
prices subsequently deemed to be less than the fair value of the common stock on
the grant date and (2) the fair value of warrants issued to Microsoft and Lycos,
Inc. and shares of our Series D Convertible Preferred Stock issued to Microsoft,
Excite and TicketMaster Online-CitySearch, Inc. at prices below their fair
value. See "Certain Transactions with Related Parties." At September 30, 1999,
deferred stock compensation relating to employee stock options, which is a
component of stockholders' equity, totaled approximately $3.7 million, net of
amortization of $216,070. This amount is being amortized ratably over the
vesting periods of the applicable stock options, typically four years, with 25%
vesting on the first anniversary of the grant date and the balance vesting 6.25%
quarterly thereafter. We expect to incur equity related compensation expense of
at least $471,000 in 1999, $981,000 in 2000, $979,000 in 2001, $979,000 in 2002
and $506,000 in 2003.
At September 30, 1999, other deferred equity related charges, which is a
component of stockholders' equity, totaled approximately $49.9 million, net of
amortization of $821,183. This amount is being amortized ratably over the terms
of the related agreements, from three to five years. We expect to incur expenses
of at least $3.7 million in 1999, $11.7 million in 2000, $11.7 million in 2001,
$10.6 million in 2002, $7.8 million in 2003, and $5.2 million in 2004.
In connection with our auction services agreement with Lycos, we issued to
Lycos a performance-based warrant for the purchase of common stock which will be
valued when earned, recorded as deferred equity related charges and amortized
over the remaining term of the contract.
INTEREST INCOME, NET
Interest income, net, consists of interest earned on cash and cash
equivalents, offset by interest expense. Interest expense has not been material
during any of the quarters since the third quarter of 1998. Interest income
increased substantially in the first quarter of 1999 compared to the prior
quarter due to higher average cash balances resulting from the sale of shares of
our Series C Convertible Preferred Stock in February 1999, the proceeds of which
totaled approximately $10.5 million. The increase in interest income in the
second quarter of 1999 compared to the first quarter of 1999 reflects a full
quarter's impact of the investment of the proceeds from the sale of the Series C
Convertible Preferred Stock, partially offset by cash used in operations.
Interest income increased from the second to the third quarter of 1999 due to
higher average cash balances resulting from the sale of the Series D Convertible
Preferred Stock in August and September 1999, the cash proceeds of which totaled
approximately $14.0 million.
25
<PAGE> 29
RESULTS OF OPERATIONS FOR PERIOD OF INCEPTION THROUGH DECEMBER 31, 1997 AND THE
YEAR ENDED DECEMBER 31, 1998
For the period from inception through December 31, 1997 ("fiscal 1997"),
our net loss was $601,575. For year ended December 31, 1998, our net loss was
approximately $1.4 million. The net loss increased $786,722 from fiscal 1997 to
1998 due to an increase in total operating expenses of $816,174, partially
offset by an increase in interest income.
REVENUE
During fiscal 1997 and 1998, our revenue was derived primarily from
transaction fees from the sale of computer equipment and peripherals on our
former auction web site. Our revenue increased from $2,523 for fiscal 1997 to
$3,784 in 1998 primarily due to the growth in transaction fees on transactions
conducted through our former auction site.
OPERATING EXPENSES
Total operating expenses increased by $816,174, from $607,082 for fiscal
1997 to approximately $1.4 million for 1998. Sales and marketing expenses
increased by $404,511, from $278,633 for fiscal 1997 to $683,144 in 1998. This
increase was primarily due to increased personnel expenses and, to a lesser
extent, increases in advertising and promotional expenses and related overhead
expenses. Development and engineering expenses increased by $219,248, from
$94,406 for fiscal 1997 to $313,654 in 1998, primarily due to increased
engineering personnel expenses in 1998. General and administrative expenses
increased by $192,415, from $234,043 for fiscal 1997 to $426,458 in 1998. This
increase was primarily attributable to contract services relating to business
development and accounting and finance.
INTEREST INCOME
Interest income was $4,415 for fiscal 1997 and $31,256 for the year ended
December 31, 1998. The increase in interest income of $26,841 is primarily due
to a higher average cash balance during 1998 compared to fiscal 1997. In
December 1997, we completed the sale of 1,170,000 shares of our Series B
Convertible Preferred Stock, the net proceeds of which totaled approximately
$1.3 million, and in August 1998, we completed the sale of 720,000 additional
shares of our Series B Convertible Preferred Stock, the net proceeds of which
totaled $795,066.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND THE NINE
MONTHS ENDED SEPTEMBER 30, 1999
For the nine months ended September 30, 1998, our net loss was $985,672.
For the nine months ended September 30, 1999, our net loss was approximately
$5.8 million. The increase in net loss of approximately $4.8 million is
primarily due to an increase in total operating expenses of approximately $5.9
million over such periods, partially offset by an increase in revenue of
$888,974 and an increase in interest income of $257,305.
REVENUE
During 1998, our revenue was derived primarily from transaction fees
charged to sellers of computer equipment and peripherals on our former auction
web site. In December 1998, we began offering an outsourced, private-label
auction solution to merchant customers and online community customers, deriving
our revenue from monthly service fees and a share of fees from transactions
completed on auction sites participating in the FairMarket Network. Total
revenue
26
<PAGE> 30
was $2,448 for the nine months ended September 30, 1998 and $891,442 for the
nine months ended September 30, 1999. The increase in revenue is primarily due
to an increase in monthly service revenue generated from customers that joined
the FairMarket Network in 1999. The one-time set-up fees we charge for the
implementation of auction sites are deferred and recorded as revenue over the
term of the related contracts. At September 30, 1999, there was $252,531 of
deferred revenue relating to set-up fees. We also defer recognition of
transaction fee revenue arising from our contracts with Microsoft and Excite.
COST OF REVENUE
Cost of revenue was not material during 1998. For the nine months ended
September 30, 1999, cost of revenue was $422,442. Cost of revenue consists of
costs for both direct and auction site end-user customer support, depreciation
of network equipment, fees paid to network providers for bandwidth and monthly
fees paid to third-party network providers. The increase in cost of revenue is
primarily due to increases in personnel-related expenses relating to the
increase in our employee base across all functions to support our anticipated
growth, and, to a lesser extent, an increase in costs for the provision and
maintenance of the FairMarket Network.
SALES AND MARKETING
Sales and marketing expenses increased by approximately $2.6 million, from
$545,826 for the nine months ended September 30, 1998 to approximately $3.1
million for the nine months ended September 30, 1999. This increase primarily
resulted from the building of a sales and marketing organization, and the
commencement during the third quarter of 1999 of a significant increase in
advertising and promotional activities.
DEVELOPMENT AND ENGINEERING
Development and engineering expenses increased by approximately $1.1
million, from $196,249 for the nine months ended September 30, 1998 to
approximately $1.3 million for the nine months ended September 30, 1999. This
increase was primarily due to the hiring of additional engineering personnel and
other engineering costs incurred to enhance and scale our online auction system
and the FairMarket Network.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by $784,587, from $272,945
for the nine months ended September 30, 1998 to approximately $1.1 million for
the nine months ended September 30, 1999. This increase was primarily due to
building finance and human resources departments combined with external
recruiting contractor costs supporting all functional areas.
EQUITY RELATED CHARGES
Equity related charges consist of the amortization of (1) deferred stock
compensation resulting from the grant of stock options to employees at exercise
prices subsequently deemed to be less than the fair value of the common stock on
the grant date and (2) the fair value of warrants issued to strategic partners
and shares of our Series D Convertible Preferred Stock issued to strategic
partners at prices below their fair value. At September 30, 1999, deferred stock
compensation, which is a component of deferred compensation and equity related
charges in stockholders' equity, totaled approximately $3.7 million, net of
amortization of $216,070. This amount is being amortized ratably over the
vesting periods of the applicable stock options, typically four years, with 25%
vesting on the first anniversary of the grant date
27
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and the balance vesting 6.25% quarterly thereafter. We expect to incur equity
related compensation expense of at least $471,000 in 1999, $981,000 in 2000,
$979,000 in 2001, $979,000 in 2002 and $506,000 in 2003.
At September 30, 1999, other deferred equity related charges, which is a
component of stockholders' equity, totaled approximately $49.9 million, net of
amortization of $821,183. This amount is being amortized ratably over the terms
of the related agreements, from three to five years. We expect to incur expenses
of at least $3.7 million in 1999, $11.7 million in 2000, $11.7 million in 2001,
$10.6 million in 2002, $7.8 million in 2003 and $5.2 million in 2004.
INTEREST INCOME
Interest income was $26,981 for the nine months ended September 30, 1998
and $284,286 for the nine months ended September 30, 1999. The increase in
interest income of $257,305 is primarily due to a higher average cash balance
during 1999 compared to 1998. The average cash balance increased in 1999
compared to 1998 primarily due to the sale of shares of our convertible
preferred stock, partially offset by increases in the use of cash in operations
and in investing activities. In February 1999, we completed the sale of
approximately 6,168,000 shares of our Series C Convertible Preferred Stock, the
net cash proceeds of which totaled approximately $10.5 million, and in August
and September 1999, we completed the sale of 5,250,000 and 2,250,000 shares,
respectively, of our Series D Convertible Preferred Stock, the net cash proceeds
of which totaled approximately $14.0 million.
MICROSOFT AND EXCITE CONTRACTS
Our auction services agreements with Microsoft and Excite provide that, if
these companies drive more than a specified number of Internet users to the
FairMarket Network through their Internet portal sites, we will guarantee them a
minimum level of transaction fee revenue regardless of actual transaction fee
revenue earned by the companies. If Microsoft and/or Excite meet their minimum
annual traffic guarantees but the increase in traffic does not produce
sufficient revenue to meet the minimum guaranteed revenue, we will have a
financial obligation to Microsoft and/or Excite. This obligation will be an
amount equal to the difference between the minimum guaranteed payment and their
portion of fees actually collected. Our agreement with Microsoft provides for
minimum guaranteed revenue of $5.0 million, $10.0 million, $10.0 million, $15.0
million and $20.0 million for the first, second, third, fourth and fifth
contract years, respectively. Our agreement with Excite provides for minimum
guaranteed revenue of $0.8 million, $2.1 million, $4.6 million, $7.0 million and
$8.4 million for the first, second, third, fourth and fifth contract years,
respectively.
We defer recognition of revenue on our share of transaction fees under
these agreements until Microsoft and Excite receive the minimum guaranteed
revenue or until they fail to meet their performance targets.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through
private sales of capital stock, the net proceeds of which totaled approximately
$26.6 million as of September 30, 1999. At September 30, 1999, cash and cash
equivalents totaled approximately $18.9 million.
Cash used in operating activities was $953,844 for the nine months ended
September 30, 1998 and approximately $3.9 million for the nine months ended
September 30, 1999. Net cash flows from operating activities in each period
reflect increasing net losses and, to a lesser
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extent, an increase in accounts receivable and prepaid expenses, offset in part
by increases in accounts payable, deferred revenue and accrued expenses.
Cash used in investing activities was $89,730 for the nine months ended
September 30, 1998 and approximately $2.3 million for the nine months ended
September 30, 1999. Net cash used for investing activities in each period
reflects purchases of property and equipment, primarily the purchase of computer
equipment. During the nine months ended September 30, 1999, we purchased
computers and servers at a total cost of approximately $2.2 million to support
the expansion of the FairMarket Network and to provide computers and equipment
for new employees hired during that period.
Cash provided by financing activities was $847,494 for the nine months
ended September 30, 1998 and approximately $24.5 million for the nine months
ended September 30, 1999. Cash provided by financing activities for these
periods was derived primarily from private sales of our convertible preferred
stock.
In addition to other costs relating to the expansion of our business, we
anticipate making substantial expenditures during the first quarter of 2000 as
part of the continued expansion of the FairMarket Network, the build-out of
additional office space and the acquisition of back-up computer facilities.
We believe that the net proceeds from this offering, together with our
current cash and cash equivalents, will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next 12
months. We believe that without the proceeds from this offering, we would need
to raise additional funds to continue our operations, and that our expansion
plans might have to be slowed down or scaled back. Our future long-term capital
needs will be highly dependent on our rate of expansion and our results of
operations. Thus, any projections of future long-term cash needs and cash flows
are subject to substantial uncertainty. If the net proceeds of this offering
together with our available funds and cash generated from operations are
insufficient to satisfy our long-term liquidity requirements, we may seek to
borrow funds or to sell additional equity or debt securities. If additional
funds are raised through the issuance of debt securities, these securities could
have rights, preferences and privileges senior to those accruing to holders of
our common stock, and the terms of these debt securities or other debt financing
could impose restrictions on our operations. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders. We cannot be certain that additional financing will be available
in amounts or on terms acceptable to us, if at all. If we need and are unable to
obtain additional financing, we may be required to reduce the scope of our
planned technology, services or product development and sales and marketing
efforts.
We consider all highly liquid investment instruments purchased with an
original maturity of three months or less to be cash equivalents. We invest our
cash and cash equivalents in an overnight investment account, commercial paper
and a money market account. We place our cash and temporary cash investments
with financial institutions which management believes are of high credit
quality.
We have not invested in any financial instruments that expose us to
material market risk.
YEAR 2000 COMPLIANCE
Impact of Year 2000 Computer Problem. The year 2000 computer problem
refers to the potential for system and processing failures of date-related data
as a result of computer-controlled systems using two digits rather than four to
define the applicable year. For example, computer programs that have
time-sensitive software may recognize a date represented as "00" as the year
1900 rather than the year 2000. This could result in a system failure or
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miscalculation causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices or engage in
similar normal business activities.
State of Readiness of our Service. We have designed the FairMarket Network
and our service offerings for use in the year 2000 and beyond. We believe they
are year 2000 compliant. We have successfully tested the FairMarket Network and
our service offerings for year 2000 compliance. However, our network is
constructed from sophisticated hardware and software products supplied by other
vendors. We cannot evaluate whether all of these constituent products are year
2000 compliant. We may face claims based on year 2000 problems in other
companies' products or based on issues arising from the integration of multiple
third-party products within the overall network. Although no such claims have
been made against us, we may in the future be required to defend our service in
legal proceedings, which could be expensive regardless of the merits of such
claims. To date, neither our internal systems nor the systems of any third
parties on which we rely to provide our services have experienced any year 2000
failures.
State of Readiness of our Internal Systems. Our business may be affected
by year 2000 issues related to noncompliant internal systems developed by us or
by third-party vendors. Our material third-party vendors have stated that they
are year 2000 compliant. We are not currently aware of any year 2000 problems
relating to any of our material internal systems. We have successfully tested
all such systems for year 2000. We do not believe that we have any significant
systems that contain embedded chips that are not year 2000 compliant. Our
internal operations and business are also dependent upon the computer-controlled
systems of third parties such as our suppliers, customers or other service
providers. We believe that, absent a systemic failure outside our control, such
as a prolonged loss of electrical or telephone service, year 2000 problems at
third parties such as manufacturers, suppliers, customers and service providers
will not have a material impact on our operations. If our manufacturers,
suppliers, vendors, partners, customers and service providers fail to correct
their year 2000 problems, these failures could result in an interruption in, or
a failure of, our normal business activities and services. If a year 2000
problem occurs, it may be difficult to determine which party's products have
caused the problem. These failures could interrupt our operations and damage our
relationships with our customers. Due to the general uncertainty inherent in the
year 2000 problem resulting from the readiness of third-party manufacturers,
suppliers and vendors, we are unable to determine at this time whether year 2000
failures could harm our business and our financial results. To date, neither our
internal systems nor the systems of any third parties on which we rely to
provide our services have experienced any year 2000 failures.
Risks. The failure of our internal systems to be year 2000 compliant could
temporarily prevent us from providing service to our customers, issuing invoices
and developing new services and service enhancements, and could require us to
devote significant resources to correct such problems. Due to the general
uncertainty inherent in the year 2000 computer problem, which results from the
uncertainty of the year 2000 readiness of third-party suppliers and vendors, we
are unable to determine at this time whether the consequences of year 2000
failures will have a material impact on our business, results of operations or
financial condition. To date, we have incurred expenses of approximately $50,000
in connection with our efforts to become year 2000 compliant and do not
anticipate that any future costs associated with our year 2000 compliance
efforts will be material. To mitigate the risks associated with the year 2000,
we have conducted an extensive internal audit of our systems, hardware and
software. To date, neither our internal systems nor the systems of any third
parties on which we rely to provide our services have experienced any year 2000
failures.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. To date, we have not engaged in derivative and hedging
activities, and accordingly do not believe that the adoption of SFAS No. 133
will have a material impact on our financial reporting and related disclosures.
We will adopt SFAS No. 133 as required by SFAS No. 137, "Deferral of the
Effective Date of FASB Statement No. 133," in fiscal year 2000.
We have adopted Statement of Position ("SOP") 98-1, which requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. Costs eligible for
capitalization under SFAS No. 86 and SOP 98-1 have been insignificant to date.
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BUSINESS
OVERVIEW
FairMarket provides outsourced, networked online auction services for
companies that desire to develop or enhance their Internet marketplaces. Our
primary service offering consists of the development, hosting and maintenance of
private-label online auction sites for business merchants, Internet portal sites
and other companies that have a presence on the web. We host these auction sites
on our central operating system, which gives us the ability to aggregate
listings of goods and services available for sale on each of our customers'
auction sites and make those listings available for display and sale on auction
sites of other FairMarket customers. We refer to this network of customer
auction sites as the FairMarket Network.
There are two types of auction sites in the FairMarket Network. The first
are merchant auction sites developed for our business customers who wish to sell
their own goods or those of their business partners. These are the only goods
available for sale on a merchant auction site. The second are auction sites
developed for our Internet portal customers and other businesses that desire to
provide an online auction marketplace on which third parties can sell products
and services. These sites are commonly referred to as community auction sites.
We believe that conducting online auctions can benefit our customers as
follows:
- Merchant customers gain an additional sales format to offer on their
sites. In addition, by joining the FairMarket Network, merchants gain
instant access to potential buyers across the FairMarket Network.
- Community customers gain an opportunity to derive revenue from visitor
traffic and an attractive web site feature that provides an expanded
offering of products and services, potentially enhancing the experience
of their users and promoting increased user traffic and loyalty.
We also provide other market pricing formats, such as AutoMarkdown and
classified advertisements, which are currently included in our auction service
offering.
We provide an array of operating and support services to customers,
including auction site hosting and maintenance, direct customer support and
end-user support. We have designed our central operating system to be reliable
and to handle rapid growth in customers, listings and transaction activity. Our
central technology enables us to rapidly develop a customer's auction site,
typically in under 30 days. Because we host and maintain our customers' auction
sites on our system, our customers do not need to invest in additional hardware
and software or devote significant engineering or support resources to develop
and maintain their auction sites.
Our primary sources of revenue are service fees and network fees. Service
fees include a site implementation fee, monthly operating and support fees and
professional services fees. Network fees include our share of listing,
merchandizing and transaction fees. Through September 30, 1999, approximately
88% of our revenue was attributable to service fees.
Today, over 90 businesses, including CompUSA, Outpost.com and
SportsLine.com, Inc., and several top Internet portal sites, including MSN.com,
Excite@Home and Lycos, are members of the FairMarket Network.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND E-COMMERCE. The Internet has emerged as a global
medium that enables millions of businesses and consumers worldwide to
communicate, share
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information and conduct business electronically. The Internet possesses unique
characteristics that differentiate it from traditional forms of media, including
real-time access and instantaneous connections between merchants and consumers,
between merchants and other businesses, and between individuals. Businesses and
consumers are taking increasing advantage of these characteristics by conducting
more of their commerce over the Internet. Forrester Research, Inc. estimates
that U.S. transaction values for goods and services sold online will grow from
$52 billion in 1998 to approximately $1.4 trillion in 2003. Of this amount,
Forrester Research estimates that approximately $108 billion will be generated
in business-to-consumer transactions, approximately $1.3 trillion will be
generated in business-to-business transactions and approximately $6.4 billion
will be generated in person-to-person transactions.
NEED FOR OUTSOURCED E-COMMERCE SERVICE PROVIDERS. As more enterprises
conduct business online, ensuring the quality, availability and reliability of
Internet sites has become critical. In order to successfully manage and grow
their online operations, businesses need reliable computer systems that can be
scaled to grow with the enterprise, and the expertise and resources to
continuously maintain and upgrade those systems to reflect changing
technologies. As a result, we believe that many online businesses will seek to
enter into outsourcing arrangements with e-commerce service providers to reduce
time to market, initial capital expenditures and online operating expenses, and
to enhance their e-commerce strategies.
EMERGENCE OF INTERNET-BASED MARKET PRICING. The dominant format for
traditional commercial transactions today is fixed pricing, in which sellers
dictate prices to buyers. This often results from the fact that sellers
traditionally have been unable to adjust prices in a timely manner to reflect
the demands of buyers because they have lacked access to current information on
quantities, demand and specific prices.
The Internet is transforming traditional commerce by allowing market
information to be disseminated more quickly and efficiently, in greater quantity
and to a wider audience than was historically possible. These factors have
reduced the need for sellers to adhere to fixed pricing and given rise to
increased use of market pricing in e-commerce transactions. In a market pricing
format, buyers and sellers determine the prices of goods on a
transaction-by-transaction basis through negotiation or bidding.
Auctions are among the most well known forms of market pricing. Forrester
Research, Inc. estimates that the value of goods and services sold through
business-to-consumer and person-to-person auctions was $1.4 billion in 1998 and
projects this to grow at 68% per year to $19.0 billion in 2003. According to
Forrester Research, business-to-business auctions is an even larger market
opportunity with an estimated transaction value of goods and services of $8.7
billion in 1998 that is projected to grow to $52.6 billion in 2002. We believe
that the rapid growth in online auctions and e-commerce will bring more
companies into the market for online auctions and that many companies will seek
outsourced services to meet their e-commerce needs, including online auction and
other market pricing mechanisms, rather than developing those services in-house.
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THE CURRENT LANDSCAPE FOR ONLINE MARKET PRICING FORMATS. Aside from our
outsourced, networked service offering, there are a number of other ways
businesses can participate in the online auction market:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
OPTION ADVANTAGES DISADVANTAGES
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
List goods on a general - No investment in technology, - Surrender of online branding
third-party destination auction personnel or resources - Surrender of control of users'
web site - Access to existing marketplace auction experience
- Limited access to auction-
generated user, pricing and
marketing data
- Limited range of pricing
formats
- -------------------------------------------------------------------------------------------------------------
License and install third- - Ability to brand and customize - Significant initial and
party auction software auction site ongoing investments in
- Access to auction-generated user, technology, personnel and
pricing and marketing data resources
- Minimal initial traffic and
bidding activity
- Limited range of pricing
formats
- -------------------------------------------------------------------------------------------------------------
Develop auction software - Ability to brand and customize - Significant initial and
in-house auction site ongoing investments in
- Access to auction-generated user, technology, personnel and
pricing and marketing data resources
- Minimal initial traffic and
bidding activity
- -------------------------------------------------------------------------------------------------------------
</TABLE>
THE FAIRMARKET SOLUTION
The following are the principal characteristics of FairMarket's service
offering.
NETWORKED DISTRIBUTION. The FairMarket Network is designed to provide our
customers with access to a significantly greater number of potential buyers and
a broader range of products than their individual auction sites alone. By
maintaining listings of products and services in a central database, we are able
to make those listings available for display on community auction sites in the
FairMarket Network. For merchants and other sellers, listed items are seen by
more web site visitors, increasing the likelihood that items will be bid on and
sold. For buyers on community sites, this means a broader range of products and
services for purchase, making the community sites more attractive to Internet
users and potentially increasing user traffic to their main web sites. Media
Metrix estimates that user traffic across our portal customers' web sites is
over 40 million unique users per month. Although not all portal visitors have
visited or will visit the related auction sites, we believe that the high volume
of traffic across the main sites of our portal and other community customers
represents the potential for a much larger number of users of the related
auction sites and, as a result, the potential for an increase in auction
transactions and related auction site activity.
OUTSOURCED SOLUTION. By outsourcing their auction site needs to us, our
customers can remain focused on their businesses while benefiting from our
outsourced e-commerce expertise.
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We develop, host and maintain our customers' auction sites on a central
operating system. As a result, we can rapidly deploy new auction sites, quickly
implement new features and other enhancements and centrally provide direct
customer support, end-user support and maintenance services. Our customers do
not need to develop or acquire software or hardware and do not need to divert
resources to hire, train or utilize in-house engineering and support personnel
to develop and maintain their auction sites.
COMPREHENSIVE ARRAY OF PRICING FORMATS. FairMarket provides a
comprehensive set of market pricing formats that enables e-commerce market
participants to buy and sell goods efficiently. Our pricing options range from
traditional auction formats such as English and Dutch auctions to classified
listings, Quick-Win auctions and a falling price by time pricing format. Sellers
can select the pricing mechanism that they believe will optimize the sale price
for their goods and services and/or the time it will take to complete sales, and
buyers have an increased ability to participate in determining the price of the
goods they want to purchase. We believe that the breadth of the pricing
solutions currently available through our service and our ability to develop and
quickly implement new pricing solutions distinguish us from our competitors and
are important factors in our ability to attract and retain customers.
PROMOTION OF CUSTOMER BRAND. Our service allows customers to promote their
brands by enabling them to create private-label auction sites. A private-label
site is an auction site designed to have the look and feel of the customer's
home web site. All of the features available to visitors to a customer's auction
site, including extensive search and automatic bidding capabilities, automatic
email notifications to bidders and sellers and individual account tracking, are
customized so that users are not aware that they are leaving the customer's home
web site or using a third party service. The result is user-friendly auction
experience with a breadth of features that can enhance the user's visit to the
customer's web site. We believe that our customers' ability to offer this
experience to their users can increase new and repeat user visits to their main
web sites, thereby expanding their marketing and revenue opportunities.
CUSTOMER CONTROL OF AUCTION SITE. As part of our service offering, we
provide a web-based site configuration module that enables our customers to
control the auction experience and activity on their sites. Customers can set
the auction parameters for individual product and service listings, register
auction site users and set transaction, listing and merchandising fees. Because
the site configuration module is located on our central system, each customer is
also able to monitor and analyze current and historical activity data from its
auction site to improve its sales strategies.
RELIABILITY AND SCALABILITY. Our system is comprised of computing and
network hardware and proprietary transactional software. This system is designed
to easily expand to accommodate larger numbers of users and transactions, as
well as future enhancements, without delay and without additional cost to our
customers. The system incorporates standby hardware components and specialized
control software that are designed to allow operations to continue despite
failures in individual components. Also, our system provides a central point of
maintenance, reducing the likelihood of system errors and the time and personnel
needed to maintain and upgrade our systems.
STRATEGY
Our goal is to become a leading provider of outsourced, networked
e-commerce services for Internet marketplaces. Key elements of our strategy
include:
EXPAND THE REACH AND SCOPE OF THE FAIRMARKET NETWORK. We are dedicating
sales and marketing resources to expand the reach of the FairMarket Network by
increasing the number of new customers and the rate at which we obtain new
customers. Our focus is on forming
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relationships with large businesses that have well-known brand names, quality
product offerings and a desire for enhanced marketing and distribution channels.
To achieve this goal, we intend to open additional U.S. and international sales
offices over the next year. We seek to increase awareness of the FairMarket name
and recognition of our services in the business community through advertising
and targeted marketing and promotional activities, and to educate traditional
businesses about the benefits of a networked e-commerce sales strategy.
INCREASE TRAFFIC AND TRANSACTIONS ACROSS THE FAIRMARKET NETWORK. We are
committed to enhancing the productivity of the FairMarket Network by turning
more web site viewers into auction site participants. We intend to increase
traffic through expanded merchandising and promotional programs with our
community customers. These programs may include general advertising advice,
suggestions regarding placement of links to customer auction sites, and analysis
of transaction activity for the purpose of improving customers' marketing
efforts. We believe that these efforts will result in increased transaction
volumes across the FairMarket Network, increasing revenue to us and our
customers.
CONTINUE TO PROVIDE NEW SERVICE OFFERINGS. We intend to expand our service
offerings through internal development, new strategic relationships or
acquisitions. We will continue to enhance our existing auction service features
and we intend to develop new e-commerce features to provide a comprehensive
array of online buying and selling services. For example, we recently introduced
our AutoMarkdown feature to complement our auction offering. We also plan to
enter into relationships with third party providers to expand our service
offerings to such areas as order fulfillment, credit card and escrow services.
EXPAND INTO ADDITIONAL INTERNATIONAL MARKETS. We intend to capitalize on
the considerable market opportunities outside the United States. We recently
began operations in Australia and in the United Kingdom and we intend to further
expand into these countries and continental Europe over the next year. In some
cases, we may seek to reduce the costs and risks of international expansion by
entering into strategic alliances with companies that can provide local sales,
marketing, development and customer support personnel, contacts and cultural
expertise.
FURTHER PENETRATE THE BUSINESS-TO-BUSINESS MARKET. We intend to take
advantage of our auction expertise in the business-to-consumer and
person-to-person markets to further penetrate the growing business-to-business
market. The business-to-business market is typically characterized by large
transaction sizes and volumes which could represent substantial transaction
revenue for us. We intend to expand our presence in this space through increased
sales and marketing efforts towards business-to-business merchants and through
development of enhanced business-to-business service offerings such as sealed
bidding.
THE FAIRMARKET SERVICE OFFERING
PRICING FORMATS
Our service offering includes the following pricing formats.
- English auctions -- Buyers bid on-line until the auction ends at a
pre-determined time, usually 1 to 14 days. The item is then sold to the
highest bidder. Under this format, the seller has the option of setting a
reserve price, below which the listing will not be sold.
- Quick-Win auctions -- Like an English auction, buyers bid online until
the auction ends at a pre-determined time. The item is sold to the first
bidder who meets the threshold price set by the seller.
- Dutch auctions -- Used for selling multiple items. Buyers bid online
until the auction ends at a pre-determined time and all winning bidders
pay the same price, which is the lowest winning bid.
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- AutoMarkdown (falling price by time) -- Available for merchant sites
only, this pricing format is typically used for selling multiple
quantities of a certain item. Here, the price for an item decreases over
time in increments that are pre-determined by the seller, and each bid
results in an actual purchase.
- Classified listings -- Classified listings are similar to the classified
listings typically published in newspapers and other publications. There
is no bidding on a classified listing, and the buyer and seller
communicate directly to decide on the price for the item.
PRINCIPAL AUCTION SITE FEATURES
In addition to the pricing formats described above, our auction service
offers the following features.
LISTING FEATURES. A merchant begins the auction process by uploading its
product listings to its auction site. This can be done through periodic uploads
or via integration with the merchant's back-end systems. When the merchant
uploads product listings, it selects the sale parameters for each listing,
including product category, pricing format and duration of the auction, special
bidding, payment or shipping instructions, and export or other sale limitations.
A listing placed by the merchant on its auction site is assigned a unique
listing identifier and immediately becomes available for display and sale, with
the merchant's chosen sale parameters, on community sites across the FairMarket
Network. Each merchant listing that appears on a community site is accompanied
by a listing detail page that contains graphics and a description of both the
listed product and the merchant.
Sellers on a community site generally have the same listing options as
merchants. Online communities may charge sellers a fee to list items for sale on
their auction sites. Our customers do not typically charge buyers for making
bids or purchases.
MERCHANDISING FEATURES. Our service provides a merchandising area beside
the main auction activity area, which merchants can use to showcase listings of
special interest or special sales events. Merchants can also link individual
listings to other areas of their main web sites or to product reviews.
Similarly, a seller on a community site can choose from among a variety of
merchandising options designed to highlight the seller or a specific listing.
For example, a seller can, for a fee, have its name included under a list of
Featured Merchants or have a specific listing included under a list of Featured
Listings in a community site's merchandising area.
REPORTING FEATURES. Our service includes a number of reporting functions.
Through our site configuration module, customers can monitor activity on
specific listings as well as obtain aggregated information on bidding and sales
activity for a given time period. In addition, merchants can conduct end-user
based searches, listing searches and bid searches to refine their listing and
pricing strategies. At the end of each day, our service transmits to each of our
merchant customers an encrypted report that contains order information from the
day's sales to enable the merchant to fulfill those sales. We also provide our
customers with periodic reports that include detail on site traffic and page
views.
EMAIL FEATURES. Our service transmits a number of automatic email messages
to end-users, including registration and welcome emails, bid confirmation,
losing bid notification, winning bid notification, out-bid notification,
winning-again bid notification, and daily bid status updates. Customers can
customize these email messages through our site configuration module. Our
service also provides end-users with a shopping agent that allows buyers to
choose to be notified automatically by email when products specified by the
buyer become available within a price range specified by the buyer.
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FAIRMARKET PROFESSIONAL SERVICES
We provide our customers with the following professional services as part
of our outsourced solution.
IMPLEMENTATION SERVICES. We work closely with each customer to build an
auction site that presents the customer's desired branding and maintains the
look and feel of its main web site. As part of the implementation process, we
train the customer to manage all aspects of the auction experience, to access
auction site activity data and to upload product and service listings to its
auction site. We usually develop an auction site within four weeks of contract
execution, but we can develop a site in as little as two days if a customer so
requests and if the customer devotes sufficient attention to implementation.
PROMOTIONAL AND MERCHANDISING SERVICES. We work with the customer to
develop a promotional plan to ensure the successful launch of its auction site.
Following the launch of a customer's auction site, we help the customer develop
promotional and merchandising programs designed to drive user traffic to its
auction site. These programs include merchandising advice, including placement
of web site buttons and links, and promotional activities such as holiday or
special event auctions.
SUPPORT SERVICES. We provide ongoing support services to both our direct
customers and their auction site end-users. Basic technical support is provided
for our direct customers during regular business hours at no additional cost and
consists of telephone or email responses to questions relating to the operation
of the auction site and site access. We also provide transparent support
services to our customers' end-users via email on a 24 hour per day, seven day
per week basis, at no extra cost. Premium direct customer support services are
available for an additional fee and include extended support service hours and
an assigned account manager who assists the customer on an ongoing basis with
day-to-day auction site operation and maintenance issues.
FRAUD PROTECTION SERVICES. We provide a number of fraud protection
measures for the benefit of buyers and sellers. In order to participate in an
auction, all users must have a valid email address, which we verify during the
registration process. Sellers on community auction sites are required to provide
a credit card number to post listings; our customers can also require that a
buyer enter a credit card number to bid on listings. We also provide a buyer and
seller rating system for community auction sites, which allows buyers and
sellers to rate their experiences with one another and comment on their buying
and selling experience after a bid is won. If a seller receives negative ratings
above a limit selected by a community site, the seller is unable to post
additional listings to that site. Communities also have the option to offer
third-party escrow services to buyers and sellers.
SALES AND MARKETING
We sell our services through our direct sales force. Our sales personnel
identify potential customers through direct contact, by responding to requests
we receive by telephone or through our web site, and through attendance at trade
shows. Currently, our sales organization is located at our corporate
headquarters in Woburn, Massachusetts. Over the next year, we plan to
significantly increase the size of our sales force and to open additional U.S.
and international sales offices as we expand the size and scope of our business.
We have focused our marketing efforts on increasing the awareness of the
FairMarket brand in the business community and generating qualified leads for
our sales team. We promote the FairMarket name and services through a variety of
advertising media, including print, local radio, targeted direct mail campaigns
and attendance at trade shows. Our contracts generally provide for the inclusion
of a FairMarket Network logo on each web page of a customer's auction site.
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NETWORK MEMBERS
PARTICIPATING SITES. Two customer groups form the FairMarket Network:
merchants and Internet portal or online community web site owners. Merchants
bring name-brand products to the FairMarket Network, and communities bring their
registered users, who represent potential buyers and sellers. As of December 31,
1999, the FairMarket Network had grown to over 90 auction sites. As indicated by
the following partial list, our customers span a wide range of businesses:
<TABLE>
<CAPTION>
PORTAL AND OTHER COMMUNITY
MERCHANT CUSTOMERS CUSTOMERS
<S> <C>
Alloy Online, Inc. The Boston Globe's boston.com
CompUSA, Inc. Excite@Home
e-Wood.com, Inc. Lycos.com
Multiple Zones International, Inc. MSN.com
Outpost.com MyWay.com Corporation
SportingAuction, Inc. TicketMaster's cityauction.com
SportsLine.com, Inc. Wantads.com, Inc.
W.W. Grainger, Inc. Xoom.com
ZoneTrader.com, Inc.
</TABLE>
TECHNOLOGY
We have built a system consisting of computing and network hardware and
proprietary transactional software. This system is designed to easily expand to
accommodate larger numbers of users and transactions, as well as added features.
The system is designed so that parts of the overall workload are assigned to
specific classes of machines and it incorporates standby hardware components and
specialized control software designed to allow operations to continue despite
failures in individual components. For example, all interaction with web site
users is handled by web servers and all data storage is handled by a database
server and file server. Each customer auction site is maintained on multiple
servers and can be expanded to accommodate additional users or functional
requirements without redesign. A shared, secure administrative server is used
for auction site internal administrative traffic and reporting activities and
for diagnostic and performance monitoring of the auction sites. The FairMarket
Network is available on a 24 hour a day, seven day a week basis, subject to
scheduled maintenance. Our system is hosted by NaviSite, Inc. in Andover,
Massachusetts, which provides a secure environment, redundant communications
lines and emergency power backup. We expect to continue to spend a significant
amount of time and money on systems development to ensure the continued
reliability and scalability of our technology as our business grows.
COMPETITION
The market for Internet-based e-commerce services is highly competitive and
is evolving rapidly. While we believe that no company provides as comprehensive
an array of market pricing mechanisms as we do and that few companies operate in
a fully networked environment, as we do, many companies offer some form of
Internet auction or other single e-commerce pricing application, including
non-networked auction hosting, such as OpenSite, auction and other market
pricing software applications, such as Moai, and general third-party destination
auction sites, such as Yahoo! Auctions. In addition, network-based competitors
could emerge in the future. We compete for customers with those providers, as
well as with developers of in-house market pricing applications.
We believe that our knowledge of the e-commerce marketplace, our ability to
develop new service offerings and enhancements, and the technical and creative
talents of our employees are important to our ability to establish and maintain
a strong market position in a rapidly changing
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<PAGE> 43
and evolving competitive and technological landscape. We also believe that the
existence and nature of the FairMarket Network will position us to implement new
service offerings more quickly and cost-effectively than many of our
competitors. The market for e-commerce services, however, is highly competitive
and we expect this competition to intensify in the future. For more information
on competition, please see "Risk Factors."
INTELLECTUAL PROPERTY
Protection of our technology and other proprietary assets and respect for
the intellectual property rights of others are among our highest priorities. We
rely heavily on various types of intellectual property for our success and
competitive positioning. We use trademarks, copyrights, trade secrets and the
laws pertaining to them as well as contractual provisions to protect our
intellectual property. Currently, our most important proprietary rights are
those embodied in our auction service offerings and in the FairMarket Network.
We also license software from Microsoft for use in our development and
production systems. Because our technology is located on our operating systems
and we do not license our software to any customer or other third party, we
believe that the risk of unauthorized use of our technology is small. However,
no combination of intellectual property protections can guarantee the continued
security and availability of our intellectual property.
Creation and/or implementation of our technology, business model, marketing
research and plans, lead generation activities, customer lists, strategic plans
and similar proprietary assets are all protected at their inception and
throughout their economic lifetimes by confidentiality and proprietary rights
agreements which each of our employees is required to execute upon entering into
employment with us. We also rely on confidentiality agreements entered into with
contractors and vendors. In addition, we have filed trademark applications on
the service marks "FairMarket," "FairMarket Network," "AuctionPlace,"
"AutoMarkdown" and other marks. We also claim rights in other marks. We rely on
our marks to protect our domain and brand names. We have applications pending
with the U.S. Patent and Trademark Office but, while we continue to evaluate the
importance of patents to our business, we do not believe that our ability to
obtain patents is material to the success of our business and results of
operations.
We take such action as we may deem necessary or advisable to protect our
intellectual property. While such actions have not entailed litigation to date,
we might have to litigate in the future to protect our intellectual property
rights. For more information on the effect of intellectual property rights on
our business, please see "Risk Factors."
PRIVACY
We believe that issues relating to privacy and use of personal information
of Internet users are becoming increasingly important as the Internet and its
commercial use grow. Users of a FairMarket customer's auction site must agree to
that site's use and privacy policy when registering to use the auction site.
Customers' use and privacy policies may vary and we depend on our customers to
maintain adequate privacy policies on their sites. While FairMarket does not
sell or rent any personally identifiable information about users to any third
party without the consent of the user, we cannot guarantee that the privacy
policies of our customers contain similar protections. Sellers and winning
bidders do receive information about each other to enable them to complete a
sale. In addition, our customers may utilize information about their users for
internal purposes in order to improve marketing and promotional efforts, to
analyze site usage, and to improve content, product offerings and site layout.
We may utilize aggregated user data, other than identifiable user data such as
names, residence or email addresses or telephone numbers, from FairMarket
Network member sites for similar purposes.
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<PAGE> 44
LAW AND GOVERNMENTAL REGULATION
We are subject to various laws and regulations affecting our business.
Congress has recently passed legislation concerning the availability and
protection of copyrighted works on the Internet under the Digital Millennium
Copyright Act and continues to consider laws relating to Internet taxation. In
addition, there are recommended uniform state laws relating to technology that
are currently under consideration in a number of state legislatures. The
European Union has recently enacted regulations relating to online privacy
protections. These laws and regulations are very recent and their impact on us
and our industry has yet to be determined. This impact could include litigation
which, whether successful or not, would likely be time-consuming and costly and
require substantial management attention and resources. Also, while there are
relatively few laws today that specifically regulate Internet-related companies
and e-commerce in general, the sizeable growth in Internet usage and e-commerce
transactions has prompted many governmental bodies to consider legislation in
such areas as pricing, content, data protection, privacy protection,
intellectual property protection, taxation and consumer protection. Enactment of
laws or regulations in these areas could place burdens on us, either directly or
as a burden to e-commerce in general. In addition, numerous jurisdictions have
laws and regulations regarding the conduct of auctions and the liability of
auctioneers. We do not believe that these laws and regulations, which were
enacted for consumer protection before the development of the Internet, apply to
our online auction services. However, one or more jurisdictions may attempt to
impose these laws and regulations on our operations or our customers in the
future. For more information on law and governmental regulation, please see
"Risk Factors."
EMPLOYEES
As of December 31, 1999, we had 139 full-time employees. None of our
employees are covered by a collective bargaining agreement. We consider our
relations with our employees to be good.
FACILITIES
All of our operations are located in an office park located in Woburn,
Massachusetts, where we lease approximately 79,000 square feet of space. During
the year 2000, we intend to open additional U.S. and international sales
offices.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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<PAGE> 45
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, their positions and their ages as of
December 31, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Scott Randall..................... 37 President, Chief Executive Officer, Director and
Chairman
John Belchers..................... 55 Chief Financial Officer and Treasurer
Matthew Ackley.................... 32 Vice President, Product Management
Louis Gennaro..................... 52 Vice President, Sales
Bryan Semple...................... 35 Vice President, Product Marketing
Robert Supnik..................... 52 Vice President, Engineering
Bruce Worrall..................... 40 Vice President, Business Development
Jeffrey Drazan.................... 41 Director
Nanda Krish....................... 38 Director
</TABLE>
SCOTT RANDALL founded FairMarket in February 1997. Prior to founding
FairMarket, he was President of Yahoo! Marketplace, a joint venture between
Yahoo! and VISA International which was responsible for developing the online
retail shopping area of the Yahoo! site, from June through December 1996 and
President of the Internet Shopping Network, the Internet retail shopping
division of the Home Shopping Network, from February through May 1996. From June
1994 through January 1996, he was the general manager of NECX Direct, an
Internet home and office technology shopping site. Prior to that, Mr. Randall
held positions in brand management at Procter & Gamble. Mr. Randall is a
graduate of Harvard College and Harvard Business School.
JOHN BELCHERS has served as Chief Financial Officer of FairMarket since
August 1999. From March 1998 to January 1999, he served as Senior Vice President
and Chief Financial Officer of Microprose, then a publicly-held publisher and
distributor of entertainment software, now a subsidiary of Hasbro, Inc. From
1996 to 1997, he served as Executive Vice President and Chief Operating and
Financial Officer of Discovery Toys, which specializes in children's educational
products. From 1989 to 1996, Mr. Belchers held senior management positions at
American President Lines, a publicly-held, global transportation company. Mr.
Belchers holds a degree in Business Science from the University of Cape Town,
South Africa.
MATTHEW ACKLEY joined FairMarket in December 1998 and has served as Vice
President of Product Management of FairMarket since May 1999. Before joining
FairMarket, Mr. Ackley held management positions at Andersen Consulting from
September 1990 to August 1996 and attended Harvard Business School from August
1996 to June 1998. In February 1998, Mr. Ackley co-founded SocialGoods.com, now
part of 4charity.com, an Internet shopping site, and served as Chief Operating
Officer of that company through November 1998. He graduated from Duke University
with a degree in Biomedical and Electrical Engineering and received his MBA from
Harvard Business School.
LOUIS GENNARO has served as Vice President of Sales of FairMarket since
January 2000. From December 1998 through March 1999, Mr. Gennaro provided
business planning assistance to an early stage start-up company. From September
to November 1998, Mr. Gennaro served as Executive Vice President, Sales
Operations, of Parametric Technology Corporation, a developer of manufacturing
and industrial design software. From February 1997 until March 1998, Mr. Gennaro
was the President and Chief Executive Officer of net.Genesis Corp., then a
privately-held developer of analytical software for online businesses. From
January 1987
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<PAGE> 46
through October 1996, Mr. Gennaro held various management positions with Silicon
Graphics, Inc., a computer and software technology company, including the
positions of Vice President, U.S. Field Operations from October 1995 to October
1996 and Vice President, Eastern Area, from April 1990 to September 1995. Mr.
Gennaro holds a BA degree from Fordham University and an MBA from Long Island
University.
BRYAN SEMPLE joined FairMarket in March 1999. Mr. Semple became Vice
President of Product Marketing of FairMarket in January 2000. From March 1999 to
January 2000, Mr. Semple served as Vice President of Sales of FairMarket. Prior
to joining FairMarket, Mr. Semple co-founded PetStart.com, a development-phase
start-up company formed to develop an Internet shopping site for pet-related
products, where he served from November 1998 to February 1999. From August 1997
to November 1998, he served as Director of E-Commerce and Inside Sales for
Trellix Corporation, a developer of PC-based web site development applications
for individuals. Prior to that, Mr. Semple was regional sales and marketing
manager for PepsiCo from January 1996 to April 1997. Prior to his time at
PepsiCo, Mr. Semple served as a sales representative at Sybase, Inc., a
developer of enterprise database management software applications, from January
1994 to January 1996. He is a graduate of the U.S. Naval Academy and Stanford
University, where he received his MBA.
ROBERT SUPNIK has served as Vice President of Engineering of FairMarket
since August 1999. Prior to joining FairMarket, Mr. Supnik spent more than 20
years at Digital Equipment Corporation (now Compaq), where he managed the group
charged with the development of the Alpha architecture and systems. From 1996 to
1999, Mr. Supnik held the position of Vice President of Corporation Research at
Digital Equipment Corporation (DEC), and had overall responsibility for the team
that developed AltaVista, the Palo Alto Internet Exchange, the Millicent
Microcommerce System and the Personal Jukebox. From 1994 to 1996, Mr. Supnik
held the position of Vice President and Technical Director of Engineering
Strategy at DEC. Mr. Supnik holds a BS in Mathematics and a BS in History from
the Massachusetts Institute of Technology and a Masters in Arts and History from
Brandeis University.
BRUCE WORRALL has served as Vice President of Business Development of
FairMarket since November 1999. From November 1997 until November 1999, Mr.
Worrall served as Manager of Business Development at Microsoft Corporation. From
July 1995 to October 1997, he founded and directed Health Oasis, Inc., an online
health and pharmaceuticals shopping network. From January 1992 until January
1996, Mr. Worrall was Director of Information and Transaction Services and
Interactive Travel and Shopping Services at AT&T. Mr. Worrall holds a BA Degree
in Social Research from the City University of New York, and an MBA from Baruch
College.
JEFFREY DRAZAN has served as a director of FairMarket since February 1999.
He is a general partner of Sierra Ventures, a venture capital organization.
Prior to joining Sierra Ventures in 1984, Mr. Drazan held senior management
positions at AT&T and Bell Laboratories. Mr. Drazan graduated from Princeton
University with a BS in Engineering and from New York University where he
received his MBA.
NANDA KRISH has served as a director of FairMarket since April 1997. Mr.
Krish is part of the founding team of iBelong.com, a creator of networks for
affinity-based portals, where he has served as General Manager since November
1998. From 1995 to November 1998, Mr. Krish served as Vice President of
Corporate Development of Open Market, Inc., a provider of Internet commerce
software. Before that, Mr. Krish held various positions with Electronic Data
Systems Corporation (EDS), an information technology services company, most
recently as Vice President and General Manager of the EDS unit responsible for
the company's interactive shopping strategy. Mr. Krish holds a BS in Mechanical
Engineering from BU/India,
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<PAGE> 47
and a Masters in Computer and Information Science and a Masters in Management
Engineering from the New Jersey Institute of Technology/Rutgers University.
BOARD COMPOSITION
The number of directors is fixed at five and we currently have four
directors serving. Following the closing of this offering, our Board of
Directors will be divided into three classes, with the members of each class
serving for a staggered three-year term. Our Board of Directors will consist of
one Class I director, whose term of office will continue until the 2000 annual
meeting of stockholders, two Class II directors, whose terms of office will
continue until the 2001 annual meeting of stockholders, and one Class III
director, whose term of office will continue until the 2002 annual meeting of
stockholders. At each annual meeting of stockholders, a class of directors will
be elected for a three-year term to succeed the directors of the same class
whose terms are then expiring.
There are no family relationships among any directors or executive
officers. An Investors' Rights Agreement among Scott Randall and FairMarket's
preferred stockholders provides that the Board of Directors will consist of
Scott Randall, two persons designated by Scott Randall, one person designated by
the holders of our Series B Preferred Stock, and one person designated by the
holders of our Series C Preferred Stock. Pursuant to this agreement, Mr. Krish
was designated as a director by Mr. Randall and Mr. Drazan was designated as a
director by the holders of the Series C Preferred Stock. Upon the closing of
this offering, all rights to designate directors under the Investors' Rights
Agreement will terminate.
BOARD COMMITTEES
Effective upon the closing of this offering, our Board of Directors will
reconstitute its Audit Committee and Compensation Committee.
Audit Committee. The members of the Audit Committee, all of whom will be
independent directors, will be responsible for recommending to the Board of
Directors the engagement of our outside auditors and reviewing our accounting
controls and the results and scope of audits and other services provided by our
auditors.
Compensation Committee. The members of the Compensation Committee, a
majority of whom will be independent directors, will be responsible for
reviewing and recommending to the Board of Directors the amount and type of
consideration to be paid to senior management, administering our stock option
plan and establishing and reviewing general policies relating to compensation
and benefits of employees.
DIRECTOR COMPENSATION
Directors who are employees receive no additional compensation or
reimbursement of expenses for their services as directors. Non-employee
directors do not currently receive a fee or reimbursement of expenses for their
service as directors, although the Board of Directors may in the future
determine to pay fees and/or reimburse expenses. Non-employee directors are
eligible to participate in the 1999 Stock Option Plan and 2000 Stock Option and
Incentive Plan at the discretion of the full Board of Directors.
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<PAGE> 48
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued in
the years ended December 31, 1998 and 1999 to our Chief Executive Officer. None
of our other executive officers had aggregate compensation in excess of $100,000
during 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------------------
ANNUAL COMPENSATION NUMBER
--------------------------------------------- OF SECURITIES
OTHER UNDERLYING RESTRICTED
NAME AND ANNUAL OPTIONS STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) GRANTED(#) AWARDS($) COMPENSATION($)
- ------------------ ---- --------- -------- --------------- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott Randall
President and
Chief Executive Officer....... 1998 $133,654 $-- $-- -- $-- $--
1999 $150,000 -- -- -- -- --
</TABLE>
No stock options were granted to our Chief Executive Officer as of December
31, 1999.
AMENDED AND RESTATED 1997 STOCK OPTION PLAN
Our Amended and Restated 1997 Stock Option Plan provides for the issuance
of up to 750,000 shares of common stock under incentive stock options (ISOs) and
nonqualified stock options (NSOs). The 1997 Plan provided for the granting of
ISOs to employees and NSOs to nonemployee directors and consultants. Options
granted under the 1997 Plan have a maximum term of 10 years from the date of
grant, vest over four years and have an exercise price not less than fair value
of the stock at the date of grant. As of December 31, 1999, 56,250 shares of
common stock were available for grant under the 1997 Plan.
1999 STOCK OPTION PLAN
Our 1999 Stock Option Plan provides for the issuance of up to 3,421,237
shares of common stock under ISOs or NSOs or through the direct issuance or sale
of common stock to officers, employees, directors and consultants of the
Company.
The Board of Directors determines the term of each option, the option
price, the number of shares for which each option is granted and the rate at
which each option is exercisable. For holders of 10% or more of our outstanding
common stock, ISOs may not be granted at less than 110% of the fair market value
of the common stock at the date of grant. As of December 31, 1999, 104,737
shares of common stock were available for grant under the 1999 Stock Option
Plan.
2000 STOCK OPTION AND INCENTIVE PLAN
Our 2000 Stock Option and Incentive Plan was adopted by our Board of
Directors and approved by our stockholders in January 2000. The 2000 Stock Plan
permits us to make grants of:
- incentive stock options;
- non-qualified stock options;
- stock appreciation rights (SARs);
- restricted stock awards;
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<PAGE> 49
- deferred stock awards;
- unrestricted stock awards;
- performance share awards; and
- dividend equivalent rights.
Under the 2000 Stock Plan, 1.8 million shares of common stock are available
for grants of awards subject to adjustment in the event of a stock split, stock
dividend or other change in capitalization. Any shares forfeited from awards
under the 2000 Stock Plan will also be available for future awards under the
2000 Stock Plan. No common stock has been issued to date under the 2000 Stock
Plan.
2000 Stock Plan Administration. The 2000 Stock Plan provides for
administration by a committee of not fewer than two non-employee directors, as
appointed by the Board of Directors, or by the full Board of Directors. The
committee has full power to select, from among the individuals eligible for
awards, the participants to whom awards will be granted, to make any combination
of awards to participants, and to determine the specific terms and conditions of
each award, subject to the provisions of the 2000 Stock Plan.
Eligibility and Limitations on Grants. All officers, employees, directors
and key persons, including consultants and prospective employees, are eligible
to participate in the 2000 Stock Plan, subject to the discretion of the
committee. From and after the date awards made under the 2000 Stock Plan become
subject to Section 162(m) of the Internal Revenue Code, no participant may
receive options or stock appreciation rights to purchase more than
shares of common stock, subject to adjustment for stock splits, stock dividends
and other change in capitalization, during any one calendar year period.
Option Terms. The committee has authority to determine the terms of
options granted under the 2000 Stock Plan. However, ISOs will have an exercise
price that is not less than 100% of the fair market value of the common stock on
the date of the option grant, and NQOs, other than those granted in lieu of a
participant's cash compensation at the participant's election with the consent
of the committee, will have an exercise price that is not less than 85% of the
fair market value of the common stock on the date of the option grant.
At the discretion of the committee, stock options granted under the 2000
Stock Plan may include a "re-load" feature pursuant to which an optionee
exercising an option by the delivery of shares of common stock would
automatically be granted an additional stock option, with an exercise price
equal to the fair market value of the common stock on the date the additional
stock option is granted, to purchase that number of shares of common stock equal
to the number delivered to exercise the original stock option. The purpose of
this feature is to enable participants to maintain their equity interest without
dilution.
Acceleration Upon a Merger, Sale or Change of Control of Company. Upon (1)
dissolution or liquidation of the company, (2) the sale of all or substantially
all the assets of the company, (3) a merger, reorganization or consolidation of
the company, (4) the sale of all of the stock of the company, or (5) a change of
control of the company, unless otherwise provided in the award agreements, all
outstanding awards granted under the 2000 Stock Plan will automatically become
fully exercisable or fully vested and nonforfeitable. In the event of certain
transactions, such as a merger, consolidation, dissolution or liquidation, the
committee in its discretion may provide for appropriate substitutions or
adjustments of outstanding stock options or SARs; alternatively, outstanding
stock options and SARs will terminate and the holder will receive a cash payment
equal to the excess of the fair market value per share over the applicable
exercise price, multiplied by the number of shares of common stock covered by
the stock option or SAR.
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<PAGE> 50
Amendments and Termination. The Board of Directors may at any time amend
or discontinue the 2000 Stock Plan and the committee may at any time amend or
cancel any outstanding award for the purpose of satisfying changes in law or for
any other lawful purpose, but no such action may adversely affect the rights
under any outstanding awards without the holder's consent. To the extent
required by the Internal Revenue Code to ensure that options granted under the
2000 Stock Plan qualify as ISOs, plan amendments will be subject to approval by
our stockholders.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our 2000 Employee Stock Purchase Plan was adopted by our Board of Directors
and approved by our stockholders in January 2000. Up to 1 million shares of
common stock may be issued under the Stock Purchase Plan.
The first offering under the Stock Purchase Plan will begin on the
effective date of this offering and end on June 30, 2000. Subsequent offerings
will commence on each July 1 and January 1 thereafter and will have a duration
of six months. Generally, all employees who are customarily employed for more
than 20 hours per week as of the first day of the applicable offering period
will be eligible to participate in the Stock Purchase Plan. An employee who owns
or is deemed to own shares of stock representing in excess of 5% of the combined
voting power of all classes of our stock will not be eligible to participate in
the Stock Purchase Plan.
During each offering, an employee may purchase shares under the Stock
Purchase Plan by authorizing payroll deductions of up to 10% of his or her cash
compensation during the offering period. The maximum number of shares that may
be purchased by any participating employee during any six-month offering period
is limited to the number of whole shares which is less than or equal to $12,500
divided by the closing price per share on the first day of the applicable
offering period. Unless the employee has previously withdrawn from the offering,
his or her accumulated payroll deductions will be used to purchase common stock
on the last business day of the period at a price equal to 85% of the fair
market value of the common stock on the first or last day of the offering
period, whichever is lower. For purposes of the initial offering period, the
fair market value of the common stock on the first day of the offering period
shall be the offering price to the public. Under applicable tax rules, an
employee may purchase no more than $25,000 worth of common stock in any calendar
year. No common stock has been issued to date under the Stock Purchase Plan.
401(k) PLAN
We have established a savings plan for our employees which is designed to
be qualified under Section 401(k) of the Internal Revenue Code. Eligible
employees are permitted to contribute to the 401(k) plan through payroll
deduction within statutory and plan limits.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this offering, our Board of Directors and senior management were
directly involved in setting compensation for our executives.
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<PAGE> 51
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of December 31, 1999 and on a pro forma basis
to reflect the issuance of shares upon the conversion of our preferred stock and
the exercise of a warrant immediately prior to the closing of this offering and
on a pro forma as adjusted basis to reflect the sale of the common stock offered
hereby, by:
- all persons known by us to own beneficially 5% or more of our common
stock;
- each of our directors;
- our Chief Executive Officer; and
- all directors and executive officers as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares of common stock beneficially owned
by the stockholder.
The number of shares beneficially owned by each stockholder is determined
under rules issued by the Securities and Exchange Commission and includes voting
or investment power with respect to securities. Under these rules, beneficial
ownership includes any shares as to which the individual or entity has sole or
shared voting power or investment power and includes any shares as to which the
individual or entity has the right to acquire beneficial ownership within 60
days after December 31, 1999 through the exercise of any warrant, stock option
or other right. As of December 31, 1999, a total of 26,845,926 shares of common
stock were either outstanding or subject to options or warrants that are
exercisable or that will become exercisable within 60 days of December 31, 1999.
The inclusion in this prospectus of such shares does not, however, constitute an
admission by the named stockholder that the stockholder is a direct or indirect
beneficial owner of such shares. The applicable percentage of "beneficial
ownership" after the offering is based upon 31,845,926 shares of common stock
outstanding.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING(1)
--------------------- ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------ --------- ------- --------- -------
<S> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Scott Randall.............................. 3,996,000 15% 3,996,000 13%
Jeffrey Drazan............................. 5,319,149(2) 20% 5,319,149(2) 17%
Nanda Krish................................ 50,000 * 50,000 *
All executive officers and directors, as a
group (9 persons)........................ 9,400,149 35% 9,400,149 30%
OTHER 5% BENEFICIAL OWNERS
Excite, Inc................................ 4,000,000 15% 4,000,000 13%
555 Broadway
Redwood City, CA 94063
Microsoft Corporation...................... 5,750,000(3) 21% 5,750,000(3) 18%
One Microsoft Way
Redmond, WA 98502
Sierra Ventures VII, L.P................... 4,925,334 18% 4,925,334 15%
3000 Sand Hill Road
Menlo Park, CA 94025
TicketMaster Online-CitySearch, Inc........ 2,250,000 8% 2,250,000 7%
790 E. Colorado Blvd.
Pasadena, CA 91101
</TABLE>
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- -------------------------
* Represents less than 1% of the outstanding shares of common stock.
(1) Assumes the underwriters do not elect to exercise the over-allotment option
to purchase an additional 750,000 shares of common stock.
(2) Includes 4,925,334 shares held by Sierra Ventures VII, L.P. of which Mr.
Drazan is a general partner and 393,815 shares held by Sierra Ventures
Associates VII, L.L.C., of which Mr. Drazan is a managing member. Mr. Drazan
disclaims beneficial ownership of such shares.
(3) Includes 4,500,000 shares issuable upon exercise of a warrant held by
Microsoft.
CERTAIN TRANSACTIONS WITH RELATED PARTIES
Since our founding in February 1997, we have sold preferred stock in four
private placements, which are described below. All outstanding shares of
preferred stock will automatically convert into common stock at the closing of
this offering. Also, in 1999 we entered into Auction Services Agreements with
four of the parties that purchased shares of our preferred stock or acquired
warrants to purchase our common stock, as described below.
Founder. On February 20, 1997, we issued 4,000,000 shares of common stock
to Scott Randall, the founder of FairMarket, for $0.001 per share or a total
consideration of $4,000.
Series A Convertible Preferred Stock. On November 17, 1997, we issued
754,603 shares of Series A Convertible Preferred Stock to an investor for
$0.6626 per share or a total consideration of $500,000.
Series B Convertible Preferred Stock. On December 31, 1997 and August 22,
1998, we issued a total of 1,890,000 shares of Series B Convertible Preferred
Stock to 20 investors for $1.1111 per share or an aggregate consideration of
approximately $2.1 million.
Series C Convertible Preferred Stock. On February 25, 1999, we issued a
total of 6,168,282 shares of Series C Convertible Preferred Stock to 18
investors for $1.714 per share or an aggregate consideration of approximately
$10.5 million. Of these shares, Sierra Ventures VII, L.P. purchased 4,925,334
shares for an aggregate consideration of approximately $8.4 million, and Sierra
Ventures Associates VII, L.L.C. purchased 393,815 shares for an aggregate
consideration of $674,999. Neither Sierra Ventures nor Sierra Ventures
Associates had any affiliation with the Company at the time of the purchase.
Sierra Ventures VII holds approximately 17.1% of our outstanding capital stock,
and Jeffrey Drazan, a general partner of Sierra Ventures and Sierra Ventures
Associates, became a director of FairMarket on February 25, 1999.
In connection with Sierra Ventures' investment in the Series C Convertible
Preferred Stock, we entered into an Investors' Rights Agreement and a Right of
First Offer and Co-Sale Agreement. All rights under these agreements will
terminate upon the closing of this offering, except for the registration rights
described in "Description of Capital Stock -- Registration Rights." In addition,
we have agreed to indemnify Sierra Ventures and Sierra Ventures Associates
against liabilities arising out of their status as stockholders of FairMarket.
Lycos Agreement. On May 12, 1999, we entered into an Auction Services
Agreement with Lycos which has a three-year term, subject to renewal by mutual
agreement. Under the agreement, we have agreed to provide auction solutions to
several Lycos web sites, including Tripod, AngelFire and Lycos Auctions, in
return for a share of listing fees charged on the Lycos sites. Lycos or
FairMarket may terminate the agreement upon the occurrence of specified events
of default.
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<PAGE> 53
In connection with this agreement, Lycos received two warrants to purchase
shares of our common stock. The first is exercisable for 725,000 shares of our
common stock at an exercise price of $0.01 per share, and must be exercised
before the closing of this offering. The second is exercisable for up to 595,000
shares of our common stock at an exercise price of $1.71 per share, and will
continue to exist after this offering. The degree to which Lycos meets certain
performance criteria determines the number of shares purchasable through
exercise of this second warrant. The second warrant is currently not
exercisable. The second warrant will terminate on May 12, 2006 or earlier if
FairMarket sells substantially all of its assets to a third party.
Microsoft Agreement. On August 23, 1999, we entered into an Auction
Services Agreement with Microsoft which has a five-year initial term with an
automatic renewal term of five years. Under the agreement, we have agreed to
provide auction services to MSN.com and certain other web sites owned or
operated by Microsoft, in return for monthly hosting fees and a share of listing
fees charged on the Microsoft sites.
The agreement with Microsoft provides that if Microsoft drives more than a
specified number of Internet users to the FairMarket Network through its
Internet portal site, we will guarantee them a minimum level of transaction fee
revenue regardless of actual transaction fee revenue earned by Microsoft. If
Microsoft meets a minimum annual traffic guarantee but the increase in traffic
does not produce sufficient revenue to meet the minimum guaranteed revenue, we
will have a financial obligation to Microsoft. This obligation will be an amount
equal to the difference between the minimum guaranteed payment and Microsoft's
portion of fees actually collected. Microsoft or FairMarket may terminate the
agreement upon the occurrence of specified events of default.
In connection with this agreement, Microsoft purchased 1,250,000 shares of
our Series D Convertible Preferred Stock for $7.00 per share, or an aggregate
cash consideration of approximately $8.8 million, and received a warrant to
purchase 4,500,000 shares of our common stock at an exercise price of $1.71 per
share. After the closing of this offering, Microsoft must exercise the warrant
if the closing price of our common stock on the Nasdaq National Market equals or
exceeds $25.00 for a period of 20 consecutive trading days.
Excite Agreement. On August 23, 1999 we entered into an Auction Services
Agreement with Excite which has a five-year initial term, subject to annual
renewal unless terminated by either party. Under this agreement, we have agreed
to provide auction services to [email protected] and certain other web sites owned
or operated by Excite, Inc. in return for a share of listing fees charged by the
Excite sites.
Under the agreement, Excite will supply online banner and other advertising
services to us in return for $2.5 million per quarter during 2000 and 2001, or a
total of $20.0 million.
The agreement also provides that if Excite drives more than a specified
level of Internet users to the FairMarket Network through its Internet portal
site, we will guarantee them a minimum level of transaction fee revenue
regardless of actual transaction fee revenue earned by Excite. If Excite meets a
minimum annual traffic guarantee but the increase in traffic does not produce
sufficient revenue to meet the minimum guaranteed revenue, we will have a
financial obligation to Excite. This obligation will be an amount equal to the
difference between the minimum guaranteed payment and Excite's portion of fees
actually collected. Excite or FairMarket may terminate the agreement upon the
occurrence of specified events of default.
In connection with this agreement, Excite purchased 2,500,000 shares of our
Series D Convertible Preferred Stock for $7.00 per share or an aggregate cash
consideration of $17.5 million. Under the purchase agreement, Excite withheld
the $17.5 million against our obligation to pay for advertising as described
above. An additional 1,500,000 of these shares were issued to Excite as
consideration for signing the Auction Services Agreement. Upon
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<PAGE> 54
completion of this offering, Excite will be obligated to pay us $5.0 million of
such amount, but may retain the remainder against our ongoing obligations. Also,
on or before August 23, 2000, if the Auction Services Agreement with Excite is
terminated because we are sold to an Excite competitor or because Excite
breaches the agreement, we will have the right, but not the obligation, to
repurchase up to 1,500,000 shares of our stock from Excite, at a price based on
the market price of the stock at the time of repurchase.
TicketMaster Online-CitySearch, Inc. Agreement. On September 15, 1999, we
entered into an Auction Services Agreement with TicketMaster Online-CitySearch,
Inc. (TMCS), which has a three-year initial term, subject to annual renewal
unless terminated by either party. Under the agreement, we have agreed to
provide auction services to several web sites owned and controlled by TMCS.
In connection with this agreement, TMCS purchased 750,000 shares of our
Series D Convertible Preferred Stock for $7.00 per share or an aggregate cash
consideration of approximately $5.3 million. An additional 1,500,000 of these
shares were issued to TMCS as consideration for signing the Auction Services
Agreement and a license for TMCS's CityAuction technology. Under the Auction
Services Agreement, TMCS is obligated to provide us with $2.0 million in
Internet advertising and $3.0 million in television and radio advertising. Under
the CityAuction license, TMCS has granted us an exclusive license to the
technology underlying its former CityAuction web site.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
As of December 31, 1999, there were:
- 42 holders of record of our common stock;
- 5,243,226 shares of common stock issued and outstanding;
- Outstanding stock options to purchase 3,748,749 shares of common stock,
of which 10,000 were then currently exercisable; and
- Outstanding warrants to purchase 5,820,000 shares of common stock, of
which 5,225,000 were then currently exercisable.
Following the offering, our authorized capital stock will consist of 100
million shares of common stock, of which 26,556,111 will be issued and
outstanding, and 10 million shares of undesignated preferred stock issuable in
one or more series designated by our Board of Directors, of which no shares will
be issued and outstanding.
COMMON STOCK
Voting Rights. The holders of our common stock have one vote per share.
Holders of our common stock are not entitled to vote cumulatively for the
election of directors. Generally, all matters to be voted on by stockholders
must be approved by a majority, or, in the case of the election of directors, by
a plurality, of the votes cast at a meeting at which a quorum is present, voting
together as a single class, subject to any voting rights granted to holders of
any then outstanding preferred stock.
Dividends. Holders of common stock will share ratably in any dividends
declared by our Board of Directors, subject to the preferential rights of any
preferred stock then outstanding.
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<PAGE> 55
Dividends consisting of shares of common stock may be paid to holders of shares
of common stock.
Other Rights. Upon the liquidation, dissolution or winding up of
FairMarket, all holders of common stock are entitled to share ratably in any
assets available for distribution to holders of shares of common stock. No
shares of common stock are subject to redemption other than the 1,500,000 shares
issued to Excite and described in "Certain Transactions with Related Parties,"
or have preemptive rights to purchase additional shares of common stock.
PREFERRED STOCK
Our certificate of incorporation provides that shares of preferred stock
may be issued from time to time in one or more series. Our Board of Directors is
authorized to fix the voting rights, if any, designations, powers, preferences,
qualifications, limitations and restrictions thereof, applicable to the shares
of each series. Our Board of Directors may, without stockholder approval, issue
preferred stock with voting and other rights that could adversely affect the
voting power and other rights of the holders of the common stock and could have
anti-takeover effects, including preferred stock or rights to acquire preferred
stock in connection with implementing a shareholder rights plan. We have no
present plans to issue any shares of preferred stock. The ability of our Board
of Directors to issue preferred stock without stockholder approval could have
the effect of delaying, deferring or preventing a change of control of
FairMarket or the removal of existing management.
REGISTRATION RIGHTS
Set forth below is a summary of the common stock registration rights of the
holders of our existing preferred stock, which will convert automatically into
common stock immediately prior to the consummation of this offering.
Demand Registrations. At any time after January 1, 2001, the holders of 50%
or more of the shares having registration rights (registrable securities) may
request that we register shares of common stock, subject to our right, upon
advice of our underwriters, to reduce the number of shares proposed to be
registered ratably among the demanding holders. We will be obligated to effect
only two registrations pursuant to such a request by holders of registration
rights. We are not obligated to effect a registration during the period starting
with the date 60 days prior to the filing of and ending on a date 180 days
following effectiveness of the most recent Company-initiated registration.
Piggyback Registration Rights. The holders who have registration rights
have unlimited rights to request that shares be included in any
Company-initiated registration of common stock other than registrations of
employee benefit plans, business combinations subject to Rule 145 under the
Securities Act of 1933, convertible debt or certain other registrations. In our
initial registration and subsequent registrations, the underwriters may, for
marketing reasons, exclude all or part of the shares requested to be registered
on behalf of all stockholders having the right to request inclusion in such
registration. In addition, we have the right to terminate any registration we
initiated prior to its effectiveness regardless of any request for inclusion by
any stockholders.
Form S-3 Registrations. After we have qualified for registration on Form
S-3, which will not be until at least 12 months after the closing of this
offering, holders of 2% or more of the shares having registration rights may
request in writing that we effect a registration of these shares on Form S-3,
provided that the gross offering price of the shares to be so registered in each
such registration exceeds $1 million. The holders may request an unlimited
number of registrations on Form S-3.
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<PAGE> 56
Future Grants of Registration Rights. Without the consent of the holders of
at least a majority of the then outstanding registrable securities, we may not
grant further registration rights which would be on equal or more favorable
terms than the existing registration rights.
Transferability. The registration rights are transferable upon transfer of
registrable securities and notice by the holder to us of the transfer, provided
that the transferee or assignee assumes the rights and obligations of the
transferor for such shares.
Termination. The registration rights will terminate as to any particular
stockholder on the earlier of five years after the date of this offering or the
date on which the stockholder may sell all of its shares in any three-month
period pursuant to Rule 144 under the Securities Act of 1933.
WARRANTS
As of December 31, 1999, we had outstanding warrants to purchase an
aggregate of 5,820,000 shares of our common stock. The weighted average exercise
price of the warrants is $1.50 per share. These warrants consist of:
- warrants issued to Lycos to purchase up to 725,000 shares of common stock
at an exercise price of $0.01 per share and up to 595,000 shares at an
exercise price of $1.71 per share. The first warrant will terminate upon
the closing of this offering. The second warrant expires in May 2006 or
upon a sale of substantially all of the assets of FairMarket to a third
party, whichever occurs first.
- a warrant issued to Microsoft to purchase up to 4,500,000 shares of
common stock at an exercise price of $1.71 per share. The warrant expires
in August 2004, or upon a sale of FairMarket, whichever occurs first. In
addition, after the closing of this offering, Microsoft must exercise the
warrant if the closing price of our common stock on the Nasdaq Stock
Market equals or exceeds $25 for a period of 20 consecutive trading days.
Any warrant may be exercised by applying the value of a portion of the
warrant, which is equal to the number of shares issuable under the warrant being
exercised multiplied by the fair market value of the security receivable upon
exercise of the warrant, less the per share exercise price, in lieu of paying
the per share exercise price in cash.
INDEMNIFICATION MATTERS
We have entered into indemnification agreements with each of our directors.
The form of indemnity agreement provides that we will indemnify our directors
for expenses incurred because of their status as a director, to the fullest
extent permitted by Delaware law, our certificate of incorporation and our
by-laws.
Our certificate of incorporation contains a provision permitted by Delaware
law that generally eliminates the personal liability of directors for monetary
damages for breaches of their fiduciary duty, including breaches involving
negligence or gross negligence in business combinations, unless the director has
breached his or her duty of loyalty, failed to act in good faith, engaged in
intentional misconduct or a knowing violation of law, paid a dividend or
approved a stock repurchase in violation of the Delaware General Corporation Law
or obtained an improper personal benefit. This provision does not alter a
director's liability under the federal securities laws and does not affect the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty. Our by-laws provide that directors and officers shall
be, and in the discretion of our Board of Directors, non-officer employees may
be, indemnified by FairMarket to the fullest extent authorized by Delaware law,
as it now exists or may in the future be amended, against all expenses and
liabilities reasonably incurred in connection with
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<PAGE> 57
service for or on behalf of FairMarket. The by-laws also provide for the
advancement of expenses to directors and, in the discretion of our Board of
Directors, officers and non-officer employees. In addition, our by-laws provide
that the right of directors and officers to indemnification shall be a contract
right and shall not be exclusive of any other right now possessed or hereafter
acquired under any by-law, agreement, vote of stockholders or otherwise. We also
have directors' and officers' insurance against certain liabilities. We believe
that the indemnification agreements, together with the limitation of liability
and indemnification provisions of our certificate of incorporation and by-laws
and directors' and officers' insurance will assist us in attracting and
retaining qualified individuals to serve as directors and officers of
FairMarket.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be provided to directors, officers or persons controlling FairMarket
as described above, we have been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. At present,
there is no pending material litigation or proceeding involving any director,
officer, employee or agent of FairMarket in which indemnification will be
required or permitted.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS THAT MAY HAVE
ANTI-TAKEOVER EFFECTS
The provisions of our certificate of incorporation and by-laws described
below, as well as the ability of our Board of Directors to issue shares of
preferred stock and to set the voting rights, preferences and other terms
thereof, may be deemed to have an anti-takeover effect and may discourage
takeover attempts not first approved by our Board of Directors, including
takeovers which particular stockholders may deem to be in their best interests.
These provisions also could have the effect of discouraging open market
purchases of our common stock because they may be considered disadvantageous by
a stockholder who desires subsequent to such purchases to participate in a
business combination transaction with us or elect a new director to our Board.
Classified Board of Directors. Our Board of Directors is divided into three
classes serving staggered three-year terms, with one-third of the Board being
elected each year. Our classified Board, together with certain other provisions
of our certificate of incorporation authorizing the Board of Directors to fill
vacant directorships or increase the size of the Board, may prevent a
stockholder from removing, or delay the removal of, incumbent directors and
simultaneously gaining control of the Board of Directors by filling vacancies
created by such removal with its own nominees.
Director Vacancies and Removal. Our certificate of incorporation provides
that vacancies in our Board of Directors shall be filled only by the affirmative
vote of a majority of the remaining directors. Our certificate of incorporation
provides that directors may be removed from office only with cause and only by
the affirmative vote of holders of at least 75% of the shares then entitled to
vote in an election of directors.
No Stockholder Action by Written Consent. Our certificate of incorporation
provides that any action required or permitted to be taken by our stockholders
at an annual or special meeting of stockholders must be effected at a duly
called meeting and may not be taken or effected by a written consent of
stockholders.
Special Meetings of Stockholders. Our certificate of incorporation and
by-laws provide that a special meeting of stockholders may be called only by our
Board of Directors. Our by-laws provide that only those matters included in the
notice of the special meeting may be considered or acted upon at that special
meeting unless otherwise provided by law.
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Advance Notice of Director Nominations and Stockholder Proposals. Our
by-laws include advance notice and informational requirements and time
limitations on any director nomination or any new proposal which a stockholder
wishes to make at an annual meeting of stockholders. For the first annual
meeting following the completion of this offering, a stockholder's notice of a
director nomination or proposal will be timely if delivered to the secretary of
FairMarket at our principal executive offices not later than the close of
business on the later of the 75th day prior to the scheduled date of such annual
meeting or the 10th day following the day on which public announcement of the
date of such annual meeting is made by FairMarket.
Amendment of the Certificate of Incorporation. As required by Delaware
law, any amendment to our certificate of incorporation must first be approved by
a majority of our Board of Directors and, if required by law, thereafter
approved by a majority of the outstanding shares entitled to vote with respect
to such amendment, except that any amendment to the provisions relating to
stockholder action by written consent, directors, limitation of liability and
the amendment of our certificate of incorporation must be approved by not less
than 75% of the outstanding shares entitled to vote with respect to such
amendment.
Amendment of By-laws. Our certificate of incorporation and by-laws provide
that our by-laws may be amended or repealed by our Board of Directors or by the
stockholders. Such action by the Board of Directors requires the affirmative
vote of a majority of the directors then in office. Such action by the
stockholders requires the affirmative vote of at least 75% of the shares present
in person or represented by proxy at an annual meeting of stockholders or a
special meeting called for such purpose unless our Board of Directors recommends
that the stockholders approve such amendment or repeal at such meeting, in which
case such amendment or repeal only requires the affirmative vote of a majority
of the shares present in person or represented by proxy at the meeting.
STATUTORY BUSINESS COMBINATION PROVISION
Following the offering, we will be subject to Section 203 of the Delaware
General Corporation Law, which prohibits a publicly-held Delaware corporation
from consummating a "business combination," except under certain circumstances,
with an "interested stockholder" for a period of three years after the date such
person became an "interested stockholder" unless:
- before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;
- upon the closing of the transaction that resulted in the interested
stockholder becoming such, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding shares held by directors who are also
officers of the corporation and shares held by employee stock plans; or
- following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of at least two-thirds of the
outstanding voting stock of the corporation not owned by the interested
stockholder.
The term "interested stockholder" generally is defined as a person who,
together with affiliates and associates, owns, or, within the prior three years,
owned, 15% or more of a corporation's outstanding voting stock. The term
"business combination" includes mergers, consolidations, asset sales involving
10% or more of a corporation's assets and other similar
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transactions resulting in a financial benefit to an interested stockholder.
Section 203 makes it more difficult for an "interested stockholder" to effect
various business combinations with a corporation for a three-year period. A
Delaware corporation may "opt out" of Section 203 with an express provision in
its original certificate of incorporation or an express provision in its
certificate of incorporation or by-laws resulting from an amendment approved by
holders of at least a majority of the outstanding voting stock. Neither our
certificate of incorporation nor our by-laws contain any such exclusion.
TRADING ON THE NASDAQ NATIONAL MARKET
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "FAIM."
NO PREEMPTIVE RIGHTS
No holder of any class of our stock has any preemptive right to subscribe
for or purchase any kind or class of our securities.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock will be BankBoston,
N.A.
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SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock,
and we cannot predict the effect, if any, that sales of common stock or the
availability of common stock for sale will have on the market price of our
common stock prevailing from time to time. Nonetheless, substantial sales of
common stock in the public market following this offering, or the perception
that such sales could occur, could lower the market price of our common stock or
make it difficult for us to raise additional equity capital in the future.
Following this offering, there will be approximately 31,781,111 shares of
our common stock outstanding on a fully diluted basis, assuming exercise of all
vested options and warrants to purchase our common stock. Of these shares, the
5,000,000 shares which are being sold in this offering generally will be freely
transferable without restriction or further registration under the Securities
Act of 1933, except that any shares held by our "affiliates" as defined in Rule
144 under the Securities Act may be sold only in compliance with the limitations
described below. The remaining 26,781,111 shares of common stock which will be
outstanding after the offering will be "restricted securities" as defined in
Rule 144, and may be sold in the future without registration under the
Securities Act subject to compliance with the provisions of Rule 144 or any
other applicable exemption under the Securities Act.
In connection with this offering, our existing officers and directors and
persons who will own an aggregate of 23,686,688 shares of common stock after
this offering, assuming exercise of all vested options and warrants to purchase
our common stock, have agreed with the underwriters that, subject to exceptions,
they will not sell or dispose of any of their shares for 180 days after the date
of this prospectus. Deutsche Bank Securities Inc. may, in its sole discretion
and at any time without notice, release all or any portion of the shares subject
to such restrictions. The shares of common stock outstanding upon the closing of
this offering will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF SHARES DESCRIPTION
- ---------------- -----------
<C> <S>
5,000,000 After the date of this prospectus, freely tradeable shares
sold in the offering.
27,446,629 After 180 days from the date of this prospectus, the lock-up
period will expire and these shares will be saleable under
Rule 144 (subject, in some cases, to volume limitations).
1,648,761 After one year from the date of this prospectus, these
shares will be saleable under Rule 144 (subject, in some
cases, to volume limitations).
963,937 After two years from the date of this prospectus, these
shares will be saleable under Rule 144 without limitations
as to volume, except that shares held by our affiliates will
continue to be subject to limitations as described below.
</TABLE>
In general, under Rule 144, as currently in effect, a person or persons
whose shares are required to be aggregated, including an affiliate of ours, and
who has beneficially owned shares for at least one year is entitled to sell,
within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of 1% of the
then outstanding shares of common stock, which is expected to be approximately
3,178,111 shares upon the completion of this offering, or the average weekly
trading volume of the common stock during the four calendar weeks preceding the
date on which notice of such sale is filed, subject to certain restrictions. In
addition, a person who is not deemed to have been an affiliate of ours 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 would be entitled to sell such
shares under Rule 144(k) without regard to the public information, volume
limitations and notice filing requirements of Rule 144. To the extent that a
person acquires shares from an affiliate of ours, that person's holding period
for the purpose of effecting a sale under Rule 144 commences on the date of
transfer from the affiliate.
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We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of this prospectus, except we
may issue, and grant options to purchase, shares of common stock under our stock
option plans and stock purchase plan.
In general, under Rule 701 under the Securities Act, any of our employees,
directors, officers, consultants or advisors who purchased shares of common
stock from us in connection with a compensatory stock or option plan or other
written agreement before the effective date of this offering is entitled to sell
those shares beginning 90 days after the effective date of this offering in
reliance on Rule 144, without having to comply with the holding period and
notice filing requirements of Rule 144 and, in the case of non-affiliates,
without having to comply with the public information, volume limitation or
notice filing provisions of Rule 144. The SEC has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject to
the reporting requirements of the Securities Exchange Act of 1934, along with
the shares acquired upon exercise of such options (including exercises after the
date of this prospectus).
FairMarket intends to file one or more registration statements on Form S-8
under the Securities Act following this offering to register all shares of
common stock which are issuable upon exercise of outstanding stock options and
all shares of common stock issuable under FairMarket's stock option and stock
purchase plans. These registration statements are expected to become effective
upon filing. Shares covered by these registration statements will thereupon be
eligible for sale in the public markets, upon the expiration or release from the
terms of the lock-up agreements, to the extent applicable.
In addition, after the expiration of the 180-day lock-up period, the
holders of our existing preferred stock, which will convert automatically into
common stock immediately prior to the consummation of this offering, will have
the registration rights described in "Description of Capital Stock --
Registration Rights."
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, the underwriters named below, for whom
Deutsche Bank Securities Inc., FleetBoston Robertson Stephens Inc., and
Prudential Securities Incorporated are acting as representatives, have severally
but not jointly agreed to purchase from FairMarket the following respective
number of shares of common stock:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Deutsche Bank Securities Inc. ..............................
FleetBoston Robertson Stephens Inc..........................
Prudential Securities Incorporated..........................
---------
Total............................................. 5,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to approval of certain conditions precedent and that
the underwriters will be obligated to purchase all of the shares of the common
stock offered hereby, other than those shares covered by the over-allotment
option described below, if any are purchased. The underwriting agreement
provides that, in the event of a default by an underwriter, in certain
circumstances the purchase commitments of non-defaulting underwriters may be
increased or the underwriting agreement may be terminated.
58
<PAGE> 62
The underwriting discount will be an amount equal to the public offering
price per share, less the amount paid per share by the underwriters to
FairMarket. The following table shows the underwriting discount to be paid to
the underwriters by FairMarket in this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of our common stock to cover over-allotments.
<TABLE>
<CAPTION>
% OF INITIAL
PUBLIC OFFERING
NO EXERCISE FULL EXERCISE PRICE
----------- ------------- ---------------
<S> <C> <C> <C>
Per Share......................... $ $
Total............................. $ $
</TABLE>
FairMarket will pay the offering expenses, estimated to be approximately
$1.3 million, which consist of registration and filing fees, legal and
accounting fees and expenses, printing expenses, blue sky qualification fees and
expenses, transfer agent fees and other miscellaneous expenses.
FairMarket has granted to the underwriters an option expiring on the 30th
day after the date of this prospectus to purchase up to 750,000 additional
shares of common stock at the initial public offering price, less the
underwriting discounts and commissions. Such option may be exercised only to
cover over-allotments in the sale of shares of common stock. To the extent such
option is exercised, each underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of common stock as it was obligated to purchase pursuant to the
underwriting agreement.
FairMarket has been advised by the representatives that the underwriters
propose to offer the shares of common stock to the public initially at the
public offering price set forth on the cover page of this prospectus and,
through the representatives, to selling group members at such price less a
concession of $ per share, and the underwriters and such selling group
members may allow a discount of $ per share on sales to certain other
broker-dealers. After the offering, the public offering price and concession and
discount to dealers may be changed by the representatives.
The representatives have informed FairMarket that they do not expect
discretionary sales by the underwriters to exceed 5% of the shares being offered
hereby.
FairMarket, its officers and directors, and certain other existing
stockholders and optionholders of FairMarket have agreed that they will not
offer, sell, contract to sell, pledge or otherwise dispose of or transfer,
directly or indirectly, or, in the case of FairMarket, file with the Securities
and Exchange Commission a registration statement relating to, any shares of
common stock or securities exchangeable or exercisable for or convertible into
shares of common stock, or publicly disclose the intention to do any of the
foregoing, without the prior written consent of Deutsche Bank Securities Inc.
for a period of 180 days after the date of this prospectus, except under certain
circumstances.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of the common stock for persons designated by
FairMarket. The number of shares available for sale to the general public will
be reduced to the extent such persons purchase such reserved shares. Any
reserved shares not so purchased will be offered by the underwriters to the
general public on the same basis as other shares offered hereby. FairMarket
intends to seek indications of interest from designated persons who may include
employees, customers and others with whom FairMarket has or may seek to develop
business relationships. No offers or other solicitations were made prior to the
filing of the registration statement of which this prospectus is a part.
FairMarket has not contacted anyone regarding the purchase of reserved shares
and has not determined how many persons it will contact. Reserved shares will
not be subject to lock-up agreements with the underwriters.
59
<PAGE> 63
FairMarket has agreed to indemnify the underwriters against liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments which the underwriters may be required to make in respect thereof.
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "FAIM."
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between FairMarket and the representatives. The principal factors considered in
determining the initial public offering price will include:
- the information set forth in this prospectus and otherwise available to
the representatives;
- the history of, and the prospects for, FairMarket and the industry in
which it competes;
- an assessment of FairMarket's management;
- the prospects for, and the timing of, future earnings of FairMarket;
- the present state of FairMarket's development and its current financial
condition;
- the general condition of the securities markets at the time of the
offering;
- the recent market prices of, and the demand for, publicly-traded common
stock of companies in businesses similar to those of FairMarket;
- market conditions for initial public offerings; and
- other relevant factors.
There can be no assurance that an active trading market will develop for
the common stock or that the common stock will trade in the market after this
offering at or above the initial public offering price.
The representatives, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance 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
shares of the common stock in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
representatives to reclaim a selling concession from a syndicate member when
shares of the common stock originally sold by such syndicate member are
purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
VALIDITY OF COMMON STOCK
The validity of the shares of common stock offered hereby will be passed
upon for FairMarket by Goodwin, Procter & Hoar LLP, Boston, Massachusetts.
Various legal matters related to the sale of the common stock offered hereby
will be passed upon for the underwriters by Ropes & Gray, Boston, Massachusetts.
60
<PAGE> 64
EXPERTS
The audited financial statements of FairMarket as of December 31, 1997 and
1998, the period from February 20, 1997 (date of inception) to December 31,
1997, 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 the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, or SEC, a
registration statement on Form S-1 (including the exhibits and schedules
thereto) under the Securities Act of 1933 and the rules and regulations
thereunder, for the registration of the common stock offered hereby. This
prospectus is part of the registration statement. This prospectus does not
contain all the information included in the registration statement because we
have omitted certain parts of the registration statement as permitted by the SEC
rules and regulations. For further information about us and our common stock,
you should refer to the registration statement. Statements contained in this
prospectus as to any contract, agreement or other document referred to are not
necessarily complete. Where the contract or other document is an exhibit to the
registration statement, each statement is qualified by the provisions of that
exhibit.
You can inspect and copy the registration statement and the exhibits and
schedules thereto at the public reference facility maintained by the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional
offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may call the
SEC at 1-800-732-0330 for further information about the operation of the public
reference rooms. Copies of all or any portion of the registration statement can
be obtained from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, the registration
statement is publicly available through the SEC's site on the Internet's World
Wide Web, located at http://www.sec.gov.
We will also file annual, quarterly and current reports, proxy statements
and other information with the SEC. You can also request copies of these
documents, for a copying fee, by writing to the SEC. Our SEC filings are also
available to the public from the SEC's website at http://www.sec.gov. We intend
to furnish to our stockholders annual reports containing audited financial
statements for each fiscal year.
61
<PAGE> 65
FAIRMARKET, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets
As of December 31, 1997 and 1998 and as of September 30,
1999 (unaudited) and pro forma as of September 30, 1999
(unaudited)............................................... F-3
Statements of Operations
For the period February 20, 1997 (date of inception) to
December 31, 1997, for the year ended December 31, 1998,
and for the nine months ended September 30, 1998
(unaudited) and 1999 (unaudited).......................... F-4
Statements of Stockholders' Equity
For the period February 20, 1997 (date of inception) to
December 31, 1997, for the year ended December 31, 1998
and for the nine months ended September 30, 1999
(unaudited)............................................... F-5
Statements of Cash Flows
For the period February 20, 1997 (date of inception) to
December 31, 1997, for the year ended December 31, 1998
and for the nine months ended September 30, 1998
(unaudited) and 1999 (unaudited).......................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 66
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
FairMarket, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity and cash flows present fairly, in all
material respects, the financial position of FairMarket, Inc. at December 31,
1997 and 1998, and the results of its operations and its cash flows for the
period from February 20, 1997 (date of inception) to December 31, 1997 and 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 audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
January 13, 1999, except as to the information in Note 6
related to the issuance of Series C Convertible Preferred Stock, for
which the date is February 25, 1999
F-2
<PAGE> 67
FAIRMARKET, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, (NOTE 2)
------------------------ SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1999 1999
---------- ----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $1,128,617 $ 539,603 $ 18,854,556 $ 23,854,556
Accounts receivable, net of allowance of $51,890 at
September 30, 1999...................................... 31,037 -- 579,799 579,799
Prepaid expenses.......................................... 46,933 12,729 235,665 235,665
Other assets.............................................. 4,500 20,029 35,577 35,577
---------- ----------- ------------ ------------
Total current assets................................ 1,211,087 572,361 19,705,597 24,705,597
Property and equipment, net (Note 4)........................ 48,599 199,082 2,340,178 2,340,178
---------- ----------- ------------ ------------
Total assets........................................ $1,259,686 $ 771,443 $ 22,045,775 $ 27,045,775
========== =========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... 24,445 67,743 356,066 356,066
Deferred revenue.......................................... -- -- 252,531 252,531
Accrued expenses.......................................... 63,569 46,140 944,927 944,927
---------- ----------- ------------ ------------
Total liabilities................................... 88,014 113,883 1,553,524 1,553,524
Commitments and contingencies (Notes 5 and 6)
Series D Convertible Preferred Stock (Note 6), $0.001 par
value, 10,000,000 shares authorized; 2,500,000 shares
issued and outstanding (entitled in liquidation to
$17,500,000), at September 30, 1999 subject to a put
option at $7 per share.................................... -- -- 17,500,000 --
Stockholders' equity (Notes 6 and 7):
Series A Convertible Preferred Stock, $0.001 par value,
2,000,000 shares authorized at December 31, 1997 and
1998 and 754,603 shares authorized at September 30,
1999; 754,603 shares issued and outstanding (entitled in
liquidation to $500,000), net of issuance costs, at
December 31, 1997 and 1998 and September 30, 1999,
respectively, and none issued and outstanding on a pro
forma basis............................................. 498,330 498,330 498,330 --
Series B Convertible Preferred Stock, $0.001 par value,
5,000,000 shares authorized at December 31, 1997 and
1998 and 1,890,000 shares authorized at September 30,
1999; 1,170,000, 1,890,000 and 1,890,000 shares issued
and outstanding (entitled in liquidation to $1,300,000,
$2,100,000 and $2,100,000, respectively), net of
issuance costs, at December 31, 1997 and 1998 and
September 30, 1999, respectively, and none issued and
outstanding on a pro forma basis........................ 1,287,849 2,082,915 2,082,915 --
Series C Convertible Preferred Stock, $0.001 par value,
6,168,282 shares authorized, issued and outstanding
(entitled in liquidation to $10,572,435), net of
issuance costs, at September 30, 1999 and none issued
and outstanding on a pro forma basis.................... -- -- 10,526,937 --
Series D Convertible Preferred Stock, $0.001 par value,
10,000,000 shares authorized; 5,000,000 shares issued
and outstanding (entitled in liquidation to
$35,000,000), net of issuance costs, at September 30,
1999 and none issued and outstanding on a pro forma
basis................................................... -- -- 34,970,000 --
Common Stock, $0.001 par value, 15,000,000 shares
authorized at December 31, 1997 and 1998 and 36,000,000
shares authorized at September 30, 1999; 4,430,682,
4,764,682, 5,049,992 and 21,362,877 shares issued and
outstanding at December 31, 1997 and 1998, September 30,
1999 and September 30, 1999 pro forma, respectively..... 4,431 4,765 5,050 21,363
Additional paid-in capital................................ 32,687 61,422 33,745,069 99,306,938
Deferred compensation and equity related charges.......... -- -- (53,590,332) (53,590,332)
Stock subscription receivable............................. (50,050) -- (17,500,000) (12,500,000)
Accumulated deficit....................................... (601,575) (1,989,872) (7,745,718) (7,745,718)
---------- ----------- ------------ ------------
Total stockholders' equity.......................... 1,171,672 657,560 2,992,251 25,492,251
---------- ----------- ------------ ------------
Total liabilities and stockholders' equity.......... $1,259,686 $ 771,443 $ 22,045,775 $ 27,045,775
========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 68
FAIRMARKET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FEBRUARY 20, 1997 NINE MONTHS ENDED
(DATE OF INCEPTION) YEAR ENDED SEPTEMBER 30,
TO DECEMBER 31, -------------------------
DECEMBER 31, 1997 1998 1998 1999
------------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue.................................... $ 2,523 $ 3,784 $ 2,448 $ 891,422
Operating expenses:
Cost of revenue, exclusive of $17,988
reported below as equity related
charges................................ -- -- -- 422,442
Sales and marketing, exclusive of
$906,978 reported below as equity
related charges........................ 231,533 674,944 537,626 1,761,485
Advertising expense...................... 47,100 8,200 8,200 1,383,002
Development and engineering, exclusive of
$82,582 reported below as equity
related charges........................ 94,406 313,654 196,249 1,264,613
General and administrative, exclusive of
$29,705 reported below as equity
related charges........................ 234,043 426,458 272,945 1,057,532
Equity related charges................... -- -- -- 1,037,253
--------- ----------- ----------- -----------
Total operating expenses........... 607,082 1,423,256 1,015,020 6,926,327
--------- ----------- ----------- -----------
Loss from operations....................... (604,559) (1,419,472) (1,012,572) (6,034,905)
Interest income............................ 4,415 31,256 26,981 284,286
Interest expense........................... (1,431) (81) (81) (5,227)
--------- ----------- ----------- -----------
Net loss........................... $(601,575) $(1,388,297) $ (985,672) $(5,755,846)
========= =========== =========== ===========
Basic and diluted net loss per share....... $ (0.15) $ (0.30) $ (0.22) $ (1.16)
========= =========== =========== ===========
Shares used in computing basic and diluted
net loss per share....................... 4,072,998 4,571,428 4,526,774 4,969,939
Unaudited pro forma basic and diluted net
loss per share........................... $ (0.21) $ (0.43)
=========== ===========
Shares used in computing pro forma basic
and diluted net loss per share........... 6,764,304 13,479,689
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 69
FAIRMARKET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 20, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997,
FOR THE YEAR ENDED
DECEMBER 31, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D SERIES A SERIES B
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED PREFERRED PREFERRED COMMON PREFERRED PREFERRED
STOCK STOCK STOCK STOCK STOCK STOCK STOCK
----------- ----------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock........... 4,430,682
Issuance of Series A Convertible
Preferred Stock, net.............. 754,603 $498,330
Issuance of Series B Convertible
Preferred Stock, net.............. 1,170,000 $1,287,849
Net loss...........................
------- --------- --------- -------- ----------
Balance at December 31, 1997....... 754,603 1,170,000 4,430,682 498,330 1,287,849
Issuance of common stock for
services.......................... 334,000
Issuance of Series B Convertible
Preferred Stock, net.............. 720,000 795,066
Net loss...........................
------- --------- --------- -------- ----------
Balance at December 31, 1998....... 754,603 1,890,000 4,764,682 498,330 2,082,915
Issuance of common stock........... 246,872
Issuance of Series C Convertible
Preferred Stock, net.............. 6,168,282
Issuance of Series D Convertible
Preferred Stock, net.............. 7,500,000
Exercise of employee stock
options........................... 38,438
Deferred compensation related to
employee stock options............
Issuance of warrants...............
Equity related charges.............
Net loss...........................
------- --------- --------- --------- --------- -------- ----------
Balance at September 30, 1999
(unaudited)....................... 754,603 1,890,000 6,168,282 7,500,000 5,049,992 $498,330 $2,082,915
======= ========= ========= ========= ========= ======== ==========
<CAPTION>
DEFERRED
SERIES C SERIES D COMPENSATION
CONVERTIBLE CONVERTIBLE COMMON ADDITIONAL AND EQUITY STOCK
PREFERRED PREFERRED STOCK PAID-IN RELATED SUBSCRIPTION ACCUMULATED
STOCK STOCK AT PAR CAPITAL CHARGES RECEIVABLE DEFICIT
----------- ----------- ------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock........... $4,431 $ 32,687
Issuance of Series A Convertible
Preferred Stock, net..............
Issuance of Series B Convertible
Preferred Stock, net.............. $ (50,050)
Net loss........................... $ (601,575)
------ ----------- ------------ -----------
Balance at December 31, 1997....... 4,431 32,687 (50,050) (601,575)
Issuance of common stock for
services.......................... 334 28,735
Issuance of Series B Convertible
Preferred Stock, net.............. 50,050
Net loss........................... (1,388,297)
------ ----------- ------------ -----------
Balance at December 31, 1998....... 4,765 61,422 -- (1,989,872)
Issuance of common stock........... 247 52,256
Issuance of Series C Convertible
Preferred Stock, net.............. $10,526,937
Issuance of Series D Convertible
Preferred Stock, net.............. $34,970,000 $(21,000,000) (17,500,000)
Exercise of employee stock
options........................... 38 3,806
Deferred compensation related to
employee stock options............ 3,916,185 (3,916,185)
Issuance of warrants............... 29,711,400 (29,711,400)
Equity related charges............. 1,037,253
Net loss........................... (5,755,846)
----------- ----------- ------ ----------- ------------ ------------ -----------
Balance at September 30, 1999
(unaudited)....................... $10,526,937 $34,970,000 $5,050 $33,745,069 $(53,590,332) $(17,500,000) $(7,745,718)
=========== =========== ====== =========== ============ ============ ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Issuance of common stock........... $ 37,118
Issuance of Series A Convertible
Preferred Stock, net.............. 498,330
Issuance of Series B Convertible
Preferred Stock, net.............. 1,237,799
Net loss........................... (601,575)
-----------
Balance at December 31, 1997....... 1,171,672
Issuance of common stock for
services.......................... 29,069
Issuance of Series B Convertible
Preferred Stock, net.............. 845,116
Net loss........................... (1,388,297)
-----------
Balance at December 31, 1998....... 657,560
Issuance of common stock........... 52,503
Issuance of Series C Convertible
Preferred Stock, net.............. 10,526,937
Issuance of Series D Convertible
Preferred Stock, net.............. (3,530,000)
Exercise of employee stock
options........................... 3,844
Deferred compensation related to
employee stock options............ --
Issuance of warrants............... --
Equity related charges............. 1,037,253
Net loss........................... (5,755,846)
-----------
Balance at September 30, 1999
(unaudited)....................... $ 2,992,251
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 70
FAIRMARKET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FEBRUARY 20, 1997 YEAR NINE MONTHS ENDED
(DATE OF INCEPTION) ENDED SEPTEMBER 30,
TO DECEMBER 31, DECEMBER 31, ------------------------
1997 1998 1998 1999
------------------- ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................... $ (601,575) $(1,388,297) $ (985,672) $(5,755,846)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation......................................... 8,709 49,865 17,741 197,178
Reserve for uncollectible accounts................... -- -- -- 51,890
Value of stock issued for services................... 23,068 28,525 9,450 5,650
Amortization of deferred compensation and equity
related charges.................................... -- -- -- 1,037,253
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable....... (31,037) 31,037 31,037 (631,689)
(Increase) decrease in prepaid expenses.......... (46,933) 34,204 44,649 (222,936)
Increase in other assets......................... (4,500) (15,529) (17,768) (15,548)
Increase in accounts payable..................... 24,445 43,298 10,288 288,323
Increase in deferred revenue..................... -- -- -- 252,531
Increase (decrease) in accrued expenses.......... 63,569 (17,429) (63,569) 898,787
---------- ----------- ---------- -----------
Net cash used in operating activities.............. (564,254) (1,234,326) (953,844) (3,894,407)
---------- ----------- ---------- -----------
Cash flows from investing activities:
Additions to property and equipment...................... (57,308) (200,348) (89,730) (2,338,274)
---------- ----------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock................... 14,050 544 49 50,697
Proceeds from issuance of notes payable.................. 500,000 -- -- --
Payment of fees related to issuance of Series A
Convertible Preferred Stock, net of issuance costs..... (1,670) -- --
Proceeds from issuance of Series B Convertible Preferred
Stock, net of issuance costs........................... 1,237,799 795,066 797,395 --
Proceeds from issuance of Series C Convertible Preferred
Stock, net of issuance costs........................... -- -- -- 10,526,937
Proceeds from issuance of Series D Convertible Preferred
Stock, net of issuance costs........................... -- -- -- 13,970,000
Collection of subscription receivable.................... -- 50,050 50,050 --
---------- ----------- ---------- -----------
Net cash provided by financing activities.......... 1,750,179 845,660 847,494 24,547,634
Net increase (decrease) in cash............................ 1,128,617 (589,014) (196,080) 18,314,953
Cash at beginning of period................................ -- 1,128,617 1,128,617 539,603
---------- ----------- ---------- -----------
Cash at end of period...................................... $1,128,617 $ 539,603 $ 932,537 $18,854,556
========== =========== ========== ===========
Supplemental data:
Non-cash activity:
Issuance of Series A Convertible Preferred Stock in
exchange for notes payable............................. $ 500,000 -- -- --
Issuance of warrants to non-employees recorded as a
deferred charge........................................ -- -- -- $29,711,400
Issuance of Series D Convertible Preferred Stock below
fair value recorded as a deferred charge............... -- -- -- $38,500,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 71
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY:
FairMarket, Inc. (the "Company" or "FairMarket") was formed as a Delaware
corporation in February 1997 and is headquartered in Woburn, Massachusetts. From
its inception through May 1998, the Company devoted substantially all of its
efforts to its initial business model of matching buyers and sellers of computer
products and peripherals utilizing the Company's own Internet auction web site.
Product sales were transacted directly between the buyer and the seller, with
the Company earning a transaction fee based on the dollar amount of completed
sales and, beginning in May 1998, a fee for listing products on its auction
site. In December 1998, the Company began to implement its current business
model involving the offering of outsourced, private-label auction solutions.
The Company has a single operating segment, providing outsourced,
private-label auction solutions. The Company has no organizational structure
dictated by product lines, geography or customer type. To date, revenue has
primarily been derived from services provided to domestic companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could materially differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investment instruments purchased
with an original maturity of three months or less to be cash equivalents. Cash
equivalents consists of cash placed in an overnight investment account,
commercial paper and a money market account.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents.
The Company places its cash and temporary cash investments with financial
institutions that management believes are of high credit quality.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Costs of major additions and betterments are capitalized; maintenance and
repairs which do not improve or extend the life of the respective assets are
charged to operations. On disposal, the related accumulated depreciation or
amortization is removed from the accounts and any resulting gain
F-7
<PAGE> 72
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
or loss is included in the results of operations. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets as
follows:
<TABLE>
<CAPTION>
ESTIMATED USEFUL LIFE
------------------------
<S> <C>
Computer equipment......................................... 3 years
Furniture and fixtures..................................... 5 years
Leasehold improvements..................................... shorter of lease term or
asset useful life
</TABLE>
REVENUE RECOGNITION
From inception through May 1998, the Company earned revenue by charging
buyers and sellers a transaction fee on transactions effected on the Company's
former auction site. The Company recognized revenue when the seller shipped the
auctioned merchandise to the buyer. From May 1998 through November 1998, the
Company also charged sellers a listing fee and recognized this fee as revenue at
the conclusion of the auction. In December 1998, the Company began offering an
outsourced, private-label auction solution for business merchants and online web
communities. The Company derives revenue in the form of service fees and network
fees.
Service fees consist of site implementation fees, operating and support
fees. A site implementation fee is charged for the initial design, development
and implementation of a customer's auction site in accordance with the terms of
the contract. The site implementation fee is payable upon execution of the
contract, recorded as deferred revenue and recognized as revenue, ratably, over
the contract period. A monthly service fee covers hosting services, basic direct
customer support services, services for online billing and collection of fees,
and fraud protection services. Monthly service fees are recognized as revenue in
the month that the service is provided.
Network fees consist of the Company's share of transaction, listing and
merchandizing fees charged to our customers or their end-users. Merchant
customers pay transaction fees at varying percentages of the gross proceeds from
the sale of their listed products and services, whether sold on their sites or
on other Network sites. Community customers pay transaction fees from the sale
of the items that are listed through the community auction site and are sold
either on their sites or on other FairMarket Network sites. The fee percentages
vary by customer depending on the anticipated level of auction site activity on
the customer's site. Communities receive a percentage of the gross proceeds from
the sale of items that are listed directly through other auction sites in the
FairMarket Network and sold through the community auction site. The Company
records revenue net of amounts shared with its customers. Transaction fees are
invoiced and recognized at the completion of the auction period. Listing fees
are amounts charged to community customers for listing of items for auction on a
community site. Listing fees are recognized at the completion of an auction.
Merchandising fees are amounts charged to merchant customers who wish to
highlight certain listings outside of the main auction activity area. A seller
on a community site can choose from several merchandizing options designed to
highlight the seller or specific listing. Merchandising fees are recognized at
the completion of the contractual period for the merchandising event.
The Company's agreements with two of its customers provide that if the
companies drive a minimum level of Internet traffic to the FairMarket Network
through their portal sites, the Company guarantees the customers a minimum level
of transaction fee revenue regardless of
F-8
<PAGE> 73
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the level of actual revenue realized by the customer (also see Note 6). The
Company defers its share of related transaction revenue until either i) the
customer has earned the minimum level of transaction fee revenue or ii) it is
determined that the customer has not met the minimum traffic requirements.
DEVELOPMENT AND ENGINEERING
Development and engineering costs consist primarily of labor and related
costs for the design, deployment, testing and enhancement of the Company's
auction systems and are expensed as incurred.
On January 1, 1999, the Company adopted American Institute of Certified
Public Accountants Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
Accordingly, the Company's policy is to capitalize costs associated with the
design and implementation of its operating systems, including internally and
externally developed software. Expenditures for upgrades and significant
enhancements which are at least probable to result in increased functionality of
existing software, are capitalized. Year to date, costs incurred have related
primarily to maintenance and enhancements of existing software and systems and
internal costs eligible for capitalization under SOP 98-1 have been immaterial.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expenses of
approximately $47,100, $8,200, $8,200 and $1,383,000 were charged to sales and
marketing expenses for the period from February 20, 1997 (date of inception) to
December 31, 1997, for the year ended December 31, 1998 and for the nine-month
periods ended September 30, 1998 and 1999, respectively.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future
tax consequences, using current tax rates, of temporary differences between the
financial statement carrying amounts and the income tax bases of assets and
liabilities. A valuation allowance is applied against any net deferred tax asset
if, based on the weighted available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," encourages but does not require companies to
record compensation costs for stock-based employee compensation at fair value.
The Company has chosen to account for stock-based compensation granted to
employees using the intrinsic value method prescribed in Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation costs for stock options
granted to employees is measured as the excess, if any, of the fair value of the
Company's stock at the date of the grant over the amount that must be paid to
acquire the stock. Stock-based compensation issued to non-employees is measured
and recorded using the fair value method prescribed in SFAS No. 123.
F-9
<PAGE> 74
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company, to date, has not engaged in
derivative and hedging activities, and accordingly does not believe that the
adoption of SFAS No. 133 will have a material impact on the financial reporting
and related disclosures of the Company. The Company will adopt SFAS No. 133 as
required by SFAS No. 137, "Deferral of the Effective Date of FASB Statement No.
133," in fiscal year 2000.
INTERIM FINANCIAL INFORMATION
The consolidated financial statements of the Company as of September 30,
1999 and for the nine months ended September 30, 1998 and 1999 are unaudited.
All adjustments (consisting only of normal recurring adjustments) have been made
which, in the opinion of management, are necessary for a fair presentation of
the financial statements. Results of operations for the nine months ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999 or for any future period.
PRO FORMA BALANCE SHEET (UNAUDITED)
Upon the closing of the Company's initial public offering, all of the
outstanding shares of the Company's Series A, B, C and D Convertible Preferred
Stock will automatically convert on a 1-for-1 basis into shares (16,312,885
shares in the aggregate) of the Company's common stock, assuming an offering
price of greater than $7 per share and $15,000,000 in the aggregate. Upon the
closing of the Company's initial public offering, a put right for 2,500,000
shares of Series D Convertible Preferred Stock will expire. Upon the closing,
Excite, Inc. is obligated to pay the Company $5,000,000 related to a
subscription receivable (see Note 6). The unaudited pro forma presentation of
the balance sheet has been prepared assuming the conversion of the convertible
preferred stock into common stock, the expiration of the put right, and that the
payment has been made by Excite at September 30, 1999.
3. NET LOSS PER SHARE AND PRO FORMA LOSS PER SHARE:
Basic loss per share is computed using the weighted average number of
common shares outstanding during the period. Diluted loss per share is computed
using the weighted average number of common shares outstanding during the period
plus the effect of any dilutive potential common shares. Dilutive potential
common shares consist of stock options, preferred stock and warrants. Potential
common shares were excluded from the calculation of net loss per share for the
periods presented since their inclusion would be antidilutive. At December 31,
1997, there were options to purchase 303,000 common shares and 1,924,603 shares
of preferred stock convertible into 1,924,603 shares of common stock; at
December 31, 1998, there were options to purchase 510,000 shares of common stock
and 2,644,603 shares of preferred stock convertible into 2,644,603 shares of
common stock; at September 30, 1999, there were options to purchase 3,226,062
shares of common stock, 16,312,885 shares of preferred stock convertible into
16,312,885 shares of common stock and warrants to purchase
F-10
<PAGE> 75
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5,820,000 shares of common stock, all of which have been excluded from the
calculation of diluted earnings per share.
Pro forma basic and diluted loss per share have been calculated assuming
the conversion of all outstanding shares of preferred stock into common stock,
as if the shares had converted as of January 1, 1998 or the date of issuance, if
later.
The following is a calculation of pro forma net loss per share (unaudited):
<TABLE>
<CAPTION>
NINE
YEAR ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Pro forma net loss.......................................... $(1,388,297) $(5,755,846)
=========== ===========
Shares used in computing pro forma basic and diluted net
loss per share:
Weighted average number of common shares outstanding... 4,571,428 4,969,939
Weighted average impact of assumed conversion of
preferred stock...................................... 2,192,876 8,509,750
----------- -----------
Shares used in computing pro forma basic and diluted net
loss per share............................................ 6,764,304 13,479,689
=========== ===========
Basic and diluted pro forma net loss per common share....... $ (0.21) $ (0.43)
=========== ===========
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
------- -------- -------------
<S> <C> <C> <C>
Computer equipment.................................. $44,663 $230,866 $2,387,352
Furniture and fixtures.............................. 12,645 26,790 145,986
Leasehold improvements.............................. -- -- 62,592
------- -------- ----------
57,308 257,656 2,595,930
Less accumulated depreciation....................... (8,709) (58,574) (255,752)
------- -------- ----------
Property and equipment, net......................... $48,599 $199,082 $2,340,178
======= ======== ==========
</TABLE>
Depreciation expense was $8,709, $49,865, $17,741 and $197,178 for the
period from February 20, 1997 (date of inception) to December 31, 1997, for the
year ended December 31, 1998, for the nine months ended September 30, 1998 and
for the nine months ended September 30, 1999, respectively.
F-11
<PAGE> 76
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES:
In February 1998 and April 1999, the Company entered into long-term leases
for office space expiring in 2001 and 2004, respectively. Future minimum lease
payments under noncancelable operating leases at September 30, 1999 are as
follows:
1999........................................................ $ 62,029
2000........................................................ 248,115
2001........................................................ 214,734
2002........................................................ 164,185
2003........................................................ 164,185
Thereafter.................................................. 15,583
--------
Total....................................................... $868,831
========
Rental expense under operating leases amounted to $9,182 and $80,114 for
the period from February 20, 1997 (date of inception) to December 31, 1997, and
for the year ended December 31, 1998, respectively, and $60,086 and $138,376 for
the nine months ended September 30, 1998 and 1999, respectively.
The Company is also a party to certain auction service agreements under
which it has contingent commitments (see Note 6).
6. STOCKHOLDERS' EQUITY:
At December 31, 1997 and 1998, the Company had authorized the issuance of
15,000,000 shares of common stock with a par value of $0.001 ("Common Stock")
and 10,000,000 shares of preferred stock with a par value of $0.001 of which
2,000,000 have been designated as Series A Convertible Preferred Stock ("Series
A Preferred"), 5,000,000 have been designated as Series B Convertible Preferred
Stock ("Series B Preferred"), and 3,000,000 remain undesignated. At September
30, 1999, the authorized capital stock of the Company consisted of (i)
36,000,000 shares of voting Common Stock authorized for issuance with a par
value of $0.001 and (ii) 20,000,000 shares of preferred stock with a par value
of $0.001, of which 754,603 shares have been designated as Series A Preferred,
1,890,000 shares have been designated as Series B Preferred, 6,168,282 shares
have been designated as Series C Convertible Preferred Stock ("Series C
Preferred") and 10,000,000 shares have been designated as Series D Convertible
Preferred Stock ("Series D Preferred") (collectively, the "Convertible Preferred
Stock").
The number of shares designated for each series may be increased or
decreased by the Company's Board of Directors without a vote of the
stockholders. The Board of Directors has the authority to determine the voting
powers, designation, preferences, privileges and restrictions of the
undesignated preferred shares.
Each share of Convertible Preferred Stock is convertible, at the option of
the holder, at any time after the date of issuance, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing the
original Series A issue price, the original Series B issue price, the original
Series C issue price or the original Series D issue price, as the case may be,
by the conversion price applicable to such share, as in effect on the date the
share certificate is surrendered for conversion.
F-12
<PAGE> 77
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Each share of Convertible Preferred Stock will automatically convert into
shares of Common Stock at the then-current conversion price, immediately upon
the earlier of (i) the Company's sale of its Common Stock in a firm commitment
underwritten public offering pursuant to a registration statement on Form S-1 or
Form SB-2 under the Securities Act of 1933, as amended, the public offering
price of which is not less than $7.00 per share (as adjusted for any stock
splits, stock dividends, recapitalization or the like) and $15,000,000 in the
aggregate or (ii) the date specified by written consent or agreement of the
holders of a majority of the then outstanding shares of Convertible Preferred
Stock (voting together as a single class and not as a separate series, and on an
as-converted basis).
No dividends or other distributions may be authorized, declared, paid or
set apart on any shares of Common Stock or Preferred Stock unless at the same
time (A) a dividend is declared or paid to the Series C Preferred stockholders
equal to the greater of (1) $0.137 per share per annum, and to the Series D
Preferred stockholders in the amount of $0.56 per share per annum, or (2) an
amount equal to that paid on any other outstanding shares of the Company
(assuming conversion of the Series C Preferred and Series D Preferred as of the
record date for the dividend) and (B) a dividend is declared or paid upon the
shares of Series A Preferred and Series B Preferred in an amount equal to that
paid on any other outstanding shares of the Company (assuming conversion of the
Series A Preferred and Series B Preferred as of the record date for the
dividend). Dividends shall not be cumulative. The preferred shares are not
redeemable, except for certain shares of Series D Preferred that are subject to
a put option (see below), and are restricted as to transferability. The holders
of the preferred shares vote with the holders of the common shares on an
as-converted basis. The holders of the Series B Preferred and Series C Preferred
are, each as a class, entitled to elect one director to the Company's Board of
Directors.
The Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred shares have a preference in liquidation of $0.6626, $1.1111, $1.714,
and $7.00, respectively, subject to the full payment of shares of stock of the
Company ranking senior as to the liquidation rights of those preferred shares.
If funds legally available for distribution upon liquidation are insufficient to
pay the holders of the Series C Preferred and Series D Preferred their full
preferential amounts, then amounts paid must be distributed ratably among the
holders of the Series C Preferred and Series D Preferred in proportion to the
preferential amount to which each holder would be otherwise entitled.
If upon completion of the distribution to the Series C Preferred
Stockholders and Series D Preferred stockholders, there are assets remaining in
the Company, then the Series B Preferred shares will rank on parity with the
Series A Preferred shares with respect to a preference in liquidation. If funds
legally available for distribution upon liquidation are insufficient to pay the
holders of the Series A Preferred and Series B Preferred their full preferential
amount, then amounts paid shall be distributed ratably among the holders of the
Series A Preferred and Series B Preferred in proportion to the preferential
amounts to which each holder would otherwise be entitled.
If upon completion of the distribution to the Series A Preferred
Stockholders and Series B Preferred Stockholders, there are remaining assets of
the Company, then these remaining assets will be distributed among the holders
of the Common Stock pro rata based on the number of shares of Common Stock held.
F-13
<PAGE> 78
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company has reserved 1,924,603, 2,644,603 and 16,312,885 shares of
Common Stock for issuance upon the conversion of the preferred shares
outstanding at December 31, 1997 and 1998 and September 30, 1999, respectively.
On December 31, 1997, the Company issued 754,603 shares of Series A
Preferred in exchange for notes in the amount of $500,000.
The Company issued 1,170,000 and 720,000 shares of Series B Preferred
during the period from February 20, 1997 (date of inception) to December 31,
1997 and during the year ended December 31, 1998, respectively. Cash proceeds of
$1,287,849 and $795,066 from the sale were recorded net of issuance costs of
$12,151 and $4,934, respectively.
On February 8, 1999 the Company borrowed $2,000,000 pursuant to a
convertible promissory note. Amounts borrowed under this note bear interest at
the monthly "applicable federal rate" established by the Internal Revenue
Service. The principal balance of the note plus interest in the amount of $5,227
was paid in full on March 12, 1999 with the proceeds from the sale of the Series
C Preferred. On February 25, 1999, the Company sold 6,168,282 shares of Series C
Preferred. Proceeds from the sale of $10,526,937 were recorded net of issuance
costs of $45,498.
AUCTION SERVICES AGREEMENTS WITH LYCOS, MICROSOFT, EXCITE AND TMCS
On May 12, 1999, the Company entered into an Auction Services Agreement
with Lycos, Inc. which has a three-year term (subject to renewal by mutual
agreement). Under the agreement, the Company has agreed to provide auction
solutions to several Lycos web sites in return for a share of the network fees
charged on the Lycos sites.
In connection with this agreement, Lycos received two warrants to purchase
shares of the Company's Common Stock. The first is exercisable for 725,000
shares of the Company's Common Stock at an exercise price of $0.01 per share,
and must be exercised before the closing of an initial public offering. The
second is exercisable for up to 595,000 shares of the Company's Common Stock at
an exercise price of $1.71 per share. The number of shares for which the second
warrant may be exercised depends on Lycos meeting certain performance criteria.
The second warrant is currently not exercisable. The second warrant will
terminate on May 12, 2006 or earlier if FairMarket is sold to a third party. The
Company estimated the value of the first warrant to be $1,235,400 using the
Black-Scholes valuation model at the date of grant. The value of the warrant is
being amortized over the term of the agreement. Related expense for the nine
months ended September 30, 1999 was $171,583. Should the performance criteria on
the second warrant be met, the fair value of the warrant will be estimated at
the time the performance criteria are met.
On August 23, 1999, the Company entered into an Auction Services Agreement
with Microsoft Corporation which has a five-year initial term with an automatic
renewal term of five years. Under the agreement, the Company has agreed to
provide auction solutions to MSN.com and certain other web sites owned or
operated by Microsoft, in return for monthly hosting fees and a share of the
network fees charged on the Microsoft sites.
The agreement with Microsoft contains certain performance guarantees. If
Microsoft drives more than a specified number of Internet users to the
FairMarket Network through its Internet portal site for each year of the
contract's initial term, the Company will guarantee them a minimum level of
transaction fee revenue regardless of actual transaction fee revenue earned by
F-14
<PAGE> 79
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Microsoft. Minimum transaction fees guaranteed to Microsoft are $5.0 million,
$10.0 million, $10.0 million, $15.0 million and $20.0 million for the years
ending December 31, 2000, 2001, 2002, 2003 and 2004, respectively. If Microsoft
meets the minimum annual traffic guarantee but the increase in traffic does not
produce sufficient revenue to meet the minimum guaranteed revenue, we will have
a financial obligation to Microsoft. This obligation will be an amount equal to
the difference between the minimum guaranteed payment and Microsoft's portion of
fees actually collected. To date the traffic minimum has not been reached and
accordingly, no amounts have been accrued related to these contingent
liabilities.
In connection with this agreement, Microsoft purchased 1,250,000 shares of
the Series D Preferred for cash consideration of $8,750,000.
The Company also issued warrants to Microsoft for the purchase of 4,500,000
shares of Common Stock at an exercise price of $1.71 per share. The warrants
terminate upon closing of the sale of the Company. Following an initial public
offering (IPO), the warrants terminate on the earlier of two years after the
consummation of the IPO, 30 days after the Company has sent written notice to
the warrant holder that the IPO price of Common Stock equaled or exceeded $25
per share, or 30 days after the Company has sent written notice to the holder
that the reported closing price of the Common Stock on the exchange or market on
which the Common Stock is listed or traded equaled or exceeded $25.00 for 20
consecutive trading days. Unless earlier terminated as described above, the
warrants terminate on August 20, 2004. The Company has estimated the fair value
of the warrants to be $28,476,000 using the Black-Scholes valuation model. The
value of the warrants is being amortized over five years, the initial term of
the agreement. Related expense for the nine months ended September 30, 1999 was
$474,600. During the nine months ended September 30, 1999, the Company
recognized revenue of $120,000 from Microsoft for monthly service fees. At
September 30, 1999, the Company had receivables totaling $60,000 from Microsoft.
On August 23, 1999, the Company entered into an Auction Services Agreement
with Excite, Inc. which has a five-year initial term. Under this agreement, the
Company has agreed to provide auction solutions to Excite.com and certain other
web sites owned or operated by Excite, Inc. in return for a share of the network
fees charged by the Excite sites.
The agreement with Excite contains certain performance guarantees. If
Excite drives more than a specified number of Internet users to the FairMarket
Network through its Internet portal site for each year of the contract's initial
term, the Company will guarantee them a minimum level of transaction fee revenue
regardless of actual transaction fee revenue earned by Excite. Minimum
transaction fees guaranteed to Excite are $0.8 million, $2.1 million, $4.6
million, $7.0 million and $8.4 million for the years ending December 31, 2000,
2001, 2002, 2003 and 2004, respectively. If Excite meets the minimum annual
traffic guarantee but the increase in traffic does not produce sufficient
revenue to meet the minimum guaranteed revenue, we will have a financial
obligation to Excite. This obligation will be an amount equal to the difference
between the minimum guaranteed payment and Excite's portion of fees actually
collected. To date the traffic minimum has not been reached and accordingly, no
amounts have been accrued related to these contingent liabilities.
In addition, the Company has committed to purchase from Excite online
banner and other advertising services for $2.5 million per quarter during 2000
and 2001, for a total of $20.0 million.
F-15
<PAGE> 80
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In addition, Excite has purchased 2,500,000 shares of Series D Preferred
for cash consideration of $17,500,000. Under the stock purchase agreement,
Excite withheld the $17,500,000 as a prepayment against the Company's obligation
to purchase advertising as described above. This amount has been recorded as a
subscription receivable in the stockholders equity section of the balance sheet.
Upon completion of this offering, Excite is obligated to pay the Company
$5,000,000 of such amount, but may retain the remainder against the Company's
ongoing advertising obligations.
For the period beginning December 15, 1999 through the date of the
Company's initial public offering, Excite has the right to require the Company
to buy back the shares of Series D Preferred (put option) for the original
purchase price. Accordingly, these shares are presented above the equity section
of the balance sheet as of September 30, 1999.
The Company also issued to Excite 1,500,000 shares of Series D Preferred
for no cash consideration. The Company may repurchase the shares for up to one
year if Excite terminates the Auction Services Agreement. The Company has
recorded the shares at fair value for a total of $10,500,000, as a deferred
charge to be amortized over the term of the agreement. The related expense for
the nine months ended September 30, 1999 was $175,000. The value of the shares
will be remeasured and adjusted at each balance sheet date over the period
during which the shares may be repurchased.
On September 15 1999, the Company entered into an Auction Services
Agreement with TicketMaster Online-CitySearch, Inc. ("TMCS") which has a
three-year initial term (subject to annual renewal unless terminated by either
party). Under the agreement, the Company provides auction solutions to certain
web sites owned and controlled by TMCS in return for a share of the network fees
charged by TMCS.
In connection with this agreement, TMCS purchased 750,000 shares of Series
D Preferred for proceeds of $5,250,000. The Company also issued 1,500,000 shares
of Series D Preferred in exchange for one year of advertising and a license to
certain technology. The Company has recorded the shares at fair value, for a
total of $10,500,000, as a deferred charge to be amortized over three years, the
term of the agreement. There was no related expense recorded for the nine months
ended September 30, 1999.
7. STOCK OPTION PLANS:
1997 STOCK OPTION PLAN
In March 1997, the Board of Directors and stockholders approved the Amended
and Restated 1997 Stock Option Plan (the "1997 Plan") which provides for the
issuance of up to 750,000 shares of Common Stock under incentive stock options
("ISOs") and nonstatutory stock options ("NSOs"). The 1997 Plan provides for the
granting of ISOs to employees of the Company and NSOs to nonemployee directors
of the Company and consultants. ISOs and NSOs granted under the 1997 Plan have a
maximum term of 10 years from the date of grant, vest over four years and in the
case of ISOs, have an exercise price not less than fair value of the Common
Stock at the date of grant.
1999 STOCK OPTION PLAN
In February 1999, the Board of Directors and stockholders approved the 1999
Stock Option Plan (the "1999 Plan"), which provides for the issuance of up to
3,421,237 shares of
F-16
<PAGE> 81
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Common Stock under ISOs or NSOs or through the direct issuance or sale of common
stock to officers, employees, directors, and consultants of the Company.
The Board of Directors determines the term of each option, the option
price, the number of shares for which each option is granted and the rate at
which each option is exercisable. For holders of 10% or more of the Company's
outstanding Common Stock, ISOs may not be granted at less than 110% of the fair
market value of the Common Stock at the date of grant.
The following tables summarize information about stock options outstanding
at September 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- ----------------------------
REMAINING WEIGHTED WEIGHTED
RANGE OF EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
PRICE PER SHARE OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------- ----------- --------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.10 691,562 9.02 $0.100 44,627 $0.100
0.20 1,390,000 9.62 0.200 -- --
0.50 702,000 9.79 0.500 -- --
1.50 312,500 9.89 1.500 -- --
3.00 130,000 9.96 3.000 -- --
--------- ------
$0.10-$3.00 3,226,062 9.57 $0.483 44,627 $0.100
========= ======
</TABLE>
Stock option activity for the period from February 20, 1997 (date of
inception) to December 31, 1997, for the year ended December 31, 1998 and for
the nine months ended September 30, 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 SEPTEMBER 30, 1999
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE PER NUMBER PRICE PER NUMBER PRICE PER
OF SHARES SHARE OF SHARES SHARE OF SHARES SHARE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year...................... 303,000 $ 0.04 510,000 $ 0.10
Granted..................... 303,000 $ 0.04 600,000 0.10 2,869,500 0.54
Exercised................... -- (48,750) 0.011 (38,438) 0.10
Canceled.................... -- (344,250) 0.061 (115,000) 0.36
------- -------- ---------
Outstanding at end of
period.................... 303,000 $ 0.04 510,000 $ 0.10 3,226,062 $ 0.48
======= ======== =========
Options exercisable at
period-end................ -- 18,875 $ 0.10 44,627 $ 0.10
Weighted average fair value
of options granted during
the period................ $0.009 $0.017 $1.872
</TABLE>
There were 857,987 shares available for future option grants as of
September 30, 1999.
During the nine-month period ended September 30, 1999, the Company recorded
unearned compensation of $3.9 million for stock options granted to employees,
which were subsequently determined to be below fair value. The Company is
recognizing the compensation expense over the vesting period. In the nine months
ended September 30, 1999, related expense recognized was $216,070.
F-17
<PAGE> 82
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company follows the disclosure provisions of SFAS No. 123 and has
applied APB Opinion 25 and related interpretations in accounting for its stock
option plans. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates as calculated
in accordance with SFAS No. 123, the Company's net loss for the year ended
December 31, 1998 and the period ended December 31, 1997 would have increased to
the pro forma amounts indicated below:
1997 1998
--------- -----------
Net loss attributable to common stockholders
As reported...................................... $(601,575) $(1,388,297)
Pro forma........................................ (601,764) (1,389,195)
Net loss per common share
As reported...................................... $ (0.15) $ (0.30)
Pro forma........................................ $ (0.15) $ (0.30)
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions: an
expected life of four years, expected volatility of 0%, no dividends, and a
weighted average risk-free interest rate of 6.25% and 5.06% for the period from
February 20, 1997 (date of inception) to December 31, 1997 and for the year
ended December 31, 1998, respectively.
8. INCOME TAXES:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
At December 31, 1997 and 1998, the deferred tax asset is as follows:
1997 1998
--------- ---------
Net operating loss carryforwards....................... $ 2,365
Start-up costs......................................... 248,744 $ 790,576
Depreciation........................................... 3,159 9,570
Other.................................................. -- 7,448
--------- ---------
Total deferred tax asset............................... 254,268 807,594
Valuation allowance.................................... (254,268) (807,594)
--------- ---------
Net deferred tax asset................................. -- --
========= =========
A valuation allowance is established if it is more likely than not that all
or a portion of the deferred tax asset will not be realized. Accordingly, a
valuation allowance has been recorded for the full amount of the deferred tax
asset due to the uncertainty of realization.
9. EMPLOYEE BENEFIT PLAN:
In January 1999, the Company established a savings plan for its employees
which is designed to be qualified under Section 401(k) of the Internal Revenue
Code. Eligible employees are permitted to contribute to the 401(k) plan through
payroll deduction within statutory and plan limits.
F-18
<PAGE> 83
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS:
In November 1999, the Company entered into a five-year lease agreement for
approximately 67,000 square feet of office space in Woburn, Massachusetts. The
term of the lease begins on January 1, 2000. The Company will pay base rental
obligations of $792,988 in the first year of the lease and $1,515,173 in each
subsequent year for the remainder of the lease term. In connection with the
lease, the Company paid the lessor a security deposit in the amount of
$1,800,000 in the form of an irrevocable, freely transferable letter of credit
with a six-month term.
F-19
<PAGE> 84
Inside Back Cover Graphics
Text: How it works: (1) Merchandise is posted on an auction site, (2)
Merchandise is added to the FairMarket Network, (3) Merchandise is listed on
FairMarket Network sites.
[Photograph of a computer screen displaying the CompUSA auction site. Arrow
pointing from the computer screen photograph to the FairMarket logo. Arrows
point from the logo of FairMarket to multiple photographs of computer screens
displaying FairMarket customer auction sites including MSN.com, Excite@Home and
Lycos.com.]
Text: Today, over 90 businesses, including CompUSA, Outpost.com and
SportsLine.com, Inc. and several top Internet portal sites, including MSN.com,
Excite@Home and Lycos, are members of the FairMarket Network.
<PAGE> 85
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT RELY ON ANY
UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS AN OFFER TO SELL
THE SHARES OFFERED HEREBY, BUT ONLY UNDER CIRCUMSTANCES AND IN JURISDICTIONS
WHERE IT IS LAWFUL TO DO SO. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
CURRENT ONLY AS OF ITS DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 4
Special Note Regarding Forward-
Looking Statements.................. 17
Use of Proceeds....................... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 19
Selected Financial Data............... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 32
Management............................ 42
Principal Stockholders................ 48
Certain Transactions with Related
Parties............................. 49
Description of Capital Stock.......... 51
Shares Eligible For Future Sale....... 57
Underwriting.......................... 58
Validity of Common Stock.............. 60
Experts............................... 61
Where You Can Find More
Information......................... 61
Index to Financial Statements......... F-1
</TABLE>
THROUGH AND INCLUDING , 2000 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING 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 AN UNDERWRITER AND WITH RESPECT TO AN UNSOLD ALLOTMENT OR
SUBSCRIPTION.
[FAIRMARKET LOGO]
FAIRMARKET, INC.
5,000,000 SHARES
COMMON STOCK
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
PROSPECTUS
, 2000
<PAGE> 86
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by us in
connection with the offering (excluding underwriting discounts and commissions):
NATURE OF EXPENSE
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
SEC registration fee........................................ $ 16,698
NASD filing fee............................................. 6,000
Nasdaq National Market listing fee.......................... 95,000
Accounting fees and expenses................................ 350,000
Legal fees and expenses..................................... 500,000
Printing expenses........................................... 250,000*
Blue sky qualification fees and expenses.................... 7,500
----------
Transfer Agent's fee........................................ 12,000
Miscellaneous............................................... 62,802*
----------
Total....................................................... $1,300,000
==========
</TABLE>
The amounts set forth above, except for the Securities and Exchange
Commission, National Association of Securities Dealers, Inc. and Nasdaq National
Market fees, are in each case estimated.
- ------------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the Delaware General Corporation Law,
Article VII of our amended and restated certificate of incorporation provides
that no director of the Company shall be personally liable to the Company or our
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (1) for any breach of the director's duty of loyalty to the
Company or our stockholders, (2) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3) in
respect of unlawful dividend payments or stock redemptions or repurchases, or
(4) for any transaction from which the director derived an improper personal
benefit. In addition, our amended and restated certificate of incorporation
provides that if the Delaware General Corporation Law is amended to authorize
the further elimination or limitation of the liability of directors, then the
liability of a director of the Company shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
Article V of our amended and restated by-laws provides for indemnification
by the Company of our officers and certain non-officer employees under certain
circumstances against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement, reasonably incurred by those persons in connection
with the defense or settlement of any threatened, pending or completed legal
proceeding in which any such person is involved by reason of the fact that such
person is or was an officer or employee of the Company if such person acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interests of the Company, and, with respect to criminal actions or
proceedings, if such person had no reasonable cause to believe his or her
conduct was unlawful.
II-1
<PAGE> 87
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since our incorporation in February 1997, we have sold and issued the
following securities:
(1) On February 20, 1997, we issued 4,000,000 shares of common stock
to Scott Randall, our founder, for an aggregate consideration of
$4,000. The issuance of securities described in this paragraph
were deemed to be exempt from registration under the Securities
Act of 1933 in reliance on Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
(2) On December 31, 1997, we issued 754,603 shares of Series A
Convertible Preferred Stock to one investor for an aggregate
consideration of $500,000. The issuance of securities described in
this paragraph was deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act
as a transaction by an issuer not involving a public offering.
(3) From December 13, 1997 to August 22, 1998, we issued a total of
1,890,000 shares of Series B Convertible Preferred Stock to 20
investors for an aggregate consideration of $2,100,000. The
issuances of securities described in this paragraph were deemed to
be exempt from registration under the Securities Act in reliance
on Section 4(2) of the Securities Act as transactions by an issuer
not involving a public offering.
(4) On February 25, 1999, we issued 6,168,282 shares of Series C
Convertible Preferred Stock to 18 investors for an aggregate
consideration of $10,572,435. The issuances of securities
described in this paragraph were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2)
of the Securities Act as transactions by an issuer not involving a
public offering.
(5) On May 12, 1999, we issued two warrants to Lycos, Inc. to purchase
1,320,000 shares of common stock (the first warrant is exercisable
for 725,000 shares of common stock at an exercise price of $0.01
per share, and the second warrant is exercisable for up to 595,000
shares of common stock, at an exercise price of $1.71 per share).
The issuances of securities described in this paragraph were
deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act as transactions by
an issuer not involving a public offering.
(6) From August 23, 1999 to September 15, 1999, we issued a total of
7,500,000 shares of Series D Convertible Preferred Stock to
Microsoft Corporation, Excite, Inc. and TicketMaster
Online-CitySearch, Inc. for aggregate cash consideration of
$31,500,000 (of which $17,500,000 is being credited against future
obligations of FairMarket to Excite). The issuances of securities
described in this paragraph were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2)
of the Securities Act as transactions by an issuer not involving a
public offering.
(7) On August 23,1999, we issued a warrant to purchase 4,500,000
shares of common stock to Microsoft Corporation at an exercise
price of $1.71. The issuance of securities described in this
paragraph was deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act
as a transaction by an issuer not involving a public offering.
(8) Since our incorporation and as of December 31, 1999, we have
issued 971,725 shares of common stock and options to purchase an
aggregate of 4,792,000 shares of common stock with exercise prices
ranging from $0.01 to $9.00 per share. All sales of common stock
were made upon exercise of options or for fair
II-2
<PAGE> 88
market value at the time of the sale. Since our incorporation and as
of December 31, 1999, options to purchase 271,501 shares have been
exercised for an aggregate consideration of $22,819 and options to
purchase 781,750 shares have been cancelled without exercise. These
issuances of securities were deemed to be exempt from registration
under the Securities Act in reliance on Rule 701 under the Securities
Act as transactions pursuant to compensatory benefits plans and
contracts relating to compensation. The recipients of securities in
each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were
affixed to the share certificates and other instruments issued in
such transactions. All recipients either received adequate
information about FairMarket or had access, through employment or
other relationships, to such information.
There were no underwriters employed in connection with any of the
transactions set forth in this item 15.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement.
+3.1 Amended and Restated Certificate of Incorporation of
FairMarket, Inc. (the "Company")
3.2 Form of Second Amended and Restated Certificate of
Incorporation of the Company (to be filed with the Delaware
Secretary of State immediately prior to the effectiveness of
this registration statement)
3.3 Form of Third Amended and Restated Certificate of
Incorporation of the Company (to be filed with the Delaware
Secretary of State immediately following the closing of this
offering)
+3.4 Bylaws of the Company
3.5 Form of Amended and Restated Bylaws of the Company (to be
effective upon the closing of this offering)
4.1 Form of Specimen Certificate for the Company's Common Stock
+ 4.2 Investors' Rights Agreement, dated February 25, 1999,
between the Company and the stockholders named therein
+ 4.3 Amendment to Investors' Rights Agreement, dated August 23,
1999, between the Company and the stockholders named therein
+ 4.4 Amendment to Investors' Rights Agreement, dated September
15, 1999, between the Company and TicketMaster
Online-CitySearch, Inc.
* 5.1 Opinion of Goodwin, Procter & Hoar LLP regarding the
legality of the securities being registered
10.1 Form of Indemnity Agreement entered into by the Company with
each of its directors
+10.2 Amended and Restated 1997 Stock Option Plan
+10.3 1999 Stock Option Plan
10.4 Form of 2000 Stock Option and Incentive Plan
10.5 Form of 2000 Employee Stock Purchase Plan
+10.6 Lease Agreement dated November 9, 1999, between DIV Unicorn,
LLC and the Company
</TABLE>
II-3
<PAGE> 89
<TABLE>
<C> <S>
+10.7 Sublease Agreement dated January 22, 1998, between Insignia
Solutions, Inc. and the Company
+10.8 Sublease Agreement dated April 5, 1999, between Indigo
America, Inc. and the Company
10.9 Warrant to Purchase Common Stock between the Company and
Lycos, Inc. dated as of May 12, 1999
10.10 Performance Warrant to Purchase Common Stock between the
Company and Lycos, Inc., dated as of May 12, 1999
10.11 Warrant to Purchase Common Stock between the Company and
Microsoft Corporation, dated as of August 23, 1999
10.12 Siteharbor Services Agreement between the Company and
Navisite Services Corporation, dated as of October 30, 1998
*23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit
5.1 hereto)
23.2 Consent of PricewaterhouseCoopers LLP
+24.1 Powers of Attorney (included on the signature pages hereto)
+27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment to this registration statement.
+ Previously filed.
(b) Financial Statement Schedules
All schedules have been omitted because they are not required or because
the required information is given in the financial statements or the notes to
those statements.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, 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.
II-4
<PAGE> 90
(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-5
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Boston, on January 25, 2000.
FairMarket, Inc.
By: /s/ SCOTT T. RANDALL
-----------------------------------------------
Scott T. Randall
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ SCOTT T. RANDALL President, Chief Executive January 25, 2000
- ------------------------------------------------ Officer and Director
Scott T. Randall (Principal Executive Officer)
/s/ JOHN BELCHERS Chief Financial Officer January 25, 2000
- ------------------------------------------------ (Principal Financial Officer
John Belchers and Principal Accounting
Officer)
* Director January 25, 2000
- ------------------------------------------------
Jeffrey Drazan
* Director January 25, 2000
- ------------------------------------------------
Nanda Krish
* By: /s/ JOHN BELCHERS
- -----------------------------------------------
John Belchers
Attorney-in-fact
</TABLE>
II-6
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement
+3.1 Amended and Restated Certificate of Incorporation of
FairMarket, Inc. (the "Company")
3.2 Form of Second Amended and Restated Certificate of
Incorporation of the Company (to be filed with the Delaware
Secretary of State immediately prior to the effectiveness of
this registration statement)
3.3 Form of Third Amended and Restated Certificate of
Incorporation of the Company (to be filed with the Delaware
Secretary of State immediately following the closing of this
offering)
+3.4 Bylaws of the Company
3.5 Form of Amended and Restated Bylaws of the Company (to be
effective upon the closing of this offering)
4.1 Form of Specimen Certificate for the Company's Common Stock
+4.2 Investors' Rights Agreement, dated February 25, 1999,
between the Company and the stockholders named therein
+4.3 Amendment to Investors' Rights Agreement, dated August 23,
1999, between the Company and the stockholders named therein
+4.4 Amendment to Investors' Rights Agreement, dated September
15, 1999, between the Company and TicketMaster
Online-CitySearch, Inc.
*5.1 Opinion of Goodwin, Procter & Hoar LLP regarding the
legality of the securities being registered
10.1 Form of Indemnity Agreement entered into by the Company with
each of its directors
+10.2 Amended and Restated 1997 Stock Option Plan
+10.3 1999 Stock Option Plan
10.4 Form of 2000 Stock Option and Incentive Plan
10.5 Form of 2000 Employee Stock Purchase Plan
+10.6 Lease Agreement dated November 9, 1999, between DIV Unicorn,
LLC and the Company
+10.7 Sublease Agreement dated January 22, 1998, between Insignia
Solutions, Inc. and the Company
+10.8 Sublease Agreement dated April 5, 1999, between Indigo
America, Inc. and the Company
10.9 Warrant to Purchase Common Stock between the Company and
Lycos, Inc. dated as of May 12, 1999
10.10 Performance Warrant to Purchase Common Stock between the
Company and Lycos, Inc., dated as of May 12, 1999
10.11 Warrant to Purchase Common Stock between the Company and
Microsoft Corporation, dated as of August 23, 1999
10.12 Siteharbor Services Agreement between the Company and
Navisite Services Corporation, dated as of October 30, 1998
23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit
5.1 hereto)
23.2 Consent of PricewaterhouseCoopers LLP
</TABLE>
<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
+24.1 Powers of Attorney (included on the signature pages hereto)
+27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment to this registration statement.
+ Previously filed.
<PAGE> 1
EXHIBIT 3.2
FORM OF
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
FAIRMARKET, INC.
FairMarket, Inc., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is FairMarket, Inc. The date of
the filing of its original Certificate of Incorporation with the Secretary of
State of the State of Delaware was February 20, 1997 (the "Original
Certificate").
2. This Amended and Restated Certificate of Incorporation (the
"Certificate") amends, restates and integrates the provisions of the Original
Certificate, and was duly adopted in accordance with the provisions of Sections
242 and 245 of the Delaware General Corporation Law (the "DGCL").
3. The text of the Original Certificate is hereby amended and
restated in its entirety to provide as herein set forth in full.
<PAGE> 2
ARTICLE I
The name of the Corporation is FairMarket, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is c/o The Corporation Trust Company, 1209 Orange Street in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the DGCL.
ARTICLE IV
CAPITAL STOCK
The total number of shares of capital stock which the Corporation shall
have authority to issue is ___________ (________) shares, of which (i) shares
shall be a class designated as Common Stock, par value $0.001 per share (the
"Common Stock"), (ii) _____________ (_________) shares shall be Series A
Preferred Stock, par value $ ___ per share (the "Series A Preferred Stock"),
(iii) _______ (______) shares shall be Series B Preferred Stock, par value
$_____ per share (the "Series B Preferred Stock"), (iv) ________ (_______)
shares shall be Series C Preferred Stock, par value $_____ per share (the
"Series C Preferred Stock"), (v) _________ (_______) shares shall be Series D
Preferred Stock, par value $_____ per share (the "Series D Preferred Stock")
(together, the "Convertible Preferred Stock") and (vi) _____________ (_________)
shares shall be undesignated preferred stock, par value $ ___ per share (the
"Undesignated Preferred Stock" and, together with the Convertible Preferred
Stock, the "Preferred Stock").
The number of authorized shares of the class of Undesignated Preferred
Stock may from time to time be increased or decreased (but not below the number
of shares outstanding) by the affirmative vote of the holders of a majority of
the outstanding shares of Common Stock entitled to vote, without a vote of the
holders of the Preferred Stock (subject to the terms of the
2
<PAGE> 3
Convertible Preferred Stock and except as otherwise provided in any certificate
of designations of any series of Undesignated Preferred Stock).
The powers, preferences and rights of, and the qualifications,
limitations and restrictions upon, each class or series of stock shall be
determined in accordance with, or as set forth below in, this Article IV.
Except as otherwise required by law, holders of Common Stock, as such,
shall not be entitled to vote on any amendment to this Certificate (or on any
amendment to a certificate of designations of any series of Undesignated
Preferred Stock) that alters or changes the powers, preferences, rights or
other terms of one or more outstanding series of Undesignated Preferred Stock if
the holders of such affected series are entitled to vote, either separately or
together with the holders of one or more other such series, on such amendment
pursuant to this Certificate (or pursuant to a certificate of designations
of any series of Undesignated Preferred Stock) or pursuant to the DGCL.
A. COMMON STOCK
Subject to all the rights, powers and preferences of the Preferred
Stock and except as provided by law or in this Article IV (or in any certificate
of designations of any series of Undesignated Preferred Stock):
(a) the holders of the Common Stock shall have the
exclusive right to vote for the election of directors of the Corporation (the
"Directors") Directors and on all other matters requiring stockholder action,
each outstanding share entitling the holder thereof to one vote on each matter
properly submitted to the stockholders of the Corporation for their vote;
PROVIDED, HOWEVER, that, except as otherwise required by law, holders of Common
Stock shall not be entitled to vote on any amendment to this Certificate
(including any certificate of designations relating to any series of
Undesignated Preferred Stock) that relates solely to the terms of one or more
outstanding series of Undesignated Preferred Stock if the holders of such
affected series are entitled, either separately or together as a class with the
holders of one or more other such series, to vote thereon pursuant to this
Certificate (including any certificate of designations relating to any series of
Undesignated Preferred Stock);
(b) dividends may be declared and paid or set apart for
payment upon the Common Stock out of any assets or funds of the Corporation
legally available for the payment of dividends, but only when and as declared by
the Board or any authorized committee thereof; and
(c) upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the net assets of the Corporation
shall be distributed pro rata to the holders of the Common Stock.
3
<PAGE> 4
B. CONVERTIBLE PREFERRED STOCK
1. Dividend Provisions.
(a) No dividends or other distributions shall be authorized,
declared, paid or set apart for payment on any shares of Common Stock or
Preferred Stock unless at the same time (i) a dividend is declared or paid upon,
or distribution made on, the shares of Series C Preferred Stock and Series D
Preferred Stock equal to the greater of (A) with respect to the Series C
Preferred Stock, $.137 per share per annum (as adjusted for any stock splits,
stock dividends, recapitalizations or the like) and with respect to the Series D
Preferred Stock, $.56 per annum (as adjusted for any stock splits, stock
dividends, recapitalizations or the like), and (B) an amount equal to that paid
on any other outstanding shares of this corporation (assuming conversion of the
Series C Preferred Stock and Series D Preferred Stock as of the record date for
such dividend or distribution), and (ii) a dividend is declared or paid upon, or
distribution made on, the shares of Series A Preferred Stock and Series B
Preferred Stock in an amount equal to that paid on any other outstanding shares
of this corporation (assuming conversion of the Series A Preferred Stock and
Series B Preferred Stock as of the record date for such dividend or
distribution). Dividends shall not be cumulative.
2. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up
of this corporation, either voluntary or involuntary, the holders of Series C
Preferred Stock and Series D Preferred Stock shall be entitled to receive, prior
and in preference to any distribution of any of the assets of this corporation
to the holders of Series A Preferred Stock, the holders of Series B Preferred
Stock or the holders of Common Stock by reason of their ownership thereof, an
amount per share equal to the sum of (i) $1.714 for each outstanding share of
Series C Preferred Stock (the "Original Series C Issue Price"), (ii) $7.00 for
each outstanding share of Series D Preferred Stock (the "Original Series D Issue
Price") and (iii) declared but unpaid dividends on such shares
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(subject to adjustment of such fixed dollar amounts for any stock splits, stock
dividends, combinations, recapitalizations or the like). If upon the occurrence
of such event, the assets and funds thus distributed among the holders of the
Series C Preferred Stock and Series D Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential amounts,
then the entire assets and funds of this corporation legally available for
distribution shall be distributed ratably among the holders of the Series C
Preferred Stock and Series D Preferred Stock in proportion to the full
preferential amount to which each such holder would otherwise be entitled
pursuant to this subsection (a).
Upon completion of the distribution required by subsection (a) of this
Section 2, if assets remain in this corporation, the holders of Series A
Preferred Stock and Series B Preferred Stock shall be entitled to receive, prior
and in preference to any distribution of any of the assets of this corporation
to the holders of the Common Stock by reason of their ownership thereof, (A) in
the case of the Series A Preferred Stock, an amount per share equal to the sum
of (i) $.6626 for each outstanding share of Series A Preferred Stock (the
"Original Series A Issue Price") and (ii) an amount equal to declared but unpaid
dividends on such share (subject to adjustment of such fixed dollar amounts for
any stock splits, stock dividends, combinations, recapitalizations or the like),
and (B) in the case of the Series B Preferred Stock, an amount per share equal
to the sum of (i) $1.1111 for each outstanding share of Series B Preferred Stock
(the "Original Series B Issue Price") and (ii) an amount equal to declared but
unpaid dividends on such share (subject to adjustment of such fixed dollar
amounts for any stock splits, stock dividends, combinations, recapitalizations
or the like). If upon the occurrence of such event, the remaining assets and
funds thus distributed among the holders of the Series A Preferred Stock and
Series B Preferred Stock shall be insufficient to permit the payment to such
holders of the full aforesaid preferential amounts, then the entire assets and
funds of the corporation legally available for distribution shall be distributed
ratably among the holders of the Series A Preferred Stock and Series B Preferred
Stock in proportion to the full preferential amount each such holder is
otherwise entitled to receive under this subsection (a).
(b) Upon completion of the distribution required by subsection
(a) of this Section 2, all of the remaining assets of this corporation available
for distribution to stockholders shall be distributed among the holders of
Common Stock pro rata based on the number of shares of Common Stock held by
each.
(c) (i) For purposes of this Section 2, a liquidation,
dissolution or winding up of this corporation shall be deemed to be occasioned
by, or to include, (A) the acquisition of this corporation by another entity by
means of any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation) that results in the
transfer of fifty percent (50%) or more of the outstanding voting power of this
corporation; or (B) a sale of all or substantially all of the assets of this
corporation.
(ii) In any of such events, if the consideration received by
this corporation is other than cash, its value will be deemed its fair market
value. Any securities shall be valued as follows:
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(A) Securities not subject to investment letter or
other similar restrictions on free marketability covered by (B) below:
(1) If traded on a securities exchange or through
the Nasdaq National Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange or system over the thirty (30)
day period ending three (3) days prior to the closing;
(2) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty (30) day period ending three (3) days
prior to the closing; and
(3) If there is no active public market, the
value shall be the fair market value thereof, as mutually determined by this
corporation and the holders of at least a majority of the voting power of all
then outstanding shares of Preferred Stock.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (A) (1), (2) or (3) to reflect the approximate fair
market value thereof, as mutually determined by this corporation and the holders
of at least a majority of the voting power of all then outstanding shares of
such Preferred Stock.
(iii) In the event the requirements of this Section 2(a) are
not complied with, this corporation shall forthwith either:
(A) cause such closing to be postponed until such time
as the requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event the
rights, preferences and privileges of the holders of the Preferred Stock shall
revert to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in subsection
2(c)(iv) hereof.
(iv) This corporation shall give each holder of record of
Preferred Stock written notice of such impending transaction not later than
twenty (20) days prior to the stockholders' meeting, if any, called to approve
such transaction, or twenty (20) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction. The first of such notices shall describe the
material terms and conditions of the impending transaction and the provisions of
this Section 2, and this corporation shall thereafter give such holders prompt
notice of any material changes. The transaction shall in no event take place
sooner than twenty (20) days after this corporation has given the first notice
provided for herein or sooner than ten (10) days after this corporation
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has given notice of any material changes provided for herein; provided, however,
that such periods may be shortened upon the written consent of the holders of
Preferred Stock that are entitled to such notice rights or similar notice rights
and that represent at least a majority of the voting power of all then
outstanding shares of such Preferred Stock.
3. REDEMPTION.
The Preferred Stock is not redeemable.
4. CONVERSION. The holders of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall
have conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share, at the office of this corporation or any
transfer agent for such stock, into such number of fully paid and nonassessable
shares of Common Stock as is determined by dividing the Original Series A Issue
Price, the Original Series B Issue Price, the Original Series C Issue Price or
the Original Series D Issue Price, as the case may be, by the Conversion Price
applicable to such share, determined as hereafter provided, in effect on the
date the certificate is surrendered for conversion. The initial Conversion Price
per share for shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock shall be the Original
Series A Issue Price, the Original Series B Issue Price, the Original Series C
Issue Price and the Original Series D Issue Price, respectively; provided,
however, that the Conversion Price for the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be
subject to adjustment as set forth in subsection 4(d).
(b) AUTOMATIC CONVERSION. Each share of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock shall automatically be converted into shares of Common Stock at the
Conversion Price at the time in effect for such Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
immediately upon the earlier of (i) this corporation's sale of its Common Stock
in a firm commitment underwritten public offering pursuant to a registration
statement on Form S-1 or Form SB-2 under the Securities Act of 1933, as amended,
the public offering price of which was not less than $7.00 per share (as
adjusted for any stock splits, stock dividends, recapitalizations or the like)
and $15,000,000 in the aggregate or (ii) the date specified by written consent
or agreement of the holders of a majority of the then outstanding shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
and Series D Preferred Stock (voting together as a single class and not as a
separate series, and on an as-converted basis).
(c) MECHANICS OF CONVERSION. Before any holder of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D
Preferred Stock shall be
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entitled to convert the same into shares of Common Stock, he or she shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of this corporation or of any transfer agent for the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock
and shall give written notice to this corporation at its principal corporate
office, of the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock are to
be issued. This corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock or Series D Preferred Stock or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred
Stock to be converted, and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock as of such date.
If the conversion is in connection with an underwritten offering of securities
registered pursuant to the Securities Act of 1933, the conversion may, at the
option of any holder tendering Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock or Series D Preferred Stock for conversion, be
conditioned upon the closing with the underwriters of the sale of securities
pursuant to such offering, in which event the persons entitled to receive the
Common Stock upon conversion of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock or Series D Preferred Stock shall not be deemed
to have converted such Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock until immediately prior to
the closing of such sale of securities.
(d) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR CERTAIN
DILUTIVE ISSUANCES, SPLITS AND COMBINATIONS. The Conversion Price of the Series
A Preferred, Series B Preferred, Series C Preferred Stock and Series D Preferred
Stock shall be subject to adjustment from time to time as follows:
(i) (A) If this corporation shall issue, after the date
upon which any shares of Series D Preferred Stock were first issued (the
"Purchase Date"), any Additional Stock (as defined below) without consideration
or for a consideration per share less than the Conversion Price for the Series C
Preferred Stock or Series D Preferred Stock in effect immediately prior to the
issuance of such Additional Stock, the Conversion Price for such Series C
Preferred Stock or Series D Preferred Stock, as applicable, in effect
immediately prior to each such issuance shall forthwith (except as otherwise
provided in this clause (i)) be adjusted to a price determined by multiplying
such Conversion Price by a fraction, the numerator of which shall be the number
of shares of Common Stock outstanding immediately prior to such issuance
(including shares of Common Stock deemed to be issued pursuant to subsection
4(d)(i)(E)(1) or (2)) (but not including shares excluded from the definition of
Additional Stock by Section 4(d)(ii)(B)) plus the number of shares of Common
Stock that the aggregate consideration received by this corporation for such
issuance would purchase at such Conversion Price; and the denominator of which
shall be the number of shares of Common Stock outstanding immediately
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prior to such issuance (including shares of Common Stock deemed to be issued
pursuant to subsection 4(d)(i)(E)(1) or (2)) (but not including shares excluded
from the definition of Additional Stock by subsection 4(d)(ii)(B)) plus the
number of shares of such Additional Stock.
(B) No adjustment of the Conversion Price for the
Series C Preferred Stock or Series D Preferred Stock shall be made in an amount
less than one cent per share, provided that any adjustments that are not
required to be made by reason of this sentence shall be carried forward and
shall be either taken into account in any subsequent adjustment made prior to
three (3) years from the date of the event giving rise to the adjustment being
carried forward, or shall be made at the end of three (3) years from the date of
the event giving rise to the adjustment being carried forward. Except to the
limited extent provided for in subsections (E)(3) and (E)(4), no adjustment of
such Conversion Price pursuant to this subsection 4(d)(i) shall have the effect
of increasing the Conversion Price above the Conversion Price in effect
immediately prior to such adjustment.
(C) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor.
(D) In the case of the issuance of the Common Stock
for a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined by the
Board of Directors irrespective of any accounting treatment.
(E) In the case of the issuance after the Purchase
Date of options to purchase or rights to subscribe for Common Stock, securities
by their terms convertible into or exchangeable for Common Stock or options to
purchase or rights to subscribe for such convertible or exchangeable securities,
the following provisions shall apply for all purposes of this subsection 4(d)(i)
and subsection 4(d)(ii):
(1) The aggregate maximum number of shares of
Common Stock deliverable upon exercise of such options to purchase or rights to
subscribe for Common Stock shall be deemed to have been issued at the time such
options or rights were issued and for a consideration equal to the consideration
(determined in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D)), if
any, received by this corporation upon the issuance of such options or rights
plus the minimum exercise price provided in such options or rights for the
Common Stock covered thereby.
(2) The aggregate maximum number of shares of
Common Stock deliverable upon conversion of, or in exchange for, any such
convertible or exchangeable securities or upon the exercise of options to
purchase or rights to subscribe for such convertible or exchangeable securities
and subsequent conversion or exchange thereof shall be deemed to have been
issued at the time such securities were issued or such options or rights were
issued and for a consideration equal to the consideration, if any, received by
this corporation for any such securities and related options or rights
(excluding any cash received on account of
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accrued interest or accrued dividends), plus the minimum additional
consideration, if any, to be received by this corporation upon the conversion or
exchange of such securities or the exercise of any related options or rights
(the consideration in each case to be determined in the manner provided in
subsections 4(d)(i)(C) and (d)(i)(D)).
(3) In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to this
corporation upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof (unless
such options or rights or convertible or exchangeable securities were merely
deemed to be included in the numerator and denominator for purposes of
determining the number of shares of Common Stock outstanding for purposes of
subsection 4(d)(i)(A)), the Conversion Price of the Series C Preferred Stock or
the Series D Preferred Stock, to the extent in any way affected by or computed
using such options, rights or securities, shall be recomputed to reflect such
change, but no further adjustment shall be made for the actual issuance of
Common Stock or any payment of such consideration upon the exercise of any such
options or rights or the conversion or exchange of such securities.
(4) Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Price of the Series C Preferred Stock and the Series
D Preferred Stock, to the extent in any way affected by or computed using such
options, rights or securities or options or rights related to such securities
(unless such options or rights were merely deemed to be included in the
numerator and denominator for purposes of determining the number of shares of
Common Stock outstanding for purposes of subsection 4(d)(i)(A)), shall be
recomputed to reflect the issuance of only the number of shares of Common Stock
(and convertible or exchangeable securities that remain in effect) actually
issued upon the exercise of such options or rights, upon the conversion or
exchange of such securities or upon the exercise of the options or rights
related to such securities.
(5) The number of shares of Common Stock deemed
issued and the consideration deemed paid therefor pursuant to subsections
4(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change,
termination or expiration of the type described in either subsection
4(d)(i)(E)(3) or (4).
(ii) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to subsection 4(d)(i)(E))
by this corporation after the Purchase Date other than:
(A) Common Stock issued pursuant to a transaction
described in subsection 4(d)(iii) hereof;
(B) up to 4,171,237 shares of Common Stock (excluding
shares repurchased at cost by this corporation in connection with the
termination of
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service) issuable or issued to employees, consultants, directors or vendors (if
in transactions with primarily non-financing purposes) of this corporation
directly or pursuant to a stock option plan or restricted stock plan or similar
plan approved by the Board of Directors of this corporation; or
(C) Common Stock issued in connection with a Board
approved acquisition by this corporation of stock or assets of another entity by
means of purchase, merger, consolidation or otherwise.
(iii) In the event this corporation should at any time or
from time to time after the Purchase Date fix a record date for the effectuation
of a split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or other securities or
rights convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the Conversion
Price of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock shall be appropriately decreased so
that the number of shares of Common Stock issuable on conversion of each share
of such series shall be increased in proportion to such increase of the
aggregate of shares of Common Stock outstanding and those issuable with respect
to such Common Stock Equivalents.
(iv) If the number of shares of Common Stock outstanding at
any time after the Purchase Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price for the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion of each share of such series shall be decreased in proportion to such
decrease in outstanding shares.
(e) OTHER DISTRIBUTIONS. In the event this corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by this corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in subsection 4(d)(iii), then,
in each such case for the purpose of this subsection 4(e), the holders of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
and Series D Preferred Stock shall be entitled to a proportionate share of any
such distribution as though they were the holders of the number of shares of
Common Stock of this corporation into which their shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock are convertible as of the record date fixed for the
determination of the holders of Common Stock of this corporation entitled to
receive such distribution.
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(f) RECAPITALIZATIONS. If at any time or from time to time there
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 4 or Section 2) provision shall be made so that the holders of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
and Series D Preferred Stock shall thereafter be entitled to receive upon
conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock the number of shares of stock or
other securities or property of the Corporation or otherwise, to which a holder
of Common Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 4 with respect to the rights of
the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock after the recapitalization to the
end that the provisions of this Section 4 (including adjustment of the
Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock) shall be applicable after that
event as nearly equivalent as may be practicable.
(g) NO IMPAIRMENT. This corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by this corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock against
impairment.
(h) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
(i) No fractional shares shall be issued upon the
conversion of any share or shares of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, and the
number of shares of Common Stock to be issued shall be rounded to the nearest
whole share. Whether or not fractional shares are issuable upon such conversion
shall be determined on the basis of the total number of shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series
D Preferred Stock the holder is at the time converting into Common Stock and the
number of shares of Common Stock issuable upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment
of the Conversion Price of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock pursuant to this
Section 4, this corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock a certificate setting
forth such
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adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. This corporation shall, upon the written
request at any time of any holder of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, furnish
or cause to be furnished to such holder a like certificate setting forth (A)
such adjustment and readjustment, (B) the Conversion Price for such series of
Preferred Stock at the time in effect, and (C) the number of shares of Common
Stock and the amount, if any, of other property that at the time would be
received upon the conversion of a share of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock.
(i) NOTICES OF RECORD DATE. In the event of any taking by this
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
corporation shall mail to each holder of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, at
least ten (10) days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
(j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. This
corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock, such number of
its shares of Common Stock as shall from time to time be sufficient to effect
the conversion of all outstanding shares of the Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock; and
if at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then outstanding shares
of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock, in addition to such other remedies as shall
be available to the holder of such Preferred Stock, this corporation will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes, including, without limitation,
engaging in best efforts to obtain the requisite shareholder approval of any
necessary amendment to this Restated Certificate of Incorporation.
(k) NOTICES. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock, shall be deemed given five days after being deposited in the United
States mail, postage prepaid, and addressed to each holder of record at his
address appearing on the books of this corporation.
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5. VOTING RIGHTS.
(a) GENERAL VOTING RIGHTS. The holder of each share of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series
D Preferred Stock, shall have the right to one vote for each share of Common
Stock into which such Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock and Series D Preferred Stock could then be converted, and with
respect to such vote, such holder shall have full voting rights and powers equal
to the voting rights and powers of the holders of Common Stock, and shall be
entitled, notwithstanding any provision hereof, to notice of any stockholders'
meeting in accordance with the bylaws of this corporation, and shall be entitled
to vote, together with holders of Common Stock, with respect to any question
upon which holders of Common Stock have the right to vote. Fractional votes
shall not, however, be permitted and any fractional voting rights available on
an as-converted basis (after aggregating all shares into which shares of Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock held by each holder could be converted) shall be
rounded to the nearest whole number (with one-half being rounded upward).
(b) VOTING FOR THE ELECTION OF DIRECTORS. As long as at least a
majority of the shares of Series C Preferred Stock originally issued remain
outstanding, the holders of such shares of Series C Preferred Stock shall be
entitled to elect one (1) director of this corporation at each annual election
of directors. As long as at least a majority of the shares of Series B Preferred
Stock originally issued remain outstanding, the holders of such shares of Series
B Preferred Stock shall be entitled to elect one (1) director of the this
corporation at each annual election of directors. The holders of a majority of
the outstanding capital stock of the Company shall be entitled to elect the
remaining directors of this corporation at each annual election of directors.
In the case of any vacancy (other than a vacancy caused by removal) in the
office of a director occurring among the directors elected by the holders of a
class or series of stock pursuant to this Section 5(b), the remaining directors
so elected by that class or series may by affirmative vote of a majority thereof
(or the remaining director so elected if there be but one, or if there are no
such directors remaining, by the affirmative vote of the holders of a majority
of the shares of that class or series), elect a successor or successors to hold
office for the unexpired term of the director or directors whose place or places
shall be vacant. Any director who shall have been elected by the holders of a
class or series of stock or by any directors so elected as provided in the
immediately preceding sentence hereof may be removed during the aforesaid term
of office, either with or without cause, by, and only by, the affirmative vote
of the holders of the shares of the class or series of stock entitled to elect
such director or directors, given either at a special meeting of such
stockholders duly called for that purpose or pursuant to a written consent of
stockholders, and any vacancy thereby created may be filled by the holders of
that class or series of stock represented at the meeting or pursuant to
unanimous written consent.
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6. PROTECTIVE PROVISIONS.
(a) So long as any shares of Series C Preferred Stock or Series
D Preferred Stock are outstanding, this corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the then outstanding shares of Series C
Preferred Stock and Series D Preferred Stock, voting together as a class:
(i) sell, convey, or otherwise dispose of all or
substantially all of its property or business or merge into or consolidate with
any other corporation (other than a wholly-owned subsidiary corporation) or
effect any transaction or series of related transactions in which more than
fifty percent (50%) of the voting power of this corporation is disposed of;
(ii) authorize or issue, or obligate itself to issue, any
other equity security (including any other security convertible into or
exercisable for any equity security) having a preference over the Series C
Preferred Stock or Series D Preferred Stock with respect to dividends,
liquidation, redemption or voting;
(iii) redeem, purchase or otherwise acquire (or pay into or
set aside for a sinking fund for such purpose) any share or shares of Preferred
Stock or Common Stock; provided, however, that this restriction shall not apply
to (i) the repurchase of shares of Common Stock from employees, officers,
directors, consultants or other persons performing services for this corporation
or any subsidiary pursuant to agreements under which this corporation has the
option to repurchase such shares at cost or at cost upon the occurrence of
certain events, such as the termination of employment or (ii) the redemption of
any share or shares of Preferred Stock in accordance with Section 3; or
(iv) change the authorized number of directors of this
corporation.
(b) So long as any shares of Series C Preferred Stock are
outstanding, this corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of at least a
majority of the then outstanding shares of Series C Preferred Stock, voting as a
class:
(i) alter or change the rights, preferences or privileges
of the shares of Series C Preferred Stock so as to adversely affect the shares
of Series C Preferred Stock; or
(ii) increase or decrease (other than by redemption or
conversion) the total number of authorized shares of Series C Preferred Stock.
(c) So long as any shares of Series D Preferred Stock are
outstanding, this corporation shall not without first obtaining the approval (by
vote or written consent, as
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provided by law) of the holders of at least a majority of the then outstanding
shares of Series D Preferred Stock, voting as a class:
(i) alter or change the rights, preferences or privileges
of the shares of Series D Preferred Stock so as to adversely affect the shares
of Series D Preferred Stock; or
(ii) increase or decrease (other than by redemption or
conversion) the total number of authorized shares of Series D Preferred Stock.
7. Status of Redeemed or Converted Stock. In the event any shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or
Series D Preferred Stock shall be redeemed or converted pursuant to Section 3 or
Section 4 hereof, the shares so redeemed or converted shall be cancelled and
shall not be issuable by this corporation.
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<PAGE> 17
C. UNDESIGNATED PREFERRED STOCK
The Board of Directors or any authorized committee thereof is expressly
authorized, to the fullest extent permitted by law, to provide for the issuance
of the shares of Undesignated Preferred Stock in one or more series of such
stock, and by filing a certificate pursuant to applicable law of the State of
Delaware, to establish or change from time to time the number of shares to be
included in each such series, and to fix the designations, powers including
voting powers, full or limited, or no voting powers, preferences and the
relative, participating, optional or other special rights of the shares of each
series and any qualifications, limitations and restrictions thereof.
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ARTICLE V
STOCKHOLDER ACTION
1. ACTION WITHOUT MEETING. Except as otherwise provided herein,
any action required or permitted to be taken by the stockholders of the
Corporation at any annual or special meeting of stockholders of the Corporation
must be effected at a duly called annual or special meeting of stockholders and
may not be taken or effected by a written consent of stockholders in lieu
thereof.
2. SPECIAL MEETINGS. Except as otherwise required by statute and
subject to the rights, if any, of the holders of any series of Undesignated
Preferred Stock, special meetings of the stockholders of the Corporation may be
called only by the Board of Directors acting pursuant to a resolution approved
by the affirmative vote of a majority of the Directors then in office. Only
those matters set forth in the notice of the special meeting may be considered
or acted upon at a special meeting of stockholders of the Corporation.
ARTICLE VI
DIRECTORS
1. GENERAL. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors except as otherwise
provided herein or required by law.
2. ELECTION OF DIRECTORS. Election of Directors need not be by
written ballot unless the By-laws of the Corporation (the "Bylaws") shall so
provide.
3. NUMBER OF DIRECTORS; TERM OF OFFICE. The number of Directors
of the Corporation shall be fixed solely and exclusively by resolution duly
adopted from time to time by the Board of Directors. The Directors, other than
those who may be elected by the holders of any series or class of Preferred
Stock, shall be classified, with respect to the term for which they severally
hold office, into three
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classes, as nearly equal in number as reasonably possible. The initial Class I
Directors of the Corporation shall be ___________; the initial Class II
Directors of the Corporation shall be ___________; and the initial Class III
Directors of the Corporation shall be ________. The initial Class I Directors
shall serve for a term expiring at the annual meeting of stockholders to be held
in _______, the initial Class II Directors shall serve for a term expiring at
the annual meeting of stockholders to be held in __________, and the initial
Class III Directors shall serve for a term expiring at the annual meeting of
stockholders to be held in ________. At each annual meeting of stockholders,
Directors elected to succeed those Directors whose terms expire shall be elected
for a term of office to expire at the third succeeding annual meeting of
stockholders after their election. Notwithstanding the foregoing, the Directors
elected to each class shall hold office until their successors are duly elected
and qualified or until their earlier resignation or removal.
Notwithstanding the foregoing, whenever, pursuant to the provisions of
Article IV of this Certificate, the holders of any one or more series or class
of Preferred Stock shall have the right, voting separately as a series or
together with holders of other such series, to elect Directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Certificate and any certificate of designations applicable
thereto.
4. VACANCIES. Subject to the rights, if any, of the holders of
any series or class of Preferred Stock to elect Directors and to fill vacancies
in the Board of Directors relating thereto, any and all vacancies in the Board
of Directors, however occurring, including, without limitation, by reason of an
increase in size of the Board of Directors, or the death, resignation,
disqualification or removal of a Director, shall be filled solely and
exclusively by the affirmative vote of a majority of the remaining Directors
then in office, even if less than a quorum of the Board of Directors, and not by
the stockholders. Any Director appointed in accordance with the preceding
sentence shall hold office for the remainder of the full term of the class of
Directors in which the new directorship was created or the vacancy occurred and
until such Director's successor shall have been duly elected and qualified or
until his or her earlier resignation or removal. Subject to the rights, if any,
of the holders of any series or class of Preferred Stock to elect Directors,
when the number of Directors is increased or decreased, the Board of Directors
shall, subject to Article VI.3 hereof, determine the class or classes to which
the increased or decreased number of Directors shall be apportioned; PROVIDED,
HOWEVER, that no decrease in the number of Directors shall shorten the term of
any incumbent Director.
5. REMOVAL. Subject to the rights, if any, of any series or class
of Preferred Stock to elect Directors and to remove any Director whom the
holders of any such stock have the right to elect, any Director (including
persons elected by Directors to fill vacancies in the Board of Directors) may be
removed from office (i) only with cause and (ii) only by the affirmative vote of
the holders of 75% or more of the shares then entitled to vote at an election
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of Directors. At least forty-five (45) days prior to any meeting of stockholders
at which it is proposed that any Director be removed from office, written notice
of such proposed removal, and the alleged grounds thereof, shall be sent to the
Director whose removal will be considered at the meeting.
ARTICLE VII
LIMITATION OF LIABILITY
A Director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (a) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the DGCL or (d) for any transaction
from which the Director derived an improper personal benefit. If the DGCL is
amended after the effective date of this Certificate to authorize corporate
action further eliminating or limiting the personal liability of Directors, then
the liability of a Director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the DGCL, as so amended.
Any repeal or modification of this Article VII by either of (i) the
stockholders of the Corporation or (ii) an amendment to the DGCL, shall not
adversely affect any right or protection existing at the time of such repeal or
modification with respect to any acts or omissions occurring before such repeal
or modification of a person serving as a Director at the time of such repeal or
modification.
ARTICLE VIII
AMENDMENT OF BY-LAWS
1. AMENDMENT BY DIRECTORS. Except as otherwise provided by law,
the By-laws of the Corporation may be amended or repealed by the Board of
Directors by the affirmative vote of a majority of the Directors then in office.
2. AMENDMENT BY STOCKHOLDERS. The By-laws of the Corporation may
be amended or repealed at any annual meeting of stockholders, or special meeting
of stockholders called for such purpose as provided in the By-laws, by the
affirmative vote of at least 75% of the shares present in person or represented
by proxy at such meeting and entitled to vote on such amendment or repeal,
voting together as a single class; PROVIDED, HOWEVER, that if the Board of
Directors recommends that stockholders approve such amendment or repeal at such
meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of the majority of the shares present in person or represented
by proxy at such meeting and entitled to vote on such amendment or repeal,
voting together as a single class.
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ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to amend or repeal this Certificate
in the manner now or hereafter prescribed by statute and this Certificate, and
all rights conferred upon stockholders herein are granted subject to this
reservation. Whenever any vote of the holders of voting stock is required to
amend or repeal any provision of this Certificate, and in addition to any other
vote of holders of voting stock that is required by this Certificate or by law,
such amendment or repeal shall require the affirmative vote of the majority of
the outstanding shares entitled to vote on such amendment or repeal, and the
affirmative vote of the majority of the outstanding shares of each class
entitled to vote thereon as a class, at a duly constituted meeting of
stockholders called expressly for such purpose; PROVIDED, HOWEVER, that the
affirmative vote of not less than 75% of the outstanding shares entitled to vote
on such amendment or repeal, and the affirmative vote of not less than 75% of
the outstanding shares of each class entitled to vote thereon as a class, shall
be required to amend or repeal any provision of Article V, Article VI, Article
VII or Article IX of this Certificate.
[End of Text]
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<PAGE> 22
THIS SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION is executed
as of this ____ day of __________, ____.
FairMarket, Inc.
By: ________________________________
Name: _________________________
Title: _________________________
<PAGE> 1
EXHIBIT 3.3
FORM OF
THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
FAIRMARKET, INC.
FairMarket, Inc., a corporation organized and existing under the laws
of the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is FairMarket, Inc. The date of
the filing of its original Certificate of Incorporation with the Secretary of
State of the State of Delaware was February 20, 1997 (the "Original
Certificate").
2. This Third Amended and Restated Certificate of Incorporation
(the "Certificate") amends, restates and integrates the provisions of the
Amended and Restated Certificate of Incorporation that was filed with the
Secretary of State of the State of Delaware on _________ (the "Second Amended
and Restated Certificate"), and was duly adopted in accordance with the
provisions of Sections 242 and 245 of the Delaware General Corporation Law (the
"DGCL").
3. The text of the Second Amended and Restated Certificate is
hereby amended and restated in its entirety to provide as herein set forth in
full.
ARTICLE I
The name of the Corporation is FairMarket, Inc.
<PAGE> 2
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is c/o The Corporation Trust Company, 1209 Orange Street in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the DGCL.
ARTICLE IV
CAPITAL STOCK
The total number of shares of capital stock which the Corporation shall have
authority to issue is ______________ (________) shares, of which (i)
_________________ (_______) shares shall be a class designated as common stock,
par value $___ per share (the "Common Stock") and (ii) ___________________
(________) shares shall be a class designated as undesignated preferred stock,
par value $___ per share (the "Undesignated Preferred Stock").
The number of authorized shares of the class of Undesignated Preferred
Stock may from time to time be increased or decreased (but not below the number
of shares outstanding) by the affirmative vote of the holders of a majority of
the outstanding shares of Common Stock entitled to vote, without a vote of the
holders of the Undesignated Preferred Stock (except as otherwise provided in any
certificate of designations of any series of Undesignated Preferred Stock).
The powers, preferences and rights of, and the qualifications,
limitations and restrictions upon, each class or series of stock shall be
determined in accordance with, or as set forth below in, this Article IV.
Except as otherwise required by law, holders of Common Stock, as such,
shall not be entitled to vote on any amendment to this Certificate (or on any
amendment to a certificate of designations of any series of Undesignated
Preferred Stock) that alters or changes the powers, preferences, rights or
other terms of one or more outstanding series of Undesignated Preferred Stock if
the holders of such affected series are entitled to vote, either separately or
together with the holders of one or more other such series, on such amendment
pursuant to this Certificate (or pursuant to a certificate of designations
of any series of Undesignated Preferred Stock) or pursuant to the DGCL.
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<PAGE> 3
A. COMMON STOCK
Subject to all the rights, powers and preferences of the
Undesignated Preferred Stock and except as provided by law or in this Article IV
(or in any certificate of designations of any series of Undesignated Preferred
Stock):
(a) the holders of the Common Stock shall have
the exclusive right to vote for the election of directors of the Corporation,
(the "Directors") and on all other matters requiring stockholder action,
each outstanding share entitling the holder thereof to one vote on each matter
properly submitted to the stockholders of the Corporation for their vote;
PROVIDED, HOWEVER, that, except as otherwise required by law, holders of Common
Stock shall not be entitled to vote on any amendment to this Certificate
(including any certificate of designations relating to any series of
Undesignated Preferred Stock) that relates solely to the terms of one or more
outstanding series of Undesignated Preferred Stock if the holders of such
affected series are entitled, either separately or together as a class with the
holders of one or more other such series, to vote thereon pursuant to this
Certificate (including any certificate of designations relating to any series of
Undesignated Preferred Stock);
(b) dividends may be declared and paid or set
apart for payment upon the Common Stock out of any assets or funds of the
Corporation legally available for the payment of dividends, but only when and as
declared by the Board or any authorized committee thereof; and
(c) upon the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, the net assets of the
Corporation shall be distributed pro rata to the holders of the Common Stock.
B. UNDESIGNATED PREFERRED STOCK
The Board of Directors or any authorized committee thereof is expressly
authorized to the fullest extent permitted by law, to provide for the issuance
of the shares of Undesignated Preferred Stock in one or more series of such
stock, and by filing a certificate pursuant to applicable law of the State of
Delaware, to establish or change from time to time the number of shares, each
such series, and to fix the designations, powers, including voting powers, full
or limited, or no voting powers, preferences and the relative, participating,
optional or other special rights of the shares of each series and any
qualifications, limitations and restrictions thereof.
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<PAGE> 4
ARTICLE V
STOCKHOLDER ACTION
1. ACTION WITHOUT MEETING. Except as otherwise provided herein,
any action required or permitted to be taken by the stockholders of the
Corporation at any annual or special meeting of stockholders of the Corporation
must be effected at a duly called annual or
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<PAGE> 5
special meeting of stockholders and may not be taken or effected by a written
consent of stockholders in lieu thereof.
2. SPECIAL MEETINGS. Except as otherwise required by statute and
subject to the rights, if any, of the holders of any series of Undesignated
Preferred Stock, special meetings of the stockholders of the Corporation may be
called only by the Board of Directors acting pursuant to a resolution approved
by the affirmative vote of a majority of the Directors then in office. Only
those matters set forth in the notice of the special meeting may be considered
or acted upon at a special meeting of stockholders of the Corporation.
ARTICLE VI
DIRECTORS
1. GENERAL. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors except as otherwise
provided herein or required by law.
2. ELECTION OF DIRECTORS. Election of Directors need not be by
written ballot unless the By-laws of the Corporation (the "Bylaws") shall so
provide.
3. NUMBER OF DIRECTORS; TERM OF OFFICE. The number of Directors
of the Corporation shall be fixed solely and exclusively by resolution duly
adopted from time to time by the Board of Directors. The Directors, other than
those who may be elected by the holders of any series of Undesignated Preferred
Stock, shall be classified, with respect to the term for which they severally
hold office, into three classes, as nearly equal in number as reasonably
possible. The initial Class I Directors of the Corporation shall be
________________; the initial Class II Directors of the Corporation shall be
________________; and the initial Class III Directors of the Corporation shall
be ________________. The initial Class I Directors shall serve for a term
expiring at the annual meeting of stockholders to be held in ____, the initial
Class II Directors shall serve for a term expiring at the annual meeting of
stockholders to be held in _______, and the initial Class III Directors shall
serve for a term expiring at the annual meeting of stockholders to be held in
_______. At each annual meeting of stockholders, Directors elected to succeed
those Directors whose terms expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after their
election. Notwithstanding the foregoing, the Directors elected to each class
shall hold office until their successors are duly elected and qualified or until
their earlier resignation or removal.
Notwithstanding the foregoing, whenever, pursuant to the provisions of
Article IV of this Certificate, the holders of any one or more series of
Undesignated Preferred Stock shall have the right, voting separately as a series
or together with holders of other such series, to elect Directors at an annual
or special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of
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<PAGE> 6
this Certificate and any certificate of designations applicable thereto.
4. VACANCIES. Subject to the rights, if any, of the holders of
any series of Undesignated Preferred Stock to elect Directors and to fill
vacancies in the Board of Directors relating thereto, any and all vacancies in
the Board of Directors, however occurring, including, without limitation, by
reason of an increase in size of the Board of Directors, or the death,
resignation, disqualification or removal of a Director, shall be filled solely
and exclusively by the affirmative vote of a majority of the remaining Directors
then in office, even if less than a quorum of the Board of Directors, but not by
the stockholders. Any Director appointed in accordance with the preceding
sentence shall hold office for the remainder of the full term of the class of
Directors in which the new directorship was created or the vacancy occurred and
until such Director's successor shall have been duly elected and qualified or
until his or her earlier resignation or removal. Subject to the rights, if any,
of the holders of any series of Undesignated Preferred Stock to elect Directors,
when the number of Directors is increased or decreased, the Board of Directors
shall, subject to Article VI.3 hereof, determine the class or classes to which
the increased or decreased number of Directors shall be apportioned; PROVIDED,
HOWEVER, that no decrease in the number of Directors shall shorten the term of
any incumbent Director. In the event of a vacancy in the Board of Directors, the
remaining Directors, except as otherwise provided by law, shall exercise the
powers of the full Board of Directors until the vacancy is filled.
5. REMOVAL. Subject to the rights, if any, of any series of
Undesignated Preferred Stock to elect Directors and to remove any Director whom
the holders of any such stock have the right to elect, any Director (including
persons elected by Directors to fill vacancies in the Board of Directors) may be
removed from office (i) only with cause and (ii) only by the affirmative vote of
the holders of 75% or more of the shares then entitled to vote at an election of
Directors. At least forty-five (45) days prior to any meeting of stockholders at
which it is proposed that any Director be removed from office, written notice of
such proposed removal, and alleged grounds thereof, shall be sent to the
Director whose removal will be considered at the meeting.
ARTICLE VII
LIMITATION OF LIABILITY
A Director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (a) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the DGCL or (d) for any transaction
from which the Director derived an improper personal benefit. If the DGCL is
amended after the effective date of this Certificate to authorize corporate
action further eliminating or limiting the personal liability of Directors, then
the liability of a Director of the
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<PAGE> 7
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as so amended.
Any repeal or modification of this Article VII by either of (i) the
stockholders of the Corporation or (ii) an amendment to the DGCL, shall not
adversely affect any right or protection existing at the time of such repeal or
modification with respect to any acts or omissions occurring before such repeal
or modification of a person serving as a Director at the time of such repeal or
modification.
ARTICLE VIII
AMENDMENT OF BY-LAWS
1. AMENDMENT BY DIRECTORS. Except as otherwise provided by law,
the By-laws of the Corporation may be amended or repealed by the Board of
Directors by the affirmative vote of a majority of the Directors then in office.
2. AMENDMENT BY STOCKHOLDERS. The By-laws of the Corporation may
be amended or repealed at any annual meeting of stockholders, or special meeting
of stockholders called for such purpose as provided in the By-laws, by the
affirmative vote of at least 75% of the shares present in person or represented
by proxy at such meeting and entitled to vote on such amendment or repeal,
voting together as a single class; PROVIDED, HOWEVER, that if the Board of
Directors recommends that stockholders approve such amendment or repeal at such
meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of the majority of the shares present in person or represented
by proxy at such meeting and entitled to vote on such amendment or repeal,
voting together as a single class.
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to amend or repeal this Certificate
in the manner now or hereafter prescribed by statute and this Certificate, and
all rights conferred upon stockholders herein are granted subject to this
reservation. Whenever any vote of the holders of voting stock is required to
amend or repeal any provision of this Certificate, and in addition to any other
vote of holders of voting stock that is required by this Certificate or by law,
such amendment or repeal shall require the affirmative vote of the majority of
the outstanding shares entitled to vote on such amendment or repeal, and the
affirmative vote of the majority of the outstanding shares of each class
entitled to vote thereon
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<PAGE> 8
as a class, at a duly constituted meeting of stockholders called expressly for
such purpose; PROVIDED, HOWEVER, that the affirmative vote of not less than 75%
of the outstanding shares entitled to vote on such amendment or repeal, and the
affirmative vote of not less than 75% of the outstanding shares of each class
entitled to vote thereon as a class, shall be required to amend or repeal any
provision of Article V, Article VI, Article VII or Article IX of this
Certificate.
[End of Text]
8
<PAGE> 9
THIS THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION is
executed as of this ____ day of __________, ____.
FairMarket, Inc.
By: ____________________________
Name: _____________________
Title: _____________________
<PAGE> 1
EXHIBIT 3.5
FORM OF
AMENDED AND RESTATED
BY-LAWS
OF
FAIRMARKET, INC.
(the "Corporation")
ARTICLE I
STOCKHOLDERS
SECTION 1. ANNUAL MEETING. The annual meeting of stockholders (any such
meeting being referred to in these By-laws as an "Annual Meeting") shall be held
at the hour, date and place within or without the United States which is fixed
by the Board of Directors, which time, date and place may subsequently be
changed at any time by vote of the Board of Directors. If no Annual Meeting has
been held for a period of thirteen months after the Corporation's last Annual
Meeting, a special meeting in lieu thereof may be held, and such special meeting
shall have, for the purposes of these By-laws or otherwise, all the force and
effect of an Annual Meeting. Any and all references hereafter in these By-laws
to an Annual Meeting or Annual Meetings also shall be deemed to refer to any
special meeting(s) in lieu thereof.
SECTION 2. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
(a) ANNUAL MEETINGS OF STOCKHOLDERS.
(1) Nominations of persons for election to the Board of
Directors of the Corporation and the proposal of business to be
considered by the stockholders may be made at an Annual Meeting (a)
pursuant to the Corporation's notice of meeting, (b) by or at the
direction of the Board of Directors or (c) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of
notice provided for in this By-law, who is entitled to vote at the
meeting, who is present (in person or in proxy) at the meeting and who
complies with the notice procedures set forth in this By-law. In
addition to the other requirements set forth in this By-law, for any
proposal of business to be considered at an Annual Meeting such
proposal must be a proper subject for action by stockholders of the
Corporation under Delaware law.
(2) For nominations or other business to be properly
brought before an Annual Meeting by a stockholder pursuant to clause
(c) of paragraph (a)(1) of this Bylaw, the stockholder must have given
timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice shall be delivered to the
Secretary at the principal executive offices of the Corporation not
later than the close of business on the 75th day nor earlier than the
close of business on the 105th day prior to the first
<PAGE> 2
anniversary of the preceding year's Annual Meeting; provided, however,
that in the event that the date of the Annual Meeting is advanced by
more than 30 days before or delayed by more than 60 days after such
anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the 105th day prior
to such Annual Meeting and not later than the close of business on the
later of the 75th day prior to such Annual Meeting or the 10th day
following the day on which public announcement of the date of such
meeting is first made. Notwithstanding anything to the contrary
provided herein, for the first annual meeting following the initial
public offering of common stock of the corporation, a stockholder's
notice shall be timely if delivered to the secretary at the principal
executive offices of the corporation not later than the close of
business on the later of the 75th day prior to the scheduled date of
such annual meeting or the 10th day following the day on which public
announcement of the date of such annual meeting is first made or sent
by the corporation. Such stockholder's notice shall set forth (a) as to
each person whom the stockholder proposes to nominate for election or
reelection as a director, all information relating to such person that
is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each
case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder
(including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); (b) as
to any other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the
meeting, any material interest in such business of such stockholder and
the beneficial owner, if any, on whose behalf the proposal is made, and
the names and addresses of other stockholders known by the stockholder
proposing such business to support such proposal, and the class and
number of shares of the Corporation's capital stock beneficially owned
by such other stockholders; and (c) as to the stockholder giving the
notice and the beneficial owner, if any, on whose behalf the nomination
or proposal is made (i) the name and address of such stockholder, as
they appear on the Corporation's books, and of such beneficial owner,
and (ii) the class and number of shares of the Corporation which are
owned beneficially and of record by such stockholder and such
beneficial owner.
(3) Notwithstanding anything in the second sentence of
paragraph (a)(2) of this By-law to the contrary, in the event that the
number of directors to be elected to the Board of Directors of the
Corporation is increased and there is no public announcement naming all
of the nominees for director or specifying the size of the increased
Board of Directors made by the Corporation at least 85 days prior to
the first anniversary of the preceding year's Annual Meeting, a
stockholder's notice required by this By-law shall also be considered
timely, but only with respect to nominees for any new positions created
by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close
of business on the 10th day following the day on which such public
announcement is first made by the Corporation.
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<PAGE> 3
(b) GENERAL.
(1) Only such persons who are nominated in accordance
with the provisions of this By-law shall be eligible for election and
to serve as directors and only such business shall be conducted at an
Annual Meeting as shall have been brought before the meeting in
accordance with the provisions of this By-law. The Board of Directors
or a designated committee thereof shall have the power to determine
whether a nomination or any business proposed to be brought before the
meeting was made in accordance with the provisions of this By-law. If
neither the Board of Directors nor such designated committee makes a
determination as to whether any stockholder proposal or nomination was
made in accordance with the provisions of this By-law, the presiding
officer of the Annual Meeting shall have the power and duty to
determine whether the stockholder proposal or nomination was made in
accordance with the provisions of this By-law. If the Board of
Directors or a designated committee thereof or the presiding officer,
as applicable, determines that any stockholder proposal or nomination
was not made in accordance with the provisions of this By-law, such
proposal or nomination shall be disregarded and shall not be presented
for action at the Annual Meeting.
(2) For purposes of this By-law, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News
Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and
Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange
Act.
(3) Notwithstanding the foregoing provisions of this
By-law, a stockholder shall also comply with all applicable
requirements of the Exchange Act and the rules and regulations
thereunder with respect to the matters set forth in this By-law.
Nothing in this By-law shall be deemed to affect any rights of (i)
stockholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii)
the holders of any series of preferred stock to elect directors under
specified circumstances.
SECTION 3. SPECIAL MEETINGS. Except as otherwise required by statute
and subject to the rights, if any, of the holders of any series of Undesignated
Preferred Stock, special meetings of the stockholders of the Corporation may be
called only by the Board of Directors acting pursuant to a resolution approved
by the affirmative vote of a majority of the Directors then in office. Only
those matters set forth in the notice of the special meeting may be considered
or acted upon at a special meeting of stockholders of the Corporation.
SECTION 4. NOTICE OF MEETINGS; ADJOURNMENTS. A written notice of each
Annual Meeting stating the hour, date and place of such Annual Meeting shall be
given by the Secretary or an Assistant Secretary (or other person authorized by
these By-laws or by law) not less than 10 days nor more than 60 days before the
Annual Meeting, to each stockholder entitled to vote thereat and to each
stockholder who, by law or under the Certificate of Incorporation of the
Corporation (as the same may hereafter be amended and/or restated, the
"Certificate") or under
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these By-laws, is entitled to such notice, by delivering such notice to him or
by mailing it, postage prepaid, addressed to such stockholder at the address of
such stockholder as it appears on the Corporation's stock transfer books. Such
notice shall be deemed to be given when hand delivered to such address or
deposited in the mail so addressed, with postage prepaid.
Notice of all special meetings of stockholders shall be given in the
same manner as provided for Annual Meetings, except that the written notice of
all special meetings shall state the purpose or purposes for which the meeting
has been called.
Notice of an Annual Meeting or special meeting of stockholders need not
be given to a stockholder if a written waiver of notice is signed before or
after such meeting by such stockholder or if such stockholder attends such
meeting, unless such attendance was for the express purpose of objecting at the
beginning of the meeting to the transaction of any business because the meeting
was not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any Annual Meeting or special meeting of stockholders need
be specified in any written waiver of notice.
The Board of Directors may postpone and reschedule any previously
scheduled Annual Meeting or special meeting of stockholders and any record date
with respect thereto, regardless of whether any notice or public disclosure with
respect to any such meeting has been sent or made pursuant to Section 2 of this
Article I of these By-laws or otherwise. In no event shall the public
announcement of an adjournment, postponement or rescheduling of any previously
scheduled meeting of stockholders commence a new time period for the giving of a
stockholder's notice under Section 2 of this Article I of these By-laws.
When any meeting is convened, the presiding officer may adjourn the
meeting if (a) no quorum is present for the transaction of business, (b) the
Board of Directors determines that adjournment is necessary or appropriate to
enable the stockholders to consider fully information which the Board of
Directors determines has not been made sufficiently or timely available to
stockholders, or (c) the Board of Directors determines that adjournment is
otherwise in the best interests of the Corporation. When any Annual Meeting or
special meeting of stockholders is adjourned to another hour, date or place,
notice need not be given of the adjourned meeting other than an announcement at
the meeting at which the adjournment is taken of the hour, date and place to
which the meeting is adjourned; provided, however, that if the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote thereat and each stockholder who, by
law or under the Certificate or these By-laws, is entitled to such notice.
SECTION 5. QUORUM. A majority of the shares entitled to vote, present
in person or represented by proxy, shall constitute a quorum at any meeting of
stockholders. If less than a quorum is present at a meeting, the holders of
voting stock representing a majority of the voting power present at the meeting
or the presiding officer may adjourn the meeting from time to time, and the
meeting may be held as adjourned without further notice, except as provided in
Section 5 of this Article I. At such adjourned meeting at which a quorum is
present, any business may be
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transacted which might have been transacted at the meeting as originally
noticed. The stockholders present at a duly constituted meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
SECTION 6. VOTING AND PROXIES. Stockholders shall have one vote for
each share of stock entitled to vote owned by them of record according to the
stock ledger of the Corporation, unless otherwise provided by law or by the
Certificate. Stockholders may vote either (i) in person, (ii) by written proxy
or (iii) by a transmission permitted by [Sec]212(c) of the Delaware General
Corporation Law ("DGCL") law. Any copy, facsimile telecommunication or other
reliable reproduction of the writing or transmission permitted by [Sec]212(c) of
the DGCL may be substituted for or used in lieu of the original writing or
transmission of any and all purposes for which the original writing or
transmission could be used, provided that such copy, facsimile telecommunication
or other reproduction shall be a complete reproduction of the entire original
writing or transmission. Proxies shall be filed in accordance with the
procedures established for the meeting of stockholders. Any copy, facsimile
telecommunication or other reliable reproduction of the writing or transmission
created pursuant to this paragraph may be substituted or used in lieu of the
original writing or transmission for any and all purposes for which the original
writing or transmission could be used, provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or transmission. Except as otherwise limited therein or
as otherwise provided by law, proxies authorizing a person to vote at a specific
meeting shall entitle the persons authorized thereby to vote at any adjournment
of such meeting, but they shall not be valid after final adjournment of such
meeting. A proxy with respect to stock held in the name of two or more persons
shall be valid if executed by or on behalf of any one of them unless at or prior
to the exercise of the proxy the Corporation receives a specific written notice
to the contrary from any one of them.
SECTION 7. ACTION AT MEETING. When a quorum is present at any meeting
of stockholders, any matter before any such meeting (other than an election of a
director or directors) shall be decided by a majority of the votes properly cast
for and against such matter, except where a larger vote is required by law, by
the Certificate or by these By-laws. Any election of directors by stockholders
shall be determined by a plurality of the votes properly cast on the election of
directors. The Corporation shall not directly or indirectly vote any shares of
its own stock; provided, however, that the Corporation may vote shares which it
holds in a fiduciary capacity to the extent permitted by law.
SECTION 8. STOCKHOLDER LISTS. The Secretary or an Assistant Secretary
(or the Corporation's transfer agent or other person authorized by these By-laws
or by law) shall prepare and make, at least 10 days before every Annual Meeting
or special meeting of stockholders, a complete list of the stockholders entitled
to vote at the meeting, arranged in alphabetical order, and showing the address
of each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least 10 days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the hour, date and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
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SECTION 9. PRESIDING OFFICER. The Chairman of the Board, if one is
elected, or if not elected or in his or her absence, the President, shall
preside at all Annual Meetings or special meetings of stockholders and shall
have the power, among other things, to adjourn such meeting at any time and from
time to time, subject to Sections 5 and 6 of this Article I. The order of
business and all other matters of procedure at any meeting of the stockholders
shall be determined by the presiding officer.
SECTION 10. INSPECTORS OF ELECTIONS. The Corporation shall, in advance
of any meeting of stockholders, appoint one or more inspectors to act at the
meeting and make a written report thereof. The Corporation may designate one or
more persons as alternate inspectors to replace any inspector who fails to act.
If no inspector or alternate is able to act at a meeting of stockholders, the
presiding officer shall appoint one or more inspectors to act at the meeting.
Any inspector may, but need not, be an officer, employee or agent of the
Corporation. Each inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall perform such duties as are required by the DGCL,
including the counting of all votes and ballots. The inspectors may appoint or
retain other persons or entities to assist the inspectors in the performance of
the duties of the inspectors. The presiding officer may review all
determinations made by the inspectors, and in so doing the presiding officer
shall be entitled to exercise his or her sole judgment and discretion and he or
she shall not be bound by any determinations made by the inspectors. All
determinations by the inspectors and, if applicable, the presiding officer,
shall be subject to further review by any court of competent jurisdiction.
ARTICLE II
DIRECTORS
SECTION 1. POWERS. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors except as otherwise
provided by the Certificate or required by law.
SECTION 2. NUMBER AND TERMS. The number of directors of the Corporation
shall be fixed solely and exclusively by resolution duly adopted from time to
time by the Board of Directors. The directors shall hold office in the manner
provided in the Certificate.
SECTION 3. QUALIFICATION. No director need be a stockholder of the
Corporation.
SECTION 4. VACANCIES. Vacancies in the Board of Directors shall be
filled in the manner provided in the Certificate.
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SECTION 5. REMOVAL. Directors may be removed from office in the manner
provided in the Certificate.
SECTION 6. RESIGNATION. A director may resign at any time by giving
written notice to the Chairman of the Board, if one is elected, the President or
the Secretary. A resignation shall be effective upon receipt, unless the
resignation otherwise provides.
SECTION 7. REGULAR MEETINGS. The regular annual meeting of the Board of
Directors shall be held, without notice other than this Section 7, on the same
date and at the same place as the Annual Meeting following the close of such
meeting of stockholders. Other regular meetings of the Board of Directors may be
held at such hour, date and place as the Board of Directors may by resolution
from time to time determine without notice other than such resolution.
SECTION 8. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called, orally or in writing, by or at the request of a majority of the
directors, the Chairman of the Board, if one is elected, or the President. The
person calling any such special meeting of the Board of Directors may fix the
hour, date and place thereof.
SECTION 9. NOTICE OF MEETINGS. Notice of the hour, date and place of
all special meetings of the Board of Directors shall be given to each director
by the Secretary or an Assistant Secretary, or in case of the death, absence,
incapacity or refusal of such persons, by the Chairman of the Board, if one is
elected, or the President or such other officer designated by the Chairman of
the Board, if one is elected, or the President. Notice of any special meeting of
the Board of Directors shall be given to each director in person, by telephone,
or by facsimile, electronic mail or other form of electronic communication, sent
to his or her business or home address, at least 24 hours in advance of the
meeting, or by written notice mailed to his or her business or home address, at
least 48 hours in advance of the meeting. Such notice shall be deemed to be
delivered when hand delivered to such address, read to such director by
telephone, deposited in the mail so addressed, with postage thereon prepaid if
mailed, dispatched or transmitted if faxed, telexed or telecopied, or when
delivered to the telegraph company if sent by telegram.
When any Board of Directors meeting, either regular or special, is
adjourned for 30 days or more, notice of the adjourned meeting shall be given as
in the case of an original meeting. It shall not be necessary to give any notice
of the hour, date or place of any meeting adjourned for less than 30 days or of
the business to be transacted thereat, other than an announcement at the meeting
at which such adjournment is taken of the hour, date and place to which the
meeting is adjourned.
A written waiver of notice signed before or after a meeting by a
director and filed with the records of the meeting shall be deemed to be
equivalent to notice of the meeting. The attendance of a director at a meeting
shall constitute a waiver of notice of such meeting, except where a director
attends a meeting for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because such meeting is not lawfully
called or convened. Except as otherwise required by law, by the Certificate or
by these By-laws, neither
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the business to be transacted at, nor the purpose of, any meeting of the Board
of Directors need be specified in the notice or waiver of notice of such
meeting.
SECTION 10. QUORUM. At any meeting of the Board of Directors, a
majority of the total number of directors shall constitute a quorum for the
transaction of business, but if less than a quorum is present at a meeting, a
majority of the directors present may adjourn the meeting from time to time, and
the meeting may be held as adjourned without further notice, except as provided
in Section 9 of this Article II. Any business which might have been transacted
at the meeting as originally noticed may be transacted at such adjourned meeting
at which a quorum is present. For purposes of this section, the total number of
directors includes any unfilled vacancies of the Board of Directors.
SECTION 11. ACTION AT MEETING. At any meeting of the Board of Directors
at which a quorum is present, the vote of a majority of the directors present
shall constitute action by the Board of Directors, unless otherwise required by
law, by the Certificate or by these By-laws.
SECTION 12. ACTION BY CONSENT. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting if
all members of the Board of Directors consent thereto in writing. Such written
consent shall be filed with the records of the meetings of the Board of
Directors and shall be treated for all purposes as a vote at a meeting of the
Board of Directors.
SECTION 13. MANNER OF PARTICIPATION. Directors may participate in
meetings of the Board of Directors by means of conference telephone or similar
communications equipment by means of which all directors participating in the
meeting can hear each other, and participation in a meeting in accordance
herewith shall constitute presence in person at such meeting for purposes of
these By-laws.
SECTION 14. COMMITTEES. The Board of Directors, by vote of a majority
of the directors then in office, may elect from its number one or more
committees, including, without limitation, an Executive Committee, a
Compensation Committee, a Stock Option Committee and an Audit Committee, and may
delegate thereto some or all of its powers except those which by law, by the
Certificate or by these By-laws may not be delegated. Except as the Board of
Directors may otherwise determine, any such committee may make rules for the
conduct of its business, but unless otherwise provided by the Board of Directors
or in such rules, its business shall be conducted so far as possible in the same
manner as is provided by these By-laws for the Board of Directors. All members
of such committees shall hold such offices at the pleasure of the Board of
Directors. The Board of Directors may abolish any such committee at any time.
Any committee to which the Board of Directors delegates any of its powers or
duties shall keep records of its meetings and shall report its action to the
Board of Directors.
SECTION 15. COMPENSATION OF DIRECTORS. Directors shall receive such
compensation for their services as shall be determined by a majority of the
Board of Directors, or a designated compensation committee thereof, provided
that directors who are serving the Corporation as employees and who receive
compensation for their services as such, shall not receive any salary or other
compensation for their services as directors of the Corporation.
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ARTICLE III
OFFICERS
SECTION 1. ENUMERATION. The officers of the Corporation shall consist
of a President, a Treasurer, a Secretary and such other officers, including,
without limitation, a Chairman of the Board of Directors, a Chief Executive
Officer and one or more Vice Presidents (including Executive Vice Presidents or
Senior Vice Presidents), Assistant Vice Presidents, Assistant Treasurers and
Assistant Secretaries, as the Board of Directors may determine.
SECTION 2. ELECTION. At the regular annual meeting of the Board of
Directors following the Annual Meeting, the Board of Directors shall elect the
President, the Treasurer and the Secretary. Other officers may be elected by the
Board of Directors at such regular annual meeting of the Board of Directors or
at any other regular or special meeting.
SECTION 3. QUALIFICATION. No officer need be a stockholder or a
director. Any person may occupy more than one office of the Corporation at any
time. Any officer may be required by the Board of Directors to give bond for the
faithful performance of his or her duties in such amount and with such sureties
as the Board of Directors may determine.
SECTION 4. TENURE. Except as otherwise provided by the Certificate or
by these Bylaws, each of the officers of the Corporation shall hold office until
the regular annual meeting of the Board of Directors following the next Annual
Meeting and until his or her successor is elected and qualified or until his or
her earlier resignation or removal.
SECTION 5. RESIGNATION. Any officer may resign by delivering his or her
written resignation to the Corporation addressed to the President or the
Secretary, and such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
SECTION 6. REMOVAL. Except as otherwise provided by law, the Board of
Directors may remove any officer with or without cause by the affirmative vote
of a majority of the directors then in office.
SECTION 7. ABSENCE OR DISABILITY. In the event of the absence or
disability of any officer, the Board of Directors may designate another officer
to act temporarily in place of such absent or disabled officer.
SECTION 8. VACANCIES. Any vacancy in any office may be filled for the
unexpired portion of the term by the Board of Directors.
SECTION 9. PRESIDENT. The President shall, subject to the direction of
the Board of Directors, have general supervision and control of the
Corporation's business. If there is no Chairman of the Board or if he or she is
absent, the President shall preside, when present, at all
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meetings of stockholders and of the Board of Directors. The President shall have
such other powers and perform such other duties as the Board of Directors may
from time to time designate.
SECTION 10. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one is
elected, shall preside, when present, at all meetings of the stockholders and of
the Board of Directors. The Chairman of the Board shall have such other powers
and shall perform such other duties as the Board of Directors may from time to
time designate.
SECTION 11. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer, if
one is elected, shall have such powers and shall perform such duties as the
Board of Directors may from time to time designate.
SECTION 12. VICE PRESIDENTS AND ASSISTANT VICE PRESIDENTS. Any Vice
President (including any Executive Vice President or Senior Vice President) and
any Assistant Vice President shall have such powers and shall perform such
duties as the Board of Directors or the Chief Executive Officer may from time to
time designate.
SECTION 13. TREASURER AND ASSISTANT TREASURERS. The Treasurer shall,
subject to the direction of the Board of Directors and except as the Board of
Directors or the Chief Executive Officer may otherwise provide, have general
charge of the financial affairs of the Corporation and shall cause to be kept
accurate books of account. The Treasurer shall have custody of all funds,
securities, and valuable documents of the Corporation. He or she shall have such
other duties and powers as may be designated from time to time by the Board of
Directors or the Chief Executive Officer.
Any Assistant Treasurer shall have such powers and perform such duties
as the Board of Directors or the Chief Executive Officer may from time to time
designate.
SECTION 14. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall
record all the proceedings of the meetings of the stockholders and the Board of
Directors (including committees of the Board) in books kept for that purpose. In
his or her absence from any such meeting, a temporary secretary chosen at the
meeting shall record the proceedings thereof. The Secretary shall have charge of
the stock ledger (which may, however, be kept by any transfer or other agent of
the Corporation). The Secretary shall have custody of the seal of the
Corporation, and the Secretary, or an Assistant Secretary, shall have authority
to affix it to any instrument requiring it, and, when so affixed, the seal may
be attested by his or her signature or that of an Assistant Secretary. The
Secretary shall have such other duties and powers as may be designated from time
to time by the Board of Directors or the Chief Executive Officer. In the absence
of the Secretary, any Assistant Secretary may perform his or her duties and
responsibilities.
Any Assistant Secretary shall have such powers and perform such duties
as the Board of Directors or the Chief Executive Officer may from time to time
designate.
SECTION 15. OTHER POWERS AND DUTIES. Subject to these By-laws and to
such limitations as the Board of Directors may from time to time prescribe, the
officers of the
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Corporation shall each have such powers and duties as generally pertain to their
respective offices, as well as such powers and duties as from time to time may
be conferred by the Board of Directors or the Chief Executive Officer.
ARTICLE IV
CAPITAL STOCK
SECTION 1. CERTIFICATES OF STOCK. Each stockholder shall be entitled to
a certificate of the capital stock of the Corporation in such form as may from
time to time be prescribed by the Board of Directors. Such certificate shall be
signed by the Chairman of the Board of Directors, the President or a Vice
President and by the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary. The Corporation seal and the signatures by the
Corporation's officers, the transfer agent or the registrar may be facsimiles.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on such certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the time of its issue. Every certificate
for shares of stock which are subject to any restriction on transfer and every
certificate issued when the Corporation is authorized to issue more than one
class or series of stock shall contain such legend with respect thereto as is
required by law.
SECTION 2. TRANSFERS. Subject to any restrictions on transfer and
unless otherwise provided by the Board of Directors, shares of stock may be
transferred only on the books of the Corporation by the surrender to the
Corporation or its transfer agent of the certificate theretofore properly
endorsed or accompanied by a written assignment or power of attorney properly
executed, with transfer stamps (if necessary) affixed, and with such proof of
the authenticity of signature as the Corporation or its transfer agent may
reasonably require.
SECTION 3. RECORD HOLDERS. Except as may otherwise be required by law,
by the Certificate or by these By-laws, the Corporation shall be entitled to
treat the record holder of stock as shown on its books as the owner of such
stock for all purposes, including the payment of dividends and the right to vote
with respect thereto, regardless of any transfer, pledge or other disposition of
such stock, until the shares have been transferred on the books of the
Corporation in accordance with the requirements of these By-laws.
SECTION 4. RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which
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record date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board of Directors, and which record date: (a) in
the case of determination of stockholders entitled to vote at any meeting of
stockholders, shall, unless otherwise required by law, not be more than sixty
nor less than ten days before the date of such meeting and (b) in the case of
any other action, shall not be more than sixty days prior to such other action.
If no record date is fixed: (i) the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held and (ii) the record date for determining
stockholders for any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
SECTION 5. REPLACEMENT OF CERTIFICATES. In case of the alleged loss,
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms as the Board of Directors may
prescribe.
ARTICLE V
INDEMNIFICATION
SECTION 1. DEFINITIONS. For purposes of this Article:
(a) "Corporate Status" describes the status of a person who is serving
or has served (i) as a Director of the Corporation, (ii) as an Officer of the
Corporation, or (iii) as a director, partner, trustee, officer, employee or
agent of any other corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise which such person is or was serving at the
request of the Corporation. For purposes of this Section 1(a), an Officer or
Director of the Corporation who is serving or has served as a director,
partner, trustee, officer, employee or agent of a Subsidiary shall be deemed to
be serving at the request of the Corporation;
(b) "Director" means any person who serves or has served the
Corporation as a director on the Board of Directors of the Corporation;
(c) "Disinterested Director" means, with respect to each Proceeding in
respect of which indemnification is sought hereunder, a Director of the
Corporation who is not and was not a party to such Proceeding;
(d) "Expenses" means all reasonable attorneys' fees, retainers, court
costs, transcript costs, fees of expert witnesses, private investigators and
professional advisors (including, without limitation, accountants and investment
bankers), travel expenses, duplicating costs, printing and binding costs, costs
of preparation of demonstrative evidence and other courtroom presentation aids
and devices, costs incurred in connection with document review, organization,
imaging and computerization, telephone charges, postage, delivery service fees,
and all other disbursements, costs or expenses of the type customarily incurred
in connection with prosecuting, defending, preparing to prosecute or defend,
investigating, being or preparing to be a witness in, settling or otherwise
participating in, a Proceeding;
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(e) "Non-Officer Employee" means any person who serves or has served
as an employee or agent of the Corporation but who is not or was not a Director
or Officer;
(f) "Officer" means any person who serves or has served the
Corporation as an officer appointed by the Board of Directors of the
Corporation;
(g) "Proceeding" means any threatened, pending or completed action,
suit, arbitration, alternate dispute resolution mechanism, inquiry,
investigation, administrative hearing or other proceeding, whether civil,
criminal, administrative, arbitrative or investigative; and
(h) "Subsidiary" shall mean any corporation, partnership, limited
liability company, joint venture, trust or other entity of which the Corporation
owns (either directly or through or together with another Subsidiary of the
Corporation) either (i) a general partner, managing member or other similar
interest or (ii) (A) 50% or more of the voting power of the voting capital
equity interests of such corporation, partnership, limited liability company,
joint venture or other entity, or (B) 50% or more of the outstanding voting
capital stock or other voting equity interests of such corporation, partnership,
limited liability company, joint venture or other entity.
SECTION 2. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Subject to the
operation of Section 4 of this Article V of these By-laws, each Director and
Officer shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the DGCL, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than such law
permitted the Corporation to provide prior to such amendment) against any and
all Expenses, judgments, penalties, fines and amounts reasonably paid in
settlement that are incurred by such Director or Officer or on such Director's
or Officer's behalf in connection with any threatened, pending or completed
Proceeding or any claim, issue or matter therein, which such Director or Officer
is, or is threatened to be made, a party to or participant in by reason of such
Director's or Officer's Corporate Status, if such Director or Officer acted in
good faith and in a manner such Director or Officer reasonably believed to be in
or not opposed to the best interests of the Corporation and, with respect to any
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The rights of indemnification provided by this Section 2 shall
continue as to a Director or Officer after he or she has ceased to be a Director
or Officer and shall inure to the benefit of his or her heirs, executors,
administrators and personal representatives. Notwithstanding the foregoing, the
Corporation shall indemnify any Director or Officer seeking indemnification in
connection with a Proceeding initiated by such Director or Officer only if such
Proceeding was authorized by the Board of Directors of the Corporation, unless
such Proceeding was brought to enforce an Officer or Director's rights to
Indemnification or advancement of Expenses under these By-laws in accordance
with the provisions set forth herein.
SECTION 3. INDEMNIFICATION OF NON-OFFICER EMPLOYEES. Subject to the
operation of Section 4 of this Article V of these By-laws, each Non-Officer
Employee may, in the discretion
13
<PAGE> 14
of the Board of Directors of the Corporation, be indemnified by the Corporation
to the fullest extent authorized by the DGCL, as the same exists or may
hereafter be amended, against any or all Expenses, judgments, penalties, fines
and amounts reasonably paid in settlement that are incurred by such Non-Officer
Employee or on such Non-Officer Employee's behalf in connection with any
threatened, pending or completed Proceeding, or any claim, issue or matter
therein, which such Non-Officer Employee is, or is threatened to be made, a
party to or participant in by reason of such Non-Officer Employee's Corporate
Status, if such Non-Officer Employee acted in good faith and in a manner such
Non-Officer Employee reasonably believed to be in or not opposed to the best
interests of the Corporation and, with respect to any criminal proceeding, had
no reasonable cause to believe his or her conduct was unlawful. The rights of
indemnification provided by this Section 3 shall exist as to a Non- Officer
Employee after he or she has ceased to be a Non-Officer Employee and shall inure
to the benefit of his or her heirs, personal representatives, executors and
administrators. Notwithstanding the foregoing, the Corporation may indemnify any
Non-Officer Employee seeking indemnification in connection with a Proceeding
initiated by such Non-Officer Employee only if such Proceeding was authorized by
the Board of Directors of the Corporation.
SECTION 4. GOOD FAITH. Unless ordered by a court, no indemnification
shall be provided pursuant to this Article V to a Director, to an Officer or to
a Non-Officer Employee unless a determination shall have been made 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 Corporation and, with respect to
any criminal Proceeding, such person had no reasonable cause to believe his or
her conduct was unlawful. Such determination shall be made by (a) a majority
vote of the Disinterested Directors, even though less than a quorum of the Board
of Directors, (b) a committee comprised of Disinterested Directors, such
committee having been designated by a majority vote of the Disinterested
Directors (even though less than a quorum), (c) if there are no such
Disinterested Directors, or if a majority of Disinterested Directors so directs,
by independent legal counsel in a written opinion, or (d) by the stockholders of
the Corporation.
SECTION 5. ADVANCEMENT OF EXPENSES TO DIRECTORS PRIOR TO FINAL
DISPOSITION.
(a) The Corporation shall advance all Expenses incurred by or on
behalf of any Director in connection with any Proceeding in which such Director
is involved by reason of such Director's Corporate Status within ten (10) days
after the receipt by the Corporation of a written statement from such Director
requesting such advance or advances from time to time, whether prior to or after
final disposition of such Proceeding. Such statement or statements shall
reasonably evidence the Expenses incurred by such Director and shall be preceded
or accompanied by an undertaking by or on behalf of such Director to repay any
Expenses so advanced if it shall ultimately be determined that such Director is
not entitled to be indemnified against such Expenses.
(b) If a claim for advancement of Expenses hereunder by a Director
is not paid in full by the Corporation within 10 days after receipt by the
Corporation of documentation of Expenses and the required undertaking, such
Director may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and if successful in whole or in part,
such
14
<PAGE> 15
Director shall also be entitled to be paid the expenses of prosecuting such
claim. The failure of the Corporation (including its Board of Directors or any
committee thereof, independent legal counsel, or stockholders) to make a
determination concerning the permissibility of such advancement of Expenses
under this Article V shall not be a defense to the action and shall not create a
presumption that such advancement is not permissible. The burden of proving that
a Director is not entitled to an advancement of expenses shall be on the
Corporation.
(c) In any suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the Corporation
shall be entitled to recover such expenses upon a final adjudication that the
Director has not met any applicable standard for indemnification set forth in
the DGCL.
SECTION 6. ADVANCEMENT OF EXPENSES TO OFFICERS AND NON-OFFICER
EMPLOYEES PRIOR TO FINAL DISPOSITION.
(a) The Corporation may, at the discretion of the Board of
Directors of the Corporation, advance any or all Expenses incurred by or on
behalf of any Officer and Non- Officer Employee in connection with any
Proceeding in which such is involved by reason of the Corporate Status of such
Officer or Non-Officer Employee upon the receipt by the Corporation of a
statement or statements from such Officer or Non-Officer Employee requesting
such advance or advances from time to time, whether prior to or after final
disposition of such Proceeding. Such statement or statements shall reasonably
evidence the Expenses incurred by such Officer and Non-Officer Employee and
shall be preceded or accompanied by an undertaking by or on behalf of such to
repay any Expenses so advanced if it shall ultimately be determined that such
Officer or Non-Officer Employee is not entitled to be indemnified against such
Expenses.
(b) In any suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the Corporation
shall be entitled to recover such expenses upon a final adjudication that the
Officer or Non-Officer Employee has not met any applicable standard for
indemnification set forth in the DGCL.
SECTION 7. CONTRACTUAL NATURE OF RIGHTS.
(a) The foregoing provisions of this Article V shall be deemed to
be a contract between the Corporation and each Director and Officer entitled to
the benefits hereof at any time while this Article V is in effect, and any
repeal or modification thereof shall not affect any rights or obligations then
existing with respect to any state of facts then or theretofore existing or any
Proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
(b) If a claim for indemnification of Expenses hereunder by a Director
or Officer is not paid in full by the Corporation within 60 days after receipt
by the Corporation of a written claim for indemnification, such Director or
Officer may at any time thereafter bring suit against
15
<PAGE> 16
the Corporation to recover the unpaid amount of the claim, and if successful in
whole or in part, such Director or Officer shall also be entitled to be paid the
expenses of prosecuting such claim. The failure of the Corporation (including
its Board of Directors or any committee thereof, independent legal counsel, or
stockholders) to make a determination concerning the permissibility of such
indemnification under this Article V shall not be a defense to the action and
shall not create a presumption that such indemnification is not permissible. The
burden of proving that a Director or Officer is not entitled to indemnification
shall be on the Corporation.
(c) In any suit brought by a Director or Officer to enforce a
right to indemnification hereunder, it shall be a defense that such Director or
Officer has not met any applicable standard for indemnification set forth in the
DGCL.
SECTION 8. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and
advancement of Expenses set forth in this Article V shall not be exclusive of
any other right which any Director, Officer, or Non-Officer Employee may have or
hereafter acquire under any statute, provision of the Certificate or these
By-laws, agreement, vote of stockholders or Disinterested Directors or
otherwise.
SECTION 9. INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any Director, Officer or Non-Officer Employee
against any liability of any character asserted against or incurred by the
Corporation or any such Director, Officer or Non-Officer Employee, or arising
out of any such person's Corporate Status, whether or not the Corporation would
have the power to indemnify such person against such liability under the DGCL or
the provisions of this Article V.
ARTICLE VI
MISCELLANEOUS PROVISIONS
SECTION 1. FISCAL YEAR. The fiscal year of the Corporation shall be
determined by the Board of Directors.
SECTION 2. SEAL. The Board of Directors shall have power to adopt and
alter the seal of the Corporation.
SECTION 3. EXECUTION OF INSTRUMENTS. All deeds, leases, transfers,
contracts, bonds, notes and other obligations to be entered into by the
Corporation in the ordinary course of its business without director action may
be executed on behalf of the Corporation by the Chairman of the Board, if one is
elected, the President or the Treasurer or any other officer, employee or agent
of the Corporation as the Board of Directors or Executive Committee may
authorize.
SECTION 4. VOTING OF SECURITIES. Unless the Board of Directors
otherwise provides, the Chairman of the Board, if one is elected, the President
or the Treasurer may waive notice of and act on behalf of this Corporation, or
appoint another person or persons to act as proxy or attorney
16
<PAGE> 17
in fact for this Corporation with or without discretionary power and/or power of
substitution, at any meeting of stockholders or shareholders of any other
corporation or organization, any of whose securities are held by this
Corporation.
SECTION 5. RESIDENT AGENT. The Board of Directors may appoint a
resident agent upon whom legal process may be served in any action or proceeding
against the Corporation.
SECTION 6. CORPORATE RECORDS. The original or attested copies of the
Certificate, By-laws and records of all meetings of the incorporators,
stockholders and the Board of Directors and the stock transfer books, which
shall contain the names of all stockholders, their record addresses and the
amount of stock held by each, may be kept outside the State of Delaware and
shall be kept at the principal office of the Corporation, at the office of its
counsel or at an office of its transfer agent or at such other place or places
as may be designated from time to time by the Board of Directors.
SECTION 7. CERTIFICATE. All references in these By-laws to the
Certificate shall be deemed to refer to the Amended and Restated Certificate of
Incorporation of the Corporation, as amended and in effect from time to time.
SECTION 8. AMENDMENT OF BY-LAWS.
(a) AMENDMENT BY DIRECTORS. Except as provided otherwise by law,
these By-laws may be amended or repealed by the Board of Directors by the
affirmative vote of a majority of the directors then in office.
(b) AMENDMENT BY STOCKHOLDERS. These By-laws may be amended or
repealed at any Annual Meeting, or special meeting of stockholders called for
such purpose, by the affirmative vote of at least 75% of the shares present in
person or represented by proxy at such meeting and entitled to vote on such
amendment or repeal, voting together as a single class; provided, however, that
if the Board of Directors recommends that stockholders approve such amendment or
repeal at such meeting of stockholders, such amendment or repeal shall only
require the affirmative vote of the majority of the shares present in person or
represented by proxy at such meeting and entitled to vote on such amendment or
repeal, voting together as a single class. Notwithstanding the foregoing,
stockholder approval shall not be required unless mandated by the Certificate,
these By-laws, or other applicable law.
Adopted ___________, ____ and effective as of ___________, ____.
17
<PAGE> 1
Exhibit 4.1
================================================================================
- -------------------- --------------------
NUMBER SHARES
[FAIRMARKET LOGO]
FAI
- -------------------- --------------------
COMMON STOCK SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFICATE IS
TRANSFERABLE IN
BOSTON, MA OR NEW
YORK, NY
FAIRMARKET, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 305158 10 7
----------------------------------------------------------------------
THIS CERTIFIES THAT
IS THE OWNER OF
----------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
$.001 PAR VALUE PER SHARE, OF
=============================== FAIRMARKET, INC. ===============================
transferable on the books of the Company by the holder hereof in person or by
its duly authorized attorney upon surrender of this Certificate properly
endorsed or assigned. This Certificate and the shares represented hereby are
issued and shall be held subject to the laws of the State of Delaware and the
provisions of the Certificate of Incorporation and the By-laws of the Company,
as amended from time to time, to which the holder by acceptance hereof assents.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
Witness the facsimile seal of the Company and the facsimile signatures of
its duly authorized officers.
Dated:
[FAIRMARKET,
INC. SEAL 1997
DELAWARE]
/s/ Scott Randall
COUNTERSIGNED AND REGISTERED PRESIDENT AND CHIEF EXECUTIVE OFFICER
BANKBOSTON, N.A.
TRANSFER AGENT
AND REGISTRAR
BY /s/ L. E. Seeley /s/ John Belchers
AUTHORIZED SIGNATURE CHIEF FINANCIAL OFFICER AND TREASURER
================================================================================
<PAGE> 2
FAIRMARKET, INC.
The Company is authorized to issue more than one class or series of
stock. Upon written request the Company will furnish without charge to each
stockholder a copy of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT - ..........Custodian..........
(Cust) (Minor)
under Uniform Gifts to Minors
Act..........................
(State)
Additional abbreviations may also be used though not in the above list.
For value received,___________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------
- ----------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Company with full
power of substitution in the premises.
Dated __________________
__________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE
OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED: __________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 10.1
FORM OF
INDEMNIFICATION AGREEMENT
This Agreement made and entered into this ____ day of ______, (the
"Agreement"), by and between FairMarket, Inc., a Delaware corporation
(the "Company," which term shall include, where appropriate, any Entity (as
hereinafter defined) controlled directly or indirectly by the Company) and
____________ (the "Indemnitee"):
WHEREAS, it is essential to the Company that it be able to retain and
attract as directors the most capable persons available;
WHEREAS, increased corporate litigation has subjected directors to
litigation risks and expenses, and the limitations on the availability of
directors and officers liability insurance have made it increasingly difficult
for the Company to attract and retain such persons;
WHEREAS, the Company's Amended and Restated Certificate of
Incorporation and Amended and Restated By-Laws (the "Certificate of
Incorporation" and "By-laws," respectively) require it to indemnify its
directors to the fullest extent permitted by law and permit it to make other
indemnification arrangements and agreements;
WHEREAS, the Company desires to provide Indemnitee with specific
contractual assurance of Indemnitee's rights to full indemnification against
litigation risks and expenses (regardless, among other things, of any amendment
to or revocation of the Certificate of Incorporation or By-laws or any change in
the ownership of the Company or the composition of its Board of Directors);
WHEREAS, the Company intends that this Agreement provide Indemnitee
with greater protection than that which is provided by the Company's Certificate
of Incorporation and By-laws; and
WHEREAS, Indemnitee is relying upon the rights afforded under this
Agreement in a director of the Company.
NOW, THEREFORE, in consideration of the promises and the covenants
contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:
1. DEFINITIONS.
(a) "Corporate Status" describes the status of a person who is
serving or has served (i) as a director of the Company, (ii)
in any capacity with respect to any employee benefit plan of
the Company, or (iii) as a director, partner, trustee,
<PAGE> 2
officer, employee, or agent of any other Entity at the request
of the Company. For purposes of subsection (iii) of this
Section 1(a), if Indemnitee is serving or has served as a
director, partner, trustee, officer, employee or agent of a
Subsidiary, Indemnitee shall be deemed to be serving at the
request of the Company.
(b) "Entity" shall mean any corporation, partnership, limited
liability company, joint venture, trust, foundation,
association, organization or other legal entity.
(c) "Expenses" shall mean all fees, costs and expenses
incurred by Indemnitee in connection with any Proceeding (as
defined below), including, without limitation, attorneys'
fees, disbursements and retainers (including, without
limitation, any such fees, disbursements and retainers
incurred by Indemnitee pursuant to Sections 10 and 11(c) of
this Agreement), fees and disbursements of expert witnesses,
private investigators and professional advisors (including,
without limitation, accountants and investment bankers), court
costs, transcript costs, fees of experts, travel expenses,
duplicating, printing and binding costs, telephone and fax
transmission charges, postage, delivery services, secretarial
services, and other disbursements and expenses.
(d) "Indemnifiable Expenses," "Indemnifiable Liabilities" and
"Indemnifiable Amounts" shall have the meanings ascribed to
those terms in Section 3(a) below.
(e) "Liabilities" shall mean judgments, damages, liabilities,
losses, penalties, excise taxes, fines and amounts paid in
settlement.
(f) "Proceeding" shall mean any threatened, pending or
completed claim, action, suit, arbitration, alternate dispute
resolution process, investigation, administrative hearing,
appeal, or any other proceeding, whether civil, criminal,
administrative, arbitrative or investigative, whether formal
or informal, including a proceeding initiated by Indemnitee
pursuant to Section 10 of this Agreement to enforce
Indemnitee's rights hereunder.
(g) "Subsidiary" shall mean any corporation, partnership,
limited liability company, joint venture, trust or other
Entity of which the Company owns (either directly or through
or together with another Subsidiary of the Company) either (i)
a general partner, managing member or other similar interest
or (ii) (A) 50% or more of the voting power of the voting
capital equity interests of such corporation, partnership,
limited liability company, joint venture or other Entity, or
(B) 50% or more of the outstanding voting capital stock or
other voting equity interests of such corporation,
partnership, limited liability company, joint venture or other
Entity.
2
<PAGE> 3
2. SERVICES OF INDEMNITEE. In consideration of the Company's covenants
and commitments hereunder, Indemnitee agrees to serve or continue to serve as a
director of the Company. However, this Agreement shall not impose any obligation
on Indemnitee or the Company to continue Indemnitee's service to the Company
beyond any period otherwise required by law or by other agreements or
commitments of the parties, if any.
3. AGREEMENT TO INDEMNIFY. The Company agrees to indemnify Indemnitee
as follows:
(a) Proceedings Other Than By or In the Right of the Company.
Subject to the exceptions contained in Section 4(a) below, if
Indemnitee was or is a party or is threatened to be made a
party to any Proceeding (other than an action by or in the
right of the Company) by reason of Indemnitee's Corporate
Status, Indemnitee shall be indemnified by the Company against
all Expenses and Liabilities incurred or paid by Indemnitee in
connection with such Proceeding (referred to herein as
"Indemnifiable Expenses" and "Indemnifiable Liabilities,"
respectively, and collectively as "Indemnifiable Amounts").
(b) Proceedings By or In the Right of the Company. Subject to
the exceptions contained in Section 4(b) below, if Indemnitee
was or is a party or is threatened to be made a party to any
Proceeding by or in the right of the Company by reason of
Indemnitee's Corporate Status, Indemnitee shall be indemnified
by the Company against all Indemnifiable Expenses.
4. EXCEPTIONS TO INDEMNIFICATION. Indemnitee shall be entitled to
indemnification under Sections 3(a) and 3(b) above in all circumstances other
than with respect to any specific claim, issue or matter involved in the
Proceeding out of which Indemnitee's claim for indemnification has arisen, as
follows:
(a) Proceedings Other Than By or In the Right of the Company.
If indemnification is requested under Section 3(a) and it has
been finally adjudicated by a court of competent jurisdiction
that, in connection with such specific claim, issue or matter,
Indemnitee failed to act (i) in good faith and (ii) in a
manner Indemnitee reasonably believed to be in or not opposed
to the best interests of the Company, or, with respect to any
criminal action or proceeding, Indemnitee had reasonable cause
to believe that Indemnitee's conduct was unlawful, Indemnitee
shall not be entitled to payment of Indemnifiable Amounts
hereunder.
(b) Proceedings By or In the Right of the Company. If
indemnification is requested under Section 3(b) and
(i) it has been finally adjudicated by a
court of competent jurisdiction that, in
connection with such specific claim, issue
or
3
<PAGE> 4
matter, Indemnitee failed to act (A) in good
faith and (B) in a manner Indemnitee
reasonably believed to be in or not opposed
to the best interests of the Company,
Indemnitee shall not be entitled to payment
of Indemnifiable Expenses hereunder; or
(ii) it has been finally adjudicated by a
court of competent jurisdiction that
Indemnitee is liable to the Company with
respect to such specific claim, no
Indemnifiable Expenses shall be paid with
respect to such claim, issue or matter
unless the Court of Chancery or another
court in which such Proceeding was brought
shall determine upon application that,
despite the adjudication of liability, but
in view of all the circumstances of the
case, Indemnitee is fairly and reasonably
entitled to indemnification for such
Indemnifiable Expenses which such court
shall deem proper.
5. PROCEDURE FOR PAYMENT OF INDEMNIFIABLE AMOUNTS. Indemnitee shall
submit to the Company a written request specifying the Indemnifiable Amounts for
which Indemnitee seeks payment under Section 3 of this Agreement and the basis
for the claim. The Company shall pay such Indemnifiable Amounts to Indemnitee
within sixty (60) calendar days of receipt of the request. At the request of the
Company, Indemnitee shall furnish such documentation and information as are
reasonably available to Indemnitee and necessary to establish that Indemnitee is
entitled to indemnification hereunder.
6. INDEMNIFICATION FOR EXPENSES OF A PARTY WHO IS WHOLLY OR PARTLY
SUCCESSFUL. Notwithstanding any other provision of this Agreement, and without
limiting any such provision, to the extent that Indemnitee is, by reason of
Indemnitee's Corporate Status, a party to and is successful, on the merits or
otherwise, in any Proceeding, Indemnitee shall be indemnified against all
Expenses reasonably incurred by Indemnitee or on Indemnitee's behalf in
connection therewith. If Indemnitee is not wholly successful in such Proceeding
but is successful, on the merits or otherwise, as to one or more but less than
all claims, issues or matters in such Proceeding, the Company shall indemnify
Indemnitee against all Expenses reasonably incurred by Indemnitee or on
Indemnitee's behalf in connection with each successfully resolved claim, issue
or matter. For purposes of this Agreement, the termination of any claim, issue
or matter in such a Proceeding by dismissal, with or without prejudice, by
reason of settlement, judgment, order or otherwise, shall be deemed to be a
successful result as to such claim, issue or matter.
7. EFFECT OF CERTAIN RESOLUTIONS. Neither the settlement or termination
of any Proceeding nor the failure of the Company to award indemnification or to
determine that indemnification is payable shall create a presumption that
Indemnitee is not entitled to indemnification hereunder. In addition, the
termination of any proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent shall not create a presumption
that Indemnitee did not act in good faith and in a manner which Indemnitee
reasonably believed to be in or not opposed to the best interests of the Company
or, with
4
<PAGE> 5
respect to any criminal action or proceeding, had reasonable cause to believe
that Indemnitee's action was unlawful.
8. AGREEMENT TO ADVANCE EXPENSES; UNDERTAKING. The Company shall
advance all Expenses incurred by or on behalf Indemnitee in connection with any
Proceeding, including a Proceeding by or in the right of the Company, in which
Indemnitee is involved by reason of such Indemnitee's Corporate Status within
ten (10) calendar days after the receipt by the Company of a written statement
from Indemnitee requesting such advance or advances from time to time, whether
prior to or after final disposition of such Proceeding. To the extent required
by Delaware law, Indemnitee hereby undertakes to repay any and all of the amount
of Indemnifiable Expenses paid to Indemnitee if it is finally determined by a
court of competent jurisdiction that Indemnitee is not entitled under this
Agreement to indemnification with respect to such Expenses. This undertaking is
an unlimited general obligation of Indemnitee.
9. PROCEDURE FOR ADVANCE PAYMENT OF EXPENSES. Indemnitee shall submit
to the Company a written request specifying the Indemnifiable Expenses for which
Indemnitee seeks an advancement under Section 8 of this Agreement, together with
documentation evidencing that Indemnitee has incurred such Indemnifiable
Expenses. Payment of Indemnifiable Expenses under Section 8 shall be made no
later than ten (10) calendar days after the Company's receipt of such request.
10. REMEDIES OF INDEMNITEE.
(a) Right to Petition Court. In the event that Indemnitee
makes a request for payment of Indemnifiable Amounts under
Sections 3 and 5 above or a request for an advancement of
Indemnifiable Expenses under Sections 8 and 9 above and the
Company fails to make such payment or advancement in a timely
manner pursuant to the terms of this Agreement, Indemnitee may
petition the Court of Chancery to enforce the Company's
obligations under this Agreement.
(b) Burden of Proof. In any judicial proceeding brought under
Section 10(a) above, the Company shall have the burden of
proving that Indemnitee is not entitled to payment of
Indemnifiable Amounts hereunder.
(c) Expenses. If Indemnitee is successful in whole or in part
in connection with any action brought by Indemnitee under
Section 10(a) above, the Company agrees to reimburse
Indemnitee in full for any Expenses incurred by Indemnitee in
connection with investigating, preparing for, litigating,
defending or settling any such action, or in connection with
any claim or counterclaim brought by the Company in connection
therewith.
(d) Failure to Act Not a Defense. The failure of the Company
(including its Board of Directors or any committee thereof,
independent legal counsel, or stockholders) to make a
determination concerning the permissibility of the
5
<PAGE> 6
payment of Indemnifiable Amounts or the advancement of
Indemnifiable Expenses under this Agreement shall not be a
defense in any action brought under Section 10(a) above, and
shall not create a presumption that such payment or
advancement is not permissible.
11. DEFENSE OF THE UNDERLYING PROCEEDING.
(a) Notice by Indemnitee. Indemnitee agrees to notify the
Company promptly upon being served with any summons, citation,
subpoena, complaint, indictment, information, or other
document relating to any Proceeding which may result in the
payment of Indemnifiable Amounts or the advancement of
Indemnifiable Expenses hereunder; provided, however, that the
failure to give any such notice shall not disqualify
Indemnitee from the right, or otherwise affect in any manner
any right of Indemnitee, to receive payments of Indemnifiable
Amounts or advancements of Indemnifiable Expenses unless the
Company's ability to defend in such Proceeding is materially
and adversely prejudiced thereby.
(b) Defense by Company. Subject to the provisions of the last
sentence of this Section 11(b) and of Section 11(c) below, the
Company shall have the right to defend Indemnitee in any
Proceeding which may give rise to the payment of Indemnifiable
Amounts hereunder; provided, however that the Company shall
notify Indemnitee of any such decision to defend within ten
(10) calendar days of receipt of notice of any such Proceeding
under Section 11(a) above. The Company shall not, without the
prior written consent of Indemnitee, consent to the entry of
any judgment against Indemnitee or enter into any settlement
or compromise which (i) includes an admission of fault of
Indemnitee or (ii) does not include, as an unconditional term
thereof, the full release of Indemnitee from all liability in
respect of such Proceeding, which release shall be in form and
substance reasonably satisfactory to Indemnitee. This Section
11(b) shall not apply to a Proceeding brought by Indemnitee
under Section 10(a) above or pursuant to Section 19 below.
(c) Indemnitee's Right to Counsel. Notwithstanding the
provisions of Section 11(b) above, if in a Proceeding to which
Indemnitee is a party by reason of Indemnitee's Corporate
Status, (i) Indemnitee reasonably concludes that he or she may
have separate defenses or counterclaims to assert with respect
to any issue which may not be consistent with the position of
other defendants in such Proceeding, (ii) a conflict of
interest or potential conflict of interest exists between
Indemnitee and the Company, or if the Company fails to assume
the defense of such proceeding in a timely manner, Indemnitee
shall be entitled to be represented by separate legal counsel
of Indemnitee's choice at the expense of the Company. In
addition, if the Company fails to comply with any of its
obligations under this Agreement or in the event that the
Company or any other
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person takes any action to declare this Agreement void or
unenforceable, or institutes any action, suit or proceeding to
deny or to recover from Indemnitee the benefits intended to be
provided to Indemnitee hereunder, Indemnitee shall have the
right to retain counsel of Indemnitee's choice, at the expense
of the Company, to represent Indemnitee in connection with any
such matter.
12. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to Indemnitee as follows:
(a) Authority. The Company has all necessary power and
authority to enter into, and be bound by the terms of, this
Agreement, and the execution, delivery and performance of the
undertakings contemplated by this Agreement have been duly
authorized by the Company.
(b) Enforceability. This Agreement, when executed and
delivered by the Company in accordance with the provisions
hereof, shall be a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with
its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, moratorium, reorganization
or similar laws affecting the enforcement of creditors' rights
generally.
13. INSURANCE. The Company shall, from time to time, make the good
faith determination whether or not it is practicable for the Company to obtain
and maintain a policy or policies of insurance with a reputable insurance
company providing the Indemnitee with coverage for losses from wrongful acts,
and to ensure the Company's performance of its indemnification obligations under
this Agreement. In all policies of director and officer liability insurance,
Indemnitee shall be named as an insured in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's officers and directors. Notwithstanding the foregoing,
the Company shall have no obligation to obtain or maintain such insurance if the
Company determines in good faith that such insurance is not reasonably
available, if the premium costs for such insurance are disproportionate to the
amount of coverage provided, or if the coverage provided by such insurance is
limited by exclusions so as to provide an insufficient benefit. The Company
shall promptly notify Indemnitee of any good faith determination not to provide
such coverage.
14. CONTRACT RIGHTS NOT EXCLUSIVE. The rights to payment of
Indemnifiable Amounts and advancement of Indemnifiable Expenses provided by this
Agreement shall be in addition to, but not exclusive of, any other rights which
Indemnitee may have at any time under applicable law, the Company's Certificate
of Incorporation or By-laws, or any other agreement, vote of stockholders or
directors (or a committee of directors), or otherwise, both as to action in
Indemnitee's official capacity and as to action in any other capacity as a
result of Indemnitee's serving as a director of the Company.
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<PAGE> 8
15. SUCCESSORS. This Agreement shall be (a) binding upon all successors
and assigns of the Company (including any transferee of all or a substantial
portion of the business, stock and/or assets of the Company and any direct or
indirect successor by merger or consolidation or otherwise by operation of law)
and (b) binding on and shall inure to the benefit of the heirs, personal
representatives, executors and administrators of Indemnitee. This Agreement
shall continue for the benefit of Indemnitee and such heirs, personal
representatives, executors and administrators after Indemnitee has ceased to
have Corporate Status.
16. SUBROGATION. In the event of any payment of Indemnifiable Amounts
under this Agreement, the Company shall be subrogated to the extent of such
payment to all of the rights of contribution or recovery of Indemnitee against
other persons, and Indemnitee shall take, at the request of the Company, all
reasonable action necessary to secure such rights, including the execution of
such documents as are necessary to enable the Company to bring suit to enforce
such rights.
17. CHANGE IN LAW. To the extent that a change in Delaware law (whether
by statute or judicial decision) shall permit broader indemnification or
advancement of expenses than is provided under the terms of the By-laws and this
Agreement, Indemnitee shall be entitled to such broader indemnification and
advancements, and this Agreement shall be deemed to be amended to such extent.
18. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Agreement, or any clause thereof,
shall be determined by a court of competent jurisdiction to be illegal, invalid
or unenforceable, in whole or in part, such provision or clause shall be limited
or modified in its application to the minimum extent necessary to make such
provision or clause valid, legal and enforceable, and the remaining provisions
and clauses of this Agreement shall remain fully enforceable and binding on the
parties.
19. INDEMNITEE AS PLAINTIFF. Except as provided in Section 10(c) of
this Agreement and in the next sentence, Indemnitee shall not be entitled to
payment of Indemnifiable Amounts or advancement of Indemnifiable Expenses with
respect to any Proceeding brought by Indemnitee against the Company, any Entity
which it controls, any director or officer thereof, or any third party, unless
the Board of Directors of the Company has consented to the initiation of such
Proceeding. This Section shall not apply to counterclaims or affirmative
defenses asserted by Indemnitee in an action brought against Indemnitee.
20. MODIFICATIONS AND WAIVER. Except as provided in Section 17 above
with respect to changes in Delaware law which broaden the right of Indemnitee to
be indemnified by the Company, no supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by each of the parties
hereto. No waiver of any of the provisions of
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this Agreement shall be deemed or shall constitute a waiver of any other
provisions of this Agreement (whether or not similar), nor shall such waiver
constitute a continuing waiver.
21. GENERAL NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given (a) when delivered by hand, (b) when transmitted by facsimile and
receipt is acknowledged, or (c) if mailed by certified or registered mail with
postage prepaid, on the third business day after the date on which it is so
mailed:
(i) If to Indemnitee, to:
(ii) If to the Company, to:
or to such other address as may have been furnished in the same manner by any
party to the others.
22. GOVERNING LAW; CONSENT TO JURISDICTION; SERVICE OF PROCESS. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Delaware without regard to its rules of conflict of laws. Each of the
Company and the Indemnitee hereby irrevocably and unconditionally consents to
submit to the exclusive jurisdiction of the Court of Chancery of the State of
Delaware and the courts of the United States of America located in the State of
Delaware (the "Delaware Courts") for any litigation arising out of or relating
to this Agreement and the transactions contemplated hereby (and agrees not to
commence any litigation relating thereto except in such courts), waives any
objection to the laying of venue of any such litigation in the Delaware Courts
and agrees not to plead or claim in any Delaware Court that such litigation
brought therein has been brought in an inconvenient forum. Each of the parties
hereto agrees, (a) to the extent such party is not otherwise subject to service
of process in the State of Delaware, to appoint and maintain an agent in the
State of Delaware as such party's agent for acceptance of legal process, and (b)
that service of process may also be made on such party by prepaid certified mail
with a proof of mailing receipt validated by the United States Postal Service
constituting evidence of valid service. Service made pursuant to (a) or (b)
above shall have the same legal force and effect as if served upon such party
personally within the State of Delaware. For purposes of implementing the
parties' agreement to appoint and maintain an agent for service of process in
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the State of Delaware, each such party does hereby appoint The Corporation Trust
Company, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801, as
such agent and each such party hereby agrees to complete all actions necessary
for such appointment.
[signature page follows]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
FAIRMARKET, INC.
By:
------------------------------------
Name:
Title:
INDEMNITEE
------------------------------------
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<PAGE> 1
EXHIBIT 10.4
FORM OF
FAIRMARKET, INC.
2000 STOCK OPTION AND INCENTIVE PLAN
SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS
The name of the plan is the FairMarket, Inc. 2000 Stock Option and
Incentive Plan (the "Plan"). The purpose of the Plan is to encourage and enable
the officers, employees, Independent Directors and other key persons (including
consultants) of FairMarket, Inc. (the "Company") and its Subsidiaries upon whose
judgment, initiative and efforts the Company largely depends for the successful
conduct of its business to acquire a proprietary interest in the Company. It is
anticipated that providing such persons with a direct stake in the Company's
welfare will assure a closer identification of their interests with those of the
Company, thereby stimulating their efforts on the Company's behalf and
strengthening their desire to remain with the Company.
The following terms shall be defined as set forth below:
"Act" means the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
"Administrator" is defined in Section 2(a).
"Award" or "Awards," except where referring to a particular category of
grant under the Plan, shall include Incentive Stock Options, Non-Qualified Stock
Options, Stock Appreciation Rights, Deferred Stock Awards, Restricted Stock
Awards, Unrestricted Stock Awards, Performance Share Awards and Dividend
Equivalent Rights.
"Board" means the Board of Directors of the Company.
"Change of Control" is defined in Section 17.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor Code, and related rules, regulations and interpretations.
"Committee" means the Committee of the Board referred to in Section 2.
"Covered Employee" means an employee who is a "Covered Employee" within
the meaning of Section 162(m) of the Code.
"Deferred Stock Award" means Awards granted pursuant to Section 8.
<PAGE> 2
"Dividend Equivalent Right" means Awards granted pursuant to Section
12.
"Effective Date" means the date on which the Plan is approved by
stockholders as set forth in Section 19.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder.
"Fair Market Value" of the Stock on any given date means the fair
market value of the Stock determined in good faith by the Administrator;
provided, however, that if the Stock is admitted to quotation on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"), NASDAQ
National System or a national securities exchange, the determination shall be
made by reference to market quotations. If there are no market quotations for
such date, the determination shall be made by reference to the last date
preceding such date for which there are market quotations; provided further,
however, that if the date for which Fair Market Value is determined is the first
day when trading prices for the Stock are reported on NASDAQ or on a national
securities exchange, the Fair Market Value shall be the "Price to the Public"
(or equivalent) set forth on the cover page for the final prospectus relating to
the Company's Initial Public Offering.
"Incentive Stock Option" means any Stock Option designated and
qualified as an "incentive stock option" as defined in Section 422 of the Code.
"Independent Director" means a member of the Board who is not also an
employee of the Company or any Subsidiary.
"Initial Public Offering" means the consummation of the first fully
underwritten, firm commitment public offering pursuant to an effective
registration statement under the Act, other than on Forms S-4 or S-8 or their
then equivalents, covering the offer and sale by the Company of its equity
securities, or such other event as a result of or following which the Stock
shall be publicly held.
"Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
"Option" or "Stock Option" means any option to purchase shares of Stock
granted pursuant to Section 5.
"Performance Share Award" means Awards granted pursuant to Section 10.
"Performance Cycle" means one or more periods of time, which may be of
varying and overlapping durations, as the Administrator may select, over which
the attainment of one or more performance criteria will be measured for the
purpose of determining a grantee's right to
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and the payment of a Performance Share Award, Restricted Stock Award or Deferred
Stock Award.
"Restricted Stock Award" means Awards granted pursuant to Section 7.
"Stock" means the Common Stock, par value $.001 per share, of the
Company, subject to adjustments pursuant to Section 3.
"Stock Appreciation Right" means any Award granted pursuant to Section
6.
"Subsidiary" means any corporation or other entity (other than the
Company) in any unbroken chain of corporations or other entities beginning with
the Company if each of the corporations or entities (other than the last
corporation or entity in the unbroken chain) owns stock or other interests
possessing 50 percent or more of the economic interest or the total combined
voting power of all classes of stock or other interests in one of the other
corporations or entities in the chain.
"Unrestricted Stock Award" means any Award granted pursuant to Section
9.
SECTION 2. ADMINISTRATION OF PLAN; ADMINISTRATOR AUTHORITY TO
SELECT GRANTEES AND DETERMINE AWARDS
(a) Committee. The Plan shall be administered by either the Board or a
committee of not less than two Independent Directors (in either case, the
"Administrator").
(b) Powers of Administrator. The Administrator shall have the power and
authority to grant Awards consistent with the terms of the Plan, including the
power and authority:
(i) to select the individuals to whom Awards may from time to
time be granted;
(ii) to determine the time or times of grant, and the extent,
if any, of Incentive Stock Options, Non-Qualified Stock Options, Stock
Appreciation Rights, Restricted Stock Awards, Deferred Stock Awards,
Unrestricted Stock Awards, Performance Share Awards and Dividend
Equivalent Rights, or any combination of the foregoing, granted to any
one or more grantees;
(iii) to determine the number of shares of Stock to be covered
by any Award;
(iv) to determine and modify from time to time the terms and
conditions, including restrictions, not inconsistent with the terms of
the Plan, of any Award, which terms and conditions may differ among
individual Awards and grantees, and to approve the form of written
instruments evidencing the Awards;
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(v) to accelerate at any time the exercisability or vesting of
all or any portion of any Award;
(vi) subject to the provisions of Section 5(a)(ii), to extend
at any time the period in which Stock Options may be exercised;
(vii) to determine at any time whether, to what extent, and
under what circumstances distribution or the receipt of Stock and other
amounts payable with respect to an Award shall be deferred either
automatically or at the election of the grantee and whether and to what
extent the Company shall pay or credit amounts constituting interest
(at rates determined by the Administrator) or dividends or deemed
dividends on such deferrals; and
(viii) at any time to adopt, alter and repeal such rules,
guidelines and practices for administration of the Plan and for its own
acts and proceedings as it shall deem advisable; to interpret the terms
and provisions of the Plan and any Award (including related written
instruments); to make all determinations it deems advisable for the
administration of the Plan; to decide all disputes arising in
connection with the Plan; and to otherwise supervise the administration
of the Plan.
All decisions and interpretations of the Administrator shall be binding
on all persons, including the Company and Plan grantees.
(c) Delegation of Authority to Grant Awards. The Administrator, in its
discretion, may delegate to the Chief Executive Officer of the Company all or
part of the Administrator's authority and duties with respect to the granting of
Awards at Fair Market Value, to individuals who are not subject to the reporting
and other provisions of Section 16 of the Exchange Act or "covered employees"
within the meaning of Section 162(m) of the Code. Any such delegation by the
Administrator shall include a limitation as to the amount of Awards that may be
granted during the period of the delegation and shall contain guidelines as to
the determination of the exercise price of any Stock Option or Stock
Appreciation Right, the conversion ratio or price of other Awards and the
vesting criteria. The Administrator may revoke or amend the terms of a
delegation at any time but such action shall not invalidate any prior actions of
the Administrator's delegate or delegates that were consistent with the terms of
the Plan.
(d) Indemnification. Neither the Board nor the Committee, nor any
member of either or any delegatee thereof, shall be liable for any act,
omission, interpretation, construction or determination made in good faith in
connection with the Plan, and the members of the Board and the Committee (and
any delegatee thereof) shall be entitled in all cases to indemnification and
reimbursement by the Company in respect of any claim, loss, damage or expense
(including, without limitation, reasonable attorneys' fees) arising or resulting
therefrom to the fullest extent permitted by law and/or under any directors' and
officers' liability insurance coverage which may be in effect from time to time.
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SECTION 3. STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION
(a) Stock Issuable. The maximum number of shares of Stock reserved and
available for issuance under the Plan shall be _______ shares, subject to
adjustment as provided in Section 3(b). For purposes of this limitation, the
shares of Stock underlying any Awards which are forfeited, canceled, reacquired
by the Company, satisfied without the issuance of Stock or otherwise terminated
(other than by exercise) shall be added back to the shares of Stock available
for issuance under the Plan. Subject to such overall limitation, shares of Stock
may be issued up to such maximum number pursuant to any type or types of Award;
provided, however, that Stock Options or Stock Appreciation Rights with respect
to no more than _______ shares of Stock may be granted to any one individual
grantee during any one calendar year period. The shares available for issuance
under the Plan may be authorized but unissued shares of Stock or shares of Stock
reacquired by the Company and held in its treasury.
(b) Changes in Stock. Subject to Section 3(c) hereof, if, as a result
of any reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split or other similar change in the Company's capital
stock, the outstanding shares of Stock are increased or decreased or are
exchanged for a different number or kind of shares or other securities of the
Company, or additional shares or new or different shares or other securities of
the Company or other non-cash assets are distributed with respect to such shares
of Stock or other securities, or, if, as a result of any merger or
consolidation, sale of all or substantially all of the assets of the Company,
the outstanding shares of Stock are converted into or exchanged for a different
number or kind of securities of the Company or any successor entity (or a parent
or subsidiary thereof), the Administrator shall make an appropriate or
proportionate adjustment in (i) the maximum number of shares reserved for
issuance under the Plan, (ii) the number of Stock Options or Stock Appreciation
Rights that can be granted to any one individual grantee and the maximum number
of shares that may be granted under a Performance-based Award, (iii) the number
and kind of shares or other securities subject to any then outstanding Awards
under the Plan, (iv) the repurchase price per share subject to each outstanding
Restricted Stock Award, and (v) the price for each share subject to any then
outstanding Stock Options and Stock Appreciation Rights under the Plan, without
changing the aggregate exercise price (i.e., the exercise price multiplied by
the number of Stock Options and Stock Appreciation Rights) as to which such
Stock Options and Stock Appreciation Rights remain exercisable. The adjustment
by the Administrator shall be final, binding and conclusive. No fractional
shares of Stock shall be issued under the Plan resulting from any such
adjustment, but the Administrator in its discretion may make a cash payment in
lieu of fractional shares.
The Administrator may also adjust the number of shares subject to
outstanding Awards and the exercise price and the terms of outstanding Awards to
take into consideration material changes in accounting practices or principles,
extraordinary dividends, acquisitions or dispositions of stock or property or
any other event if it is determined by the Administrator that such adjustment is
appropriate to avoid distortion in the operation of the Plan, provided that no
such adjustment shall be made in the case of an Incentive Stock Option, without
the consent of
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the grantee, if it would constitute a modification, extension or renewal of the
Option within the meaning of Section 424(h) of the Code.
(c) Mergers and Other Transactions. In the case of and subject to the
consummation of (i) the dissolution or liquidation of the Company, (ii) the sale
of all or substantially all of the assets of the Company on a consolidated basis
to an unrelated person or entity, (iii) a merger, reorganization or
consolidation in which the outstanding shares of Stock are converted into or
exchanged for a different kind of securities of the successor entity and the
holders of the Company's outstanding voting power immediately prior to such
transaction do not own a majority of the outstanding voting power of the
successor entity immediately upon completion of such transaction, or (iv) the
sale of all of the Stock of the Company to an unrelated person or entity (in
each case, a "Sale Event"), all Options and Stock Appreciation Rights that are
not exercisable immediately prior to the effective time of the Sale Event shall
become fully exercisable as of the effective time of the Sale Event and all
other Awards with conditions and restrictions relating solely to the passage of
time and continued employment shall become fully vested and nonforfeitable as of
the effective time of the Sale Event, except as the Administrator may otherwise
specify with respect to particular Awards. Upon the effective time of the Sale
Event, the Plan and all outstanding Awards granted hereunder shall terminate,
unless provision is made in connection with the Sale Event in the sole
discretion of the parties thereto for the assumption or continuation of Awards
theretofore granted by the successor entity, or the substitution of such Awards
with new Awards of the successor entity or parent thereof, with appropriate
adjustment as to the number and kind of shares and, if appropriate, the per
share exercise prices, as such parties shall agree (after taking into account
any acceleration hereunder). In the event of such termination, each grantee
shall be permitted, within a specified period of time prior to the consummation
of the Sale Event as determined by the Administrator, to exercise all
outstanding Options and Stock Appreciation Rights held by such grantee,
including those that will become exercisable upon the consummation of the Sale
Event; provided, however, that the exercise of Options and Stock Appreciation
Rights not exercisable prior to the Sale Event shall be subject to the
consummation of the Sale Event.
Notwithstanding anything to the contrary in this Section 3.2(c), in the
event of a Sale Event pursuant to which holders of the Stock of the Company will
receive upon consummation thereof a cash payment for each share surrendered in
the Sale Event, the Company shall have the right, but not the obligation, to
make or provide for a cash payment to the grantees holding Options and Stock
Appreciation Rights, in exchange for the cancellation thereof, in an amount
equal to the difference between (A) the value as determined by the Administrator
of the consideration payable per share of Stock pursuant to the Sale Event (the
"Sale Price") times the number of shares of Stock subject to outstanding Options
and Stock Appreciation Rights (to the extent then exercisable at prices not in
excess of the Sale Price) and (B) the aggregate exercise price of all such
outstanding Options and Stock Appreciation Rights.
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(d) Substitute Awards. The Administrator may grant Awards under the
Plan in substitution for stock and stock based awards held by employees,
directors or other key persons of another corporation in connection with the
merger or consolidation of the employing corporation with the Company or a
Subsidiary or the acquisition by the Company or a Subsidiary of property or
stock of the employing corporation. The Administrator may direct that the
substitute awards be granted on such terms and conditions as the Administrator
considers appropriate in the circumstances. Any substitute Awards granted under
the Plan shall not count against the share limitation set forth in Section 3(a).
SECTION 4. ELIGIBILITY
Grantees under the Plan will be such full or part-time officers and
other employees, Independent Directors and key persons (including consultants
and prospective employees) of the Company and its Subsidiaries as are selected
from time to time by the Administrator in its sole discretion.
SECTION 5. STOCK OPTIONS
Any Stock Option granted under the Plan shall be in such form as the
Administrator may from time to time approve.
Stock Options granted under the Plan may be either Incentive Stock
Options or NonQualified Stock Options. Incentive Stock Options may be granted
only to employees of the Company or any Subsidiary that is a "subsidiary
corporation" within the meaning of Section 424(f) of the Code. To the extent
that any Option does not qualify as an Incentive Stock Option, it shall be
deemed a Non-Qualified Stock Option.
No Incentive Stock Option shall be granted under the Plan after
_______, 2010.
(a) Stock Options Granted to Employees and Key Persons. The
Administrator in its discretion may grant Stock Options to eligible employees
and key persons of the Company or any Subsidiary. Stock Options granted pursuant
to this Section 5(a) shall be subject to the
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<PAGE> 8
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Administrator
shall deem desirable. If the Administrator so determines, Stock Options may be
granted in lieu of cash compensation at the optionee's election, subject to such
terms and conditions as the Administrator may establish.
(i) Exercise Price. The exercise price per share for the Stock
covered by a Stock Option granted pursuant to this Section 5(a) shall
be determined by the Administrator at the time of grant but shall not
be less than 100 percent of the Fair Market Value on the date of grant
in the case of Incentive Stock Options, or 85 percent of the Fair
Market Value on the date of grant, in the case of Non-Qualified Stock
Options (other than options granted in lieu of cash compensation). If
an employee owns or is deemed to own (by reason of the attribution
rules of Section 424(d) of the Code) more than 10 percent of the
combined voting power of all classes of stock of the Company or any
parent or subsidiary corporation and an Incentive Stock Option is
granted to such employee, the option price of such Incentive Stock
Option shall be not less than 110 percent of the Fair Market Value on
the grant date.
(ii) Option Term. The term of each Stock Option shall be fixed
by the Administrator, but no Stock Option shall be exercisable more
than 10 years after the date the Stock Option is granted. If an
employee owns or is deemed to own (by reason of the attribution rules
of Section 424(d) of the Code) more than 10 percent of the combined
voting power of all classes of stock of the Company or any parent or
subsidiary corporation and an Incentive Stock Option is granted to such
employee, the term of such Stock Option shall be no more than five
years from the date of grant.
(iii) Exercisability; Rights of a Stockholder. Stock Options
shall become exercisable at such time or times, whether or not in
installments, as shall be determined by the Administrator at or after
the grant date. The Administrator may at any time accelerate the
exercisability of all or any portion of any Stock Option. An optionee
shall have the rights of a stockholder only as to shares acquired upon
the exercise of a Stock Option and not as to unexercised Stock Options.
(iv) Method of Exercise. Stock Options may be exercised in
whole or in part, by giving written notice of exercise to the Company,
specifying the number of shares to be purchased. Payment of the
purchase price may be made by one or more of the following methods to
the extent provided in the Option Award agreement:
(A) In cash, by certified or bank check or other
instrument acceptable to the Administrator;
(B) Through the delivery (or attestation to the
ownership) of shares of Stock that have been purchased by the
optionee on the open market or that have been beneficially
owned by the optionee for at least six months and are not then
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subject to restrictions under any Company plan. Such
surrendered shares shall be valued at Fair Market Value on the
exercise date;
(C) By the optionee delivering to the Company a
properly executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the Company
cash or a check payable and acceptable to the Company for the
purchase price; provided that in the event the optionee
chooses to pay the purchase price as so provided, the optionee
and the broker shall comply with such procedures and enter
into such agreements of indemnity and other agreements as the
Administrator shall prescribe as a condition of such payment
procedure; or
(D) By the optionee delivering to the Company a
promissory note if the Board has expressly authorized the loan
of funds to the optionee for the purpose of enabling or
assisting the optionee to effect the exercise of his Stock
Option; provided that at least so much of the exercise price
as represents the par value of the Stock shall be paid other
than with a promissory note if otherwise required by state
law.
Payment instruments will be received subject to collection. The
delivery of certificates representing the shares of Stock to be
purchased pursuant to the exercise of a Stock Option will be contingent
upon receipt from the optionee (or a purchaser acting in his stead in
accordance with the provisions of the Stock Option) by the Company of
the full purchase price for such shares and the fulfillment of any
other requirements contained in the Option Award agreement or
applicable provisions of laws. In the event an optionee chooses to pay
the purchase price by previously-owned shares of Stock through the
attestation method, the number of shares of Stock transferred to the
optionee upon the exercise of the Stock Option shall be net of the
number of shares attested to.
(v) Annual Limit on Incentive Stock Options. To the extent
required for "incentive stock option" treatment under Section 422 of
the Code, the aggregate Fair Market Value (determined as of the time of
grant) of the shares of Stock with respect to which Incentive Stock
Options granted under this Plan and any other plan of the Company or
its parent and subsidiary corporations become exercisable for the first
time by an optionee during any calendar year shall not exceed $100,000.
To the extent that any Stock Option exceeds this limit, it shall
constitute a Non-Qualified Stock Option.
(b) Reload Options. At the discretion of the Administrator, Options
granted under the Plan may include a "reload" feature pursuant to which an
optionee exercising an option by the delivery of a number of shares of Stock in
accordance with Section 5(a)(iv)(B) hereof would automatically be granted an
additional Option (with an exercise price equal to the Fair Market Value of the
Stock on the date the additional Option is granted and with such other terms as
the Administrator may provide) to purchase that number of shares of Stock equal
to
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the sum of (i) the number delivered to exercise the original Option and (ii) the
number withheld to satisfy tax liabilities, with an Option term equal to the
remainder of the original Option term unless the Administrator otherwise
determines in the Award agreement for the original Option grant.
(c) Stock Options Granted to Independent Directors.
(i) Automatic Grant of Options.
(A) Each person who is an Independent Director on the
effective date of the Initial Public Offering shall be granted
a Non-Qualified Stock Option to acquire _______ shares of
Stock.
(B) Each Independent Director who is first elected to
serve as a Director after the Initial Public Offering shall be
granted, on the fifth business day after his election, a
Non-Qualified Stock Option to acquire _______ shares of Stock.
(C) Each Independent Director who is serving as
Director of the Company on the fifth business day after each
annual meeting of shareholders, beginning with the 2001 annual
meeting, shall automatically be granted on such day a
Non-Qualified Stock Option to acquire _______ shares of Stock.
(D) The exercise price per share for the Stock
covered by a Stock Option granted under this Section 5(c)
shall be equal to the Fair Market Value of the Stock on the
date the Stock Option is granted.
(E) The Administrator, in its discretion, may grant
additional NonQualified Stock Options to Independent
Directors. Any such grant may vary among individual
Independent Directors.
(ii) Exercise; Termination.
(A) Unless otherwise determined by the Administrator,
an Option granted under Section 5(c) shall be exercisable in
full as of the grant date. An Option issued under this Section
5(c) shall not be exercisable after the expiration of ten
years from the date of grant.
(B) Options granted under this Section 5(c) may be
exercised only by written notice to the Company specifying the
number of shares to be purchased. Payment of the full purchase
price of the shares to be purchased may be made by one or more
of the methods specified in Section 5(a)(iv). An optionee
shall
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have the rights of a stockholder only as to shares acquired
upon the exercise of a Stock Option and not as to unexercised
Stock Options.
(d) Non-transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee, or by the optionee's legal
representative or guardian in the event of the optionee's incapacity.
Notwithstanding the foregoing, the Administrator, in its sole discretion, may
provide in the Award agreement regarding a given Option that the optionee may
transfer his Non-Qualified Stock Options to members of his immediate family, to
trusts for the benefit of such family members, or to partnerships in which such
family members are the only partners, provided that the transferee agrees in
writing with the Company to be bound by all of the terms and conditions of this
Plan and the applicable Option.
SECTION 6. STOCK APPRECIATION RIGHTS.
(a) Nature of Stock Appreciation Rights. A Stock Appreciation Right is
an Award entitling the recipient to receive an amount in cash or shares of Stock
or a combination thereof having a value equal to the excess of the Fair Market
Value of the Stock on the date of exercise over the exercise price Stock
Appreciation Right, which price shall not be less than 85 percent of the Fair
Market Value of the Stock on the date of grant (or more than the option exercise
price per share, if the Stock Appreciation Right was granted in tandem with a
Stock Option) multiplied by the number of shares of Stock with respect to which
the Stock Appreciation Right shall have been exercised, with the Administrator
having the right to determine the form of payment.
(b) Grant and Exercise of Stock Appreciation Rights. Stock Appreciation
Rights may be granted by the Administrator in tandem with, or independently of,
any Stock Option granted pursuant to Section 5 of the Plan. In the case of a
Stock Appreciation Right granted in tandem with a Non-Qualified Stock Option,
such Stock Appreciation Right may be granted either at or after the time of the
grant of such Option. In the case of a Stock Appreciation Right granted in
tandem with an Incentive Stock Option, such Stock Appreciation Right may be
granted only at the time of the grant of the Option.
A Stock Appreciation Right or applicable portion thereof granted in
tandem with a Stock Option shall terminate and no longer be exercisable upon the
termination or exercise of the related Option.
(c) Terms and Conditions of Stock Appreciation Rights. Stock
Appreciation Rights shall be subject to such terms and conditions as shall be
determined from time to time by the Administrator, subject to the following:
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(i) Stock Appreciation Rights granted in tandem with Options
shall be exercisable at such time or times and to the extent that the
related Stock Options shall be exercisable.
(ii) Upon exercise of a Stock Appreciation Right, the
applicable portion of any related Option shall be surrendered.
(iii) All Stock Appreciation Rights shall be exercisable
during the grantee's lifetime only by the grantee or the grantee's
legal representative.
SECTION 7. RESTRICTED STOCK AWARDS
(a) Nature of Restricted Stock Awards. A Restricted Stock Award is an
Award entitling the recipient to acquire, at such purchase price as determined
by the Administrator, shares of Stock subject to such restrictions and
conditions as the Administrator may determine at the time of grant ("Restricted
Stock"). Conditions may be based on continuing employment (or other service
relationship) and/or achievement of pre-established performance goals and
objectives. The grant of a Restricted Stock Award is contingent on the grantee
executing the Restricted Stock Award agreement. The terms and conditions of each
such agreement shall be determined by the Administrator, and such terms and
conditions may differ among individual Awards and grantees.
(b) Rights as a Stockholder. Upon execution of a written instrument
setting forth the Restricted Stock Award and payment of any applicable purchase
price, a grantee shall have the rights of a stockholder with respect to the
voting of the Restricted Stock, subject to such conditions contained in the
written instrument evidencing the Restricted Stock Award. Unless the
Administrator shall otherwise determine, certificates evidencing the Restricted
Stock shall remain in the possession of the Company until such Restricted Stock
is vested as provided in Section 7(d) below, and the grantee shall be required,
as a condition of the grant, to deliver to the Company a stock power endorsed in
blank.
(c) Restrictions. Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as
specifically provided herein or in the Restricted Stock Award agreement. If a
grantee's employment (or other service relationship) with the Company and its
Subsidiaries terminates for any reason, the Company shall have the right to
repurchase Restricted Stock that has not vested at the time of termination at
its original purchase price, from the grantee or the grantee's legal
representative.
(d) Vesting of Restricted Stock. The Administrator at the time of grant
shall specify the date or dates and/or the attainment of pre-established
performance goals, objectives and other conditions on which the
non-transferability of the Restricted Stock and the Company's right of
repurchase or forfeiture shall lapse. Subsequent to such date or dates and/or
the attainment of such pre-established performance goals, objectives and other
conditions, the shares on which all restrictions have lapsed shall no longer be
Restricted Stock and shall be
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deemed "vested." Except as may otherwise be provided by the Administrator either
in the Award agreement or, subject to Section 15 below, in writing after the
Award agreement is issued, a grantee's rights in any shares of Restricted Stock
that have not vested shall automatically terminate upon the grantee's
termination of employment (or other service relationship) with the Company and
its Subsidiaries and such shares shall be subject to the Company's right of
repurchase as provided in Section 7(c) above.
(e) Waiver, Deferral and Reinvestment of Dividends. The Restricted
Stock Award agreement may require or permit the immediate payment, waiver,
deferral or investment of dividends paid on the Restricted Stock.
SECTION 8. DEFERRED STOCK AWARDS
(a) Nature of Deferred Stock Awards. A Deferred Stock Award is an Award
of phantom stock units to a grantee, subject to restrictions and conditions as
the Administrator may determine at the time of grant. Conditions may be based on
continuing employment (or other service relationship) and/or achievement of
pre-established performance goals and objectives. The grant of a Deferred Stock
Award is contingent on the grantee executing the Deferred Stock Award agreement.
The terms and conditions of each such agreement shall be determined by the
Administrator, and such terms and conditions may differ among individual Awards
and grantees. At the end of the deferral period, the Deferred Stock Award, to
the extent vested, shall be paid to the grantee in the form of shares of Stock.
(b) Election to Receive Deferred Stock Awards in Lieu of Compensation.
The Administrator may, in its sole discretion, permit a grantee to elect to
receive a portion of the cash compensation or Restricted Stock Award otherwise
due to such grantee in the form of a Deferred Stock Award. Any such election
shall be made in writing and shall be delivered to the Company no later than the
date specified by the Administrator and in accordance with rules and procedures
established by the Administrator. The Administrator shall have the sole right to
determine whether and under what circumstances to permit such elections and to
impose such limitations and other terms and conditions thereon as the
Administrator deems appropriate.
(c) Rights as a Stockholder. During the deferral period, a grantee
shall have no rights as a stockholder; provided, however, that the grantee may
be credited with Dividend Equivalent Rights with respect to the phantom stock
units underlying his Deferred Stock Award, subject to such terms and conditions
as the Administrator may determine.
(d) Restrictions. A Deferred Stock Award may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of during the deferral
period.
(e) Termination. Except as may otherwise be provided by the
Administrator either in the Award agreement or, subject to Section 15 below, in
writing after the Award agreement is issued, a grantee's right in all Deferred
Stock Awards that have not vested shall
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automatically terminate upon the grantee's termination of employment (or
cessation of service relationship) with the Company and its Subsidiaries for any
reason.
SECTION 9. UNRESTRICTED STOCK AWARDS
Grant or Sale of Unrestricted Stock. The Administrator may, in its sole
discretion, grant (or sell at par value or such higher purchase price determined
by the Administrator) an Unrestricted Stock Award to any grantee pursuant to
which such grantee may receive shares of Stock free of any restrictions
("Unrestricted Stock") under the Plan. Unrestricted Stock Awards may be granted
in respect of past services or other valid consideration, or in lieu of cash
compensation due to such grantee.
SECTION 10. PERFORMANCE SHARE AWARDS
(a) Nature of Performance Share Awards. A Performance Share Award is an
Award entitling the recipient to acquire shares of Stock upon the attainment of
specified performance goals. The Administrator may make Performance Share Awards
independent of or in connection with the granting of any other Award under the
Plan. The Administrator in its sole discretion shall determine whether and to
whom Performance Share Awards shall be made, the performance goals, the periods
during which performance is to be measured, and all other limitations and
conditions.
(b) Rights as a Stockholder. A grantee receiving a Performance Share
Award shall have the rights of a stockholder only as to shares actually received
by the grantee under the Plan and not with respect to shares subject to the
Award but not actually received by the grantee. A grantee shall be entitled to
receive a stock certificate evidencing the acquisition of shares of Stock under
a Performance Share Award only upon satisfaction of all conditions specified in
the Performance Share Award agreement (or in a performance plan adopted by the
Administrator).
(c) Termination. Except as may otherwise be provided by the
Administrator either in the Award agreement or, subject to Section 15 below, in
writing after the Award agreement is issued, a grantee's rights in all
Performance Share Awards shall automatically terminate upon the grantee's
termination of employment (or cessation of service relationship) with the
Company and its Subsidiaries for any reason.
(d) Acceleration, Waiver, Etc. At any time prior to the grantee's
termination of employment (or other service relationship) by the Company and its
Subsidiaries, the Administrator may in its sole discretion accelerate, waive or,
subject to Section 15, amend any or all of the goals, restrictions or conditions
applicable to a Performance Share Award.
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<PAGE> 15
SECTION 11. PERFORMANCE-BASED AWARDS TO COVERED EMPLOYEES
Notwithstanding anything to the contrary contained herein, if any
Restricted Stock Award, Deferred Stock Award or Performance Share Award granted
to a Covered Employee is intended to qualify as "Performance-based Compensation"
under Section 162(m) of the Code and the regulations promulgated thereunder (a
"Performance-based Award"), such Award shall comply with the provisions set
forth below:
(a) Performance Criteria. The performance criteria used in performance
goals governing Performance-based Awards granted to Covered Employees may
include any or all of the following: (i) the Company's return on equity, assets,
capital or investment, (ii) pre-tax or after-tax profit levels of the Company or
any Subsidiary, a division, an operating unit or a business segment of the
Company, or any combination of the foregoing; (iii) cash flow, funds from
operations or similar measure; (iv) total shareholder return; (v) changes in the
market price of the Stock; (vi) sales or market share; or (vii) earnings per
share.
(b) Grant of Performance-based Awards. With respect to each
Performance-based Award granted to a Covered Employee, the Committee shall
select, within the first 90 days of a Performance Cycle (or, if shorter, within
the maximum period allowed under Section 162(m) of the Code) the performance
criteria for such grant, and the achievement targets with respect to each
performance criterion (including a threshold level of performance below which no
amount will become payable with respect to such Award). Each Performance-based
Award will specify the amount payable, or the formula for determining the amount
payable, upon achievement of the various applicable performance targets. The
performance criteria established by the Committee may be (but need not be)
different for each Performance Cycle and different goals may be applicable to
Performance-based Awards to different Covered Employees.
(c) Payment of Performance-based Awards. Following the completion of a
Performance Cycle, the Committee shall meet to review and certify in writing
whether, and to what extent, the performance criteria for the Performance Cycle
have been achieved and, if so, to also calculate and certify in writing the
amount of the Performance-based Awards earned for the Performance Cycle. The
Committee shall then determine the actual size of each Covered Employee's
Performance-based Award, and, in doing so, may reduce or eliminate the amount of
the Performance-based Award for a Covered Employee if, in its sole judgment,
such reduction or elimination is appropriate.
(d) Maximum Award Payable. The maximum Performance-based Award payable
to any one Covered Employee under the Plan for a Performance Cycle is _______
Shares (subject to adjustment as provided in Section 3(b) hereof).
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SECTION 12. DIVIDEND EQUIVALENT RIGHTS
(a) Dividend Equivalent Rights. A Dividend Equivalent Right is an Award
entitling the grantee to receive credits based on cash dividends that would have
been paid on the shares of Stock specified in the Dividend Equivalent Right (or
other award to which it relates) if such shares had been issued to and held by
the grantee. A Dividend Equivalent Right may be granted hereunder to any grantee
as a component of another Award or as a freestanding award. The terms and
conditions of Dividend Equivalent Rights shall be specified in the Award
agreement. Dividend equivalents credited to the holder of a Dividend Equivalent
Right may be paid currently or may be deemed to be reinvested in additional
shares of Stock, which may thereafter accrue additional equivalents. Any such
reinvestment shall be at Fair Market Value on the date of reinvestment or such
other price as may then apply under a dividend reinvestment plan sponsored by
the Company, if any. Dividend Equivalent Rights may be settled in cash or shares
of Stock or a combination thereof, in a single installment or installments. A
Dividend Equivalent Right granted as a component of another Award may provide
that such Dividend Equivalent Right shall be settled upon exercise, settlement,
or payment of, or lapse of restrictions on, such other award, and that such
Dividend Equivalent Right shall expire or be forfeited or annulled under the
same conditions as such other award. A Dividend Equivalent Right granted as a
component of another Award may also contain terms and conditions different from
such other award.
(b) Interest Equivalents. Any Award under this Plan that is settled in
whole or in part in cash on a deferred basis may provide in the grant for
interest equivalents to be credited with respect to such cash payment. Interest
equivalents may be compounded and shall be paid upon such terms and conditions
as may be specified by the grant.
(c) Termination. Except as may otherwise be provided by the
Administrator either in the Award agreement or, subject to Section 15 below, in
writing after the Award agreement is issued, a grantee's rights in all Dividend
Equivalent Rights or interest equivalents shall automatically terminate upon the
grantee's termination of employment (or cessation of service relationship) with
the Company and its Subsidiaries for any reason.
SECTION 13. TAX WITHHOLDING
(a) Payment by Grantee. Each grantee shall, no later than the date as
of which the value of an Award or of any Stock or other amounts received
thereunder first becomes includable in the gross income of the grantee for
Federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Administrator regarding payment of, any Federal, state, or
local taxes of any kind required by law to be withheld with respect to such
income. The Company and its Subsidiaries shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment of any kind otherwise
due to the grantee. The Company's obligation to deliver stock certificates to
any grantee is subject to and conditioned on tax obligations being satisfied by
the grantee.
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(b) Payment in Stock. Subject to approval by the Administrator, a
grantee may elect to have the minimum required tax withholding obligation
satisfied, in whole or in part, by (i) authorizing the Company to withhold from
shares of Stock to be issued pursuant to any Award a number of shares with an
aggregate Fair Market Value (as of the date the withholding is effected) that
would satisfy the withholding amount due, or (ii) transferring to the Company
shares of Stock owned by the grantee with an aggregate Fair Market Value (as of
the date the withholding is effected) that would satisfy the withholding amount
due.
SECTION 14. TRANSFER, LEAVE OF ABSENCE, ETC.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer to the employment of the Company from a Subsidiary or
from the Company to a Subsidiary, or from one Subsidiary to another; or
(b) an approved leave of absence for military service or sickness, or
for any other purpose approved by the Company, if the employee's right to
re-employment is guaranteed either by a statute or by contract or under the
policy pursuant to which the leave of absence was granted or if the
Administrator otherwise so provides in writing.
SECTION 15. AMENDMENTS AND TERMINATION
The Board may, at any time, amend or discontinue the Plan and the
Administrator may, at any time, amend or cancel any outstanding Award for the
purpose of satisfying changes in law or for any other lawful purpose, but no
such action shall adversely affect rights under any outstanding Award without
the holder's consent. If and to the extent determined by the Administrator to be
required by the Code to ensure that Incentive Stock Options granted under the
Plan are qualified under Section 422 of the Code, if and to the extent intended
to so qualify, Plan amendments shall be subject to approval by the Company
stockholders entitled to vote at a meeting of stockholders. Nothing in this
Section 15 shall limit the Administrator's authority to take any action
permitted pursuant to Section 3(c).
SECTION 16. STATUS OF PLAN
With respect to the portion of any Award that has not been exercised
and any payments in cash, Stock or other consideration not received by a
grantee, a grantee shall have no rights greater than those of a general creditor
of the Company unless the Administrator shall otherwise expressly determine in
connection with any Award or Awards. In its sole discretion, the Administrator
may authorize the creation of trusts or other arrangements to meet the Company's
obligations to deliver Stock or make payments with respect to Awards hereunder,
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provided that the existence of such trusts or other arrangements is consistent
with the foregoing sentence.
SECTION 17. CHANGE OF CONTROL PROVISIONS
Upon the occurrence of a Change of Control as defined in this Section
17:
(a) Except as otherwise provided in the applicable Award agreement,
each outstanding Stock Option and Stock Appreciation Right shall automatically
become fully exercisable.
(b) Except as otherwise provided in the applicable Award Agreement,
conditions and restrictions on each outstanding Restricted Stock Award, Deferred
Stock Award and Performance Share Award which relate solely to the passage of
time and continued employment will be removed. Performance or other conditions
(other than conditions and restrictions relating solely to the passage of time
and continued employment) will continue to apply unless otherwise provided in
the applicable Award agreement.
(c) "Change of Control" shall mean the occurrence of any one of the
following events:
(i) any "Person," as such term is used in Sections 13(d) and
14(d) of the Act (other than the Company, any of its Subsidiaries, or
any trustee, fiduciary or other person or entity holding securities
under any employee benefit plan or trust of the Company or any of its
Subsidiaries), together with all "affiliates" and "associates" (as such
terms are defined in Rule 12b-2 under the Act) of such person, shall
become the "beneficial owner" (as such term is defined in Rule 13d-3
under the Act), directly or indirectly, of securities of the Company
representing 25 percent or more of the combined voting power of the
Company's then outstanding securities having the right to vote in an
election of the Company's Board of Directors ("Voting Securities") (in
such case other than as a result of an acquisition of securities
directly from the Company); or
(ii) persons who, as of the Effective Date, constitute the
Company's Board of Directors (the "Incumbent Directors") cease for any
reason, including, without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a
majority of the Board, provided that any person becoming a director of
the Company subsequent to the Effective Date shall be considered an
Incumbent Director if such person's election was approved by or such
person was nominated for election by either (A) a vote of at least a
majority of the Incumbent Directors or (B) a vote of at least a
majority of the Incumbent Directors who are members of a nominating
committee comprised, in the majority, of Incumbent Directors; but
provided further, that any such person whose initial assumption of
office is in connection with an actual or threatened election contest
relating to the election of members of the Board of Directors or other
actual or threatened solicitation of proxies or consents by or on
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behalf of a Person other than the Board, including by reason of
agreement intended to avoid or settle any such actual or threatened
contest or solicitation, shall not be considered an Incumbent Director;
or
(iii) the approval by the stockholders of the Company of a
consolidation, merger or consolidation or sale or other disposition of
all or substantially all of the assets of the Company (a "Corporate
Transaction") or if consummation of such Corporate Transaction is
subject, at the time of such approval by stockholders, to the consent
of any government or governmental agency, obtaining of such consent
(either explicitly or implicitly by consummation); excluding , however,
a Corporate Transaction in which the stockholders of the Company
immediately prior to the Corporate Transaction, would, immediately
after the Corporate Transaction, beneficially own (as such term is
defined in Rule 13d-3 under the Act), directly or indirectly, shares
representing in the aggregate more than 50 percent of the voting
shares of the corporation issuing cash or securities in the Corporate
Transaction (or of its ultimate parent corporation, if any); or
(iv) the approval by the stockholders of any plan or proposal
for the liquidation or dissolution of the Company.
Notwithstanding the foregoing, a "Change of Control" shall not be
deemed to have occurred for purposes of the foregoing clause (i) solely as the
result of an acquisition of securities by the Company which, by reducing the
number of shares of Voting Securities outstanding, increases the proportionate
number of shares of Voting Securities beneficially owned by any person to 25
percent or more of the combined voting power of all then outstanding Voting
Securities; provided, however, that if any person referred to in this sentence
shall thereafter become the beneficial owner of any additional shares of Voting
Securities (other than pursuant to a stock split, stock dividend, or similar
transaction or as a result of an acquisition of securities directly from the
Company) and immediately thereafter beneficially owns 25 percent or more of
the combined voting power of all then outstanding Voting Securities, then a
"Change of Control" shall be deemed to have occurred for purposes of the
foregoing clause (i).
SECTION 18. GENERAL PROVISIONS
(a) No Distribution; Compliance with Legal Requirements. The
Administrator may require each person acquiring Stock pursuant to an Award to
represent to and agree with the Company in writing that such person is acquiring
the shares without a view to distribution thereof.
No shares of Stock shall be issued pursuant to an Award until all
applicable securities law and other legal and stock exchange or similar
requirements have been satisfied. The Administrator may require the placing of
such stop-orders and restrictive legends on certificates for Stock and Awards as
it deems appropriate.
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(b) Delivery of Stock Certificates. Stock certificates to grantees
under this Plan shall be deemed delivered for all purposes when the Company or a
stock transfer agent of the Company shall have mailed such certificates in the
United States mail, addressed to the grantee, at the grantee's last known
address on file with the Company.
(c) Other Compensation Arrangements; No Employment Rights. Nothing
contained in this Plan shall prevent the Board from adopting other or additional
compensation arrangements, including trusts, and such arrangements may be either
generally applicable or applicable only in specific cases. The adoption of this
Plan and the grant of Awards do not confer upon any employee any right to
continued employment with the Company or any Subsidiary.
(d) Trading Policy Restrictions. Option exercises and other Awards
under the Plan shall be subject to such Company's insider trading policy, as in
effect from time to time.
(e) Loans to Grantees. The Company shall have the authority to make
loans to grantees of Awards hereunder (including to facilitate the purchase of
shares) and shall further have the authority to issue shares for promissory
notes hereunder.
(f) Designation of Beneficiary. Each grantee to whom an Award has been
made under the Plan may designate a beneficiary or beneficiaries to exercise any
Award or receive any payment under any Award payable on or after the grantee's
death. Any such designation shall be on a form provided for that purpose by the
Administrator and shall not be effective until received by the Administrator. If
no beneficiary has been designated by a deceased grantee, or if the designated
beneficiaries have predeceased the grantee, the beneficiary shall be the
grantee's estate.
SECTION 19. EFFECTIVE DATE OF PLAN
This Plan shall become effective upon approval by the holders of a
majority of the votes cast at a meeting of stockholders at which a quorum is
present. Subject to such approval by the stockholders and to the requirement
that no Stock may be issued hereunder prior to such approval, Stock Options and
other Awards may be granted hereunder on and after adoption of this Plan by the
Board.
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SECTION 20. GOVERNING LAW
This Plan and all Awards and actions taken thereunder shall be governed
by, and construed in accordance with, the laws of the State of Delaware, applied
without regard to conflict of law principles.
DATE APPROVED BY BOARD OF DIRECTORS:
DATE APPROVED BY STOCKHOLDERS:
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EXHIBIT 10.5
FORM OF
FAIRMARKET, INC.
EMPLOYEE STOCK PURCHASE PLAN
The purpose of the FairMarket, Inc. Employee Stock Purchase Plan (the
"Plan") is to provide eligible employees of FairMarket, Inc. (the "Company")
with opportunities to purchase shares of the Company's common stock, par value
$0.001 per share (the "Common Stock"). ________________ shares of Common Stock
in the aggregate have been approved and reserved for this purpose. The Plan is
intended to constitute an "employee stock purchase plan" within the meaning of
Section 423(b) of the Internal Revenue Code of 1986, as amended (the "Code"),
and shall be interpreted in accordance with that intent.
1. Administration. The Plan will be administered by the person or
persons (the "Administrator") appointed by the Company's Board of Directors (the
"Board") for such purpose. The Administrator has authority to make rules and
regulations for the administration of the Plan, and its interpretations and
decisions with regard thereto shall be final and conclusive. No member of the
Board or individual exercising administrative authority with respect to the Plan
shall be liable for any action or determination made in good faith with respect
to the Plan or any option granted hereunder.
2. Offerings. The Company will make one or more offerings to eligible
employees to purchase Common Stock under the Plan ("Offerings"). The initial
Offering will begin on the first day of the Company's Initial Public Offering
and will end on the following _________ (the "Initial Offering"). Thereafter,
unless otherwise determined by the Administrator, an
<PAGE> 2
Offering will begin on the first business day occurring on or after each
____________ and ________ and will end on the last business day occurring on or
before the following ________ and __________, respectively. The Administrator
may, in its discretion, designate a different period for any Offering, provided
that no Offering shall exceed six months in duration or overlap any other
Offering.
3. Eligibility. All employees of the Company (including employees who
are also directors of the Company) and all employees of each Designated
Subsidiary (as defined in Section 11) are eligible to participate in any one or
more of the Offerings under the Plan, provided that as of the first day of the
applicable Offering (the "Offering Date") they are customarily employed by the
Company or a Designated Subsidiary for more than 20 hours a week.
4. Participation. An employee eligible on any Offering Date may
participate in such Offering by submitting an enrollment form to his appropriate
payroll location at least 15 business days before the Offering Date (or by such
other deadline as shall be established for the Offering). The form will (a)
state a whole percentage to be deducted from his Compensation (as defined in
Section 11) per pay period, (b) authorize the purchase of Common Stock for him
in each Offering in accordance with the terms of the Plan and (c) specify the
exact name or names in which shares of Common Stock purchased for him are to be
issued pursuant to Section 10. An employee who does not enroll in accordance
with these procedures will be deemed to have waived his right to participate.
Unless an employee files a new enrollment form or withdraws from the Plan, his
deductions and purchases will
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continue at the same percentage of Compensation for future Offerings, provided
he remains eligible. Notwithstanding the foregoing, participation in the Plan
will neither be permitted nor be denied contrary to the requirements of the
Code.
5. Employee Contributions. Each eligible employee may authorize payroll
deductions at a minimum of one percent (1%) up to a maximum of ten percent (10%)
of his Compensation for each pay period. The Company will maintain book accounts
showing the amount of payroll deductions made by each participating employee for
each Offering. No interest will accrue or be paid on payroll deductions.
6. Deduction Changes. Except as may be determined by the Administrator
in advance of an Offering, an employee may not increase or decrease his payroll
deduction during any Offering, but may increase or decrease his payroll
deduction with respect to the next Offering (subject to the limitations of
Section 5) by filing a new enrollment form at least 15 business days before the
next Offering Date (or by such other deadline as shall be established for the
Offering). The Administrator may, in advance of any Offering, establish rules
permitting an employee to increase, decrease or terminate his payroll deduction
during an Offering.
7. Withdrawal. An employee may withdraw from participation in the Plan
by delivering a written notice of withdrawal to his appropriate payroll
location. The employee's withdrawal will be effective as of the next business
day. Following an employee's withdrawal, the Company will promptly refund to him
his entire account balance under the Plan (after payment for any Common Stock
purchased before the effective date of withdrawal). Partial
3
<PAGE> 4
withdrawals are not permitted. The employee may not begin participation again
during the remainder of the Offering, but may enroll in a subsequent Offering in
accordance with Section 4.
8. Grant of Options. On each Offering Date, the Company will grant to
each eligible employee who is then a participant in the Plan an option
("Option") to purchase on the last day of such Offering (the "Exercise Date"),
at the Option Price hereinafter provided for, (a) a number of shares of Common
Stock, which number shall not exceed the number of whole shares which is less
than or equal to $12,500 divided by the closing price per share of Common Stock
on the Offering Date, or (b) such other lesser maximum number of shares as shall
have been established by the Administrator in advance of the Offering.
Notwithstanding the foregoing, on the Offering Date for the Initial Offering,
the Company will grant to each eligible employee who is then a participant in
the Plan an Option to purchase on the Exercise Date, at the Option Price
hereinafter provided for, a number of shares of Common Stock, which number shall
not exceed the number of whole shares which is less than or equal to $25,000
divided by the "Price to the Public" (or equivalent) set forth on the cover page
for the final prospectus relating to the Company's Initial Public Offering. The
purchase price for each share purchased under each Option (the "Option Price")
will be 85% of the Fair Market Value of the Common Stock on the Offering Date or
the Exercise Date, whichever is less.
Notwithstanding the foregoing, no employee may be granted an option
hereunder if such employee, immediately after the option was granted, would be
treated as owning stock possessing five percent (5%) or more of the total
combined voting power or value of all classes
4
<PAGE> 5
of stock of the Company or any Parent or Subsidiary (as defined in Section 11).
For purposes of the preceding sentence, the attribution rules of Section 424(d)
of the Code shall apply in determining the stock ownership of an employee, and
all stock which the employee has a contractual right to purchase shall be
treated as stock owned by the employee. In addition, no employee may be granted
an Option which permits his rights to purchase stock under the Plan, and any
other employee stock purchase plan of the Company and its Parents and
Subsidiaries, to accrue at a rate which exceeds $25,000 of the fair market value
of such stock (determined on the option grant date or dates) for each calendar
year in which the Option is outstanding at any time. The purpose of the
limitation in the preceding sentence is to comply with Section 423(b)(8) of the
Code.
9. Exercise of Option and Purchase of Shares. Each employee who
continues to be a participant in the Plan on the Exercise Date shall be deemed
to have exercised his Option on such date and shall acquire from the Company
such number of whole shares of Common Stock reserved for the purpose of the Plan
as his accumulated payroll deductions on such date will purchase at the Option
Price, subject to any other limitations contained in the Plan. Any amount
remaining in an employee's account at the end of an Offering solely by reason of
the inability to purchase a fractional share will be carried forward to the next
Offering; any other balance remaining in an employee's account at the end of an
Offering will be refunded to the employee promptly.
10. Issuance of Certificates. Certificates representing shares of
Common Stock purchased under the Plan may be issued only in the name of the
employee, in the name of the
5
<PAGE> 6
employee and another person of legal age as joint tenants with rights of
survivorship, or in the name of a broker authorized by the employee to be his,
or their, nominee for such purpose.
11. Definitions.
The term "Compensation" means the amount of base pay, prior to salary
reduction pursuant to either Section 125 or 401(k) of the Code, but excluding
overtime, commissions, incentive or bonus awards, allowances and reimbursements
for expenses such as relocation allowances or travel expenses, income or gains
on the exercise of Company stock options, and similar items.
The term "Designated Subsidiary" means any present or future Subsidiary
(as defined below) that has been designated by the Board to participate in the
Plan. The Board may so designate any Subsidiary, or revoke any such designation,
at any time and from time to time, either before or after the Plan is approved
by the stockholders.
The term "Fair Market Value of the Common Stock" on any given date
means the fair market value of the Common Stock determined in good faith by the
Administrator; provided, however, that if the Common Stock is admitted to
quotation on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), NASDAQ National System or national securities exchange, the
determination shall be made by reference to market quotations. If there are no
market quotations for such date, the determination shall be made by reference to
the last date preceding such date for which there are market quotations.
Notwithstanding the foregoing, if the date for which Fair Market Value of the
Common Stock is determined is the first day when trading prices for the Common
Stock are reported on
6
<PAGE> 7
NASDAQ or on a national securities exchange, the Fair Market Value of the Common
Stock shall be the "Price to the Public" (or equivalent) set forth on the cover
page for the final prospectus relating to the Company's Initial Public Offering.
The term "Initial Public Offering" means the consummation of the first
fully underwritten, firm commitment public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, other than
on Forms S-4 or S-8 or their then equivalents, covering the offer and sale by
the Company of its Common Stock.
The term "Parent" means a "parent corporation" with respect to the
Company, as defined in Section 424(e) of the Code.
The term "Subsidiary" means a "subsidiary corporation" with respect to
the Company, as defined in Section 424(f) of the Code.
12. Rights on Termination of Employment. If a participating employee's
employment terminates for any reason before the Exercise Date for any Offering,
no payroll deduction will be taken from any pay due and owing to the employee
and the balance in his account will be paid to him or, in the case of his death,
to his designated beneficiary as if he had withdrawn from the Plan under Section
7. An employee will be deemed to have terminated employment, for this purpose,
if the corporation that employs him, having been a Designated Subsidiary, ceases
to be a Subsidiary, or if the employee is transferred to any corporation other
than the Company or a Designated Subsidiary.
13. Special Rules. Notwithstanding anything herein to the contrary, the
Administrator may adopt special rules applicable to the employees of a
particular Designated
7
<PAGE> 8
Subsidiary, whenever the Administrator determines that such rules are necessary
or appropriate for the implementation of the Plan in a jurisdiction where such
Designated Subsidiary has employees; provided that such rules are consistent
with the requirements of Section 423(b) of the Code. Such special rules may
include (by way of example, but not by way of limitation) the establishment of a
method for employees of a given Designated Subsidiary to fund the purchase of
shares other than by payroll deduction, if the payroll deduction method is
prohibited by local law or is otherwise impracticable. Any special rules
established pursuant to this Section 13 shall, to the extent possible, result in
the employees subject to such rules having substantially the same rights as
other participants in the Plan.
14. Optionees Not Stockholders. Neither the granting of an Option to an
employee nor the deductions from his pay shall constitute such employee a holder
of the shares of Common Stock covered by an Option under the Plan until such
shares have been purchased by and issued to him.
15. Rights Not Transferable. Rights under the Plan are not transferable
by a participating employee other than by will or the laws of descent and
distribution, and are exercisable during the employee's lifetime only by the
employee.
16. Application of Funds. All funds received or held by the Company
under the Plan may be combined with other corporate funds and may be used for
any corporate purpose.
17. Adjustment in Case of Changes Affecting Common Stock. In the event
of a subdivision of outstanding shares of Common Stock, or the payment of a
dividend in Common Stock, the number of shares approved for the Plan, and the
share limitation set forth in
8
<PAGE> 9
Section 8, shall be increased proportionately, and such other adjustment shall
be made as may be deemed equitable by the Administrator. In the event of any
other change affecting the Common Stock, such adjustment shall be made as may be
deemed equitable by the Administrator to give proper effect to such event.
18. Amendment of the Plan. The Board may at any time, and from time to
time, amend the Plan in any respect, except that without the approval, within 12
months of such Board action, by the stockholders, no amendment shall be made
increasing the number of shares approved for the Plan or making any other change
that would require stockholder approval in order for the Plan, as amended, to
qualify as an "employee stock purchase plan" under Section 423(b) of the Code.
19. Insufficient Shares. If the total number of shares of Common Stock
that would otherwise be purchased on any Exercise Date plus the number of shares
purchased under previous Offerings under the Plan exceeds the maximum number of
shares issuable under the Plan, the shares then available shall be apportioned
among participants in proportion to the amount of payroll deductions accumulated
on behalf of each participant that would otherwise be used to purchase Common
Stock on such Exercise Date.
20. Termination of the Plan. The Plan may be terminated at any time by
the Board. Upon termination of the Plan, all amounts in the accounts of
participating employees shall be promptly refunded.
21. Governmental Regulations. The Company's obligation to sell and
deliver Common Stock under the Plan is subject to obtaining all governmental
approvals required in
9
<PAGE> 10
connection with the authorization, issuance, or sale of such stock.
The Plan shall be governed by Delaware law except to the extent that
such law is preempted by federal law.
22. Issuance of Shares. Shares may be issued upon exercise of an Option
from authorized but unissued Common Stock, from shares held in the treasury of
the Company, or from any other proper source.
23. Tax Withholding. Participation in the Plan is subject to any
minimum required tax withholding on income of the participant in connection with
the Plan. Each employee agrees, by entering the Plan, that the Company and its
Subsidiaries shall have the right to deduct any such taxes from any payment of
any kind otherwise due to the employee, including shares issuable under the
Plan.
24. Notification Upon Sale of Shares. Each employee agrees, by entering
the Plan, to give the Company prompt notice of any disposition of shares
purchased under the Plan where such disposition occurs within two years after
the date of grant of the Option pursuant to which such shares were purchased.
25. Effective Date and Approval of Shareholders. The Plan shall take
effect on the first day of the Company's Initial Public Offering, subject to
approval by the holders of a majority of the votes cast at a meeting of
stockholders at which a quorum is present or by written consent of stockholders.
10
<PAGE> 1
Exhibit 10.9
WARRANT
FAIRMARKET, INC.
WARRANT TO PURCHASE COMMON STOCK
This certifies that, for value received, Microsoft Corporation is entitled
to subscribe for and purchase that number of fully paid and nonassessable shares
of Common Stock of FairMarket, Inc. set forth in Section 2 hereof, or such other
number of shares as may be determined pursuant to an adjustment in accordance
with Section 5 hereof, at the price per share set forth in Section 2, subject to
adjustment from time to time pursuant to Section 5 hereof and subject to the
provisions and upon the terms and conditions set forth herein.
1. DEFINITIONS. As used herein, the following terms have the following
meanings:
"Common Stock" means the common stock, par value $.001 per share, of the
Company.
"Company" means FairMarket, Inc.
"Holder" means Microsoft Corporation.
"Total Purchasable Shares" means 4,500,000 shares of Common Stock.
2. TERM OF WARRANT; NUMBER OF SHARES; WARRANT PRICE. This Warrant is
exercisable, at the option of the Holder, subject to adjustment as provided
below and in accordance with Section 5 hereof, only as follows:
(a) At any time after the issuance hereof and before the earlier of
the Termination Date or the Expiration Date (each as hereinafter defined), this
Warrant may be exercised for an aggregate number of shares of Common Stock less
than or equal to the Total Purchasable Shares (subject to adjustments made
pursuant to Section 5 hereof).
(b) The price paid per share (the "Warrant Price") shall initially be
$1.71 and shall be subject to adjustment as provided in Section 5 hereof.
3. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT; PUBLIC OFFERING;
SALE.
(a) This Warrant may be exercised by the Holder by the surrender of
this Warrant (with the notice of exercise form attached hereto as EXHIBIT A duly
executed) at the principal office of the Company together with payment to the
Company of an amount equal to the then applicable Warrant Price multiplied by
the number of
<PAGE> 2
shares of Common Stock then being purchased (the "Purchase Price"). As an
alternative to paying the Purchase Price in cash, the Holder may deliver to the
Company a properly executed exercise notice and shall be entitled to receive
upon exercise a number of shares of Common Stock equal to the number of shares
of Common Stock for which the Warrant is being exercised minus a number of
shares of Common Stock having an aggregate Fair Market Value (calculated
pursuant to the following paragraph) equal to the Purchase Price.
For purposes of the above paragraph, (i) if the Company has not registered
the Common Stock under Section 12 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), then the "Fair Market Value" of a share of Common
Stock is intended to be the pro rata portion represented by such share with
respect to the value of the Company as a going concern, without application of
any premium for control or any discount for lack of control or lack of
liquidity, and shall be determined by the Board of Directors of the Company in
good faith. In the event of a dispute as to Fair Market Value, the parties shall
exercise reasonable efforts in seeking to reach agreement as to the Fair Market
Value of the Common Stock. In the absence of such agreement, such Fair Market
Value shall be determined by arbitration under the Commercial Arbitration Rules
of the American Arbitration Association in Boston, Massachusetts before a single
arbitrator selected by mutual agreement of the parties or, if the parties do not
agree, by designation of the American Arbitration Association. The expenses of
the arbitration shall be divided equally between the parties. The results of any
such arbitration shall be final and binding on the parties; and (ii) if the
Company has registered the Common Stock under Section 12 of the Exchange Act,
then the "Fair Market Value" of a share of Common Stock shall be the average of
the reported closing prices of the Common Stock on the exchange or market on
which the Common Stock is listed or traded for the ten trading days immediately
preceding the date of exercise of this Warrant.
(b) The Company agrees that the shares of Common Stock so purchased
shall be deemed to be issued to the Holder as the record owner of such shares as
of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares as aforesaid. In the event of any
exercise of the rights represented by this Warrant, certificates for the shares
of Common Stock so purchased shall be delivered to the Holder within three (3)
days thereafter. Partial exercise of this Warrant is permitted and upon any such
partial exercise, unless this Warrant has expired or terminated, a new Warrant
representing the portion of the shares of Common Stock, if any, with respect to
which this Warrant shall not then have been exercised, shall also be issued to
the Holder hereof within the three (3) day period referred to in the preceding
sentence.
(c) Upon receipt by the Holder of written notice from the Company of
the existence of an agreement or arrangement for any transaction or series of
transactions involving: (a) the sale, transfer, conveyance, exchange or other
disposition, other than in the usual and regular course of business, of all or
substantially all of the consolidated assets or properties of the Company and
its subsidiaries taken as
<PAGE> 3
a whole to one more persons or entities who are not affiliates of the Company,
or (b) the sale, transfer, conveyance, exchange or other disposition (including,
without limitation, by merger or consolidation) of all or substantially all of
the Common Stock of the Company to one or more persons or entities who are not
affiliates of the Company (a "Sale Transaction"), the Holder shall have the
right to exercise the Warrant up to and including the date immediately preceding
the date of the closing of such Sale Transaction (the "Termination Date"). If
the closing of such Sale Transaction occurs, the Warrant shall terminate and be
of no further force and effect as of the Termination Date.
In connection with a public offering (a "Public Offering") of the Company's
Common Stock pursuant to a registration statement filed under the Securities Act
of 1933, as amended (the "Securities Act"), the Warrant shall terminate on the
earlier of (i) two years after the consummation of the Public Offering, (ii)
thirty (30) days after the Company has sent written notice to the Holder that
the initial public offering price of the Common Stock equalled or exceeded
$25.00 per share, or (iii) after the consummation of the Public Offering, thirty
(30) days after the Company has sent written notice to the Holder that the
reported closing price of the Common Stock on the exchange or market on which
the Common Stock is listed or traded equalled or exceeded $25.00 for twenty
consecutive trading days.
Unless earlier terminated as provided above, the Warrant shall terminate
and be of no further force and effect on July __, 2004.
4. STOCK FULLY PAID; RESERVATION OF SHARES. All Common Stock which may be
issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be fully paid and nonassessable and free from all taxes, liens and
charges imposed by the Company with respect to the issue thereof. 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 the
issuance upon exercise of the purchase rights evidenced by this Warrant, a
sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented by this Warrant.
5. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The Warrant Price
and the number of shares of Common Stock purchasable upon exercise of the rights
represented by this Warrant shall be subject to adjustment from time to time, as
follows:
(a) In the event the Company shall at any time or from time to time
while this Warrant is outstanding, (i) pay a dividend or make a distribution in
respect of the Common Stock in shares of Common Stock, (ii) subdivide the
outstanding shares of Common Stock, or (iii) combine the outstanding shares of
Common Stock into a smaller number of shares, in each case whether by
reclassification of shares, recapitalization of the Company (including a
recapitalization effected by a merger or consolidation) or otherwise, the
Warrant Price in effect immediately prior to such action shall be adjusted by
multiplying such Warrant Price by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately before
<PAGE> 4
such event, and the denominator of which is the number of shares of Common Stock
outstanding immediately after such event. An adjustment made pursuant to this
Section 5(a) shall be given effect upon payment of such a dividend or
distribution as of the record date for the determination of shareholders
entitled to receive such dividend or distribution (on a retroactive basis) and
in the case of a subdivision or combination shall become effective immediately
as of the effective date thereof.
(b) Upon each adjustment in the Warrant Price pursuant to this
Section 5, the number of shares of Common Stock purchasable hereunder shall be
adjusted, to the next larger whole share, to the product obtained by multiplying
the number of shares purchasable immediately prior to such adjustment in the
Warrant Price by a fraction (i) the numerator of which shall be the Warrant
Price immediately prior to such adjustment and (ii) the denominator of which
shall be the Warrant Price immediately thereafter.
(c) Whenever an adjustment to the Warrant Price is required pursuant
to this Section 5, the Company shall forthwith place on file with the Secretary
of the Company a statement signed by an officer of the Company stating the
adjusted Warrant Price determined as provided herein and the number of shares of
Common Stock purchasable upon exercise of this Warrant. Such statement shall set
forth in reasonable detail such facts as shall be necessary to show the reason
and the manner of computing such adjustment. Promptly after such adjustment, the
Company shall mail a notice thereof to the Holder at the address specified in
Section 7(c) hereof.
(d) No fractional shares of Common Stock will be issued in connection
with any exercise hereunder, but in lieu of such fractional shares the number of
shares to be issued shall be rounded to the next highest number.
6. COMPLIANCE WITH SECURITIES ACT. The Holder of this Warrant, by
acceptance hereof, agrees that the shares of Common Stock to be issued upon
exercise hereof are being acquired for investment and that it will not offer,
sell or otherwise dispose of any shares of Common Stock to be issued upon
exercise of this Warrant except under circumstances which will not result in a
violation of the Securities Act. Upon exercise of this Warrant, the Holder
shall, if requested by the Company, confirm in writing that the shares of Common
Stock so purchased are being acquired for investment and not with a view toward
distribution or resale. All shares of Common Stock issued upon exercise of this
Warrant (unless registered under the Securities Act) shall be stamped or
imprinted with a legend substantially in the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE
SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR
AN OPINION OF COUNSEL
<PAGE> 5
FOR THE HOLDER, SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE ACT OR ANY APPLICABLE
STATE SECURITIES LAW.
7. MISCELLANEOUS.
(a) REPLACEMENT. On receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of this Warrant and,
in the case of loss, theft or destruction, on delivery of an indemnity agreement
or bond reasonably satisfactory in form and amount to the Company or, in the
case of mutilation, on surrender and cancellation of this Warrant, the Company,
at its expense, will execute and deliver, in lieu of this Warrant, a new Warrant
of like tenor.
(b) NOTICE OF CAPITAL CHANGES; PUBLIC OFFERING. In case:
(i) the Company shall declare any dividend or distribution
payable to the holders of shares of its Common Stock;
(ii) there shall be any capital reorganization or
reclassification of the capital stock of the Company, or Sale Transaction;
(iii) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company; or
(iv) the Company shall file a registration statement under the
Securities Act in connection with a Public Offering;
then, in any one or more of said cases, the Company shall give the Holder of
this Warrant written notice, in the manner set forth in Section 7(c) below, of
the date on which a record shall be taken for such dividend or distribution or
for determining shareholders entitled to vote upon such Sale Transaction,
dissolution, liquidation, or winding up and of the date when any such
transaction shall take place, as the case may be. Such written notice shall be
given at least twenty (20) days prior to the closing of the transaction in
question and not less than ten (10) days prior to the record date in respect
thereof or, in the case of subsection (iv), promptly after the filing of such
registration statement. In addition, in the case of a Sale Transaction, such
notice shall recite that the Warrant will terminate in accordance with the
provisions contained in Section 3(c) of this Warrant.
(c) NOTICE. Any notice to be given to either party under this Warrant
shall be in writing and shall be deemed to have been given upon delivery in hand
or when sent by overnight mail, postage prepaid, addressed, if to the Company,
at its principal office and, if to the Holder hereof, at its address as set
forth in the Company's books and records or at such other address as the Holder
hereof may have provided to the Company in writing.
<PAGE> 6
(d) WARRANT AGREEMENT. This Warrant is issued pursuant to, and is
subject to the terms and conditions of, a Warrant Agreement between the Company
and the Holder of even date herewith.
(e) GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of Delaware.
(f) AMENDMENT. The terms of this Warrant may be amended, modified or
waived only with the written consent of the Company and the Holder.
(g) Counterparts. This Warrant may be executed in multiple
counterparts, all of which together shall constitute one instrument.
(h) NO IMPAIRMENT. The Company will not by amendment to its
Certificate of Incorporation or through any reclassification, capital
reorganization, consolidation, merger, sale or conveyance of assets,
dissolution, liquidation, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of the Warrant, but will at all times in good faith assist in the carrying out
of all such terms and in the taking of all such action as may be reasonably
necessary or appropriate in order to protect the rights of the Holder.
(i) TRANSFERABILITY. This Warrant is non-transferable.
[END OF TEXT]
<PAGE> 7
This Warrant has been executed as of August 23, 1999.
FAIRMARKET, INC.
By: /s/ Scott Randall
____________________________
President
Accepted as of August 23, 1999:
MICROSOFT CORPORATION
By: /s/ Robert Eschelman
___________________________
Title: Assistant Secretary
<PAGE> 1
Exhibit 10.10
WARRANT
FAIRMARKET, INC.
WARRANT TO PURCHASE COMMON STOCK
This certifies that, for value received, Lycos, Inc. is entitled to
subscribe for and purchase that number of fully paid and nonassessable shares of
Common Stock of FairMarket, Inc. set forth in Section 2 hereof, or such other
number of shares as may be determined pursuant to an adjustment in accordance
with Section 5 hereof, at the price per share set forth in Section 2, subject to
adjustment from time to time pursuant to Section 5 hereof and subject to the
provisions and upon the terms and conditions set forth herein.
1. DEFINITIONS. As used herein, the following terms have the following
meanings:
"Auction Services Agreement" means the Auction Services Agreement of even
date herewith between Holder and the Company.
"Common Stock" means the common stock, par value $.01 per share, of the
Company.
"Company" means FairMarket, Inc.
"Holder" means Lycos, Inc.
"Total Purchasable Shares" means the total number of shares available for
purchase under this Warrant determined in accordance with Exhibit A hereto.
2. TERM OF WARRANT; NUMBER OF SHARES; WARRANT PRICE. This Warrant is
exercisable, at the option of the Holder, subject to adjustment as provided
below and in accordance with Section 5 hereof, only as follows:
(a) At any time after July 12, 1999 and before the earlier of the
Termination Date or the Expiration Date (each as hereinafter defined), this
Warrant may be exercised for an aggregate number of shares of Common Stock less
than or equal to the Total Purchasable Shares (subject to adjustments made
pursuant to Section 5 hereof).
(b) The price paid per share (the "Warrant Price") shall initially be
$0.01 and shall be subject to adjustment as provided in Section 5 hereof.
(c) This Warrant shall terminate and be of no force or effect if on
or before July 12, 1999 the Auction Services Agreement is terminated.
<PAGE> 2
3. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT; PUBLIC OFFERING;
SALE.
(a) This Warrant may be exercised by the Holder hereof by the
surrender of this Warrant (with the notice of exercise form attached hereto as
Exhibit B duly executed) at the principal office of the Company together with
payment to the Company of an amount equal to the then applicable Warrant Price
multiplied by the number of shares of Common Stock then being purchased (the
"Purchase Price"). As an alternative to paying the Purchase Price in cash, the
Holder may deliver to the Company a properly executed exercise notice and shall
be entitled to receive upon exercise a number of shares of Common Stock equal to
the number of shares of Common Stock for which the Warrant is being exercised
minus a number of shares of Common Stock having an aggregate Fair Market Value
(calculated pursuant to the following paragraph) equal to the Purchase Price.
For purposes of the above paragraph, the "Fair Market Value" of a share of
Common Stock is intended to be the pro rata portion represented by such share
with respect to the value of the Company as a going concern, without application
of any premium for control or any discount for lack of control or lack of
liquidity, and shall be determined by the Board of Directors of the Company in
good faith. In the event of a dispute as to Fair Market Value, the parties shall
exercise reasonable efforts in seeking to reach agreement as to the Fair Market
Value of the Common Stock. In the absence of such agreement, such Fair Market
Value shall be determined by arbitration under the Commercial Arbitration Rules
of the American Arbitration Association in Boston, Massachusetts before a single
arbitrator selected by mutual agreement of the parties or, if the parties do not
agree, by designation of the American Arbitration Association. The expenses of
the arbitration shall be divided equally between the parties. The results of any
such arbitration shall be final and binding on the parties.
(b) The Company agrees that the shares of Common Stock so purchased
shall be deemed to be issued to the Holder as the record owner of such shares as
of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares as aforesaid. In the event of any
exercise of the rights represented by this Warrant, certificates for the shares
of Common Stock so purchased shall be delivered to the Holder within three (3)
days thereafter. Partial exercise of this Warrant is permitted and upon any such
partial exercise, unless this Warrant has expired or terminated, a new Warrant
representing the portion of the shares of Common Stock, if any, with respect to
which this Warrant shall not then have been exercised, shall also be issued to
the Holder hereof within the three (3) day period referred to in the preceding
sentence.
(c) Upon receipt by the Holder of written notice from the Company of
(i) the filing of a registration statement by the Company under the Securities
Act of 1933, as amended (the "Securities Act") to effect a public offering (a
"Public Offering") of the Company's Common Stock or other equity securities or
(ii) the existence of an agreement or arrangement for any transaction or series
of transactions
<PAGE> 3
involving: (a) the sale, transfer, conveyance, exchange or other disposition,
other than in the usual and regular course of business, of all or substantially
all of the consolidated assets or properties of the Company and its subsidiaries
taken as a whole to one more persons or entities who are not affiliates of the
Company, or (b) the sale, transfer, conveyance, exchange or other disposition
(including, without limitation, by merger or consolidation) of all or
substantially all of the Common Stock of the Company to one or more persons or
entities who are not affiliates of the Company (a "Sale Transaction"), the
Holder shall have the right to exercise the Warrant up to and including the date
immediately preceding the date of the closing of such Public Offering or Sale
Transaction (in each case the "Termination Date"). If the closing of such Public
Offering or Sale Transaction occurs, the Warrant shall terminate and be of no
further force and effect as of the Termination Date. If the closing of a Public
Offering or Sale Transaction does not occur within seven (7) years of the
effective date of the Warrant (the "Expiration Date"), the Warrant shall
terminate and be of no further force and effect as of the Expiration Date.
4. STOCK FULLY PAID; RESERVATION OF SHARES. All Common Stock which may be
issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be fully paid and nonassessable and free from all taxes, liens and
charges imposed by the Company with respect to the issue thereof. 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 the
issuance upon exercise of the purchase rights evidenced by this Warrant, a
sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented by this Warrant.
5. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The Warrant Price
and the number of shares of Common Stock purchasable upon exercise of the rights
represented by this Warrant shall be subject to adjustment from time to time, as
follows:
(a) In the event the Company shall at any time or from time to time
while this Warrant is outstanding, (i) pay a dividend or make a distribution in
respect of the Common Stock in shares of Common Stock, (ii) subdivide the
outstanding shares of Common Stock, or (iii) combine the outstanding shares of
Common Stock into a smaller number of shares, in each case whether by
reclassification of shares, recapitalization of the Company (including a
recapitalization effected by a merger or consolidation) or otherwise, the
Warrant Price in effect immediately prior to such action shall be adjusted by
multiplying such Warrant Price by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately before such event, and
the denominator of which is the number of shares of Common Stock outstanding
immediately after such event. An adjustment made pursuant to this Section 5(a)
shall be given effect upon payment of such a dividend or distribution as of the
record date for the determination of shareholders entitled to receive such
dividend or distribution (on a retroactive basis) and in the case of a
subdivision or combination shall become effective immediately as of the
effective date thereof.
<PAGE> 4
(b) Upon each adjustment in the Warrant Price pursuant to this
Section 5, the number of shares of Common Stock purchasable hereunder shall be
adjusted, to the next larger whole share, to the product obtained by multiplying
the number of shares purchasable immediately prior to such adjustment in the
Warrant Price by a fraction (i) the numerator of which shall be the Warrant
Price immediately prior to such adjustment and (ii) the denominator of which
shall be the Warrant Price immediately thereafter.
(c) Whenever an adjustment to the Warrant Price is required pursuant
to this Section 5, the Company shall forthwith place on file with the Secretary
of the Company a statement signed by an officer of the Company stating the
adjusted Warrant Price determined as provided herein and the number of shares of
Common Stock purchasable upon exercise of this Warrant. Such statement shall set
forth in reasonable detail such facts as shall be necessary to show the reason
and the manner of computing such adjustment. Promptly after such adjustment, the
Company shall mail a notice thereof to the Holder at the address specified in
Section 7(c) hereof.
(d) No fractional shares of Common Stock will be issued in connection
with any exercise hereunder, but in lieu of such fractional shares the number of
shares to be issued shall be rounded to the next highest number.
6. COMPLIANCE WITH SECURITIES ACT. The Holder of this Warrant, by
acceptance hereof, agrees that the shares of Common Stock to be issued upon
exercise hereof are being acquired for investment and that it will not offer,
sell or otherwise dispose of any shares of Common Stock to be issued upon
exercise of this Warrant except under circumstances which will not result in a
violation of the Securities Act. Upon exercise of this Warrant, the Holder
shall, if requested by the Company, confirm in writing that the shares of Common
Stock so purchased are being acquired for investment and not with a view toward
distribution or resale. All shares of Common Stock issued upon exercise of this
Warrant (unless registered under the Securities Act) shall be stamped or
imprinted with a legend substantially in the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
APPLICABLE STATE SECURITIES LAWS. NO SALE OR DISPOSITION
MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR
THE HOLDER, SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE ACT OR ANY
APPLICABLE STATE SECURITIES LAW.
<PAGE> 5
7. MISCELLANEOUS.
(a) REPLACEMENT. On receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of this Warrant and,
in the case of loss, theft or destruction, on delivery of an indemnity agreement
or bond reasonably satisfactory in form and amount to the Company or, in the
case of mutilation, on surrender and cancellation of this Warrant, the Company,
at its expense, will execute and deliver, in lieu of this Warrant, a new Warrant
of like tenor.
(b) NOTICE OF CAPITAL CHANGES; PUBLIC OFFERING. In case:
(i) the Company shall declare any dividend or distribution
payable to the holders of shares of its Common Stock;
(ii) there shall be any capital reorganization or
reclassification of the capital stock of the Company, or Sale Transaction;
(iii) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company; or
(iv) the Company shall file a registration statement under the
Securities Act in connection with a Public Offering;
then, in any one or more of said cases, the Company shall give the Holder of
this Warrant written notice, in the manner set forth in Section 7(c) below, of
the date on which a record shall be taken for such dividend or distribution or
for determining shareholders entitled to vote upon such Sale Transaction,
dissolution, liquidation, or winding up and of the date when any such
transaction shall take place, as the case may be. Such written notice shall be
given at least twenty (20) days prior to the closing of the transaction in
question and not less than ten (10) days prior to the record date in respect
thereof or, in the case of subsection (iv), promptly after the filing of such
registration statement. In addition, in the case of a Sale Transaction, such
notice shall recite that the Warrant will terminate in accordance with the
provisions contained in Section 3(c) of this Warrant.
(c) NOTICE. Any notice to be given to either party under this Warrant
shall be in writing and shall be deemed to have been given upon delivery in hand
or when sent by overnight mail, postage prepaid, addressed, if to the Company,
at its principal office and, if to the Holder hereof, at its address as set
forth in the Company's books and records or at such other address as the Holder
hereof may have provided to the Company in writing.
(d) WARRANT AGREEMENT. This Warrant is issued pursuant to, and is
subject to the terms and conditions of, a Warrant Agreement between the Company
and the Holder of even date herewith.
<PAGE> 6
(e) GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of The Commonwealth of Massachusetts.
(f) AMENDMENT. The terms of this Warrant may be amended, modified or
waived only with the written consent of the Company and the Holder.
(g) NO IMPAIRMENT. The Company will not by amendment to its
Certificate of Incorporation or through any reclassification, capital
reorganization, consolidation, merger, sale or conveyance of assets,
dissolution, liquidation, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of the Warrant, but will at all times in good faith assist in the carrying out
of all such terms and in the taking of all such action as may be reasonably
necessary or appropriate in order to protect the rights of the Holder.
(h) TRANSFERABILITY. This Warrant is non-transferable.
[END OF TEXT]
<PAGE> 7
This Warrant has been executed as of May 12, 1999.
FAIRMARKET, INC.
By: /s/ Scott Randall
_______________________________
President
Accepted as of May 12, 1999:
LYCOS, INC.
By: /s/ Robert Dean
___________________________
Title:
<PAGE> 8
EXHIBIT A
COMMON STOCK PURCHASABLE UNDER WARRANT
725,000 shares of Common Stock.
<PAGE> 1
Exhibit 10.11
WARRANT
FAIRMARKET, INC.
PERFORMANCE-BASED WARRANT TO PURCHASE COMMON STOCK
This certifies that, for value received, Lycos, Inc. is entitled to
subscribe for and purchase that number of fully paid and nonassessable shares of
Common Stock of FairMarket, Inc. set forth in Section 2 hereof, or such other
number of shares as may be determined pursuant to an adjustment in accordance
with Section 5 hereof, at the price per share set forth in Section 2, subject to
adjustment from time to time pursuant to Section 5 hereof and subject to the
provisions and upon the terms and conditions set forth herein.
1. DEFINITIONS. As used herein, the following terms have the following
meanings:
"Auction Services Agreement" means the Auction Services Agreement of even
date herewith between Holder and the Company.
"Common Stock" means the common stock, par value $.01 per share, of the
Company.
"Company" means FairMarket, Inc.
"Holder" means Lycos, Inc.
"Total Purchasable Shares" means the total number of shares available for
purchase under this Warrant determined in accordance with Exhibit A hereto.
2. TERM OF WARRANT; NUMBER OF SHARES; WARRANT PRICE. This Warrant is
exercisable, at the option of the Holder, subject to adjustment as provided
below and in accordance with Section 5 hereof, only as follows:
(a) At any time before the earlier of the Termination Date or the
Expiration Date (each as hereinafter defined), this Warrant may be exercised for
an aggregate number of shares of Common Stock less than or equal to the Total
Purchasable Shares, provided that in no event will this Warrant be purchasable
for more than an aggregate of 595,000 shares of Common Stock (subject to
adjustments made pursuant to Section 5 hereof).
(b) The price paid per share (the "Warrant Price") shall initially be
$1.71 and shall be subject to adjustment as provided in Section 5 hereof.
<PAGE> 2
3. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT; SALE.
(a) This Warrant may be exercised by the Holder hereof by the
surrender of this Warrant (with the notice of exercise form attached hereto as
Exhibit B duly executed) at the principal office of the Company together with
payment to the Company of an amount equal to the then applicable Warrant Price
multiplied by the number of shares of Common Stock then being purchased (the
"Purchase Price"). As an alternative to paying the Purchase Price in cash, the
Holder may deliver to the Company a properly executed exercise notice and shall
be entitled to receive upon exercise a number of shares of Common Stock equal to
the number of shares of Common Stock for which the Warrant is being exercised
minus a number of shares of Common Stock having an aggregate Fair Market Value
(calculated pursuant to the following paragraph) equal to the Purchase Price.
For purposes of the above paragraph, the "Fair Market Value" of a share of
Common Stock is intended to be the pro rata portion represented by such share
with respect to the value of the Company as a going concern, without application
of any premium for control or any discount for lack of control or lack of
liquidity, and shall be determined by the Board of Directors of the Company in
good faith. In the event of a dispute as to Fair Market Value, the parties shall
exercise reasonable efforts in seeking to reach agreement as to the Fair Market
Value of the Common Stock. In the absence of such agreement, such Fair Market
Value shall be determined by arbitration under the Commercial Arbitration Rules
of the American Arbitration Association in Boston, Massachusetts before a single
arbitrator selected by mutual agreement of the parties or, if the parties do not
agree, by designation of the American Arbitration Association. The expenses of
the arbitration shall be divided equally between the parties. The results of any
such arbitration shall be final and binding on the parties.
(b) The Company agrees that the shares of Common Stock so purchased
shall be deemed to be issued to the Holder as the record owner of such shares as
of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares as aforesaid. In the event of any
exercise of the rights represented by this Warrant, certificates for the shares
of Common Stock so purchased shall be delivered to the Holder within three (3)
days thereafter. Partial exercise of this Warrant is permitted and upon any such
partial exercise, unless this Warrant has expired or terminated, a new Warrant
representing the portion of the shares of Common Stock, if any, with respect to
which this Warrant shall not then have been exercised, shall be issued to the
Holder hereof within the three (3) day period referred to in the preceding
sentence.
(c) Upon receipt by the Holder of written notice from the Company of
the existence of an agreement or arrangement for any transaction or series of
transactions involving the sale, transfer, conveyance, exchange or other
disposition, other than in the usual and regular course of business, of all or
substantially all of the consolidated assets or properties of the Company and
its subsidiaries taken as a whole
<PAGE> 3
to one more persons or entities who are not affiliates of the Company (an "Asset
Sale Transaction"), then:
(x) effective immediately prior to the closing of such Asset
Sale Transaction, the number of shares of Common Stock for which the
Warrant is exercisable (subject to such adjustments as have been made
pursuant to Section 5 hereof) shall be determined as follows:
"Hurdle Date" shall mean a date that is 30 days, 60 days, 90 days or
180 days after full launch of the Auction Services (as defined in the
Auction Services Agreement) or the first or second anniversary of the date
of the Warrant.
For any Hurdle Date that occurs on or before the date of closing of
such Asset Sale Transaction (the "Termination Date"), the Holder shall be
entitled to purchase a number of shares determined in accordance with
EXHIBIT A (subject to the limitations contained therein).
For any Hurdle Date that occurs after the Termination Date, peak daily
listings as of such Hurdle Date shall be estimated by multiplying (1) the
peak daily listings achieved prior to the Termination Date, by (2) the
quotient of (A) the number of days between the date of the Warrant and such
Hurdle Date and (B) the number of days between the date of the Warrant and
the Termination Date. In addition to shares purchasable pursuant to the
immediately preceding paragraph, the Holder shall be entitled to purchase a
number of shares determined in accordance with EXHIBIT A (subject to the
limitations contained therein) assuming that the estimated peak daily
listings had been achieved with respect to each Hurdle Date occurring after
the Termination Date; and
(y) the Holder shall have the right to exercise the Warrant up
to and including the Termination Date for the number of shares determined
in accordance with the immediately preceding subsection (x); provided, that
any such exercise shall be conditioned on the closing of such Asset Sale
Transaction. If the closing of such Asset Sale Transaction occurs, the
Warrant shall terminate and be of no further force and effect after the
Termination Date. It the closing of such Asset Sale Transaction does not
occur, then the Warrant shall continue in full force and effect without any
adjustment pursuant to subsection (x) above but subject to subsection (e).
(d) If after the date of the Warrant there shall be any reclassification,
capital reorganization or change of the Common Stock (other than as a result of
a subdivision, combination or stock dividend provided for in Section 5(a)
hereof), or any consolidation of the Company with, or merger of the Company
into, another corporation or other business organization (other than a
consolidation or merger in which the Company is the continuing corporation and
which does not result in any reclassification or change of the outstanding
Common Stock) (a "Stock Sale Transaction") then, as a condition of such Stock
Sale Transaction, lawful provisions
<PAGE> 4
shall be made, and duly executed documents evidencing the same from the Company
or its successor shall be delivered to the Holder, so that the Holder shall
thereafter have the right to purchase, at a total purchase price not to exceed
that payable upon the exercise of this Warrant in full, the kind and amount of
shares of stock and other securities and property receivable upon such Stock
Sale Transaction by a holder of the number of shares of Common Stock which might
have been purchased by the Holder immediately prior to such Stock Sale
Transaction and in any such case appropriate provisions shall be made with
respect to the rights and interest of the Holder to the end that the provisions
hereof (including without limitation provisions for the adjustment for the
number of shares issuable hereunder) shall thereafter be applicable in relation
to any shares of stock or other securities and property thereafter deliverable
upon exercise hereof.
(e) If the closing of a Stock Sale Transaction or Asset Sale Transaction
does not occur within seven (7) years of the effective date of the Warrant (the
"Expiration Date"), the Warrant shall terminate and be of no further force and
effect as of the Expiration Date.
4. STOCK FULLY PAID; RESERVATION OF SHARES. All Common Stock which may be
issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be fully paid and nonassessable and free from all taxes, liens and
charges imposed by the Company with respect to the issue thereof. 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 the
issuance upon exercise of the purchase rights evidenced by this Warrant, a
sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented by this Warrant.
5. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The Warrant Price
and the number of shares of Common Stock purchasable upon exercise of the rights
represented by this Warrant shall be subject to adjustment from time to time, as
follows:
(a) In the event the Company shall at any time or from time to time
while this Warrant is outstanding, (i) pay a dividend or make a distribution in
respect of the Common Stock in shares of Common Stock, (ii) subdivide the
outstanding shares of Common Stock, or (iii) combine the outstanding shares of
Common Stock into a smaller number of shares, in each case whether by
reclassification of shares, recapitalization of the Company (including a
recapitalization effected by a merger or consolidation) or otherwise, the
Warrant Price in effect immediately prior to such action shall be adjusted by
multiplying such Warrant Price by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately before such event, and
the denominator of which is the number of shares of Common Stock outstanding
immediately after such event. An adjustment made pursuant to this Section 5(a)
shall be given effect upon payment of such a dividend or distribution as of the
record date for the determination of shareholders entitled to receive such
dividend or
<PAGE> 5
distribution (on a retroactive basis) and in the case of a subdivision or
combination shall become effective immediately as of the effective date thereof.
(b) In the event the Company shall issue, sell or exchange any shares
of Common Stock (excluding (i) any shares of Common Stock issued in a
transaction described in Section 5(a), (ii) up to 2,000,000 shares of Common
Stock issued pursuant to a plan approved by the Board of Directors for the
benefit of officers, employees or consultants of the Company or (iii) shares of
Common Stock issued in connection with the acquisition of the assets of or
ownership interests in another entity by the Company or an affiliate of the
Company, approved by the Board of Directors, whether by merger, purchase of
stock or other ownership interests in such entity, purchase of all or
substantially all of the assets of such entity, or otherwise (the "Excluded
Shares")), without consideration or for a consideration per share less than the
Warrant Price in effect immediately prior to the issuance, sale or exchange of
such shares, then, and in such event, the Warrant Price in effect immediately
prior to the issuance, sale or exchange of such shares shall forthwith be
reduced to an amount determined by multiplying such Warrant Price by a fraction:
(A) the numerator of which shall be (1) the number of shares of
Common Stock outstanding immediately prior to the issuance of such
additional shares of Common Stock (including all shares of Common Stock
issuable upon conversion or exercise of any outstanding preferred stock,
options, warrants, rights or other convertible securities), plus (2) the
number of shares of Common Stock which the aggregate consideration received
by the Company for the total number of such additional shares of Common
Stock so issued would purchase at the Warrant Price in effect immediately
prior to such issuance, and
(B) the denominator of which shall be (1) the number of shares of
Common Stock outstanding immediately prior to the issuance of such
additional shares of Common Stock (including all shares of Common Stock
issuable upon conversion or exercise of any outstanding preferred stock,
options, warrants, rights or other convertible securities), plus (2) the
number of such additional shares of Common Stock so issued.
No adjustment of the Warrant Price shall be made under this Section 5(b)
upon the issuance of any additional shares of Common Stock which are issued
pursuant to the exercise of any warrants, options or other subscription or
purchase rights or pursuant to the exercise of any conversion or exchange rights
of any convertible securities if an adjustment shall previously have been made
upon the issuance of such warrants, options or other rights.
(c) In the event the Company shall issue options, warrants or rights
to subscribe for shares of Common Stock, or issue any securities convertible
into or exchangeable for shares of Common Stock (other than for Excluded
Shares), for a consideration per share (determined by dividing the Aggregate
Consideration (as determined below) by the aggregate number of shares of Common
Stock that would be
<PAGE> 6
issued if all such options, warrants, rights or convertible securities were
exercised or converted to the fullest extent permitted by their terms) less than
the Warrant Price in effect immediately prior to the issuance of such options or
rights or convertible or exchangeable securities, the Warrant Price in effect
immediately prior to the issuance of such options, warrants or rights or
securities shall be reduced to an amount determined by multiplying such Warrant
Price by a fraction:
(A) the numerator of which shall be (1) the number of shares of
Common Stock outstanding immediately prior to the issuance of such options,
rights or convertible securities (including all shares of Common Stock
issuable upon conversion or exercise of any outstanding preferred stock,
options, warrants, rights or other convertible securities), plus (2) the
number of shares of Common Stock which the total amount of consideration
received by the Company for the issuance of such options, warrants, rights
or convertible securities plus the minimum amount set forth in the terms of
such security as payable to the Company upon the exercise or conversion
thereof (the "Aggregate Consideration") would purchase at the Warrant Price
prior to adjustment, and
(B) the denominator of which shall be (1) the number of shares of
Common Stock outstanding immediately prior to the issuance of such options,
warrants, rights or other convertible securities (including all shares of
Common Stock issuable upon conversion or exercise of any outstanding
preferred stock, options, warrants, rights or convertible securities), plus
(2) the aggregate number of shares of Common Stock that would be issued if
all such options, warrants, rights or convertible securities were fully
exercised or converted.
Any adjustment of the Warrant Price shall be disregarded if, as, and when
the rights to acquire shares of Common Stock upon exercise or conversion of the
options, warrants, rights or convertible securities which gave rise to such
adjustment expire or are canceled without having been exercised, so that the
Warrant Price effective immediately upon such cancellation or expiration shall
be equal to the Warrant Price in effect at the time of the issuance of the
expired or canceled options, warrants, rights or convertible securities, with
such additional adjustments as would have been made to that Warrant Price had
the expired or canceled options, warrants, rights or convertible securities not
been issued.
(d) Upon each adjustment in the Warrant Price pursuant to this
Section 5, the number of shares of Common Stock purchasable hereunder shall be
adjusted, to the next larger whole share, to the product obtained by multiplying
the number of shares purchasable immediately prior to such adjustment in the
Warrant Price by a fraction (i) the numerator of which shall be the Warrant
Price immediately prior to such adjustment and (ii) the denominator of which
shall be the Warrant Price immediately thereafter.
<PAGE> 7
(e) Whenever an adjustment to the Warrant Price is required pursuant
to this Section 5, the Company shall forthwith place on file with the Secretary
of the Company a statement signed by an officer of the Company stating the
adjusted Warrant Price determined as provided herein and the number of shares of
Common Stock purchasable upon exercise of this Warrant. Such statement shall set
forth in reasonable detail such facts as shall be necessary to show the reason
and the manner of computing such adjustment. Promptly after such adjustment, the
Company shall mail a notice thereof to the Holder at the address specified in
Section 7(c) hereof.
(f) No fractional shares of Common Stock will be issued in connection
with any exercise hereunder, but in lieu of such fractional shares the number of
shares to be issued shall be rounded to the next highest number.
6. COMPLIANCE WITH SECURITIES ACT. The Holder of this Warrant, by
acceptance hereof, agrees that the shares of Common Stock to be issued upon
exercise hereof are being acquired for investment and that it will not offer,
sell or otherwise dispose of any shares of Common Stock to be issued upon
exercise of this Warrant except under circumstances which will not result in a
violation of the Securities Act. Upon exercise of this Warrant, the Holder
shall, if requested by the Company, confirm in writing that the shares of Common
Stock so purchased are being acquired for investment and not with a view toward
distribution or resale. All shares of Common Stock issued upon exercise of this
Warrant (unless registered under the Securities Act) shall be stamped or
imprinted with a legend substantially in the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
APPLICABLE STATE SECURITIES LAWS. NO SALE OR DISPOSITION
MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR
THE HOLDER, SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE ACT OR ANY
APPLICABLE STATE SECURITIES LAW.
<PAGE> 8
7. MISCELLANEOUS.
(a) REPLACEMENT. On receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of this Warrant and,
in the case of loss, theft or destruction, on delivery of an indemnity agreement
or bond reasonably satisfactory in form and amount to the Company or, in the
case of mutilation, on surrender and cancellation of this Warrant, the Company,
at its expense, will execute and deliver, in lieu of this Warrant, a new Warrant
of like tenor.
(b) NOTICE OF CAPITAL CHANGES; PUBLIC OFFERING. In case:
(i) the Company shall declare any dividend or distribution
payable to the holders of shares of its Common Stock;
(ii) there shall be any capital reorganization or
reclassification of the capital stock of the Company, or Asset Sale
Transaction or Stock Sale Transaction;
(iii) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company; or
(iv) the Company shall file a registration statement under the
Securities Act in connection with a Public Offering;
then, in any one or more of said cases, the Company shall give the Holder of
this Warrant written notice, in the manner set forth in Section 7(c) below, of
the date on which a record shall be taken for such dividend or distribution or
for determining shareholders entitled to vote upon such Asset Sale Transaction,
Stock Sale Transaction, dissolution, liquidation, or winding up and of the date
when any such transaction shall take place, as the case may be. Such written
notice shall be given at least twenty (20) days prior to the closing of the
transaction in question and not less than ten (10) days prior to the record date
in respect thereof or, in the case of subsection (iv), promptly after the filing
of such registration statement. In addition, in the case of an Asset Sale
Transaction, such notice shall recite that the Warrant will terminate in
accordance with the provisions contained in Section 3(c) of this Warrant.
(c) NOTICE. Any notice to be given to either party under this Warrant
shall be in writing and shall be deemed to have been given upon delivery in hand
or when sent by overnight mail, postage prepaid, addressed, if to the Company,
at its principal office and, if to the Holder hereof, at its address as set
forth in the Company's books and records or at such other address as the Holder
hereof may have provided to the Company in writing.
(d) WARRANT AGREEMENT. This Warrant is issued pursuant to, and is
subject to the terms and conditions of, a Warrant Agreement between the Company
and the Holder of even date herewith.
<PAGE> 9
(e) GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of The Commonwealth of Massachusetts.
(f) AMENDMENT. The terms of this Warrant may be amended, modified or
waived only with the written consent of the Company and the Holder.
(g) NO IMPAIRMENT. The Company will not by amendment to its
Certificate of Incorporation or through any reclassification, capital
reorganization, consolidation, merger, sale or conveyance of assets,
dissolution, liquidation, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of the Warrant, but will at all times in good faith assist in the carrying out
of all such terms and in the taking of all such action as may be reasonably
necessary or appropriate in order to protect the rights of the Holder.
(h) TRANSFERABILITY. This Warrant is non-transferable.
[END OF TEXT]
<PAGE> 10
This Warrant has been executed as of May 12, 1999.
FAIRMARKET, INC.
By: /s/ Scott Randall
__________________________
Title: President
Accepted as of May 12, 1999:
LYCOS, INC.
By: /s/ Robert Dean
___________________________
Title:
<PAGE> 1
Exhibit 10.12
SITEHARBOR SERVICES AGREEMENT
This Agreement is entered into on this 30th day of October 1998 (the "Effective
Date"), by and between NaviSite Internet Services Corporation ("NaviSite"), with
an address of 300 Federal Street, Andover, Massachusetts 01810 and FairMarket,
Inc. ("Client"), with an address of 400 Unicorn Park Drive, Woburn, MA 01801.
1. DEFINITIONS
1.1 "Client Equipment" means all hardware and equipment provided by Client
or acquired on behalf of Client in connection with the SiteHarbor Services.
1.2 "Client Materials" means all Client Equipment, Content and any other
materials provided by Client or acquired on behalf of Client in connection with
the SiteHarbor Services.
1.3 "Confidential Information" means, subject to the exceptions set forth
in Section 10.2 below, any information and data, regardless of whether it is in
tangible form, of either party that such party has either marked as confidential
or proprietary, or has identified in writing as confidential or proprietary
within ten (10) days of disclosure to the other party. Confidential Information
shall include, without limitation, the terms of this Agreement (but not its
existence), information regarding business plans, strategies, technology,
Clients and products, and each party's proprietary software.
1.4 "Consulting Services" has the meaning set forth in Section 2.2.
1.5 "Content" means any information, data, software, programs, operating,
systems and any other materials installed by Client or on behalf of Client on
the Client Equipment.
1.6 "Designated NaviCenters" means NaviSite's Internet data center where
the Client Materials will be installed, as listed on SCHEDULE A.
1.7 "SiteHarbor Services" has the meaning set forth in Section 2.1.
1.8 "Site Harbor Equipment" means the NaviSite Equipment and
the Supplemental Equipment.
1.9 "Supplemental Equipment" means all hardware and equipment supplied by
the Client or acquired on behalf of the Client at the Client's own expense to
supplement the NaviSite Equipment. The Client shall retain all right, title and
interest in the Supplemental Equipment.
1.10 "NaviSite Equipment" means all hardware and equipment NaviSite has
determined is necessary for providing the Site Harbor Services and NaviSite has
agreed to provide at NaviSite's expense. NaviSite shall retain all right, title
and interest in the NaviSite Equipment.
2. SERVICES
2.1 SERVICES. NaviSite will provide Client the SiteHarbor Services
described in Schedule A attached subject to the terms and conditions of this
Agreement ("SiteHarbor Services").
2.2 CONSULTING SERVICES. Client may request that NaviSite provide
additional services outside the scope of SiteHarbor Services which will
described in SCHEDULE D attached hereto ("Consulting Services"). Such Consulting
Services, if any, will be subject to the terms and conditions contained this
Agreement and any additional terms and conditions described in SCHEDULE D.
<PAGE> 2
3. FEES, PAYMENTS AND TAXES
3.1 FEES. The fees and charges for SiteHarbor Services and Consulting
Services will be as set forth in SCHEDULE B.
3.2 BILLING AND PAYMENT. Client shall pay NaviSite all amounts owed
hereunder. Payment of fees and charges are due within thirty (30) calendar days
after the date of each NaviSite invoice. All payments shall be made in U.S.
dollars. Amounts past due shall be subject to an interest charge equal to one
and one-half percent (1.5%) per month, or, if less, the highest rate allowed by
applicable law.
3.3 TAXES. Client will be responsible for and agrees to pay in full any
and all taxes resulting from this Agreement or any activities under this
Agreement except for taxes based upon NaviSite's net income.
4. CLIENT CONTENT
As between NaviSite and Client, Client shall retains all rights in the Content;
provided, however, NaviSite shall retain all rights in materials owned, licensed
or developed by NaviSite and installed on the Client Equipment by or at the
direction of NaviSite including any software or know-how related to NaviSite's
products or network services.
5. CLIENT OBLIGATIONS
As a condition to NaviSite's performance of the SiteHarbor Services and
Consulting Services, Client agrees to the following:
5.1 PROVIDE CLIENT MATERIALS. Client shall be responsible for providing
and paying for all Content and Client Materials necessary to the installation of
the Client Materials and necessary to NaviSite's offering of SiteHarbor Services
and Consulting Services.
5.2 COOPERATION. Client, at its own expense, shall reasonably cooperate
with NaviSite in performing the SiteHarbor Services and Consulting Services,
including providing NaviSite with timely access to Client Materials, personnel
(executive and staff), utilities and information reasonably necessary to the
performance of the SiteHarbor Services and Consulting Services. Client is
responsible for the accuracy and completeness of the information and data Client
supplies to NaviSite for use hereunder.
5.3 ACCESS AND SECURITY. NaviSite will provide Client access to the Client
Space within the Designated NaviCenter seven (7) days per week, twenty-four (24)
hours per day for the term of this agreement; PROVIDED, HOWEVER, that such
access shall be (i) limited solely to the individuals identified and authorized
by Client to have access to the Client Space and the Designated NaviCenter, as
named on SCHEDULE C ("Representatives") which Client may amend from time to time
by providing written notice to NaviSite, and (ii) subject to such
Representatives compliance with the terms of this Agreement..
5.4 INSURANCE. Client shall keep in full force and effect during the term
of this Agreement, comprehensive general liability for bodily injury and
property damage insurance in an amount not less than $1 million per occurrence.
Client also agrees that it will, and will be solely responsible for ensuring
that its agents (including contractors and subcontractors) maintain, other
insurance at levels no less than those required by applicable law and customary
in Client's and its agents' industries. Upon the request of NaviSite, Client
will furnish NaviSite with certificates of insurance which evidence the minimum
levels of insurance set forth above. Client will cause its insurance providers
to name NaviSite as an additional insured and notify NaviSite in writing of the
effective date thereof.
6. CLIENT REPRESENTATIONS AND WARRANTIES
6.1 CLIENT MATERIALS. Client warrants and represents that it owns or has
the legal right and authority, during the term of this Agreement, to place and
use the Client Materials as contemplated by this
The information contained in this document is proprietary and confidential.
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Agreement. Client further represents and warrants that its placement,
arrangement, and use of the Client Materials in the Designated NaviCenters will
be in accordance with applicable manufacturers' specifications.
6.2 CONTENT. Client warrants and represents that the Content: (i) shall
not infringe or violate the rights of any third party including, but not limited
to, intellectual property rights; (ii) will not result in any harm to NaviSite
or NaviSite's business, as determined in NaviSite's good faith reasonable
discretion; (ill) is not defamatory or obscene and does not violate any right of
privacy or publicity; and (iv) does not violate any applicable law or
regulation.
6.3 COMPLIANCE WITH LAW. Client warrants and represents that Client's use
of the SiteHarbor Services and Consulting Services will comply with U.S. law and
any other applicable law and regulations, including U.S. export control laws and
regulations regarding software and technical data. Client further represents and
warrants that it will not to use the SiteHarbor Services or Consulting Services
for any illegal purposes.
6.4 NON-INTERFERENCE. Client warrants and represents that Client will not
use the SiteHarbor Services or Consulting Services to interfere with or disrupt
other NaviSite clients, Internet users, network services or network equipment.
Interference or disruptions include, but are not limited, to distribution of
repeated and unsolicited advertising or chain letters, propagation of computer
worms and viruses, and use of the SiteHarbor Services or Consulting Services to
make unauthorized entry to any other computer or machine accessible via the
Internet.
6.5 BREACH OF WARRANTIES. In the event of any breach, or reasonably
anticipated breach, of any of the warranties and representations in this Section
6, in addition to any other remedies available at law or in equity, NaviSite
will have the right to immediately, in NaviSite's sole discretion, suspend the
SiteHarbor Services or Consulting Services if deemed reasonably necessary by
NaviSite to prevent any harm to NaviSite, NaviSite's clients or Internet users.
7. MARKETING
7.1 MARKETING. Client consents to NaviSite's reference to Client by trade
name and trademark in NaviSite's marketing materials and web site with the
Client's prior approval.
The information contained in this document is proprietary and confidential.
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8. NAVISITE LIMITED WARRANTY AND DISCLAIMERS
8.1 SERVICE WARRANTY. NaviSite warrants that the SiteHarbor Services and
Consulting Services, if any, provided hereunder will be performed in a
workmanlike manner in accordance with reasonable commercial standards. NaviSite
guarantees that it will maintain a 99.99% up time for facilities and IP
connectivity. In the event the Client is unable to transmit or receive
information via the Internet as a result of disruptions to either the Designated
NaviCenters or to the NaviSite Network, then NaviSite will credit the Client's
account for every five (5) consecutive minutes that the Client is unable to
transmit or receive information via the Internet with the prorated fees for one
(1) day of SiteHarbor services, up to a maximum credit during any calendar month
equal the total prorated fees due to NaviSite from Client during such calendar
month ("Standard Service Credit"). In no event will NaviSite's scheduled
maintenance of either the Designated NaviCenters or the NaviSite Network be
deemed a disruption entitling Client to the Standard Service Credit.
8.2 NO OTHER WARRANTY. EXCEPT FOR THE EXPRESS WARRANTY SET FORTH IN
SECTION 8.1 ABOVE, NAVISITE MAKES NO OTHER REPRESENTATIONS OR WARRANTIES, AND
HEREBY DISCLAIMS THE WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE AND NON-INFRINGEMENT. NAVISITE DOES NOT WARRANT THAT THE SITEHARBOR
SERVICES WILL BE UNINTERRUPTED, ERROR-FREE OR COMPLETELY SECURE.
9. LIMITATION OF LIABILITY
NAVISITE SHALL NOT BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL,
CONSEQUENTIAL OR PUNITIVE DAMAGES, INCLUDING WITHOUT LIMITATION, LOST PROFITS,
LOST SAVINGS OR DAMAGES RESULTING FROM LOSS OF USE OR LOSS OF CONTENT. NAVISITE
SHALL HAVE NO LIABILITY FOR ANY DAMAGES RESULTING FROM CLIENT'S FAILURE TO
PERFORM CLIENT'S OBLIGATIONS HEREUNDER. IN NO EVENT SHALL NAVISITE'S LIABILITY
FOR DAMAGES HEREUNDER EXCEED THE CHARGES PAID BY THE CLIENT HEREUNDER FOR THE
PRIOR TWELVE (12) MONTH PERIOD PRIOR TO THE EVENT GIVING RISE TO LIABILITY.
10. INDEMNIFICATION
10.1 NAVISITE'S INDEMNIFICATION OF CLIENT. NaviSite will indemnify, defend
and hold Client harmless from and against any and all liabilities, losses,
damages, costs and expenses, including reasonable attorney's fees, and amounts
paid in settlement, resulting from or arising out of any claim, suit, action or
proceeding brought against Client as a consequence of (i) NaviSite's
infringement of any third party copyright, trademark or trade secret, or (ii)
personal injury to Client's representatives due to NaviSite's gross negligence
or willful misconduct.
10.2 CLIENT'S INDEMNIFICATION OF NAVISITE. Client will indemnify, defend
and hold NaviSite, its affiliates and its clients harmless from and against any
and all liabilities, losses, damages, costs and expenses, including reasonable
attorney's fees, and amounts paid in settlement resulting from or arising out of
any claim, suit, action or proceeding brought against NaviSite, its affiliates
or other clients as a consequence of (i) infringement of any third party
copyright, trademark or trade secret, ( ii) breach or alleged breach of Client's
obligations, representations or warranties set forth herein, or (iii) the Client
Materials or any Client action or inaction related to the Client Materials.
11. CONFIDENTIALITY AND PROPRIETARY INFORMATION
11.1 CONFIDENTIAL INFORMATION. Each party acknowledges that it will have
access to Confidential Information. Each party agrees that it will not use in
any way, for its own account or the account of any third party, except for the
performance of this Agreement, nor disclose to any third party (except as
required by law or to that party's attorneys, accountants and other advisors
subject to a duty of confidentiality as reasonably necessary), any of the other
party's Confidential Information and will take reasonable precautions to protect
the confidentiality of such information, which, in any event, shall not be less
than those used by a party to protect its own Confidential Information.
The information contained in this document is proprietary and confidential.
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11.2 EXCEPTIONS. Information will not be deemed Confidential Information
hereunder if such information: (i) is known to the receiving party prior to
receipt from the disclosing party directly or indirectly from a source other
than one having an obligation of confidentiality to the disclosing party; (ii)
becomes known (independently of disclosure by the disclosing party) to the
receiving party directly or indirectly from a source other than one having an
obligation of confidentiality to the disclosing party; (iii) becomes publicly
known or otherwise ceases to be secret or confidential, except through a breach
of this Agreement by the receiving party; (iv) is independently developed by the
receiving party; or (v) is required to be disclosed by a court or other
governmental agency, in case reasonable advance notice shall be given to the
other party.
12. TERM AND TERMINATION
12.1 TERM. The initial term of this Agreement shall be one (1) year
commencing as of the Effective Date, unless terminated sooner as provided in
Section 12.2. On the first anniversary of the Effective Date and each subsequent
anniversary, this Agreement shall automatically renew for an additional one (1)
year term, unless either party gives written notice to terminate ninety (90)
days prior to the expiration of the initial term or any renewal term.
12.2 TERMINATION FOR CAUSE. Either party shall have the right to terminate
this Agreement if: (i) the other materially party breaches any material term of
this Agreement and fails to cure such breach within thirty (30) days after
receipt of written notice of the same, except in the case of failure to pay
fees, which must be cured within ten (10) days after receipt of written notice
from NaviSite; (ii) the other party becomes the subject of a voluntary petition
in bankruptcy or any voluntary proceeding relating to insolvency, receivership,
liquidation, or composition for the benefit of creditors; or (iii) the other
party becomes the subject of an involuntary petition in bankruptcy or any
involuntary proceeding relating to insolvency, receivership, liquidation, or
composition for the benefit of creditors, if such petition or proceeding is not
dismissed within thirty (30) days of filing.
12.3 EFFECT OF TERMINATION. Upon the effective date of expiration or
termination of this Agreement: (a) NaviSite will immediately cease providing
SiteHarbor Services and Consulting Services; (b) any and all payment obligations
of Client under this Agreement will become due immediately and Client shall
satisfy such payment obligation; (c) within thirty (30) days after such
expiration or termination, each party will destroy, or at the election of the
other party, return all Confidential Information of the other party in its
possession at the time of expiration or termination and will destroy or return
any copies of such Confidential Information except as required to comply with
any applicable legal or accounting record keeping requirement; and (d) Client
will immediately remove from the Designated NaviCenters all Client Materials and
any of its other property within the Designated NaviCenters within ten (10) days
of such expiration or termination and return the Client Space to NaviSite in the
same condition as it was prior to installation of the Client Materials, normal
wear and tear excepted. If Client does not remove such property within such
within ten (10) days of such expiration or termination, NaviSite will have the
option to (i) move any and all such property to secure storage and charge Client
for the cost of such removal and storage, or (ii) liquidate the property in any
reasonable manner. Neither party will be liable to the other for any termination
or expiration of this Agreement in accordance with its terms, provided,
however, the Client shall remain liable for all applicable fees accrued prior to
any termination provided hereunder.
12.4 SURVIVAL. Sections 9, 10, 11, 12.3, 12.4, 13.1, 13.5, and 13.6 shall
survive any termination of this Agreement.
13. GENERAL
13.1 RELATIONSHIP OF THE PARTIES. Nothing in this Agreement shall be
construed to imply a joint venture, partnership, or agency relationship between
the parties, and NaviSite shall be considered an independent contractor when
performing services under this Agreement.
The information contained in this document is proprietary and confidential.
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13.2 NO LEASE. This Agreement is a service agreement and is not intended to
and will not constitute a lease of any real or personal property.
13.3 ASSIGNMENT. Neither party may assign this Agreement, in whole or in
part, without the prior written consent of the other party. Notwithstanding the
previous sentence, NaviSite may transfer or assign its rights and obligations
under this Agreement to an entity controlling, controlled by or under common
control with NaviSite or to an entity that is NaviSite's successor in connection
with a merger or that purchases of all or substantially all of NaviSite's
assets. Subject to the above limitations , this Agreement will mutually benefit
and be binding upon the parties, their, successors and assigns.
13.4 FORCE MAJEURE. Neither party shall be in default of its obligations to
the extent its performance is delayed or prevented by causes beyond its control,
including but not limited to acts of God, earthquake, flood, embargo, riots,
sabotage, utility or transmission disruption, failure or delay, fire or labor
disturbances.
13.5 NON-SOLICITATION. During the term of this Agreement and for a period
of one year thereafter, Client will not, and will ensure that its affiliates do
not, directly or indirectly, solicit or attempt to solicit for employment any
person employed by NaviSite.
13.6 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts, with regard to
conflict of law principles. Any action, suit or other legal proceeding which the
parties commence to resolve any matter arising under or relating to any
provision of this Agreement shall be commenced only in a court of the
Commonwealth of Massachusetts (or if appropriate, the federal district court
located in Boston, Massachusetts), and the parties hereby consent to the
jurisdiction of and venue in such court.
13.7 SEVERABILITY. In the event any provision of this Agreement is held by
a tribunal of competent jurisdiction to be contrary to the law, the remaining
provisions of this Agreement will remain in full force and effect.
13.8 ENTIRE AGREEMENT. This Agreement, which includes Schedules A, B and C
attached hereto, constitutes the complete and exclusive statement between the
parties and may only be amended by an instrument in writing that refers to this
Agreement and is signed by both parties. This Agreement supersedes proposals
(oral or written), understandings, representations, conditions, warranties,
covenants and other communications between the parties relating to this
Agreement.
13.9 NOTICES. All notices called for under this agreement shall be in
writing and given by personal delivery, certified mail, return receipt
requested, or by commercial overnight courier, to the recipient's address set
forth above or to such other address or addresses as either party may specify in
writing to the other. Notice shall be deemed given the date of personal
delivery, the third business day after mailing, or the next business day after
delivery to such courier (unless the return receipt o r the courier's records
evidence a later delivery).
IN WITNESS WHEREOF the parties have executed this Agreement by their authorized
representatives.
NAVISITE INTERNET SERVICES FAIRMARKET, INC.
By: ______________________________ By: /s/ William R. Watt II
------------------------
Name: ______________________________ Name: William R. Watt II
------------------------
Title: ______________________________ Title: Project Manager
------------------------
Date: ______________________________ Date: 11/2/98
------------------------
The information contained in this document is proprietary and confidential.
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Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated January 13, 1999, except as to the information in Note 6 related to
the issuance of Series C Convertible Preferred Stock for which the date is
February 25, 1999, relating to the financial statements of FairMarket Inc.,
which appear in such Registration Statement. We also consent to the reference to
us under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 25, 2000
